Book Review: “Out of the Ether”

I recently finished reading the hardback version of “Out of the Ether” by Matt Leising. This marks the 12th blockchain and cryptocurrency-related book I have reviewed. See the full list here.

The book was first published in September 2020, so my review is criminally belated. In my defense, 2020 was a bad year (for just about everyone) and it got boxed up during one of several moves during that time.

Overall I think it is a good book and would recommend it to anyone keen to explore and understand the key figures behind the creation of Ethereum and the Ethereum universe.

Prior to his quest to discover The DAO “attacker,” I had a chance to meet the author, Leising, on several different occasions and from time-to-time introduced him to potential sources for news articles (when he was a reporter at Bloomberg).

In the book he states he is a “believer” in Ethereum but I do think he does a pretty decent job balancing out his excitement without coming across as a shill or sellout. 1

I didn’t notice any major issues, certainly nothing that would require a second edition.2 While I do have a few quibbles here and there, on balance I thought he did a really good job explaining core technical ideas in laymen’s terms.

One last comment before diving in: back in January 2014 I joined several Ethereum Skype rooms in order to write a short book that I published a couple of months later.3 It is interesting that Leising was able to capture so many details (and drama!) that was taking place behind the scenes, that never really surfaced into the public Skype rooms (or maybe I just wasn’t lurking in the right ones).

Simultaneously, I attended a number of Ethereum-related events (including the first Silicon Valley Ethereum meetup); yet even with all of the acquaintances I made over that time frame, I still learned new things from this book. That is a testament of how good the author is at first-hand reporting, which is in stark contrast to the two anti-coiner books I reviewed last summer who partly relied on trafficking second-hand conspiracies.

As usual, all transcription errors are my own.

Chapter Zero

On p. 5 he writes:

I’d been at Bloomberg for 12 years, reporting on Wall Street and energy and oil markets, and then, for most of that time, my beat became the financial infrastructure that keeps the whole system humming but that no one talks about. How exchanges work, for example, or the ins and outs of US Treasury bond trading. Then the world went through the worst financial crisis since the Depression. I covered the Dodd-Frank Act’s debate and passage: legislation written in hopes of reining in the financial world to stave off another crisis. I never thought I’d end up being a financial reporter – it just sort of happened, and then I found myself involved in one of the biggest stories of the century.

Unlike most reporters – especially the ideological variety (anti-coiners and maximalists) – what Leising brings to the table isn’t just credibility but knowledge. He actually knows what systemically important financial infrastructures (SIFIs) are and mentions them a couple of times. Only a small handful of books I have reviewed thus far have even paid SIFIs lip service. Why is this important? Because if a SIFI collapsed, it is almost the equivalent of a WMD attack on a population center. That’s why there are multiple oversight boards for them around the world; such as the FSB.

On p. 8 he writes:

While this criticism doesn’t blow a hole in the idea of digital applications, it does call into question the nearly two-year-long orgy known as the initial coin offering market that took place from about 2016 to early 2018. Billions of dollars were raised by legitimate and completely fraudulent dev teams alike. Everyone was welcome at this scamfest. And all of it can be seen in hindsight as an enormous waste of time, energy, and the little creativity that went into most ICO projects. It was a folly but only one of many to come.

This is a solid paragraph. What is a bit frustrating is that many of the folks who were enriched during this time frame – such as ICO issuers and their cheerleaders- have recycled those ill-gotten gains into both a permanent lavish lifestyle and cemented themselves as “coinfluencers.” Basically, the bad guys got rich and we’re stuck with them. Probably forever.

On p. 9 he writes:

In the world of finance the applications for Ethereum are particularly ripe, as Wall Street is – at its core – the insanely well-entrenched pure expression of middlemen profit-takers, making their money from other’s people money solely by virtue of sitting in between transactions.

If I had my druthers, while I agree with what Leising wrote here, I would have followed it up with a specific stat or figure. For instance, in 2022, credit card companies in the U.S. earned $126.4 billion from processing fees charged to merchants.4

On p. 9 he writes:

When I cowrote a story for Bloomberg Markets magazine in 2015 about Blythe Masters, a former JPMorgan executive who was now heading a blockchain startup, I didn’t even mention Ethereum. This is not a knock against Ethereum – I certainly could’ve known more about it at the time – but it’s also true that it was simply too early to be taking Ethereum seriously in a financial markets’ sense. So I didn’t dig into the story of the $55 million hack when I went back to work. It was fascinating, yes, but for Bloomberg readers it didn’t have enough of a connection to Wall Street or finance to justify me chasing it.

Also, readers should keep in mind one other thing: Ethereum was envisioned as a “world computer” and not specifically a fabric for finance.5 That’s not to say it can’t be specifically used for financial-focused applications (it clearly is) but the immediate goals (and the roadmap) of 2015 era Ethereum were elsewhere.

Plus, using proof-of-work (PoW) was probably never going to fly for regulated financial institutions that need settlement finality. PoW only provides probabilistic finality. Switching to proof-of-stake provides better assurances and guarantees which is part of the reason why “permissioned” real-world assets likely have been deployed onto these chains versus say, a proprietary permissioned chain.6

On p. 11 he writes:

People often claim that blockchain allows users to remain anonymous, but this is wrong. It’s pseudonymous, because it’s possible to know the identity of the person behind an address.

Ding ding, correct! A number of other books I have reviewed have implied that user activity on most public chains is “anonymous” when it’s technically pseudonymous.7

On p. 15 he writes about Bitcoin mining:

All of this lives entirely free and clear of Wall Street and government regulators. That’s a big key to why Bitcoin is valued as it is. People want it to have value; they want it to work and exist in a world wholly separate from Bank of America ATMs as well as governments and their central banks that set monetary policy.

That may be the case for some Bitcoin holder, maybe even a majority, but empirically not all of them. 8

On pgs. 16-17 he writes about some accomplishments for Ethereum as of early 2020. There was a typo in one (Ava should be Avalanche).

And at least one achievement wasn’t permanent, on p. 17:

Reddit, one of the most popular destinations for US internet users, integrated Ethereum smart contracts and wallets into its service in 2020 to grant “community points.” These can be used as a type of reputation metric, as they’re given for posting and contributing to reddit discussions. The points are stored in an Ethereum wallet, which could lead to a significant jump in Ethereum users.

About three months ago, Reddit announced it was winding down the “community points” initiative. Even before it was cancelled, it moved this project to an L2 (Arbitrum) because mainnet fees were too high for its userbase.

On p. 17 he writes:

Financial markets are now using Ethereum in real-world trading and settlement for assets such as stocks, credit default swaps, bonds, and equity derivatives. The Bank of France used Ethereum to replace a key component of its payment system.

Leising discusses these example later in his book. However, since we’re over 3 years into the future from when the book was released, apart from a few projects kept spinning by large intermediaries, very few capital markets have adopted any form of blockchain as of this writing. It seems for every new JP Morgan + Apollo Asset Managements project announced, there are existing projects like Contour that wind down. Perhaps that will change, and it would be inappropriate to throw the baby out with the bathwater.

On p. 20 he writes:

Much more complicated systems are also possible. It’s not unrealistic to say almost the entire global oil market could be shifted onto Ethereum using smart contracts. Oil output could be monitored and secured on the blockchain. Private trading would be simple to set up because of the small number of participants. What Ethereum is not yet ready for is the speed at which electronic oil markets, like the crude futures traded at the New York Mercantile Exchange in New York, work. Yet OPEC production cuts or gains would transmit via an automatic information feed to the Ethereum network via what’s known as an oracle. The oil tanker industry could move its supply chain to Ethereum as well.

I have heard similar pitched before, and just googling “oil gas blockchain” generates a lot of articles and papers from consultancies. With that cynical comment aside, komgo (a spin-off from ConsenSys) is one of the last remaining consortia focused on trade finance but they basically stopped using a blockchain a couple of years ago.910

On p. 21 he writes:

Bitcoin never did a pre-mine: every Bitcoin in existence has been earned by the computers on its network that ensure transaction are valid.

While technically true, there are a couple of small caveats:

1. Satoshi possibly mined ~1.1 million bitcoins in 2009 back when an individual CPU could still be used to generate the “winning solution.” Sure that’s not a real pre-mine, but if true that means she owns ~6% of the total mined supply at a cost of running a desktop PC for a year.

2. As mentioned in a couple of previous posts, by July 2014:

  • There were 84,580 blocks with “empty” blocks containing just coinbase transactions
  • 83,867 blocks were rewarded 50 bitcoins each prior to the first halving day in November 2012, the remaining 713 blocks received 25 bitcoins
  • There are an additional 12,404 blocks with 2 transactions (the coinbase transaction + one other)
  • 12,223 of these blocks came prior to the block reward halving in November 2012 which equates to 611,150 and another 181 blocks each received 25 bitcoins (amounting to 4,525 bitcoins)

This comes to around 4.8 million bitcoins, or ~37% of the total Bitcoin supply at that time.

In other words, “Earn” is doing a lot of heavy lifting in that sentence considering – at that time – no one needed to buy a powerplant or build a warehouse to fill with ASIC hashing equipment. 11

On p. 21 he wrote about Slcok.it

A slock is an Ethereum-enabled lock, which you could put on your bike, for example. Someone with the slock.it app on their phone could come along and read a QR code that links to the bike’s slock. The interaction is managed by a smart contract on the Ethereum blockchain. If the passerby pays the required amount of ether, the slock unslocks and the bike can be rented for a period of time. This is similar to how Bird scooters and the bikesharing systems that took over American cities in 2019 work, but slock.it preceded them by many years and is decentralized.

Later in the book Leising goes into detail over what the Slock.it company was, The DAO, the hack, the fork(s), and the immediate aftermath. One detail I didn’t notice (perhaps I missed it), was that the Slock.it GmbH company itself was acquired by Blockchains LLC in 2019. But the Blockchains twitter account has been inactive since November 2021.

Also, the venture craze into ridesharing blew up shortly after this book was published. For instance, the Bird e-scooter company was delisted from the NYSE in September 2023. Not super important to his point about remotely locking up (and renting) physical property.

On p. 25 he writes about something I do not believe was public information until the book was published: an encrypted message to the Robin Hood Group (the white hat hackers that parlayed with The DAO hacker):

As public support for a soft fork grew, the second attacker grew angry. He sent an encrypted message to the RHG on June 27, 2016. Here it is, verbatim, including the possibly purposefully broken English and odd syntax.

“This soft fork, and the dao-wars situation is a waste of time for everyone,” the ether thief wrote. “I’m supporting the idea that code is law at smart contract, but also the network consensus is law on blockchain.” He then pointed to the contract that had attacked the DAO on June 21, and said he’d give the money back if the RHG would as well. “Don’t you do it also to see productive future?” the thief wrote.

This is interesting insomuch as I was unaware the alleged thief attempted to negotiate the “return” of funds by all parties (it was not accepted). I wonder if the thief would go on to become an ETC supporter?

Speaking of which, days after the ETH/ETC hardfork, I gave a presentation at an Ethereum meetup entitled “Code is not Law.” It is kind of weird to see some of the older knee-jerk reactions on reddit considering how – at the time – anti-fork supporters frequently trotted out the line “code is law,” something we saw a lot a year later with the Bitcoin civil war (around block sizes). I think in retrospect, a hard fork may have been the lesser of two evils and – politics aside – paved a path showing other chain developers how to implement a successful hard fork.12

Chapter One

This chapter discusses Vitalik Buterin’s early life, his upbringing in Russia and Canada.

On p. 33 he writes:

Vitalik’s favorited stuffed animal at the time was a rabbit he’d brought with him from Russia. He’d fallen in love with the creatures and by the time he was seven he’d written a 17-page document called “The Encyclopedia of Bunnies.” It contained jokes and pictures drawn in Excel and scientific assessments, such as a periodic table of various bunny qualities.

From the section titled “Bunnies speed”:

On Oct. 19, 2001, 6:07 p.m., the bunnies run 3745.284 million km/sec. Probably on New Year 2002, they will run 0.77 light-years per second.

This is awesome. Doubly so since my daughter is about to turn 5 and I now need to tell her to watch out for bunnies travelling around at luminal speeds.

Chapter Two

On p. 41 he writes:

Like so many days in Seattle, Friday, June 17, 2016, was slightly overcast with the chance of rain. That afternoon on the edge of town, Dax Hansen left the city on the ferry for Bainbridge Island where he lives. Hansen was one of the earliest lawyers to get involved in blockchain technology and helped shape the early industry through his work as a partner at Perkins Coie. So news of the DAO hack had reached him. When he arrived on Bainbridge Island he saw his friend Peter Vessenes waiting to take the ferry back to Seattle. Vessenes had long been in the blockchain world, and Dax knew he’d have heard too.

I have had limited interactions with both in the distant past, but I wrote “what a coincidence” in the margins.13 Leising discusses some of Vessenes’ colorful history later in the book but one thing that was missing was that Vessenes almost single handedly held up the liquidation – and restitution – of Mt. Gox (post-bankruptcy) due to his spurious claims of being owed ~$16 billion.

On p. 43 he writes:

Three thousand miles away on the East Coast, another researcher had been looking at security flaws in the DAO. Emin Gün Sirer is an associate professor of computer science at Cornell University. In 2002, he devised a decentralized system for rewarding good behavior he called Karma. It was the first currency to use proof of work to establish the validity of transactions. Cynthia Dwork and Moni Naor invented the idea of proof of work in 1993 as a means to reduce email spam. The concept was later adopted for cryptocurrencies by people such as Adam Back, and most famously by Satoshi Nakamoto in his design for Bitcoin.

In the margins I wrote “Finally someone wrote about Karma.” I’m sure EGS does a grimace anytime someone incorrectly credits either Adam Back or Satoshi for having invented proof-of-work. I myself have had to correct around a half dozen books thus far for misattributing the creation of PoW, or failing to cite its origins. One common overlap between anti-coin shills and coin shills is that many seem to not understand the history of the thing they are lionizing or attacking.

Chapter Three

On p. 48 he writes about a podcast:

For the next 20 minutes or so he describes how Bitcoin solved the idea of digital scarcity. This is a very important part of the story to understand: that is, how do you protect something that is represented digitally, that can be reproduced an infinite number of times? Think of what Napster did to the music industry. Before Napster’s decentralized marketplace for digital music, sure, I could’ve burned a CD for my friend (and did) or later on been able to upload the new Pearl Jam record and email it to someone (yep). There was nothing protecting those MP3s because of their digital nature; they became a commodity once turned into ones and zeros. Then Napster came along and connected anyone around the world who wanted the new Pearl Jam record, devastating the recording industry.

This is mostly correct however Napster had a quasi-centralized model: it provided an index of files and that is why it was a relatively easy target for lawsuits by the music industry (RIAA) and law enforcement.

And to be pedantic, while Napster arose at a time when traditional physical sales were declining – and it may have played a large hand in that decline – the recording industry has seen a seen a new segment of sales over the past decade: streaming.

On p. 50 he writes about Vitalik’s interest in World of Warcraft, a game he played for a couple of years. And how one day Blizzard nerfed a spell his character relied on, leading him to disdain centralized services.

Has anyone made one of those little-to-big domino memes?

See also my related presentation from the March 2023 collapse of Credit Suisse.

On p. 55 he writes:

There were also Bitcoin development projects that needed help and would pay to code. One area was known as colored coins – a term used to describe an application that is connected to the Bitcoin blockchain but that doesn’t necessarily run in the same way. For example, a stock or bond can be digitally represented as a colored coin, allowing its owner to sell it to a buyer in the same manner they’d sell Bitcoin. In 2012 and 2013, this area of experimentation was gaining a lot of attention, as it implied that Bitcoin could be used for more than just sending value from user A to user B.

Bravo. In the margins I wrote: “Good to mention this, pretty concise explanation.” Most books that I have reviewed on this topic either neglect this small but important part of history or describe colored coins as an Israeli ICO project (it is neither). 14 Colored coin efforts were some of the earliest attempts at “tokenization” of real-world assets.15

On p. 55 he writes:

The idea for Ripple was spun directly out of what Bitcoin had accomplished in 2009 when it proved a global computer system could be utilized to send money between two parties anywhere in the world. But Bitcoin was decentralized, meaning no individual or group controlled it. Ripple envisioned itself as a central party in the network it wanted to create to compete with the global correspondent banking system. That’s the network of banks that every day send $76 billion zipping around the world as companies and individuals need to make payments in foreign currency.

