We don't need to define the benefits of privacy and decentralization at all. We need to only offer them. Those who value decentralization and privacy will use what we offer. Those who dislike the outcome of a uncontrollable, decentralized world will have to exert a great amount of force and control to stop us.
Bitcoin does not offer any form of privacy as a direct result of being decentralized. In many ways bitcoins are a huge step back from a privacy perspective simply because private people can follow all transactions.
I keep hearing this "bitcoin isn't privacy/anonymous". That may be true if you consider bitcoin by itself but I think it's important to look at the whole landscape of crypto-currencies. Consider the following:
I buy a bitcoin, I send it to BTC-e.com and sell it for $800. Now I have an $800 USD balance on my account. I wait for 4 days then buy Litecoin and send it to my offline wallet.
Now, how would you track that? Note in my HN profile I have a BTC & LTC address that I've done exactly that with more than once. I would love for someone to show me the blockchain transactions that prove that's what happened. Alos note, this is pretty much how the SheepMarketPlace thieves got away. Some guy tracing the bitcoins until it was revealed that he was just following a BTC-e.com's internal operations address. Also note that you don't need to give BTC-e.com anymore more info than a valid email-address. Just get your coins from some other place like mining or whatever, send them to the deposit-address given to you on BTC-e.com.
For people not familar with bitcoin, consider this real-world example. I steal a $100 bill from your wallet but you have a paper-thin tracking device inside it. So you watch it physically move around in the world. Now, if I go to an Airport and exchange the $100 for 89 EURO... you've lost track of the original thief. The thief still is holding the funds he gained from the theft and you're just following a $100 around in the Airport exchange system that may end up anywhere. You know where the $100 bill is but you'll never find the thief. Mix this with stuff like localbitcoins.com(equivalent of just finding a random person on the street that will exchange currency) and you'd have a pretty tough time finding out exactly how the original person spent the funds.
Since the exchanges know who you are they can fill in those gaps. BTC-e is a bit of an anomaly; at some point I expect them to either adopt KYC or be hounded out of business.
Ah, that's true. If BTC-e.com cooperates with authorities then the gap can be closed. But regular people can't force BTC-e.con to disclose that info. Also worth noting that, at least in my situation, BTC-e.com doesn't have my bank info. All they have on me is a working email address and the IP address I log in from. Only coinbase.com truly _knows_ who I am since they have my bank & e-trade account.
I guess nothing is completely out of the reach of authorities if they really wanna get you, but it's a bit more difficult with crypto-currency than just looking at your bank account history. Now, if every unregulated exchange turns into a bureaucracy-controlled entity then I guess they're no longer much better than a bank.
Well, which is better: the illusion of privacy (which you can do nothing to further secure), or the known fact that you have no privacy in an environment where you can take steps to protect yourself?
Your bank offers the illusion of privacy. Sure, a random person can't just walk up and see your balance. But a teller can pull up your account and look around. Sysadmins can certainly see your money pop up in server logs. A particularly motivated individual might even be able to pull data from disk images or memory if they were so inclined, so how safe is that information really?
I'd argue that knowing everything is public is better. It motivates people to come up with solutions like Zerocoin and CoinJoin.
You can turn this around quickly. Which is better, the actual tangible privacy your bank gives you despite its theoretical "illusion" of security, or the theoretical privacy of bitcoin which in practice is hard to maintain yourself?
Following the transactions quickly breaks down. Almost every transaction is actually 2 transactions, one to a new address that you still control by your wallet and one to the payee's address. If you really think it is trackable I'll challenge you to track my purchases as a test.
As for decentralization vs centralization. If banks asked me to sign up with my public key and didn't ask for my name or address or identification number, then sure. But the fact is that they do. The fact is that they are infiltrated by the NSA, et al. A direct result of decentralization is the absolute need for privacy, otherwise the system breaks down.
People have published papers on breaking bitcoin anonymity. It wasn't trivial, but over a long period of time they could identify people with decent probability of being correct.
