5 reasons grids should use Bitcoin (if I ever get around to finishing the money server)

Maria Korolov has written a piece at Hypergrid Business called “5 reasons grids should avoid Bitcoin”.

Bitcoin can be a little bit difficult for people to get their heads around and her article contains some misunderstandings, but they’ve been fairly thoroughly addressed in the comments, so rather than go through the thing point by point, I’m going to go ahead and put the alternative case.

Here’s why the open metaverse needs Bitcoin, or something similar.

1) Users should be able to move their money easily from grid to grid.

When Linden Lab created Second Life, they built in a very nice, simple micro-payments system that allows you easily buy and sell content created by other users. You have to pay money into their system with a credit card, but you only have to do it once, and the same money will work wherever you go in Second Life. But their system depends on having a single company running everybody’s virtual spaces. The OpenSim vision is of independently-run grids connected together, so that you can easily jump from one grid to another. But when you do that, you don’t want to have to keep paying money into every grid you visit. We need one common balance that works everywhere. Meanwhile,

2) You don’t want to be baby-sitting too much of other people’s money.

Linden Lab are a big company with rich investors and their own lawyer, but in the Open Metaverse we want anybody to be able to run a grid, just like anybody can run a web server. If you maintain your own metaverse currency, you have to take on a lot of responsibilty that you may not want, and your users have to give you a lot of trust thay they may not want to give. You also open yourself up the risk that you’re somehow in breach of one of the many amazing regulations that surround currencies and payment processing.

It would be much better to leave your users in control of their own money and wash your hands of the whole thing. The only thing you want to be doing is prompting people to make payments and checking that they’ve been made. You don’t want to set yourself up as a participant in transactions between your users, and you certainly don’t want to look after people’s money for them.

3) When you have a single point of failure, it always fails.

If you’ve been reading this so far, you may be thinking, “No problem, I’ll use Open Metaverse Currency“. OMC is a virtual currency provided by a great little company called VirWox. You can install their money module on your server, and your users will be able to buy their virtual currency and spend it on any other participating grid.

But now, having gone to all the trouble to build OpenSim and avoid being dependent on Linden Lab, we’ve made ourselves dependent on VirWox instead. If they go bust, get bought out, take on a clueless manager, make a more interesting product and decide to focus on that, get shut down by the regulators or do any of the things that usually happen to technology start-ups, it’s goodbye to all your Open Metaverse Currency. Not only that, OMC effectively have a license to print money for themselves and devalue everybody else’s. VirWox seem like very ethical people, but to avoid the temptation to make up for a poor quarter by quietly debasing the coinage, they’ll have to be.

4) Online micro-transactions need cash, not credit cards.

Maria makes a big deal of how Bitcoin isn’t backed by a company, so there’s nobody checking for fraud and looking after you if you’re a victim of it. This is of course true. But in reality I don’t know how much luck you’d have getting your OMC or your Linden Dollars refunded if somebody stole your laptop. And a lot of the fraud that credit companies deal with is actually dealing with the gaping holes in their own security. For example, credit card security is based on the idea that your money is protected by a secret number that you tell everybody that you do business with. This turned out not to work very well, so then they came up with a special three-digit code and you had to tell everybody you did business with that as well. The only way to persuade buyers to adopt a system that’s so full of holes was to let them cancel payments after they’ve been made. But instead of making up the difference themselves, they charge the cancelled payment to the unlucky merchant who was supposed to be getting it. And that, dear grid operator, is you.

It isn’t like this in the real world. We’ve been doing small transactions in meatspace for millenia, and payment systems have never been bundled together with buyer protection systems. Last week I bought a cup of coffee from MacDonalds for 100 yen and got it home only to discover if was full of coffee grounds. I took it back to the shop and they gave me a new cup. A less generous vendor might have refused. But in neither case would I have been able to take my dispute to the Bank of Japan, who issued my 100 yen coin. Small transactions work best when they are final and non-reversible. That doesn’t mean that there is no accountability; if I hadn’t been happy I could have called the national MacDonalds customer support number, or taken it up with the consumer protection bureau. But the accountability mechanism is separate from the payment system. Trying to mush them together for small transactions turns out to be expensive, unfair and unpredictable. When you get paid, you need to stay paid.

5) Volatility doesn’t matter much.

There’s one serious point in Maria’s piece, which is that although it’s been quite stable recently, Bitcoin is prone to volatility that other currencies aren’t usually subject to. Real-world currencies in developed countries tend not to vary against each other by more than a factor of two, and vendor-backed currencies like the Linden Dollar and OMC are kept close to a real-world currency by controlling how much money is issued. Bitcoin has been all over the place, and may see more crazy price spikes if it’s subject to another wave of hype.

But as a grid operator, or indeed a user, this is probably not actually a big problem in practice. You don’t keep all your money in a metaverse micro-economy, so a change in value just means a bit of variation in the value of the small amount of money you’d hold for transactions, which could go up just as easily as it goes down. If you find adjusting prices tiresome and want to peg them to the Dollar or the Yen that’s not a huge technical hurdle – we can probably build it into the money server.

Make me decentralized, but not yet.

Having said all that, there is a real reason why grid operators shouldn’t use Bitcoin yet, which is that so far there is absolutely no technical infrastructure to do it. At a minimum, we need a version of the money server designed to handle Bitcoin addresses, broker transactions and deliver inventory when they are complete. (I’m working on this, but most of my spare time goes into SLOODLE and Avatar Classroom.) And to make the process both really smooth for the end user and fully decentralized, we’ll also need integration with the viewer.

There’s some technical work to do here and I’m not confident that the metaverse will end up adopting Bitcoin. But it should.