Leising goes on to describe a bit more of how Ripple / XRP worked at the time. It’s worth pointing out that the original name for “Ripple” was… RipplePay. RipplePay was the name of a non-crypto project run out of L.A. by Ryan Fugger in the early 2000s. Its IP was acquired by Jed McCaleb and Chris Larsen who had created OpenCoin.16 Before OpenCoin, Jed McCaleb openly brainstormed about “Bitcoin without mining.”

On p. 56 he writes:

Jed McCaleb is a cofounder of Ripple, and he’d come to know Vitalik’s work in Bitcoin Magazine. He remembered Vitalik as eager and smart and he was excited to have him work for him over the summer. At that point, however, Ripple had only been a company for nine months, and to get a work visa for a summer intern, a company needs to have been in business for at least a year. The tantalizing prospect of what would’ve come from Vitalik and McCaleb working together will have to be left to a footnote in crypto history: “The world could’ve turned out quite differently if he’d come here to Ripple,” McCaleb said.

One of blockchain histories “what-ifs…”

On p. 58 he writes:

Mihai had his hands full putting out a monthly magazine, but he also wanted to dive into the more technical side of the Bitcoin world. Bitcoin wallets – the interface where users buy and sell coins – were still cumbersome in 2013, and Mihai wanted to make the process of actually buying something with Bitcoin simple and easy. His idea was to create Egora, a sort of eBay where only digital currency was accepted, and he knew just the person to help him develop it. Here was a chance for Vitalik to help build a project from the start and not to just jump into an existing one as he’d done as a work-for-hire on the colored coin project.

Does anyone else remember OpenBazaar? I’m old enough to remember when some Bitcoin-focused VCs said it would crush eBay; wonder what they would’ve said about Egora.17

Chapter Four

On p. 68 he writes:

It’s a funny quirk of history that the Internet began this way. The lack of system-wide infrastructure meant many pioneers hosted their own servers in order to put web pages up. It was decentralized by necessity, networks jury-rigged all over the place.

I agree with this observation and wrote something on this topic a few years ago: Intranets and the Internet

On p. 68 he writes:

In contrast, a decentralized version of Spotify using Ethereum would likely be built such that I interact with a smart contract to play the music I want to hear from the contract’s music library. It’s peer-to-peer in a way that Spotify isn’t, so the decentralized version would never ask to reconfigure my computer or have more access than I allow. I would be in charge, not the program.

There are more than a handful of Web3-based streaming platforms that artists can use to monetize their songs. Will they ever grow beyond a niche? What would incentivize mainstream artists to use these platforms instead of Spotify or Apple Music?

On p. 69 he writes:

Microsoft and Facebook and Google, as well as the corporate interests that benefit from them, like advertisers, all want the biggest user base they can get, Wood said in a Third Web podcast recorded in 2019. The number of users a company has equates directly with how much it will be valued by venture capitalists, for example. A social media company with five million users might get a $50 million valuation.

While the author clearly has an affinity for Ethereum-related topics, he doesn’t carry water for everyone (or everything) in that ecosystem. And unlike the anti-coiner books I reviewed this past summer, he does a decent job explaining how the Web2 world works, with domination from Big Tech – their centralized platforms – and a privileged set of individuals: VCs.18 All without handwringing or pearl clutching.

With that said, I’m not sure I buy his thesis that Web3 infrastructure can solve the cancerous misinformation / disinformation hurdles we face today.

On p. 72 he mentions Geoffrey Golberg at length. I’ve interacted with Golberg a number of times in the past and he is one of the good guys in the fight against the astroturfing bot epidemic on social media.

Chapter Five

On p. 75 he writes:

The refrain that Bitcoin will change the world is almost universal when you talk to early adherents. For one thing, it’s unstoppable, and appears to many to be an honest arbiter compared with a system of commerce they view as broken – that is, the existing financial system with central banks and commercial lenders like JPMorgan and Citigroup in charge of the money supply. Bitcoin’s hardcore follower are known as maximalists because the are unwilling to accept any other cryptocurrency as valid. Bitcoin, to a maximalist, is where the digital token conversation begins and ends. The vitriol is real and most often unleashed online. It even extends to subgroups of Bitcoin supporters, who tore each other apart between 2015 and 2017 debating how much information a Bitcoin block should contain.

This is a mostly okay explanation of Bitcoin maximalism. I would probably have pointed out that there are other “hardcore followers” who do not describe themselves as maximalists, but who basically got ejected due to the 2015-2017 civil war. I also don’t think it is accurate – for maximalists or anyone else – to equate Bitcoin as a “bank” on par with JPMorgan or Citigroup because Bitcoin, the blockchain, does not enable any form of lending.19

If the comparison is around payments, then it’s an apples-to-oranges comparison too because Bitcoin is attempting to allow pseudonymous participation whereas everyone paying or sending wires from one of these large banks, must be doxxed. And as a result you have throughput tradeoffs.

In my view, I think writers are way too generous in their description of Bitcoin maximalism in particular, which quickly evolved into a borderline hate group. I do not think it is a coincidence that some of the most toxic Bitcoin maximalists happen to be uncritical or even openly support autocrats like Nayib Bukele.20

On p. 76 he writes:

In Bitcoin, there are no grays areas of banking or usurious interest rates or shady deals. The code is all; it is your guide. It allows value to be sent from one person to another anywhere, anytime, with no one who can stop it. It’s the anti-Wall Street solution to a problem many people had a hard time putting their finger on, and it elicits a powerful response in a certain type of person. That problem, for those who have trouble articulating it, is that as I said earlier Wall Street exists for almost no other reason that to be the ultimate rent seeker, to sit in the middle of every transaction taking a cut of the capital that is created around the globe.

I agree with most of this view and have pointed out in other reviews that of Jack Bogle, the founder of Vanguard and creator of the index fund, often characterized the excessive speculation that benefited financial intermediaries as the “croupier’s take.” So Leising’s criticism is in good company (unless of course, you are one of those intermediaries).21

Two small nitpicks:

(1) Bitcoin does have powerful interest groups, including the Bitcoin Core developers who ejected the Bitcoin Cash developers in 2017. Who are the current Core developers with merge access?22 Putting aside their identity for the moment, we know that one for-profit company, Blockstream, has previously demonized its competitors (Bitmain) during the block size war, as they were ramping up their own mining ambitions. It is a potential conflict of interest.23

(2) One of the only typos I detected in the book occurs in the last sentence: “reason that” should be “reason than.”

On p. 77 he writes in parenthesis:

My favorite example of this is a group of interest-rate swap traders who worked for a brokerage called ICAP in New Jersey. These traders became known as Treasure Island because they made around $20 million a year each just for sitting in a chair and picking up a phone. There would be one bank on the line, and the ICAP trader’s job was to find another bank to complete the swap trade. The amount of money we are talking here on a yearly basis are in the hundreds of millions, and corruption on the Treasure Island desk led to US government investigations and hundreds of millions of dollars in fines.

Fun fact, when you google “treasure island ICAP government fines” the very first article is a Bloomberg news story from 2013 written by the author, Matthew Leising.

Chapter Six

On p. 82 he writes:

The other coders at Calafou who were testing and stretching the limits of what Bitcoin could do fascinated Vitalik. “For Vitalik is wasn’t so important about the luxury or the conditions or how the place looked,” Mihai said. “It was mostly about the intellectual challenge and the people who were there.” Vitalik met Amir Taaki at the compound, who was working on a project to make Bitcoin transactions and addresses impossible to track. Dubbed Dark Wallet, Taaki had partnered on the project with Cody Wilson, who had already gained fame for the 3-D printed gun design that wildly divided opinion about limits on technology available on the web.

Dark Wallet got a lot of buzz and PR in 2013-2014 but, like non-custodial Lighting wallets today, basically is missing-in-action. Speaking of MIAs, the author mentions Cody Wilson a couple of times in passing. Not that there needs to be a second edition, but in 2018 Wilson was arrested in Taiwan for sexually assaulting a 16 year old female. A year later, back in Texas, he pleaded guilty and had to register as a sex offender. Is he still involved in the coin world, a lot of bad actors have stuck around?24

On p. 86 he writes about Vitalik visiting Switzerland:

The second, Mike Hearn, began working on the Bitcoin code in 2009 and corresponded frequently with Satoshi over email. A former Google executive in Zurich, Hearn gained notice in 2016 when he announced that he had sold his Bitcoin and would no longer work on the project due to the constant infighting and personal attacks leveled by developers against fellow developers.

Mike and I were (briefly) colleagues at R3 between 2015-2017. I recall reading a draft of this specific blog post just days before he made that announcement. The New York Times also covered it. Contrary to what the always-on-maximalists claimed, Mike approached the NYT first and it had nothing to do with internal motivation from R3.25

On p. 87 he writes:

The constant infighting and antagonism – the cliques that formed and the internecine brawls among developers who may have had only the slightest difference of opinion – are almost as hardwired into Bitcoin’s ethos as the hash function. Vitalik now saw it firsthand and even met some of the combatants. The hostility of the community toward itself was beginning to make a mark on him.

This is true and has aged well. For instance, a couple of months ago “KnifeFight” – an employee at Blockstream – wrote a widely circulated post aptly titled The cult of Bitcoin culture, explaining the purity contests that go on within the company as well as the gesticulating occurring outside the company. A toxic demoralizing mess.

On p. 87 he writes:

What Vitalik faced as he delved deeper into the guts of what Bitcoin could be, how its engine could be rearranged or made to fit another purpose, is one of the central paradoxes related to the digital currency. Its greatest strength is also its main weakness. That is, Bitcoin is a wonderful vehicle for transferring value from one person to another, anywhere at anytime in the world, almost for free. Barring a complete shutdown of the Internet, no government or corporation or bank can stop it. This is exactly its design, as the title of Satoshi’s white paper blatantly spells out: “A Peer-to-Peer Electronic Cash System.” The code has worked for more than a decade, and has never been reversed, which is theoretically possible if someone – a rogue state for example – devoted enough computing power to overwhelm the network and change the transaction history for the purpose of stealing Bitcoins that have already been spent.

In an era of doxxed mining farms and mining pools, I wouldn’t go so far as to say that Bitcoin “can’t be stopped.” But putting aside hypothetical scenarios like a ‘Maginot line attack’ we have seen a couple of instances on Bitcoin itself of accidental forks that resulted in successful double spends, such as a documented occurrence in 2013.26

On p. 88 he writes:

That Bitcoin emerged when it did is a bit of a mystery. An intriguing essay from 2011 titled “Bitcoin is Worse is Better” examines the confluence of events that led to Satoshi’s breakthrough. Written by Gwern Branwen – a pseudonym for a writer and researcher who likes cats and lives in Virginia – the essay makes the case for that all of the elements needed to bring Bitcoin into the world existed long before 2008.

This is indeed a top notch explainer that I regularly recommend to newcomers (and often link to in footnotes).27

On p. 89 he writes:

All of this is to point out that Bitcoin – for all its success – is limited in how it can be adapted to other uses. It’s far from perfect: it’s clunky and uses an enormous amount of energy to secure its global ledger. In the end, it relies on whatever 51 percent of the network computers say is the truth to determine if Joe actually sent Mary five Bitcoin.

One recent estimate established that Bitcoin mining facilities used more water than New York City last year, and that was when the price was significantly lower than it is today (~$42,000).

On p. 91 he writes about Vitalik approaching the MasterCoin development team with an alternate roadmap, that they balked at:

That’s Vitali-speak for do whatever the fuck you want, I’m out. That shouldn’t diminish what he built. The protocol layer is what crypto nerds call this part of blockchain tech. It’s a bit boring but essential to the enterprise (rather like my beat at Bloomberg; no one really wants to know how the plumbing in the financial world works until it breaks). Vitalik was becoming a master plumber and dreamed of bringing whole groups of people together online in his blockchain world, like when he’d first become enmeshed in the community of rebels and scoundrels who populated the early Bitcoin scene.

Leising makes a really good point: no one really wants to know how the plumbing in the financial world works until it breaks. We saw that in after the 2008 financial crisis, during the Dodd-Frank hearings. We saw that again three years ago when Robinhood ran into collateral problems with the DTCC (the largest CSD in the world).

Chapter Seven

On p. 95 he writes:

Airbnb, Hertz, and Uber aren’t going to let Ethereum just roll into town and eliminate their businesses. These are global corporations with billions of dollars backing them. Then there’s the state of the actual technology. Ethereum is a long way from having the scale and robustness needed to support millions of users. Regulatory issues are another hurdle. But although the odds are long, there are plenty of people like Christoph, a theoretical physicist, who are willing to drop everything to work on Ethereum and willing to bet on the payout.

This is an example of how the book is mostly even-handed about its enthusiasm.

Chapter Eight

On p. 110 he mentions Primecoin for the first time, but doesn’t say what it is. He mentions it again a couple other times in the book, but unlike the other coins or tokens surrounding it (e.g., Mastercoin), no details are provided. My guess is that unlike most other “alt” coins in that era, Primecoin attempts to do “something useful” with the proof-of-work, in this case, search for chains of prime numbers.

Chapter Nine

On p. 119 he writes:

Amir Chetrit was also among the group of early Ethereum supporters who would go on to fund and organize the development of the Ethereum ecosystem. Vitalik had met Amir in Israel, where he was working on colored coin projects. Chetrit has a light presence on the web and couldn’t be reached to talk about his part in the history of Ethereum. To distinguish between the two Amirs in his life – Amir Taki and Amir Chetrit – Vitalik came up with nicknames for them. Taaki became “Anarchist Amir” and Chetrit was “Capitalist Amir.”

Ha!

Chapter Ten

On p. 135 he writes about the purported “DAO hacker”:

I’d been wrong about the man, just as I was wrong about the person I’d interviewed earlier that day at the Bloomberg bureau. In the coming weeks I learned that he wasn’t actually associated with the Ethereum address that had sent the encrypted message. While this happens from time to time in journalism, it’s still devastating. My source had gotten it wrong, and only after looking at a fuller transaction history in 2019 did my source see how the mistake had been made. There were many more links between accounts as ether or other crypto was moved around both before and during the DAO attack. What had looked simple in 2016 was now significantly more complicated. The capability of blockchain forensics was significantly less advanced in 2016, and so I had questioned an innocent man.

Unlike some of the blockchain-related books whose authors egos went unchecked, Leising ate some humble pie and moved onward.

Chapter Eleven

On p. 146 he writes about forks:

The option that changes the history of the blockchain is known as a hard fork and is one of the more contentious issues in the blockchain community. This began with Satoshi Nakamoto and the breakthrough he made with Bitcoin. Because every Bitcoin transaction is recorded and maintained by its blockchain, the problem of double spending is no longer an issue. Double spending had foiled previous e-cash projects, because if you can’t prove that the digital coins you sent to me weren’t already sent to someone else, those coins will have no value. Or put another way: maybe you just made those coins up and are trying to pass them off to me for a price. Bitcoin eliminated these possibilities by having its blockchain network check the history of every Bitcoin sent over its network. If the Bitcoin I’m sending to my mom can’t be verified by the Bitcoin network as belonging to me based on that Bitcoin’s transaction history, then my mom won’t be getting any Bitcoin from me. Sorry, mom.

This is mostly correct. The key quibble is that Bitcoin did not get rid of the issue of double spending, its use of proof-of-work forces attempted double spending to consume resources. That is to say, since any participant wanting to build the next block must submit a proof-of-work that fulfills the difficulty requirement, real resources must be consumed in that process (e.g., electricity).

In fact, as noted earlier: an accidental fork in 2013 resulted in a successful double spend of $10,000. There are successful double-spending attempts on other proof-of-works chains too, such as Ethereum Classic.

