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Bitcoin for Individual-to-Individual Transactions and Community Trade

author: Vitalik Buterin
published: 2011-06-26 17:00:03 UTC

For conventional internet transactions, Bitcoin does not seem to have that many benefits for the average user over credit cards. With a credit card, the user must put in some numbers and hit "submit", while with Bitcoin the user must open his Bitcoin program, put in a number, and hit "send". As one forum post puts it, "if I tell my clients Bitcoin is "cash", they already pay cash - so they have no incentive to go through the hassles of acquiring Bitcoin". There is also the issue that Bitcoin does not provide instant confirmation. On the other hand, there is the physical laziness factor - you do not need to move away from your computer to grab your credit card if you are paying Bitcoin, and programs like this make buying with Bitcoins even easier. On the balance, Bitcoin is slightly easier, but not when one takes the hassle of getting the bitcoins in the first place into account. It is true that credit card companies can take high transaction fees, but buying bitcoins on an exchange often requires those exact same fees to be paid, and possibly exchange fees in addition, so that advantage of Bitcoin is lost unless users that spend money in Bitcoin also earn money in Bitcoin. Thus, Bitcoin's main weakness is network effects, and while it can be used for conventional internet trade, that will not be the way it breaks through this barrier.

However, the forum poster does mention one interesting application for Bitcoins, and this is the main theme of the article - individual-to-individual (hereinafter "I2I") transactions. I define I2I transactions as being opposed to individual-to-business transactions such as buying from a store or getting a paycheck from one's employer, where one party is an established economic center and the other is not. The forum poster's comment is this:

What DID generate a huge amount of interest was Bitcoin as a barter medium. Clients hate to fork over a wad of $20s- it's a bit crude and ruins the experience for many. Within our community barter or "tribute" as a means for paying for service is very common. Unfortunately the goods and services that a client has to offer usually are not the ones that the business or it's contractors need. Bitcoins enable any client to earn sufficient funds to visit my facility with a modest investment of goods or his professional expertise.

This describes the function of a currency in a market exactly, but Bitcoins here are distanced from cash - they are seen as an agreed upon medium of exchange within a small community, not tying in to the outside system of money at all. By referring to Bitcoins as something not related to cash at all, a degree of informality is achieved. I talked about informality tangentially in a previous article; the main idea is twofold: first, performing a service in exchange for money is a job, which we have been culturally conditioned to consider unpleasant, and secondly, resulting from this, accepting money in exchange for services from a friend is seen as impolite. Performing a service in exchange for some sort of "tokens", on the other hand, removes this effect.

Many Bitcoin users are willing to go out of their way to buy products from fellow Bitcoiners, and while some of this does arise from a desire to provide a sort of economic stimulus to the Bitcoin economy, encouraging its growth, it is important not to discount the community effect. Bitcoin users are united by a common culture, many common beliefs and a common currency. Thus, much like obscure constructed languages like Lojban, despite never gaining public acceptance, find a dedicated core of users that enjoy them for the community, the obscure constructed currency that is Bitcoin can also serve to take people that are physically very far apart, and bring them together. Bitcoin can thus be the center of a phyle, a community based not on physical location but on common interests.

There is, however, another, more practical, advantage to using Bitcoins for I2I transactions: while buying with credit cards is easy, accepting money through this system is much more difficult. Credit cards are only an option for established businesses; individual sellers on sites like Ebay and Mechanical Turk must resort to systems like Paypal, where setting up a merchant account is still far more difficult than setting up Bitcoin, and where even buying is considerably more complex than credit cards or Bitcoin, involving a login step. Thus, in conventional environments where everyone has a single employer and one of a few stores where they buy things, Bitcoins are not that much better than credit cards, bank transfers and other conventional means, even if 100 times as many people adopt them. But in environments where everyone is a buyer and a seller to everyone else, that is where Bitcoin can shine. What does this mean practically? Online auctions and online work.

Sites like workforbitcoin.com, ForBitcoin, BitcoinHop and BiddingPond have become considerably more prominent recently, and they will only grow as the Bitcoin economy expands. ForBitcoin in particular is interesting: its design is intended to be informal and promote the feeling of a community exchanging services as opposed to the highly formalized and business-centric feel of Mechanical Turk. Aside from the specialized sites, the Bitcoin marketplace forums are full of offers, of which many do find takers.

The key link between these two ideas, that of a community currency for the internet and I2I transactions, is informality and democratization. Communities, especially internet communities, tend to be highly anti-hierarchical; as David de Ugarte writes, "forced cohesion tends to dissolve in a world where nothing is easier than jumping from one network to another own, than identifying with and plunging within an alternative context". I2I transactions similarly create an antihierarchical effect; there's a natural imbalance of power created in individual-to-business transactions like employment and being a customer. Informality flows naturally from this egalitarianism, and elements of informality will manifest themselves in the community. Or, perhaps, as Bitcoin grows larger and larger it will also gain its own form of seriousness, and formality may evolve rather than disappear, going in the direction of public key encrypted contracts and corporations registered on the Global Bitcoin Stock Exchange. But even still, this new style of formality is being established by and for the internet community and does not serve to attract conventional businesses. Thus, while attracting established businesses is still a worthy effort to undertake for Bitcoin evangelists, it is not a panacea; attracting individuals is just as, if not more, important. The forum poster I started off this article talking about ultimately rejected Bitcoin for her business, and we can see her reasoning:

With the Bitcoin community focused on their political message over attracting established businesses it is unlikely that any merchant coming to the currency will have opportunity for knowledge sharing and collective problem solving- thus more labor and higher entry costs. This is reflected the the structure that has been chosen for Bitcoin.org with Political and Off-topic forums, but not a single Vendors or Merchants forum. Vendors are not a priority at the moment and should not anticipate any particular support simple by virtue of adopting the currency.

Then those customers go through the process of getting setup on Bitcoin, read what's out there, and I start getting emails like "Really Jessy, you always seemed like such a level headed business woman, I never would have figured you for one of those types..." As another forum commenter put it, Bitcoin is quickly becoming "currency of teh crazy" in the mind of the public- without even any media coverage (yet) casting it as such.

Bitcoin is already becoming a community currency at the expense of attracting established businesses, and she rightly points out that businesses will be turned away by Bitcoin's political baggage, although new Bitcoin-based businesses will not - the GLBSE, for example, fully embraces anti-government activity. Individuals, on the other hand, if they support Bitcoin's politics, will happily join in, and even if they don't support Bitcoin's politics they do not have nearly as much to lose as businesses from being associated with it. Ebay handles over $60 billion of sales per year, so if Bitcoin grows to even 10% of Ebay's size its market capitalization will increase by a hundredfold. If Bitcoin stays small, it can remain the community currency of the internet.

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