08 Jan 2014 / The Umlaut – Ever since Paul Krugman started weighing in on Bitcoin recently, people have been using his notorious 1998 Internet prediction to mock him:
By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.
Krugman was dead wrong, but rather than mocking a man who now says he does not “claim any special expertise in technology,” I think we are better served by fleshing out the extremely apt Internet:communication::Bitcoin:finance analogy his critics raise. If we can see why Krugman might have thought that the Internet would not be significant, we might come to understand why many smart people think Bitcoin isn’t compelling and be able to explain why they’re wrong.
The Internet is a telecommunication system, but it was not our first telecommunication system. Telegraphs and telephones have been around for over a century. Like these older systems, the Internet allows us to communicate, but it differs in some important ways. Perhaps the biggest difference in the Internet model is the abstraction of a separate “application layer.” Core Internet protocols, such as TCP, part of the “transport layer,” shuffle packets of data around, but they don’t define how the exchange of packets is then used to create meaningful communication. Internet applications, such as email and the World Wide Web, are defined in protocols implemented on devices at the edges of the network, like servers and home computers, not in the guts of the network: routers, switches, hubs, and exchange points. The lower layers of the Internet can be completely oblivious to the specific applications that are in use; they just focus on getting packets of data to the right place.
In contrast, the traditional telephone system defines its applications more centrally. Improvements or new applications have to be supported by the network before they can be used. For example, the iPhone 5, released in 2012, supports a feature called HD Voice, essentially a set of audio compression algorithms that greatly improve call quality. However, this feature remains unsupported on major US carriers such as Verizon and AT&T in 2014. Because the “calling” application of the telephone system is defined centrally, the network needs to be upgraded before you can take advantage of the iPhone’s capability for crystal-clear calls….. Read more