Source: Coin Desk

Chapter Twelve

On p. 150 he writes:

This might sound super geeky, and you may wonder why anyone would need to know this, but the diversity of Ethereum clients actually prevented the entire network from going down when it was attacked on New Year’s Even in 2019. The clients that run Parity were targeted and so were taken offline, but the attack didn’t work on the clients that were running Geth. That meant that Ethereum stayed alive during the 14 hours the Parity team took to release a software patch to fix the bug. The Parity attack is about as good an example as you’re going to get of why decentralization is held in such high regard among the people who truly understand blockchain.

This is a really good point. Throughout the book, Leising discusses how client pluralism has been a cornerstone to the Ethereum project since day one. Strangely, a contingent of Bitcoin Core developers seem dead set against client pluralism, even though Bitcoin has faced a liveness issue before.

On p. 158 he writes:

Blockchain as a business was still relatively new in Silicon Valley at this time. There was already quite a bit of money backing Bitcoin ventures, like the San Francisco exchange Coinbase. Andressen Horowitz had been early to that game. And Dan Larimer’s BitShares had made the rounds on Sand Hill Road. Yet the debate over “blockchain not Bitcoin” was only just beginning: the idea that while Bitcoin is great, the underlying blockchain technology is the real breakthrough that would enable entire industries to modernize and achieve unheard-of levels of efficiency. The debate enraged many on the Bitcoin side, who bristled at the idea that Bitcoin was some secondary product. On the blockchain side of the argument stood people like Vitalik, who in the first line of his white paper and during his talk in Miami made the case. “In the last few months, there has been a great amount of interest into the area of using Bitcoin-like blockchain, the mechanism that allows for the entire world to agree on the state of a public ownership database, for more than just money,” he wrote in his paper. Ethereum sprang entirely from this belief, but in February 2014 it was still too early for the moneybags in Silicon Valley to have caught on.

This is fairly accurate. Chronologically the “blockchain not Bitcoin” motto did not arise until 2015, from VCs such as Adam Draper. But Leising is correct, that in early 2014, the VCs that were exploring cryptocurrencies were typically only interested in Bitcoin. A few, like Pantera, even used maximalist-like views in their publications. I witnessed this first hand at various meetups that year.28

On p. 161 he writes about Quadriga and Gerald Cotten:

In 2018, I’d traded emails with Cotten. I was working on a story about the refusal of many banks to work with crypto exchanges. “The situation here in Canada is such that it is very difficult to obtain a bank account for cryptocurrency exchanges,” Cotten wrote to me in response to question. “All five of Canada’s big-five banks (we have an bit of an oligopoly here on banking) will not permit a cryptocurrency exchange (or any business related to cryptocurrency for that matter) to have an account.” That meant Quadriga had to use a series of payment-processing companies to move customer money in and out of the market. One of these was called Crypto Capital Corp., which also processed money for the controversial exchange Bitfinex and its related entity Tether.

Leising was one of the first mainstream reporters to cast a critical eye at Tether LTD. For instance, in December 2017 he penned a Bloomberg article: There’s an $814 Million Mystery Near the Heart of the Biggest Bitcoin Exchange.

Yet despite these bonafides, some Tether Truthers ignore his contributions to that investigation.

Chapter Thirteen

On p. 181 he writes:

But if a global network of computers became judge and jury, the way humans interact with each other would radically change. That sounds crazy, doesn’t it? That we’d let a global network of computers decide human conflict? For starters, it assumes the inputs will be there to come to a decision. I can imagine something like this for a very simple conflict, maybe a dispute about an insurance policy in the time of a natural disaster. The inputs are there, the details, and they could be boiled down to yes/no questions like, Did the hurricane occur? Was it covered in the policy? But I have a very hard time seeing this global network dirty its circuits with, say, a divorce. Imagine “a disinterested algorithmic interpreter” trying to navigate charges of infidelity or abuse. And yet while this sounds ludicrous to us now, how must it have sounded in 1970 to hear about a global network of computers that sends information anywhere in the world instantly and for free? So, I don’t know, maybe Gavin Wood’s vision is the far reaches of what I’m trying to get across to you about Ethereum. Maybe this is the 100-year plan.

This sounds a bit like parametric insurance. As far as I am aware, the first product along those lines that was released was Flight Delay from Etherisc. Unfortunately, despite a lot of marketing, most of the “DeFi insurance” products to date are effectively centralized and some require claims committees to signoff on payments.

On p. 183 he writes about internal drama at the Ethereum Foundation:

Only a year before Vitalik had thought of Ethereum as a side project, something he’d work on for a few months before returning to his studies at the University of Waterloo. But then it gained traction. Serious traction. It was idea so many Bitcoin adherents had been waiting for, the next. The reaction he garnered from the blockchain community had sent the message that he couldn’t build his project on top of another existing blockchain like Primecoin; he had to make his own. And here he was six months in, in the throes of that building, and it seemed as though it could all fall apart. While the idea had spread externally all around the world as Ethereum captured the imagination of a good number of very smart computer scientists, the kitchen council Vitalik had assembled was on the verge of dissolution. The discord could cost him the whole project if he wasn’t careful. He’d now devoted years of his life to Ethereum, and he was all in. He had to save it.

There’s a little inconsistency on the time described in the passage above. At the very end the author states that Vitalik has now “devoted years of his life to Ethereum” but sentences earlier says it is about a year old. Not a big deal, just a little distracting. Also he wrote the word “next” in italics. What comes after “next,” was it accidentally dropped?

On p. 191 he writes:

“I said, by the way, why is it that making a foundation in Switzerland is so hard that we have to give up on the foundation do the for-profit?” he said. The lawyers were again consulted, and they came back and said, it’s actually not that hard to set up a Swiss-based foundation.

“When I got this news, I was like, ‘hey guys, joy, we don’t have to make a profit anymore!” Vitalik said.

I chuckled.

On p. 200 he writes:

He took the opportunity to update people on the progress they were making. They now had four clients in various stages of production. In addition to the C++, Python, and Go clients, one was being built in Java by Roman Mandeleil. Vitalik had always felt it important to have Ethereum written in as many computer languages as possible, if for no other reason than it would be impossible for one group – say Java developers – to dominate the project. It was also to address a security concern: if one or two clients were disabled in a malicious attack, the network could continue to run on the unaffected clients.

Another good example of client pluralism and diversity.

On p. 201 he writes:

It shouldn’t be overlooked that cryptocurrencies enabled an entirely new funding model for startups. An ICO allows direct fundraising from users or investors or speculators, without the need to go to VC firms for seed money or banks to undertake the long and complicated road to an initial public offering. This was decentralized finance in its purest form, and as the world would see in just a few years, staggering amounts of money would be raised – and lost – by crypto firms via the ICO market. The scams and charlatans were everywhere: you were lucky to get a white paper to explain some projects. Some white papers brazenly plagiarized existing ones. The funds raised through an ICO were meant to fund development of that particular project, of course. Yet that happened only very infrequently at best. Most of the money raised was dumb money looking for the next big rising star. The ICO market also gave rise to a host of shady cryptocurrencies that traded on shady exchanges that did no due diligence checks on their users, meaning price manipulation was rampant. Scammers brazenly organized pump-and-dump schemes on chat boards, and to call this period of crypto the Wild West does a disservice to frontiersman. There were laws in the 1800s, of course; they simply ignored them. The ICO market was a law-free zone.

This was a concise, well-written overview of that time period. One that should have been the focus of anti-coiners but for some reason, has not.

Chapter Sixteen

On p. 213 he writes:

As June turned to July, the Ethereum community – and the blockchain ecosystem in general – carried out a vigorous and sometimes pointed debate about the merits of changing Ethereum’s history to erase the DAO fiasco. Peter Todd, a well-known if contentious Bitcoin developer, wrote on his blog, “This fork is a very bad idea, and I’m not alone in thinking that.” He cited a tweet from the time (which seems to have since been deleted) from a user name Ryan Lackey, who describes himself in his Twitter bio as a cypherpunk. Here’s what Lackey wrote, typos and all: “”I’m impressed how Ethereum managed to take a compromise of DAO into an opportunity do destroy all of ETH by killing fungibility/ect.”

This is a good example, and not even the tip of the iceberg of the anti-hard fork mentality that pervaded the Bitcoin ecosystem then (and still today). Both of the people Leising mentions are vocally opposed to hard forks even though empirically we have seen how frequently the merits outweigh the demerits.29

Continuing on p. 213 he writes:

Peter Todd, who incidentally had attended the first Bitcoin meetup in Toronto at Pauper’s Pub, spelled out his wishes for how the hard fork decision should be made. A clean vote of token holders was essential, he said.

“Soft or hard forking as a response to the DAO attack isn’t technical minutia: not only are there tens of millions of dollars at stake, but many (most?) of the core Ethereum developers also have significant financial interests at stake,” he said. “Put it up for a vote, one coin, one vote, and get cryptographic proof that you’ve actually got the support of the people who have invested their funds in Ethereum.”

I didn’t then and don’t know have a strong view as to how to determine what the course of action should have been. I did write about the hard fork at the time, and I do think, in retrospect that a hard fork was probably the right thing to do. Empirically Ethereum Classic still exists but it never really gained much following beyond a slice of the Ethereum world who insisted on their interpretation of “code is law.”

But putting about what should or shouldn’t have happened in that instance, later during the Bitcoin block size civil war – that culminated in 2017 – a group of miners suggested a similar process: one coin one vote. For instance, throughout that year, a supermajority of miners indicated they supported the Segwit2x proposal. It wasn’t until F2Pool stopped supporting it that the rest folded and the promised “2x size increase” was finally dropped. With the enormous amount of lobbying that had taken place since the Hong Kong roundtable in 2016, miners faced a bait and switch. At the time, commentators such as Greg Maxwell and Peter Todd, downplayed the significance of such a signaling.30

On p. 216 he writes:

After the Zug meeting, Vitalik headed to San Francisco for a summit of the Thiel Fellowship. He’d been named a fellow in 2014 and had been awarded $100,000 to fund the continuation of Ethereum. Overall he’d been a bit disappointed in the summit; he’d hoped to meet Peter Thiel, a successful venture capitalist and founder of Palantir Technologies, the enormous and secretive data mining and analytics firm that features in the nightmares of privacy advocates the world over (an April 2018 Bloomberg Businessweek story carried the headline “Palantir Knows Everything about You”). While some of the sessions were boring, Vitalik did meet Nick Szabo at the event, whom he described as “one of the major pre-Satoshi pioneers of cryptocurrency.” It turns out Szabo was putting a substantial amount of work into Ethereum, Vitalik wrote home in an email.

I met Szabo a couple of times at events in 2014-2017 in the Bay Area. The last couple of times he wouldn’t even make eye contact with me in part because he – and his wife, Elaine Ou – became outspoken supporters of Ethereum Classic and were also Bitcoin maximalists opposed to hard forks.31 In fact, Szabo changed his Twitter profile name to include “No2x” during the block size civil war; neither was in favor of the Segwit2x proposal.

Chapter Eighteen

On p. 230 he writes about Microsoft:

Marley Gray was a big fan of Ethereum from early on. In the announcement about the deal with ConsenSys he wrote, “Ethereum provides the flexibility and extensibility many of our customers were looking for. With the Frontier release last summer, Ethereum is real and has a vibrant community of developers, enthusiasts and businesses participating.

It is interesting, although not surprising, that Leising reached out to and spoke with Marley Gray, who is currently still at Microsoft. What is surprising, and I mentioned it before, was that neither Ben McKenzie or Jacob Silverman seem to have reached out to Gray and Yorke Rhodes when writing Easy Money.

On p. 230 he writes about the formation of the Enterprise Ethereum Alliance (EEA):

Andrew Keys didn’t see eye to eye with Ming, and said she made several business decisions that hurt early Ethereum adoption. A big one involved IBM, which was considering using an altered version of Ethereum for its blockchain research and development. The deal would be enormous for the fledgling foundation. “IBM has a tremendously powerful distribution arm,” Keys said. “I didn’t appreciate until ConsenSys how embedded IBM is into Earth – all the central banks, all the banks, all the supply chains.” Keys said Ming wouldn’t take calls from IBM executives Jerry Cuomo, vice president of blockchain technologies, and John Wolpert, a global product executive for blockchain. IBM ended up creating its own blockchain, Fabric, for its R&D.

One of blockchain-histories great “what-ifs…” What if IBM had pursued a fork of Ethereum instead of Fabric, a platform that has not grown like gangbusters. What-if R3 had pursued a variant of Ethereum, instead of Corda, eschewing Richard Brown’s love affair with the UTXO model?32 Interestingly, Wolpert later left IBM and created Baseline, an Ethereum-related project supported by ConsenSys and the EEA.

On p. 232 he writes:

ConsenSys wrote some code for use with Linux and Marley handled the cloud computing side and soon they had the Ethereum Blockchain as a Service product ready. Marley specialized in financial services innovation for Microsoft, so he knew that Morgan Stanley and Goldman Sachs wanted to experiment with private blockchains. The demand was there.

And Marley was correct. Even today there is interest in private chains and subnets, such as those attached to Avalanche and its clones (such as Metal).

On p. 233 he writes about Microsoft:

“Then an email comes in, ‘ding,'” Marley said. “I look down and two threads below is Satya; he’d read a Reuters article and sent it to his direct reports, the entire leadership team.” The news agency had put out a story earlier that day with the headline “Microsoft Launches Cloud-Based Blockchain Platform with Brooklyn Start-Up.” Marley hadn’t seen it.

“This is the perfect example of growth mind-set,” Satya had written to his deputies in the email. “And I was like, okay, we’re here,” Marley said. “That’s was how everything else got started.”

Reaching out for a first hand quote is one of the reasons is one of the strengths of this book. In contrast, the lack of first hand reporting – especially with their passing comment on Microsoft – is why Easy Money needs to do a mulligan.

Chapter Nineteen

On p. 238 he writes about the 2016 hard fork:

One way the community had kept track of sentiment around the hard fork was through an online “voting” system called Carbon Vote. It allowed Ethereum holders to use their ether to signal whether they supported or opposed the hard fork. The vote was nonbinding, but it did serve as a way for people like Vitalik to gauge where the support lay. As of July 16, 87 percent of the ether holders had voted in favor of the hard fork.

It’s coincidental timing because as of this writing in Bitcoinland there is a feud between certain Core developers – such as Luke-Jr (who control the BIP process) – and dapp developers such as Taproot Wizard and Ordinals. Will it resort in a hard fork? Will Ocean Mining and its supporters smother inventiveness once again?

On p. 239 he writes about moments after the hard fork successfully occurred:

“It felt like the battle had been won at the time, so we opened up the champagne,” Gun said. He’d printed labels for the bottles that said, “Congratulations on the fork,” complete with a picture of the contentious utensil.

“It was shit champagne,” Alex said. They took pictures and posted them to Twitter, which caused an immediate backlash. People online, many of them probably not fans of Ethereum to begin with, said look at these rich jerks with their champagne after they’ve desecrated the idea of blockchain immutability.

A year after the hard fork, one of those anti-Ethereans, Greg Maxwell, pulled out the “champaign” in honor of sky high fees in the Bitcoin mempool. This was in mid-December 2017 at the height of a bubble. Those fees would quickly subside with the deflation of the bubble but the fact that a Bitcoin Core developer celebrates “high fees” is a weird one.

On p. 240 he writes about how ETH Classic arose due to miners (mining pools) providing hashrate for it:

“What f2pool basically did is they forgot to install the code to run on the fork,” Vitalik said. “To this day I have no idea if that was just them being stupid or whether that was a deliberate strategy on their part.” The thing that’s weird about this is that for the first several block on a forked blockchain, the economics are terrible for miners. The blocks are very difficult to process and have little or no reward to offer a computer that puts in the work. This is why people expected the old chain of Ethereum to die off: it just didn’t make economic sense for anyone to keep it alive.

In other book reviews I’ve mentioned Deadcoins, which is a continuously growing catalogue of dead coins, including proof-of-work-based coins.

Speaking of which:

Source: 2Miners

Above is hashrate chart of yet another fork of Ethereum called ETH PoW which arose over a year ago when Ethereum (ETH) flipped over to proof-of-stake. A number of miners wanted a way to keep the golden goose going, so they made a fork. You can see exactly when the price of the ETH PoW coin rose in value about three months ago (it rose alongside the rest of the market). Is this a particularly healthy looking hashrate chart?

On p. 240 he writes:

“There is this possibility that f2pool was pretending to be stupid but really they were trying to help the ETC chain along,” Vitalik said.

That seems possible. Not a huge surprise that f2pool was one of the earliest supporters of ETH PoW as well.

On p. 241 he writes:

The email was from Greg Maxwell, a Bitcoin Core developer and diehard supporter of Bitcoin in its purest form. He’d already publicly and harshly criticized Ethereum as going in the wrong direction and was known to be no fan of Vitalik or the Ethereum Foundation.

I think there are Bitcoin fans and supporters of say, Ordinals, who would argue that maximalists, such as Maxwell, are not supporters of Bitcoin in its purest form. For example, as mentioned in other book reviews: Samuel Patterson went through everything Satoshi ever wrote. Unsurprisingly Satoshi discussed payments significantly more than a “store of value” or other narratives that maximalists like to pivot to.

For one reason or the other, Maxwell became vocally anti-hard fork and vocally-anti bigger blocks circa 2015-2017. As CTO of Blockstream, and a gatekeeper in the Bitcoin Core BIP process, he used his influence to demonize Bitmain (remember Antbleed?) and change the roadmap away from SegWit2X to just SegWit.33

On p. 241 he writes:

“If Vitalik actually believed what he was telling others he should have taken my offer – or at least a better one like it from someone else,” Maxwell said. “A high counteroffer would have allowed me to establish that he was being dishonest about his opinions and aided me in arguing some sense into other people (and potentially saved some people from losses).”

When I speak to journalists how maximalists all seem to think they are gods of finance and trot around on high horses, this is the type of ‘concern trolling’ statement that I will refer to. Why does anyone need to conduct commerce with Maxwell? Who owes it to him?

On p. 242 he writes about the Ethereum fork:

This doesn’t happen in traditional finance. If something happens with a publicly traded company like Ford, you don’t suddenly have a clone of Ford to deal with.

Precisely why the ‘colored coin’ narrative that Chain.com and Symbiont used in 2015 made zero sense. Proof-of-work networks cannot guarantee settlement finality making them an unsuitable type of blockchain for securities transfers which require such legal and technical guarantees.

On p. 243 he writes:

The creation of ether classic is different – I think this one is an unforeseen consequence. It has to be, as no one seemed prepared for it or had planned on what to do if the hard fork wasn’t unanimous. While the hard fork had the support of basically the entire Ethereum community, the result played right into the hands of the thieves it was meant to thwart. Was anyone really in control as Ethereum lurched from one disaster to the next?

Fast forward to the first week of 2024 and Ethereum Classic still exists and actually received some additional attention in late 2022 when Ethereum switched to proof-of-stake. Is there a vibrant dapp ecosystem? Unfortunately it is currently difficult to independently separate ETC from ETH in the Electric Capital developer report portal.

Stylistically, it is unclear why the author used lowercase “ether classic” versus uppercase. Also, why uppercase Bitcoin but lowercase ether?

On p. 244 he writes:

It’s worth noting that some people who pushed ether classic at the beginning have a dark history. The RHG had changed; it had lost some of its founders, like Alex Van de Sande, and added new people. They now referred to themselves as the White Hat Group, and early interactions between the WHG and ether classic owners got nasty. I’ve spoken to several WHG members who asked me not to write about this part of the story; it’s still traumatizing to them. Threats were made, some in the WHG fell into depression and had suicidal thoughts, I was told. Some of the ETC supporters were bad people. But I never planned to write about this part of the story anyway. From the outset, I wanted to stop after the hard fork. There is another whole story to tell, another book, I’m sure, about what occurred behind the scenes in the early months of ether classic coming on to the scene. But I am not including that story here.

Some vocal ether classic supporters who were not exactly nice online include: Elaine Ou, Nick Szabo, Donald McIntyre, and Barry Silbert. Separately it is kind of funny that elements of the ETC community felt compelled to hold a POW Summit last year, to lionize PoW and demonize PoS. That would be like physiologists hosting an Appendix Summit focused on why we should Make the Appendix Great Again. Proof-of-work mining, like the appendix, are vestigial and should be quietly put to rest.

Lastly, I think chronologically if you read this book, you probably will find The Cryptopians a pretty good part two as it adds to the WHG and ETC formation story line.

Chapter Twenty

On p. 247 he writes about Tomoaki Sato

Born in Tokyo in 1993, Tomoaki had attended one of the city’s best high schools but dropped out of university. Once he discovered Bitcoin in 2013 he started reading pieces by a writer named Vitalik Butein. He was too young then to buy Bitcoin. Years later, he heard about Ethereum and was able to buy a little ether in the crowdsale. In November 2015 he went to DevCon 1 in London, where he met Vitalik, Gav Wood, and others. It was an exciting time. While not many people knew about blockchain in Japan at first, that soon changed, and Tomoaki created Smart Contract Japan in 2015. He wrote code and hired engineers to help with blockchain projects as demand rose. One of his previous jobs had been helping people recover passwords to their Bitcoin wallet, which is no easy feat. He also made fixes to the Ethereum Go client, according to his GitHub page.

Leising explores Tomoaki as a potential candidate for The DAO hacker. Coincidentally I met Tomoaki a couple of times, once at the tail end of 2015 at a Bitcoin meetup. In contrast, Laura Shin, who also wrote a book covering Ethereum’s history, believes The DAO hacker is Toby Hoenisch.34

On p. 252 he writes:

After more reporting and a bit of luck on the blockchain, I came to suspect Tomoaki. In January 2020, I thought he was the ether thief, so I wrote it that way. I want to be clear, however. I’m not accusing Tomoaki of being the ether thief. I can’t make that claim; I don’t have any direct evidence for it, just a link from a source I’m not naming and Tomoaki’s own words when we spoke.

Unlike McKenzie and Silverman who use lots of innuendo in Easy Money, Leising explicitly says he does not have evidence for a specific accusation.

On p. 252 he writes:

Eventually, Tomoaki wrote back to say he checked and discovered he closed his Poloniex account in 2018, so he couldn’t provide screenshots from 2016. As for ShapeShift, he said the exchange didn’t keep records of customers’ transactions in 2016.

In September 2018, ShapeShift was at the center of a featured exposé from The Wall Street Journal. Subsequently ShapeShift introduced some KYC measures that led to an exodus of users, only to go “full DeFi” and eschew the same KYC measures two years later.35

Chapter Twenty-one

On p. 253 he writes:

Corporate support for blockchain as a platform, which had started a year before with Microsoft coming aboard as a lead sponsor of DevCon 1 in London, only grew at DevCon 2. The likes of IBM and R3, l a consortium of all the world’s largest banks that were now experimenting with blockchain, were major presences in Shanghai. The problem was, they were slagging off Ethereum, saying it couldn’t be trusted for commercial applications.

This is sort of true. I was at DevCon 2 in Shanghai (and gave at least one presentation at the accompanying International Blockchain Week event). I believe only one or two representatives from each company made a panel appearance, so it is not like they were a huge presence.36

On p. 254 he writes:

To form these private networks, banks and corporations didn’t need to use the public blockchain systems that had made Bitcoin and Ethereum successful. There was no need for JPMorgan and Bank of America to use a proof-of-work system to mine blockchain transactions because they already knew each other. A proof-of-work system is only needed when strangers are interacting. It injects trust into a transaction where the parties don’t trust each other. JPMorgan and Bank of America, on the other hand, already trade billions of dollars’ worth of financial products between themselves every day, both for the bank’s own account and on behalf of their customers. People began applying the term distributed ledger instead of blockchain to this kind of transaction system.

This is mostly correct. But I don’t think it’s fully accurate to say that PoW is only needed when strangers are interacting, it is a vestigial process. Proof-of-stake implementations didn’t exist in 2007-2008 when Satoshi was designing Bitcoin, yet today in 2024 it is PoS that has become the dominate method deployed by new L1s. Also, it’s debatable whether “trust” is injected into a transaction. But what we can probably all agree on is that PoW requires the consumption of real resources in order make reordering the blockchain expensive. Whereas PoS does not require such consumption.

It bears mentioning that empirically regulated financial institutions largely eschewed using proof-of-work networks to deploy life cycles of assets. Will these trend change now that Ethereum has transitioned to proof-of-stake via the rise of “real-world assets” (tokenized off-chain assets)?

Lastly, I am the author of the mostly widely cited paper discussing permissioned distributed ledgers: Consensus as a Service (published in 2015). And the origin of the term “DLT” comes from Robert Sams.

On p. 254 he writes:

John Wolpert from IBM and Richard Gendal Brown from R3 presented at DevCon 2, “both of which had slides in it that basically said companies can’t trust Ethereum, it’s a fringe open-source project that can’t be trusted for commercial work,” Millar said.

That’s probably an accurate characterization, at least, that is the type of narrative that both individuals had – at that point – pushed. It’s worth pointing that a year after DevCon 2, as mentioned before, Wolpert left IBM and joined ConsenSys where he led the Baseline Protocol efforts. Fast forward to today, Brown still works at R3 and Corda – the distributed ledger R3 develops – does not appear to have gained much traction outside of its initial support group.37

On p. 254 – 255 he writes:

Microsoft’s Marley Gray was in Shanghai and remembered the IBM and R3 presentations. “IBM was particularly heavy on the FUD,” he said, referring to the acronym for “fear, uncertainty, and doubt” that crypto people use as a shorthand for anyone criticizing their work. “I still give Jerry some grief about that,” he said, referring to Jerry Cuomo, IBM’s VP of blockchain technologies.

We could probably write a lengthy blog post or two on the anti-Ethereum narratives that specific individuals at these companies employed. It bears mentioning that in my role on the Research team at R3, we attempted to remain militantly neutral — I got into numerous disagreements with several executives and senior staff on the topic of ‘anything maximalism’ . On this point, during my tenure the Research team worked with Vitalik Buterin and others in the public chain world on research papers that certainly did not kowtow to the Corda-centric world that currently dominates R3.

On p. 255 he writes:

Joe Lubin, Vitalik, Jeremy Millar, Marley Gray, Alex Batlin, and Andrew Keys were among the people in Shanghai who had the first conversations about what would become the Enterprise Ethereum Alliance. About 10-12 people intially joined the group, which Joe bankrolled until membership dues were enough to pay the bills. Marley Gray offered the Microsoft offices near Times Square for EEA meetings.

The only small quibble I have is that there was an informal precursor to the EEA that Vitalik was also connected to sometimes referred to the EEO. The EEO was a loose set of about a dozen Ethereum-focused projects that aimed to cooperate in areas they did not compete in. In its short life (less than a year), its ‘members’ predominantly were based in Asia, but also included at least one in the UK.38

On p. 255 he writes:

The Ethereum codebase would need some work as well if it was going to appeal to businesses. This was the early advantage IBM’s Hyperledger project and R3’s Corda blockchain had over Ethereum.

One small correction: Corda is not a blockchain. Note: the original Corda white paper (written by Mike Hearn) explicitly says it is not a blockchain (err ‘block chain’).

The Hyperledger project referred to above is “Fabric.” While it initially did receive enormous amounts of contributions and attention by a number of technology companies, it really did not see much wide adoption. IBM, which was the chief flag bearer for Fabric, axed nearly all of its blockchain-specific team and has now set its sights back on A.I. (again).

Also, the effort by the EEA to create and deploy a single standard implementation took significantly longer than expected. In the meantime, JP Morgan and ConsenSys deployed open source implementations catered to the needs of enterprises before the EEA did.

On p. 255 he writes:

Marley Gray said Ethereum was under pressure from other enterprise blockchains like Hyperledger that had better privacy controls and performance. “Corda was starting to make some noise. We felt like if we didn’t do something…,” Gray said.

Again, same nitpick: Hyperledger is an organization within the Linux Foundation. It helps incubate a number of blockchain-adjacent projects. At the time the book was published, the most prominently known Hyperledger project was Fabric, and IBM was a key sponsor and contributor for that.

Fast forward to the present day, on mainnet it seems like some (not all) of the performance considerations have been partly handwaved away (not necessarily resolved) with the launch of zk-proof-based rollups dubbed the zk EVM universe (such as Starkware and zkSync). Privacy controls is still unresolved on mainnet, although that can was quasi kicked down the road and in the meantime permissioned liquidity pools – such as ARC on Aave – were launched (but not really used). Will those types of pools provide comfort to regulated financial institutions?

On p. 256 he writes:

The team Baldet joined was known as first as Gemini, which oversaw several avenues the bank was pursuing. One area was strategic partnerships, like the investments JPM had made in startups Digital Asset Holdings and Axoni. Another was the issue of using public blockchains for business, which is problematic because public blockchains reveal too much information for businesses to feel comfortable using them. To address the latter issue JPM could try to use Ethereum – if Ethereum could be tweaked to be more private – or go with R3 and its Corda blockchain or build its own internal blockchain from scratch.

Again, it’s probably a fools errand to correct at this point but let the record show that Corda is not a blockchain per se, although it is frequently marketed as one. In fact, over four years ago R3 sued Coda – a public blockchain project – due to the similar name. Despite the fact that Corda whitepaper literally says Corda is not a blockchain, the Coda community changed its name to Mina.

On p. 257 he writes:

“The public Ethereum blockchain absolutely makes a lot of sense, but if you’re going to be trading security tokens between regulated banks then you didn’t need to have the burden of proof-of-work,” Alex said as each member of the bank-trading network would be known to each other, UBS used a system called proof-of-authority, which doesn’t require an ungodly amount of electricity to maintain.

It is likely that the proof-of-authority (PoA) implementation that is referred to here is most commonly associated with the Parity implementation (developed by Parity Technologies, formerly Ethcore). When the book was published, Istanbul BFT (IBFT) was under testing by the Enterprise Ethereum Alliance. And last year the QBFT, a variation of IBFT, was published by the EEA. It is unclear what the uptake of IBFT or QBFT is at the time of this writing, however the general trend continues as described in the book: regulated banks are issuing tokenized assets on PoS networks, not PoW.

On p. 258 he writes:

Lastly, there is the thorny problem of national interests in securities markets. For understandable reasons, perhaps, most countries have centralized control over their own domestic stock markets and the associated back-office settlement procedures that are arguably more important. That makes it difficult to sell shares across the world because business in London has to be reconciled with US-based business, and Asian share purchases have to be reconciled with sales of shares in the Middle East. You get the idea.

“A distributed ledger technology, or blockchain, is perfect because it’s both local and global, so you no longer need to reconcile between nations,” Batlin said.

This still the pitch and grand vision by the tokenization and digitalization movement(s). To be fair, Batlin never said it would be easy or fast.

On p. 259 he writes:

JPMorgan took this idea seriously and soon realized that just sticking a blockchain into an existing financial market only adds another layer of complexity, often without improving efficiency. “But what if we built a new debt instrument from scratch on a blockchain?” Christine Moy said. “That’s where the cash token was born, or JPMCoin was born.”

JPMCoin not only still exists but the projects it touches has grown under the Onyx umbrella and the Tokenized Collateral Network (TCN).39

On p. 261 he writes:

In a larger sense, though, while the EEA was helping establish Ethereum as fit for business, Amber and a lot of other people involved with the group wanted enterprise blockchains to lead to a better public blockchain system. The hope was that, like in the early days of the Internet, private intranets would one day merge with the public Internet. If in business or on the public chain, many in the Ethereum community wanted to move the ball in the same direction.

I never thought this was a particularly compelling argument. In fact, while it was widely echoed at conferences, it’s not a really accurate description of how “the Internet” actually works. What we call “the Internet” is just an amalgamation of peering agreements between a sundry of ISPs. Also, there are perfectly sane (security) reasons for why corporate, governmental, medical, military, and other organizations would prefer to maintain a private intranet versus connecting it all a public internet.

Chapter Twenty-two

On p. 267 he writes:

At the smaller venue Decentral used, called the Fishbowl, I overheard a comment outside the yurt-like tent: someone said that understanding this technology deeply isn’t necessary, that it’s all about bringing all sorts of varied people into the mix of blockchain and decentralized markets. Griff was in full Santa regalia that day and spoke with a group of people who were a mix of novices and people like Jonathan Levi, who helped create the Linux Foundation’s Hyperledger Fabric, an open-source blockchain system used by tech giants IBM and Cisco. Once I realized who he was, I wanted to tell the people in the tent how lucky they were to be asking him questions in such an intimate setting, but that’s not exactly Burner culture.

Unlike the previous mentions of “Hyperledger” as a singular project, Leising accurately describes it. Again, there is no need for a second edition, but if there was one, harmonizing this inconsistency would get a thumbs up.

On p. 269 he writes:

In October 2019, the SEC granted Paxos Trust Company, a blockchain company that caters to financial institutions, the green light to settle stock trades in near real time. This wasn’t a pilot program or a proof-of-concept, as Wall Street has been so fond of doing for years. It’s real stock trading in US equity markets. The move was seen as a direct threat to the Depository Trust & Clearing Corporation, the industry-created body of banks and brokerages that works to settle trades in a centralized fashion, and it marked a turning point in the DTCC’s half century of dominance in the equity market.

It’s not clear how many equities have been traded or settled through Paxos but they did announce about 15 months ago that nearly $50 billion of commodities had been settled through the Paxos Settlement Service since inception. Maybe it stalls or goes nowhere, but I’ve always wondered why Bitcoin maximalists and anti-coiners pretend as if this type of service does not exist.

For instance, a few years ago Jorge Stolfi – a prominent anti-coiner – made a priori claims that clearly were untrue about the DTCC (and Project Ion). Again, maybe all of these settling-securities-on-a-blockchain efforts fizzle out. But they exist in production, that in itself is evidence that contradicts the a priorism heavily used in both Popping the Crypto Bubble and Easy Money.

On p. 269 he writes:

The DTCC isn’t letting its business be taken away that easily, though. In a different area of what it does it’s using distributed ledger technology, or DLT, to help improve how credit default swaps are managed. CDS trades became notorious during the 2008 financial crisis, of course, and efforts to regulate them included requirements that completed trades be collected and maintained in a common location. That gave rise to the DTCC creating its Trade Information Warehouse. While such trade repositories have always been centralized in the past, DTCC is close to implementing a distributed ledger that would allow the banks and investors that trade CDSs to all be on one private network. That network is based on Ethereum.

I believe Leising is referring to Axoni, a NYC-based fintech company that was initially focused on the TIW project from the DTCC. It has since launched al derivative-focused blockchain called Veris. As of this writing it is unclear what level of activity is taking place on it.

On p. 271 he writes:

It’s an open question as to whether these blockchain advances in the corporate and financial worlds will continue. If it’s a big corporate interest that first makes a breakthrough with DLT – say an insurance company or a global supply chain – I’m not sure we’ll even notice that something has changed. The mechanics of how actuarial tables and trade routes work play out behind the scenes, and there’s not reason to think big efficiency gains would make for compelling news. Any blockchain breakout – if it happens – would more likely be noticed on the consumer front. It’s likely that some form of crypto will be required to interact with a blockchain app. That could be ether, or it could be a stable coin (which is still digital but isn’t supposed to fluctuate in value because it’s collateralized in some fashion to tie it to a real-world asset like the US dollar). It would need to be easy to buy that crypto and easy to use the app. Then you could see real threats to companies like Uber, Airbnb, and eBay – and basically any company that sits in the middle of a transaction and takes a fee for the privilege.

Fast forward to the present day, nearly four years later, and as mentioned before IBM dramatically reduced its blockchain-related headcount as did many of the other vendors who were focused on “blockchains” as if it were a software licensed product versus a shift in market structure. Nearly all of the consortium efforts have disappeared too.

Also worth pointing out that this was the first and only mention of “stable coins” as the book manuscript was completed before “DeFi summer” – a time period which heavily (parasitically) relied on this 3rd party collateral.40 One wonders why neither Easy Money nor Popping the Crypto Bubble provided a concise definition of “stable coin.”

On p. 272 he writes:

And as can be seen from its history, Ethereum has always gone much slower than people said it would go. It’s like the crowdsale that was always two weeks away. It can feel like the entire Ethereum ecosystem lives in that wait-and-see moment. The challenges are on many fronts too, and not just related to how to get people to use Ethereum-based products. The challenges are technical as well. For what it wants to be, Ethereum needs serious improvement in its performance stats. Visa claims its payment network can handle more than 24,000 retail transactions per second. Ethereum is a fast blockchain that does 15 per second. (Though it should be point out, you could potentially be sending an enormous amount of money, say $50 million, over the Ethereum blockchain. Try that on your Visa card.) In late 2018, Vitalik said on Twitter that an optimistic view would see Ethereum increase to 3,000 transactions per second with the improvements it was making, which shows you how very far it has to go.

I think this is an apples-to-oranges comparison: Ethereum wasn’t designed to be a retail payment network, but rather a “world computer” that could host a bunch of different things. Should the architects and designers have focused on a specific niche instead? Reckon time will tell?

Four years after that tweet, the mainnet transaction throughput is still roughly 15 transactions per seconds. The roadmap that was followed during that time frame tasked Ethereum as a “modular” data availability chain from which other layers (L2s) would be built on top of. In contrast, monolithic chains, such as Solana, have sprung up and taken the speed crown for the past few years. Was this the right scaling decision to make?

On p. 272 he writes:

Bringing along regulators is another hurdle Ethereum has to clear. Episodes like the DAO attacks should, on the one hand, terrify regulators due tot he “unstoppable” nature of an application running with a software bug that can’t be fixed. On the other hand, the Ethereum community voted to fix the problem, and regulators like flexibility (even if blockchain purists abhor it). When it comes to critical business systems of the type regulated under the systemically important financial market utility framework, US officials are going to be extremely cautious about allowing a network of banks and investors to reshape the bond market, as just one example. The SEC has been criticized repeatedly for not spelling out its view on cryptocurrencies in a formal fashion. People have been left guessing in a lot of cases until the feds came in with an enforcement action.

One nitpick: I don’t think it’s fair to label anti-fork maximalism as “blockchain purists.” Hard forking a chain is baked into proof-of-work chains (such as Ethereum was when the book was published): Nakamoto consensus seeks to create the canonical chain as the one with longest tree (and/or highest difficulty). Block builders should be able to choose any branch to build on. Forking Ethereum in 2016 led to two chains and that isn’t a bad thing per se. It’s only “bad” if you’re anti-choice which is what anti-fork maximalism effectively is.

One other observation is that unlike nearly every other book on this topic that I have reviewed, the author specifically mentions SIFMUs which is a big deal. Again, not that another edition needs to be made, but it would be nice to have a chapter that collects all of the SIFI/SIFMU-related public discussions as it relates to blockchains.

For instance, two weeks ago there was a public hearing held by the House Financial Service committee in which a SIFI designation, as it relates to digital assets, were mentioned. How many other public hearings from other national legislatures has this occurred in the past few years? Would be interesting to see a timeline of such key words, has the cadence increased? FMIs and the PFMIs are still not frequently discussed on social media either.41

On p. 274 he writes:

The changes being worked on boil down to making Ethereum process transactions faster so it can grow into the type of network needed for a global reach. The first change is doing away with the proof-of-work system that’s used by Ethereum miners to confirm the latest transactions on the blockchain. The computer power needed uses an enormous amount of energy, and Vitalik and others in the Ethereum community have long wanted to get away from this environmental block mark.

Exactly true. Nearly six year ago to the day, Vitalik mentioned:

“I would personally feel very unhappy if my main contribution to the world was adding Cyprus’s worth of electricity consumption to global warming.”

What is quizzical about how after Ethereum transitioned away from proof-of-work, to proof-of-stake, we still see a whole bunch of people – especially lobbyists like Coin Center – stanning for proof-of-work. Let it die in the ash heap. No one simps or stans for the original Wright brothers airplane design, so why should other outdated technology receive the same kind of lionization? There are a number of robust proof-of-stake implementations that are battle tested; the luddite defenders of PoW should just move on.

On p. 274 he writes:

While Bitcoin is known to use a larger amount of electricity for its proof-of-work that Ethereum, Ethereum is estimated to gobble a quarter to a half as much, something to IEEE Spectrum, the magazine of the world’s largest group of engineers and applied scientists. That means Ethereum’s proof-of-work uses the same amount of electricity as Iceland on any given day. IEEE Spectrum said. Put another way, one Ethereum transaction consumes more electricity than the average US household uses in a day, the magazine said.

Oof. What an absurd waste. And yet, key participants in the Ethereum Classic community organized and held a Proof-of-Work Summit about four months ago, to defend this morbid waste of resources. Guys and gals, it’s totally possible to be a fan of crypto-related assets without needing to carry water for all of them. Especially ones that are an ESG nightmare.

On p. 274 he writes:

The way Ethereum wants to change that is by switching to a confirmation process known as proof-of-stake. Proof-of-stake requires users who want to be rewarded for validating transactions to deposit ether for a set amount of time. The more ether they set aside, the bigger the reward for verifying the network. In a proof-of-work system, the winning miner who first validates a block of transactions is rewarded with an amount of Bitcoin or ether. In proof-of-stake, there are no miners. There are now validators, and they make bets on which block is next to come up for verification. If they are right, they get rewarded with a percent of ether proportional to how much ether they have committed to the proof-of-stake system.

A couple of small nitpicks: in proof-of-work chains such as Bitcoin, it is the first block maker that proposes (and builds) the new block that is rewarded a specific amount of BTC (known as the coinbase reward or coinbase transaction). Not the first to verify. Perhaps that is what Leising meant. Also, worth pointing out that there are multiple different implementations of proof-of-stake, not all use the approach that Leising described.

On p. 277 he mentions a phone call with Vitalik:

“It’s definitely slower than I expected,” he said. “But it’s happening.” Back several years ago he became excited about stable coins. Now there was Dai, a stable coin collateralized with ether that’s in wide use. He’d also wanted to see a decentralized naming system for the Internet. Now a lot of people use a service called EthDNS, where you can buy domain names that end in .eth. According to CoinDesk, foundation.eth sold for $27,000 and exchange.eth went for $609,000 in 2017. He’s also excited about decentralized storage systems, which aren’t quite here yet but are close.

Coincidentally, eighteen months ago I specifically mentioned the same examples in a presentation. That is not an endorsement, rather an observation of what was occurring in terms of activity. Will ENS (what EthDNS is now known as) eventually fizzle out? Or will Web3 functionality become wider spread, beyond niche browsers such as Brave?

Conclusion

I should have read this book earlier and recommend it to anyone wanting to understand the history of Ethereum. Also, chronologically this book should be seen as “Part 1” and read before The Cryptopians (which is effectively “Part 2”).

One non-substantive thing that lingered throughout several chapters was the lack of clear spacing between several words. It occurred too frequently and was a little distracting at first but then I got used to it.

A final quibble is that while Leising does an amazing job capturing so many details about The DAO hack and the aftermath, one thing I think that he could have added as the magnitude of how much Ether relative to the floating supply of ETH. More than 10% of all ETH mined at that point resided in The DAO.

Overall this is a solid book that has basically aged well. And in terms of pattern-matching, aligns with the observation from the previous 11 reviews: a short review means fewer errors and therefore it’s probably a decent book.

Endnotes

  1. While there are certainly a number of current and former coin-related reporters who are “industry” sycophants, it is unfair for anti-coiners and maximalists to disparage someone like Leising who was one of the first mainstream reporters to critically look into entities like Tether LTD. []
  2. For instance, unlike Popping the Crypto Bubble, the Prologue had no issues. []
  3. This was pre-Slack and pre-Discord days. []
  4. To be fair, credit card companies such as Visa and Mastercard, aren’t “Wall Street” per se but they are examples of intermediaries that exist off of interchange (swipe) fees. []
  5. For instance, on p. 16 the author writes: As Ethereum cofounder Joe Lubin put it to me, Ethereum’s ambition is to be a global computer. In a statement that surely upset Bitcoin loyalists (and there are millions of them,) Lubin said that comparing Bitcoin to Ethereum is like comparing a pocket calculator to a desktop. []
  6. Oddly enough, neither of the anti-coiner-driven books I reviewed this past year discussed this which would have shored up their weak arguments. []
  7. The caveat is that there are a handful of chains – such as Monero – and a handful of mixing applications – like Tornado Cash – that provide some forms of transaction shielding and/or confidentiality, but in the books I have reviewed, neither of these were mentioned. []
  8. On any given day about 5-10% of Bitcoin’s mined supply is traded on a variety of venues including centralized exchanges and OTC desks. []
  9. Blockchain For Energy exists too, it’s a rebrand of the OOC Oil & Gas Blockchain Consortium. []
  10. At one point a few years ago, there were at least four active blockchain-based trade finance-related consortia: we.trade, TradeLens, Marco Polo, and komgo. Note: Vakt is the trading side and komgo is the documentation of the same lifecycle. []
  11. And more precisely, there was not that many transactions actually floating around to that needed to be secured in the first couple of years. []
  12. Yes yes, I am sure the anti-hard fork proponents will point at the continued existence of ETC or ETH PoW to show how a “contentious hard fork” never prunes the tree. But who has the authority to a priori claim that the existence of forks is bad (or good!)? Go outside and touch some grass. []
  13. There are also some older interviews on YouTube with Perkins Coie lawyers that appear to have disappeared that had some interesting legal advice surrounding public-facing ICOs during the Factom-era. []
  14. Personally, one of the most memorable presentations I recall watching during this time frame was from the London Bitcoin Conference 2012 by Mike Hearn. []
  15. I have given several public presentations on tokenization. One of the most recent ones is titled: The Nuances of Tokenization []
  16. Chronologically the name itself goes something like: RipplePay -> OpenCoin -> Ripple -> Ripple Labs -> Ripple []
  17. At an event in 2015 I asked Joel Monegro, who at the time was at Union Square Ventures, why he was enthusiastic about OpenBazaar. []
  18. See also: Banking on the Cloud by Baker et al. and Cloud Empires by Vili Lehdonvirta []
  19. In contrast, some developers of smart contract-based blockchains such as Ethereum went on to build out simple lending protocols such as Compound and Aave. []
  20. Not so fun fact: when Bukele was the toast of the Bitcoin world, Nic Carter uncritically hosted him in a Twitter Spaces, along with Alex Gladstein and Balaji Srinivasan. To my knowledge, the only high profile ‘coinfluencer’ to publicly condemn Bukele – and his association with cryptocurrencies – was Vitalik Buterin. []
  21. It is not a coincidence that Vanguard – which was founded by Bogle – did not list any Bitcoin ETF on its trading platform when they were approved earlier this month. []
  22. Recall that in 2015-2017, Gavin Andresen and other “big blockers” had their commit access revoked by a group of “small blockers.” []
  23. The fact that several prominent figures within Blockstream are publicly antagonistic towards proof-of-stake, and that Blockstream remains highly influential in the BIP gating process – via sponsorship of Bitcoin Core developers – makes it unlikely that Bitcoin will quickly transition to proof-of-stake. This is unfortunate because both Zcash and Dogecoin developer communities are attempting to migrate from PoW to PoS, the only thing stopping the Bitcoin world is Bitcoin maximalists, some of whom have a vested interest in keeping the chain PoW because they can sell mining equipment. Even one of Blockstream investors / partners (Tether LTD) is actively investing in Bitcoin mining facilities instead of helping migrate it to PoS. []
  24. For instance, Michael Patryn – co-founder of defunct exchange Quadriga – was revealed to be Sifu. Patryn/Sifu were in the news last year for forking Aave. Prior to co-founding Quadriga, Patryn was part of an identity-theft ring and served time in prison. []
  25. At the time R3’s management team was uninterested in getting into a public spat with the Bitcoin world. In fact, Richard Brown – then CTO – wanted to woo Bitcoin developers to build on Corda which was something I never thought would happen. And it hasn’t yet, despite a couple of architectural similarities (e.g., Corda and Bitcoin both use an UTXO model.) []
  26.  On Settlement Finality: “And, last but not least, there is what Swanson has elsewhere called the “Maginot Line” attack: throw a very large amount of money at the problem and simply bring more miners in than the rest of the network combined.” []
  27. Who is Gwern? []
  28. As mentioned in the Popping the Crypto Bubble review, Johnny Dilley, was an associate at Pantera who publicly took the position as a “Bitcoin maximalist” in online debates with Vitalik Buterin, Dominic Williams, and others – under the pseudonym Admiral Leviathan. At one event I spoke at in San Francisco in 2014, Dilley heckled me from the audience. See also: On Bitcoin Maximalism, and Currency and Platform Network Effects []
  29. Peter Todd has previously stated he worked for R3 in various capacities. If I recall correctly, he worked as a consultant for about 7-8 weeks in the fall of 2015 and left after a few disagreements including a one-sided feud with Mike Hearn. []
  30. Readers interested in a chronology of increasing the Bitcoin block size, be sure to peruse: The Great Bitcoin Scaling Debate — A Timeline by Daniel Morgan. []
  31. For a chronology see: Falling in and Falling out: A Brief Study of the Shifts in Nick Szabo’s Attitude towards Ethereum by Chester []
  32. Arguably one of the biggest mistakes early on at R3 was creating Corda with the UTXO model instead of adopting the Accounts based model of Ethereum. This is one of the reasons it was difficult to attract developers. []
  33. During this influence campaign he even used a pseudonym – Midmagic – frequently enough to have it quasi doxxed. []
  34. I briefly met Toby a couple of times during visits to Singapore in late 2014-2015. []
  35. In July 2015 I was on a panel at an American Banker event. Also on the panel were Houman Shadab, Adam Krellenstein, Dax Hansen, and Barry Silbert (CEO of DCG). I made a comment about ShapeShift as it related to DCG’s portfolio. Unfortunately the video was never approved for release. []
  36. It is unclear who was on the full speaker agenda, but many of the talks are still online today. []
  37. According to former employees, Corda has made some inroads in the CBDC world, specifically in the Middle East and some European states. []
  38. Clearmatics, which later joined the EEA, was an informal member of the informal EEO. []
  39. Moy now works at Apollo Global Management and a couple of the core engineers for the Juno project within JPM left to create their own public chain project called Kadena. []
  40. In his defense, it is practically impossible to time the release of a book to align with unexpected future events, especially with the lag time between the completion of the manuscript and the actual publication. []
  41. Back in 2018, Jenny Leung, an Australia-based attorney – wrote one of the first articles on the PFMIs as they relate to centralized exchanges. []

Book Review: “Number Go Up”

I recently finished reading the Kindle version of Number Go Up by Zeke Faux. This marks my 11th book review of cryptocurrency and blockchain-related books. See the full list here.

But… Number Go Up is marketed as a cryptocurrency book which is debatable. I would categorize it as True Crime with certain cryptocurrencies and centrally-issued pegged assets (like USDT) providing the enabling infrastructure.

It is a refreshingly witty book on a subject matter that is chronically filled with mindless conspiracy theories or Messianic price predictions.

Faux walked the tight rope, delivering a fairly nuanced and informative testament in an otherwise cacophonous market. Best of all it includes copious amounts of first-hand comments straight from the horses mouth of actual insiders, not wannabe social media influencers.

I read this back-to-back with Easy Money, by Ben McKenzie and Jacob Silverman, which was a dud in comparison. Easy Money was riddled with numerous mistakes that should have been caught when the manuscript was sent for independent fact-checking.

One quantitative example of how robust Number Go Up was, it contained 45 pages of references. In contrast, the shallow Easy Money contained a mere 8 pages of references.1 And while both books touch on some of the same topics (Tether, FTX, Celsius) and even interview some the same exact participants (SBF, Mashinsky, Pierce), Faux’s version of the events is not only richer in detail but often includes additional supporting characters… all without having to rely on an entourage.

Did I mention this was a witty book? In the margins I wrote: jhc, haha, lol, jesus, wow, burn and several variations therein about 25 times. It didn’t make the reader just laugh either. There were several times you could easily become angry, such as the face-to-face encounters that Faux had in Cambodia investigating romance-scam “pig butchering” compounds.

While the book occasionally discusses some technical concepts, it does not attempt to bog the reader down in a sundry of technical details. And when Faux did present something technical – like how a wallet works – he was in and out with the lesson in a few sentences.

If you could only read one book on the rise and fall of the most recent (virtual) coin bubble, be sure to check out Number Go Up.

With that said, despite the excellent prose and editing, I did find a few things to quibble about. But unlike the last two book reviews, there are no major show stoppers requiring a second edition to fix.

Prologue

Faux gets down to business, on p. 9 writing:

I’d like to tell you that I was the person who exposed it all, the heroic investigator who saw through one of history’s greatest frauds. But I got tricked like everyone else.

I’m not quite sure when I began following him on Twitter, but it has been at least a year. And not once during the collapse of the lending and exchange intermediaries last year did I see him do victory laps. Perhaps he did some quiet grave stomping late at night or on the weekend that I missed, but the tone of this book feels congruent with his online voice. And unlike the always-on coinerati (and anti-coiners who shadow them), the author upfront notes that he got tricked, we all did. 2

On p. 12 the author writes:

Thit is the story of the greatest financial mania the world has ever seen. It started as an investigation of a coin called Tether that served as a kind of bank for the industry.

As I pedantically questioned in other book reviews: by what measure was the 2020-2022 bubble the greatest financial mania the world has ever seen? Maybe it is, but in my adulthood the GFC seemed like at least a magnitude larger due to the existential issues of SIFIs and TBTF banks.

On p. 13 the author writes:

I pitched this book to my publisher in November 2021, near the mania’s peak, on the premise that crypto would soon collapse, and I’d chronicle the catastrophic fallout. Three months later, I was sitting with Bankman-Fried at his Bahamas office and looking at the computer screens behind his fuzzy head.

I think the author short changes himself a little here because chronologically he was already doing some sleuthing at the beginning of the year, attending Bitcoin Miami and other events.3 The timing is happenstance because not too far from his dayjob, according to Easy Money, both McKenzie and Silverman also met in a bar in New York to discuss pitching a book to a publisher at around the same time.

On p. 13 the author writes:

I told him my theory: that the coin called Tether, the supposedly safe crypto-bank that served as the backbone for a whole lot of other cryptocurrencies, could prove to be fraudulent, and how that could bring down the whole industry.

As mentioned above, I read this book immediately after completing Easy Money and in reading this particular sentence I had a small sense of déjà vu because that was their thesis too.4

Chapter 1: “I Am Freaking Nostradamus!”

On p. 15 he writes:

Don’t worry about how exactly a dog joke turns into a financial asset—even Dogecoin’s creator didn’t understand how it happened.

While Faux does provide a reference to an interview with Jackson Palmer, it bears mentioning to the readers that Dogecoin was co-created by two people, Palmer and Billy Markus.

On p. 16 he writes:

Jay wouldn’t admit he’d gotten lucky. He acted like his Dogecoin score proved his astute understanding of crowd psychology. Even after he moved on, I didn’t. I started seeing crypto bros everywhere. They were acting like the rising prices of the coins proved they were geniuses. And their numbers were growing.

This is an excellent observation. And when you attempt to engage some of them on social media more than a few will retort, HFSP!

On p. 17 he wrote:

Crypto didn’t hold the same appeal for me. I’d resisted the topic whenever it came up at work. It seemed so obvious. The coins were transparently useless, and people were buying them anyway. A journalist composing a painstaking exposé of a crypto scam seemed like a restaurant critic writing a takedown of Taco Bell.

This is one of the many witty comments, I’ll try not to post all of them because you should grab a copy of the book and find them yourself.5

On p. 18 he writes:

The answer was not much. But I did know they were called “stablecoins” because, unlike coins with prices intended to go up, they were supposed to have a fixed value of one dollar. That was because each coin was supposed to be backed by one U.S. dollar. The biggest stablecoin by far was called Tether.

This is a decent high level description of a centrally-issued pegged coin. In academic literature it is still probably more common to see “fixed” than “pegged” but either works.

With that said, I do think it is confusing – as a reader – to be introduced to Tether and not USDT. Later on it does get confusing, because the author uses Tether to describe both the issuer (Tether LTD) and the medium-of-exchange (USDT). I had a similar nitpick about the same type of usage in Easy Money, where the authors inexplicably do not fully define what a stablecoin is or mention how there is more than one (beyond Terra).

On p. 18 he writes:

I couldn’t tell which country’s authorities were overseeing Tether. On a podcast, a company representative said it was registered with the British Virgin Islands Financial Investigation Agency. But the agency’s director, Errol George, told me that it didn’t oversee Tether. “We don’t and never have,” he said.

One of the strengths of this book is that the author routinely gets a direct quote from people involved on the regulatory and law enforcement side of the table. Strangely we do not see anything like that in Easy Money.

On p. 19 he writes:

There were plenty of critics who speculated that Tether was not actually backed by anything at all.

Another refreshing sub-narrative in this book was the lack of a sub-narrative surrounding “critics” that occurred throughout Easy Money. That is to say, Faux does not attempt to put anyone on a pedestal, least of all, people marketing themselves as “critic” or “skeptic.”

On p. 20 he writes:

“In a panic, everything collapses and they look to the federal government to bail them out,” one attendee at Yellen’s meeting told me. “If the crypto market was isolated, maybe we could live with that. But hiccups in one market start to translate into other markets. These are the things we’re paid to worry about.”

The author referenced a series of important regulatory meetings that occurred in the summer of 2021 and actually got a direct quote from an attendee. Top notch stuff, no guessing games or reliance on clout chasers on Twitter.

Chapter 2: Number Go Up Technology

Great intro to the chapter on p. 22:

The Florida crime novelist Carl Hiaasen once wrote of his home state, “Every scheming shitwad in America turned up here sooner or later, such were the opportunities for predation.” In his books, the scheming shitwads are crooked cops, corrupt politicians, and the cocaine traffickers who financed much of Miami’s skyline. But plenty of people at Bitcoin 2021, the crypto conference I’d come to attend, met the description.

On p. 22 he writes:

I was deeply skeptical about cryptocurrency before I arrived, and what I had been learning about Tether wasn’t doing much to dispel those doubts.

Unlike the previous two book reviewed, the author does not make or spin this “skepticism” into some form of identity.

On p. 22 he writes:

My plan was to listen politely to a bunch of tech bros pitching their apps, and then to ask them what they knew about Tether.

And he did!

On p. 22 he writes:

The attendees wore T-shirts with crypto slogans, like Have fun staying poor or HODL, a meme about never selling crypto derived from a typo for the word “hold.”

He got it right! Unlike the previous two books reviewed, Faux discovered “HODL” was a typo from a drunkard.

On p. 24 he writes:

The mayor equated Bitcoin’s doubters with his city’s skeptics, who liked to needle him about climate change by pointing out that streets flooded even on sunny days. As it so happened, during the week of the conference, the U.S. Army Corps of Engineers had released a report calling for a massive, twenty-foot-high seawall across Biscayne Bay, blocking the ocean views of the city’s financial district. “You guys see any water here? I don’t know, I don’t see any water here,” Suarez joked to the crowd.

Can’t say I follow Suarez closely but does he typically use dark humor?

On p. 24 he writes:

Their bête noire was “fiat money.” That means money printed by central banks—in other words, pretty much all money in modern times.

I need to be pedantic (since that’s my calling card). In the U.S., the vast majority of “fiat money” is actually created by commercial banks not central banks.6

On p. 25 he writes:

A blockchain is a database. Think of a spreadsheet with two columns: In Column A there’s a list of people, and in Column B there’s a number representing how much money they have.

Hurray, a definition. Now I didn’t care much for the example the author used but unlike the previous book review, he gave it the good ol’ college try and it conveyed the necessary information to the reader.

On p. 25 he writes:

With the Bitcoin blockchain, the numbers in Column B represent Bitcoins.

Hurray, countable blockchains. Unlike several other books I have reviewed in the past (especially in the 2016-2017 era), Faux quickly explains to readers that there is more than one blockchain. Two sentences later he mentions the Dogecoin blockchain.

In other words, unlike Easy Money and Popping the Crypto Bubble, Faux does not conflate Bitcoin with every other blockchain.

On p. 26 he writes:

The technical innovation of blockchain is that it lets customers get together and maintain the list themselves, with no banker involved. If I want to transfer 1,000 Bitcoins from my account to someone else’s, there’s no handsy banker to call. So instead, my computer broadcasts the transaction to all the computers that run the Bitcoin network, sending all the other Bitcoin people a message that says, “Hey, I’m transferring 1,000 Bitcoins to another account.”

This is a decent example. But I think a more accurate verbiage would be “intermediary” instead of “bank” (because there are a variety of intermediaries in finance).7

On p. 27 he writes:

The solution that Bitcoin uses to prevent this “double-spending problem” is called “mining,” and it’s incredibly complicated and confusing. It also uses so much electricity that the White House has warned it might prevent the United States from slowing climate change. It’s like something out of the world’s most boring dystopian science-fiction movie.

This page is about as much as readers are provided into the topic of mining. That’s a little disappointing, since the market still lacks a long-form, non-hagiography on the topic. But that’s someone else’s calling for now and would not have really fit well into the flow of the book.8

On p. 28 he writes:

The difficulty of the game automatically increases when more miners enter it.

Technically the difficulty changes (increase or decrease) is based on hashrate, not on entry or exit of “miners.” That is to say, if readers were to download and use a Bitcoin mining client on their home computer, their mere entry would not immediately change the difficulty rating because the amount of hashrate a home CPU brings to bear is miniscule relative to the ASICs housed in warehouses by existing participants.

On p. 29 he writes:

Silk Road was Bitcoin’s first commercial application. Drug consumers didn’t set up their own mining rigs before going shopping on the dark web. They bought Bitcoins for cash on rudimentary exchanges. The demand started driving up the price.

To his credit, unlike Easy Money, Faux does not sensationalize and claim Silk Road was the “most successful onboarding app” for Bitcoin. Maybe it was, but Faux doesn’t get bogged down in histrionics.

On p. 30 he writes:

The system depends on economic incentives. The miners who confirm transactions have made such a large financial investment—in buying computers to compete in the guessing game—that it wouldn’t make economic sense to undermine Bitcoin by entering false transactions. But that also means it does make economic sense to run tons of computers to guess random numbers in hopes of winning the Bitcoin reward. As one person famously put it on Twitter, “Imagine if keeping your car idling 24/7 produced solved Sudokus you could trade for heroin.”

Solid quote. Nice reference to this funny tweet too:

Source: Twitter

On p. 30 he writes:

That is as bad for the environment as it sounds. Once Bitcoin’s price started rising, competition drove out the hobbyist miners. Within a few years, companies were selling specialized computers that were extra good at the guessing game. Miners started operating whole racks of them. Then warehouses full of racks.

This is a pretty concise way of describing the absurdity of the value leaking from the ecosystem, to the benefit of state-owned energy grids, A/C manufacturers, and semiconductor companies.9

On p. 31 he writes:

Other coins would adopt different authentication systems that used far less electricity, but Bitcoiners opposed any change to Nakamoto’s mining system. There was no way to reduce mining’s energy use.

This is a fantastic nuance that other authors, especially in both Easy Money and Popping the Crypto Bubble, fail to distinguish. The ossification and intransigence by the Taliban wing of Bitcoinland is real. For instance, the core developers (and foundations) behind both Zcash and Dogecoin have announced plans to migrate away from proof-of-work and adopt proof-of-stake.

While there have been (dubious?) efforts such as “Change the code” to kickstart something similar for Bitcoin, the bottom line is that it is the centralized exchanges that ultimately call the shots because they control the BTC ticker symbol. And during the blocksize “civil war,” several major ones said they would only recognize the chain that Bitcoin Core worked on. And that clique is anti-proof-of-stake. There will be a test after this book review, so take notes and pay attention!

On p. 31 he writes:

The fundamental absurdity of all this is that the numbers in the Bitcoin blockchain don’t represent dollars, or even have any inherent tie to the financial system at all. There’s no reason why a Bitcoin should be worth more than a Dogecoin or any other number in any other database. Why would someone burn massive amounts of coal just to get a higher number written in the blockchain for their account?

Preach it, brother! As Barney Gumble might say, just hook it to my veins.

Source: Twitter

On p. 31 he writes:

But, of course, just because the supply of something is limited doesn’t make it valuable—only 21 million VHS tapes of Pixar’s Toy Story were made at first, and you can get an original on eBay for three dollars.

Bingo! Without persistent and/or increased demand, a deterministic supply is mostly meaningless.10 Empirically we see that with hundreds (thousands?) of supply capped coins that fail to reach the proverbial NGU moon.

On p. 31 he writes:

For Bitcoin believers, the rising price became its own justification. On stage in Miami, many of the speakers resorted to a sort of illogical reasoning: The price of Bitcoin will go up because it has gone up. They wielded this circular argument to ward off doubt and call forth a future of infinite bounty. It became a mantra: Number go up.

To be fair, this mantra pre-dates the soothsayers at Bitcoin Miami by years. In fact, one could argue that the origins of Bitcoin maximalism – circa March 2014 – incorporated this fallacious circular view.

On p. 32 he writes:

“NUMBER GO UP,” declared Dan Held, an executive at a crypto exchange called Kraken, on stage at Bitcoin 2021. “Number go up technology is a very powerful piece of technology. It’s the price. As the price goes higher, more people become aware of it, and buy it in anticipation of the price continuing to climb.”

A sociologist or two could write a book on Held and his former colleague, Pierre Rochard, for the crazy things they have said to defend (and promote) Bitcoin maximalism.11

On p. 32 he writes:

Max Keiser, a Bitcoin podcaster, emerged first, in a white suit and purple sunglasses, to pounding EDM. “Yeah! Yeah!” he screamed, pumping his fists, as the dance music built to a drop. Elon Musk had recently said that Tesla would not accept Bitcoin due to its environmental impact, and Keiser was raging like the billionaire had run over his dog. “We’re not selling! We’re not selling! Fuck Elon! Fuck Elon!”

During my review of Chapter 6 of Easy Money, I linked to this exact string of expletives as something the authors missed by attending the 2022 edition of Bitcoin Miami and not the 2021 that Faux witnessed.

On p. 33 he writes:

A more accurate description would be that Saylor was the biggest loser in the room. He didn’t mention it during his talk, but his software company, MicroStrategy, had nearly gone bust during the dot-com bubble, back when the internet counted as a hot new technology. In 2000, just before it popped, he told The New Yorker: “I just hope I don’t get up one day and have to look at myself in the mirror and say, ‘You had $15 billion and you blew it all. There’s the guy who flushed $15 billion down the toilet.’ ” Right afterward, he lost $13.5 billion.

Solid quote. Strangely, while Saylor does get another couple of paragraphs, Faux missed out on informing the readers that on August 31, 2022, the Attorney General for DC announced it was suing Saylor for evading more than $25 million in taxes. Surely readers would find that interesting?12

On p. 34 he writes:

Some people speculated that what Tether called “commercial paper” was really debt from exchanges like FTX. That would explain why no one on Wall Street had dealings with Tether. FTX could simply send Tether a note saying, “I promise I’ll pay you $1 billion,” and Tether could zap over 1 billion coins, and no one would be the wiser.

Of all the discussion surrounding Tether, the commercial paper (CP) angle was the one that felt like it lacked a sufficient bowtie for readers. Later he does mention how Tether announced it planned to move entirely away from CP and acquire Treasuries instead.

However I felt that – as mentioned in the reviews of both Easy Money and Popping the Crypto Bubble – it would be helpful to the audience to briefly explain the recent history of shadow payments and shadow banking in the U.S., starting with PayPal and Money Market Funds (MMFs) which trail blazed the path that Tether LTD and other centralized pegged coin issuers followed.13

Source: Twitter

On p. 35 he writes about SBF and Tether:

“We’ve wired them a lot of dollars,” he said. He also told me that he’d successfully cashed in Tethers, transferring the digital coins back to the company and receiving real U.S. dollars in exchange, though the process he described sounded a bit strange. “This is going through three different jurisdictions, through intermediary banks,” he said. “If you know the right banks to be at, you can avoid some of these intermediaries.”

The long and the short of redeeming these centrally issued pegged coins is you have to rely on legacy infrastructure (wiring). I have never attempted to redeem USDT or USDC, but a number of acquaintances have, and following the collapse of SEN and SigNet it involves ol’ fashioned wires.14

On p. 36 he writes about Mashinsky and Celsisus:

But then he described what sounded very much like monkey business. Tether, in addition to investing in Celsius, had lent more than $1 billion worth of its coins to the company, which Mashinsky used to invest in other things. Mashinsky claimed this was safe because for every $1.00 worth of Tethers he borrowed, he put up about $1.50 worth of Bitcoin as collateral. If Celsius went bust, Tether could seize the Bitcoins and sell them. He told me this was a service Tether offered to other companies too.

So I don’t want to be perceived as carrying water for Tether (or Celsius) – I stand by all my critical comments I have made of both of them in the past – but this type of arrangement is kind of what commercial banks do. And that’s probably the angle – shadow banking – I would have probed more.

On p. 37 he writes:

“Somebody is lying,” Mashinsky said. “Either the bank is lying or Celsius is lying.” I was pretty sure I knew who was lying, and it wasn’t J.P. Morgan. I made a mental note to investigate Celsius when I got back to New York.

Why not both?

As mentioned in my review of Easy Money, in 2015, J.P. Morgan paid a combined $307 million fine to settle cases with the SEC and CFTC, admitting wrongdoing in part because certain banking units failed to tell clients it favored in-house funds, clear conflicts of interest. In 2020, J.P. Morgan paid $920 million to settle DOJ, SEC and CFTC charges of illegal market manipulation or “spoofing” in the precious metals and Treasury markets.

If the author was looking for a large unblemished regulated financial institution, there probably is none. But to be fair, this was Mashinsky’s example the author was responding to.

On p. 37 he writes:

Mallers explained that he had gone to a beach town in El Salvador because a surfer from San Diego was teaching poor people there about Bitcoin, which was somehow going to help them stop being poor.

Ha, this is great. And sad too.

On p. 37 he writes:

Rather than telling his citizens first, he had chosen to reveal a major national policy to a bunch of Bitcoiners, in Miami, Florida, in English, a language most Salvadorans don’t speak.

Oof.

On p. 38 he writes:

I didn’t get it. There was a reason no one used Bitcoin to buy coffee—it was complicated, expensive, and slow to use. And what would happen if poor Salvadorans put their savings in crypto and then the price fell? But the audience was rapt. As I scanned the crowd, I saw that Mallers wasn’t the only one wiping away tears.

If there is a movie version of this book, need to have Steve Martin-like entertainer on stage ala Leap of Faith.

On p. 39 he writes:

Not everyone I spoke to in Miami was a Bitcoin cultist. The biggest users of Tether were professional traders at hedge funds and other large firms, and I interviewed several of them too. What they explained to me was that for all the talk of peer-to-peer currency, and the ingenuity of a way to transfer value without an intermediary, most people weren’t using cryptocurrencies to buy stuff. Instead, they were sending regular money to exchanges, where they could then bet on coin prices.

Compared to the two previous books, it is nice to see the author use a nuance around “Bitcoin cultist” — because not every coin or token encourages the sort of maximalism we see from Dan Held and Pierre Rochard. And empirically not every public chain project is attempting to reinvent “money.”

On p. 39 he writes:

Even so, many had their own conspiracy theories about Tether. It’s controlled by the Chinese mafia; the CIA uses it to move money; the government has allowed it to get huge so it can track the criminals who use it. It wasn’t that they trusted Tether, I realized. It was that they needed Tether to trade and they were making a lot of money doing it. There was no profit in being skeptical. “It could be way shakier, and I wouldn’t care,” said Dan Matuszewski, co-founder of CMS Holdings, a cryptocurrency investment firm.

I’m not endorsing CMS but I’ve found it weird to see certain Tether Truthers single out CMS as part of the inner ring of the Tether cabal.15 One of its most vocal members even accused Matuszewski of lying about redeeming USDT for real money, and then deleted the tweet. Maybe CMS (and Matuszewski) are indeed at the center of the Tether cabal, but the burden-of-proof is on the Truthers (the self-deputized prosecutors) to provide evidence.

Chapter 3: Doula for Creation

One of the most interesting things about this chapter is the author described, what I believe may have been the first bookform exploration into the history of Mastercoin.

I’ve read a number of interviews of Brock Pierce in the past. I even briefly met him in late 2014 at a house party in the Bay area. But this was the most colorful description of his social circle, drugs, dreams and all.

For instance, on p. 42 he writes:

I decided to mingle and ask the guests what they knew about our absent host. A beautiful woman told me she’d spent a week with Pierce in the Colombian jungle, where he’d bought land to protect it for Indigenous people. “It’s amazing what he does,” she said. Another man told me Pierce was building a spaceport on an old army base in Puerto Rico. An obnoxious guy who described himself as a “futurist” told me a story about a time in Ibiza when Pierce went three days without sleeping. “He’s surrounded by people who are benevolent dolphins and not sharks,” he said. He then asked me to smell a pastry for him before he ate it, telling me he was allergic to raspberries.

Ha! Everything in this paragraph is worth a couple chuckles because anecdotally it sounds true.

On p. 43 he writes:

At some point, a man at the other end of the table began bragging loudly about a cryptocurrency called “Let’s Go” or “Let’s Go Brandon,” a slogan that, through an almost inexplicable memeification process, had come to stand for “Fuck Joe Biden” among Trump supporters. The man, who I later figured out was a hedge fund manager named James Koutoulas, announced to the table that his plan for the coin was “dumb but it’s working.” A month earlier, a podcaster had presented Donald Trump himself with five hundred billion of the tokens, and just that afternoon, Donald Trump Jr. had made a cryptic post on Twitter seemingly referencing the meme coin. “Is that allowed?” someone asked. “They’re allowed to make money,” Koutoulas said. “Fuck the SEC.”

I had never heard of Koutoulas and I checked my email. A former colleague sent a spreadsheet in September 2018 with Typhon Capital Management listed as a “crypto fund;” that’s the fund Koutoulas founded.

On p. 43 he writes:

A doctor from Boise, Idaho, and a Bitcoiner were talking about the coronavirus vaccine and “medical freedom.” The Bitcoiner refused to tell me his name. “Real G’s move in silence,” he told me, with a high-pitched laugh.

Sounds par for the course. I’ve lost count how many supposed “cypherpunks” want to have it both ways: cash in off their notoriety and live it up large all while being “anonymous.” Jameson Lopp immediately comes to mind: telling The New York Times how he made himself “vanish” and simultaneously getting CryptoDeleted, deleted.16

On p. 44 he writes:

None of the guests seemed to know one another. A crypto venture capital fund manager—wearing a mock souvenir T-shirt from convicted pedophile Jeffrey Epstein’s private island—joked about a scam that another yacht guest was running. A crypto public relations man offered what he called “Colombian marching powder” to a young woman.

So much oof in those three sentences.

On p. 46 he writes:

I realized I had walked in on a presentation for a timeshare that I would pay money not to join. It was also not the best setting for a long conversation. My tour guide soon sent me back downstairs. When Pierce and I did catch up, by phone, he told me he’d dreamed up the idea for a stablecoin back in 2013. He said he knew from the start it would change the course of history. “I’m not an amateur entrepreneur throwing darts in the dark,” he told me. “I’m a doula for creation. I only take on missions impossible.”

Someone should call the police, the author was subjugated to some cruel and unusual punishment.

On p. 49 he writes:

By 2013, Pierce was running one of the first Bitcoin venture capital funds. There still wasn’t much you could do with Bitcoins, and crypto remained largely the domain of geeks and hobbyists. But around that time, a man going by “dacoinminster” had posted a proposal on the popular message board Bitcointalk that would lead to the creation of Tether and make the entire $3 trillion cryptocurrency bubble possible. He called his idea “MasterCoin.”

I think one detail that could have been worth adding was that this fund was originally called Crypto Currency Partners and during the “bear market” of 2015 rebranded to Blockchain Capital. The fund typically wrote small checks (around $25,000 per deal) and had spurned at least one VC rule at that time: do not invest in startups that competed with one another (e.g., if you invest in one exchange in a specific jurisdiction, then do not invest in another exchange that served the same jurisdiction).

On p. 50 he writes:

Willett imagined that once he created the MasterCoin system, other people would come up with all sorts of ways to use it: coins that tracked property titles, shares of stock, financial derivatives, and even real money. None of the ideas were completely original—he told me he’d read many discussions of them on message boards—but he was the first to put them into practice.

Could be worth mentioning that there were several (three?) colored coin projects that existed around the same time, attempting to track similar off-chain wares.

On p. 50 he writes:

“If you think Bitcoin has a reputation problem for money laundering now, just wait until you can store ‘USDCoins’ in the block chain!” Willett wrote in 2012. “I think criminals (like the rest of us) will prefer to deal with stable currencies rather than unstable ones.”

Pretty prophetic. Although, unclear from his original post if Willett was thinking of any distinction between central bank-issued digital currency versus privately issued pegged coins (which is what we have ended up with so far).

On p. 51 he writes:

Willett’s plan was innovative. It was also illegal. What Willett did was a textbook example of what the U.S. Securities and Exchange Commission calls an “unregistered securities offering,” meaning that Willett was selling an investment opportunity without any of the usual safeguards. Willett told me that the agency probably would have fined him hundreds of thousands of dollars if it had noticed what he was up to. But luckily, the regulators weren’t reading Bitcoin message boards. “They would have made a terrible example out of me if they’d known what was coming,” Willett said, laughing. “Never heard anything from them.”

So both Willet and the author could be correct. But I think referencing or quoting a U.S.-licensed attorney would have made this a stronger paragraph.

On p. 51 he writes:

Phil Potter, an executive at an offshore Bitcoin exchange, Bitfinex, was developing a similar idea. They teamed up and adopted Potter’s name for it: Tether. (Potter told me he was actually the one to first approach Sellars with the idea. “I’m sure Brock will tell you he came down from Mount Sinai with it all written on stone tablets,” he said.)

This is one of those quotes I spit-the-coffee-out, so to speak. You see, in Easy Money, the authors never got a direct quote from anyone at Tether, Bitfinex, or the regulators who oversee them. It was a disappointment. In contrast, readers of Number Go Up get a chance to hear from all of the above.

On p. 52 he wirtes:

Tethers. Then Tethers could be transferred anonymously, like any other cryptocurrency.

Pedantically, it isn’t truly anonymous: it is pseudonymously.

On p. 52 he write:

The problem was that Tether, like other cryptocurrencies, broke just about every rule in banking. Banks keep track of everyone who has an account and where they send their money, allowing law enforcement agencies to track transactions by criminals. Tether would check the identity of people who bought coins directly from the company, but once the currency was out in the world, it could be transferred anonymously, just by sending a code. A drug lord could hold millions of Tethers in a digital wallet and send it to a terrorist without anyone knowing.

I partially agree with this but believe a clarification should be added: in the U.S. That is to say, not every country has the exact equivalent of the “Bank Secrecy Act” which is what the author is referring to here.17

Source: Twitter

Three years later I would probably amend my own tweet to state on-chain activity can be surveilled by anyone running a node (tracing can be done at any time). But that surveillance sharing from CEXs depends on jurisdiction.

On p. 52 he writes:

“The U.S. will come after Tether in due time,” Budovsky wrote me in an email from a Florida prison. “Almost feel sorry for them.”

This was another spit-the-coffee-out moments. Unlike the authors of Popping the Crypto Bubble and Easy Money, Faux reached out to the creator of Liberty Reserve for a quote. And got a relevant one. Solid reporting.18

On p. 54 he writes:

When I spoke with Pierce on the phone, I asked him the central question: Was Tether actually backed up by real money? He assured me it was. He said Tether was preserving the dollar’s status as a global reserve currency. “If it were not for Tether, America would likely fall,” he said. “Tether in many ways is the hope of America.” But as he droned on, I realized Pierce had little information to offer about the location of Tether’s funds. My mind started to wander.

To me, this was the correct way to frame the conversation for the reader: Pierce is not an insider, so he probably does not have up-to-date inside info. I pointed this out in the review of Easy Money, where McKenzie and Silverman felt compelled to include Pierce’s information-free banter.

On p. 55 he writes:

But Pierce wasn’t going to help me find salvation. He told me that he’d actually given up on Tether in 2015, about a year after he started it. The currency had gotten almost no users, and it seemed likely it would be frowned upon by authorities. An SEC lawsuit, or a trip to prison, would prevent him from reaching his own destiny. “My view was if I made money from this thing it would prevent me from doing the work that I have to do for this nation,” Pierce said.

Unclear if Pierce truly believes the tales he spins.

On p. 55 he writes:

But if the exchange used Tethers instead of dollars, it wouldn’t need them. Potter pitched this idea to his boss at the exchange: Giancarlo Devasini, the Italian former plastic surgeon. He went for it. Devasini and his partners already owned 40 percent of Tether, and they bought the rest from Pierce’s crew for a few hundred thousand dollars. Pierce told me he handed over his shares for free.

This passage is another example for why I think Faux probably should have used Tether LTD to describe the issuer and USDT to describe tethers. A casual reader might assume that Devasini owns 40% of the USDT supply.

On p. 55 he writes:

After interviewing most of the people involved with Tether’s creation, I realized that they didn’t have the answers I was looking for. All of them said something similar: They definitely deserved credit for coming up with one of the most successful companies in the history of cryptocurrency, but they bore no responsibility for whatever the company was doing now.

Ha!

Chapter 4: The Plastic Surgeon

This is one of the shortest chapters, but involves some interesting color on Giancarlo Devasini that has not appeared in print before.

For instance, on p. 59 he writes:

This didn’t exactly match what I’d read on Bitfinex’s website. There, it said that Devasini’s group of companies brought in more than 100 million euros a year in revenue, and that he sold them shortly before the 2008 financial crisis. But Italian corporate records showed that the companies had revenue of just 12 million euros in 2007. Some of them even filed for bankruptcy. And none of the former employees I spoke to remembered Devasini selling them.

An example of “exit inflation”?

On p. 59 he writes:

What they did tell me was that in 2008, Devasini’s production facility was destroyed in a fire. Fuxa said it was caused by diesel generators that Devasini had set up because the local utility hadn’t provided enough power. “He basically built a power plant in the back and it went up in smoke,” Fuxa told me. But a newly unprofitable factory burning down in a mysterious fire struck me as a potential red flag, waving in the distance.

Oof.

On p. 60 he writes:

Tether called the lawsuit “meritless” and said it went nowhere.

Perhaps it is stonewalling, but a canned response is arguably better than simply not even reaching out to Tether LTD, which is apparently what a lot of the people who market themselves as “Tether Critics” have done. Solely engaging on Twitter has its limitations.

On p. 63 he worte:

Devasini was fascinated with finance. In a December 2011 post titled “The Shell Game,” he explained how Italian banks could avail themselves of billions of dollars of low-interest-rate funding. They could use it to gamble on anything, or to buy higher-yielding government bonds to make risk-free profits.

December 2011 was the middle of the European debt crisis (Italy was one of the i’s in PIIGS). Spoiler alert: since then, a number of Italian banks have struggled in what is labeled “the doom loop,” which includes the oldest Italian bank, Montei dei Paschi (which was bailed out). Would the banking sector be different if they had followed Devasini’s suggestion? Not sure, but is it a straight line between this “shell game” post and the setup of Tether LTD threeish years later?

Chapter 5: Hilariously Rich

On p. 66 he wrote:

He’d been left with a stockpile of 20 million unsold CDs and DVDs from his defunct manufacturing business. Now he decided to sell them for Bitcoin. He posted an ad on the Bitcointalk forum offering them for 0.01 Bitcoin each—about ten cents at the time. Marco Fuxa, his former business partner, told me that Devasini sold them all. If that’s true, and he kept the Bitcoins, their value would have later soared to more than $3 billion. “That’s how he got his money,” Fuxa said.

Big if true.

On p. 66 he wrote:

The first big exchange, Mt. Gox, repurposed a website created as a place to trade virtual Magic: The Gathering cards. (“Mt. Gox” stands for Magic: The Gathering Online eXchange.) Unsurprisingly, a former trading card website proved to be a bad custodian for billions of dollars.

It is interesting to see what different authors decide to include and omit to provide readers a backdrop to the industry they are covering. The collapse of Mt. Gox in 2014 unilaterally led to a 2+ year bear market and is frequently highlighted in mainstream press including this book. Yet neither Easy Money nor Popping the Crypto Bubble mentioned it even though it might have helped their arguments.19

On p. 67 he wrote about the aftermath of the 2016 Bitfinex hack (the 2nd one):

Trading increased so much that within eight months the exchange had earned enough to pay back its customers, either in cash or in Bitfinex stock. With this gambit, Bitfinex earned customers’ loyalty. And judging from what he’d do in the next few years, Devasini had learned a lesson: He could get away with bending the rules.

Even though I am not a trader, this always rubbed me the wrong way. If a regulated financial intermediary (like a custody bank) had done something similar in 2016, it is hard to see how the scrip would have been permitted to be issued. But we’ve seen some pretty strange things in traditional finance too ¯_(ツ)_/¯.

On p. 68 he writes about ICOs:

The hype was so powerful, it seemed like anyone could post a white paper explaining their plans for a new coin and raise millions. Brock Pierce, the Tether co-founder, promoted a coin called EOS, which was pitched as “the first blockchain operating system designed to support commercial decentralized applications.” It raised $4 billion. Yes, really. “I don’t care about money,” Pierce said in an interview around that time. “If I need money, I just make a token.”

Perhaps stranger is that Block.one (the entity that conducted the ICO) settled with the SEC in 2019 for $24 million with no disgorgement. Does this mean that EOS is in the clear now (in the U.S.)?

On p. 68 he writes:

These ICO-funded start-ups promised that blockchain would revolutionize commerce by enabling provenance to be tracked and verified. Even big companies like IBM and Microsoft started saying that they would put practically everything on the blockchain: diamonds, heads of lettuce, shipping containers, personal identification, and even all the real estate in the world. It seemed like blockchain-powered ICOs were the practical use that crypto had been waiting for. But there was one problem. None of this stuff ever advanced beyond the testing phases, if anyone bothered to even do that. Most ICOs were scams. And they weren’t actually an innovative form of fraud. ICOs made it easier to run a scam that’s about as old as the stock market. It’s called a “pump-and-dump” scheme.

I think this needs a paragraph break after the first sentence. Because while accurate, some readers may think that companies like IBM or Microsoft were directly involved in ICOs at that time (they were not).20

On p. 69 he writes:

With help from Mayweather, Centra raised about $25 million. But like most of the companies that raised money with ICOs, it was a total scam. It never issued its crypto debit card, or anything else at all. Even the CEO listed on its website didn’t exist—his picture was a stock photo. It would later be revealed that its founders, including a pot-smoking, opioid-addled twenty-six-year-old who ran a Miami exotic car rental business, had paid Mayweather $100,000 for his endorsement.

In contrast to Easy Money, where one of the authors talks about smoking pot and eating edibles a few times, this is the only place that marijuana is mentioned.21 Is that a good or bad thing? As Buddy Holly might say, Faux’s writing is square.

On p. 72 he writes:

By early 2017, Bitfinex was keeping its money in several banks in Taiwan. But the way the international financial system works, running an exchange required the cooperation of other banks too. Bitfinex’s Taiwanese bankers relied on other banks—known as correspondents—who acted as middlemen to pass money from Taiwan to customers in other countries.

One of my former colleagues at R3 previously worked at a large bank in Taiwan. When this publicized debanking occurred he mentioned in speaking with his former colleagues, senior managers who finally learned what was happening viewed it as scandalous because Bitfinex was flagrantly bypassing risk controls by opening up new accounts under different names.22

On p. 73 he writes:

But somewhere in the United States, an I.T. worker in his early thirties spotted the filing for the abortive lawsuit after it hit the court docket. He couldn’t believe what he was reading. Tether was supposed to be backed by real U.S. dollars in a bank. But in the lawsuit, the company itself admitted it had no access to the banking system. What was especially odd was that even after filing the case, Tether kept issuing coins. It created 200 million new ones that summer. But was anyone even sending in the corresponding $200 million, if the company didn’t have a functional bank account? The man signed up for Twitter, Medium, and other social media platforms under the pseudonym “Bitfinex’ed.” And what he started posting would create big problems for Devasini. Tether had spawned a powerful troll.

I believe one of the first times I interacted with Bitfinex’ed (prior to him losing a bet and blocking me), was when he proof read my post discussing the court case above: How newer regtech could be used to help audit cryptocurrency organizations.23

In retrospect, maybe I should have trademarked one of the subtitles: “Tether is not so tethered.”

Chapter 6: Cat and Mouse Tricks

On p. 74 he writes:

Four years later, when I started looking into Tether on my Businessweek assignment, Bitfinex’ed was still posting multiple times a day. His writing was conspiratorial, but it had struck a chord. Everyone in crypto would bring his posts up in conversation with me. Tether defenders tended to blame him for any negative news about the company. I’d seen things he wrote echoed in lawsuits and in mainstream reports. He seemed to know so much about Tether that I wondered if he worked for the company, or if he was a disgruntled government investigator. I arranged a meeting with him, on the condition I wouldn’t reveal his identity.

As mentioned in the Easy Money review, the first search result for googling “Bitfinexed identity” is to a five year old article that links to a Steemit article. Bitfinex’eds name is Spencer Macdonald.24 Back when I wrote long newsletters Bitfinex’ed was on my private mailing list and sent me the link to a Steemit article of a guy who “doxxed” him because Macdonald had re-used the same catchphrases “Boom. Done.” under an alias Voogru on reddit.25

On p. 75 he writes:

He told me that he didn’t want to reveal his real identity because he’d gotten death threats from Tether defenders. As he worked himself up, the pitch of his voice rose higher.

That sucks, I have also received a slew of threats (and petty grievances) in the past too. The people who send those threats should receive some kind of consequence. Putting that aside, why does he still use this alias at this point since it has been googlable for years?

On p. 75 he writes:

By then, Andrew had lost me. I had been hoping to get new leads at this meeting, not an analogy drawn from a cartoon about anthropomorphic ducks. Andrew told me his mission to expose Bitfinex wasn’t personal. It seemed like it was. He said he imagined Kevin Smith—who played a slovenly hacker named Warlock who works out of his mother’s basement in a Die Hard sequel—portraying him in a movie. “I think it’s more humiliating for Bitfinex that way,” he said.

I agree with Faux, it seems a bit personal too. And I don’t think there is any shame in admitting that: several Bitfinex/Tether LTD staff (executives?) wronged you in the past — plus repeatedly lied in public — and you want to get even. But Macdonald – like the rest of the Tether Truther gang – likely has no inside information, he says as much to Faux. So how does Macdonald plan to humiliate them? In Easy Money, James Block dropped the alias (DirtyBubbleMedia) and still uses chain analytics to trace linkages, why not follow his lead?

On p. 77 he writes:

When I asked for his sources or evidence, Andrew didn’t have anything new to provide. That was where I was supposed to come in.

This is a big oof. In Easy Money the authors put Macdonald/Bitfinex’ed on a pedestal, but never present a smoking gun. Perhaps there is one, but that rabbit hole took up valuable page space that Faux instead uses to interview a prosecutor from the NY AG office.

Speaking of speculation, Matt Levine recently hypothesized that Tether could be a lucrative business for one of the following reasons:

Source: Twitter

Number 2 is a possibility that Faux also independently surmises in the book, yet the authors of Easy Money do not, possibly because their sources (Bitfinex’ed/Macdonald) dismiss it a priori.26

On p. 77 he writes:

Betts explained that Noble wasn’t exactly a bank—it was an “international finance entity,” organized under looser Puerto Rican laws. His plan was to open accounts for all the major cryptocurrency hedge funds and companies. That way, they could easily transfer money between themselves without ever sending it out of Noble.

The Drake meme seems pretty fitting for this passage:

On p. 78 he writes:

The dispute got so heated that Devasini wanted to pull the company’s cash from Noble. Devasini’s deputy, Phil Potter, wanted to keep their money in the “international finance entity,” so Devasini and his other partners bought him out for $300 million. Potter took the payment in U.S. dollars, not Tethers.

That is a pretty big chunk of change. From its neighboring paragraphs, it appears this buyout took place in 2018. How did the partners who bought him out fund that buyout during this time period?

Chapter 7: “A Thin Crust of Ice”

This was a great chapter if for no other reason than we get to read in booklength (for the first time?), from a NY AG prosecutor involved in the Tether case. After reading this book, I think going forward reporters should ask Tether Truthers if they have ever reached out and/or spoken to any of the prosecutors. That seems like the bare minimum low-effort task to complete, otherwise it is just LARPing as a social media maven.

On p. 80 he writes about John Castiglione and Brian Whitehurst who were assigned to investigate the cryptocurrency market for the NY AG.

On p. 81 he writes about subpoenas:

The crypto industry responded with outrage. Four exchanges didn’t respond at all. Some of the others said they had no responsibility to police suspicious activity. Castiglione and Whitehurst decided to focus on Bitfinex, the crypto exchange owned by the same group that owned Tether. It had the most red flags. The company said it didn’t do business in New York, but one of its top executives—the chief strategy officer, Phil Potter—lived there. Castiglione sent a subpoena to some New York trading firms, and they informed him that they did use Bitfinex.

One of the exchanges that said they would not respond was Kraken whose representatives, at the time, said they did not do business in New York. Yet curiously, a year later, their head of trading – who was based in New York – sued them for stiffed compensation.

On p. 82 he writes:

This was, amazingly, even sketchier than it sounds. Crypto Capital advertised on its website that it enabled users to “deposit and withdraw fiat funds instantly to any crypto exchange around the world.” But it didn’t have any special technology. Instead, it was essentially a money-laundering service. Crypto Capital would simply open bank accounts using made-up company names. They’d tell banks they’d use the accounts for normal things, like real-estate investing. Then they’d let companies like Bitfinex use them for customer transfers. (Bitfinex would later claim that it believed Crypto Capital’s assurances that everything was on the up-and-up.)

Amazing, plus a funny parenthetical.

On p. 83 he writes:

Castiglione and his colleagues asked for proof that all Tethers were paid for with actual dollars by real customers. The defense lawyers acted affronted. But after some back-and-forth, one of the defense lawyers acknowledged that there had been what he called a “development.” They didn’t exactly come clean. Bitfinex had placed more than $850 million with a payment processor—Crypto Capital—and it appeared to be “impaired,” he said. Bitfinex had filled the hole by borrowing from Tether’s reserves. “I’m sorry, can you say that again?” Castiglione asked. Castiglione couldn’t believe it. Impaired seemed to be a euphemism for “gone,” and gone meant the exchange was insolvent and on the brink of collapse. On Wall Street, a trading venue in this situation would have to tell the world and shut down. It seemed like Bitfinex didn’t even plan on informing its customers. Castiglione asked the defense lawyers to leave so he and his colleagues could confer in private.

Future writers and reporters: if your book on Tether doesn’t have something as juicy as this statement above, do more digging because this is the bar to surpass.

On p. 85 he writes:

At first, Bitfinex’s lawyers said the deal to lend themselves Tether’s money was only pending. But after weeks of exchanging letters, they informed Castiglione that it had been completed, though they assured him it was a fair transaction negotiated without conflict of interest. They sent over papers documenting a $900 million line of credit from Tether to Bitfinex. Signing on behalf of Tether was Giancarlo Devasini. And on behalf of Bitfinex: Giancarlo Devasini.

They got the last laugh though, right? In the process of writing this, Tether LTD announced its latest attestations: about 85% of their reserves were now supposedly held in cash and cash-like equivalents (Treasuries). If they are able to pocket the 5%+ yield on Treasuries that is at least a couple billion in annual profit.27

On p. 86 he writes:

The settlement with New York required Tether to publish quarterly reports detailing its holdings, and to send even more detailed information to the attorney general. Castiglione hoped they would inspire someone to look more closely. But no regulators asked to see them.

This is interesting. Why have no other regulators reached out to see the documents? Did other regulators and law enforcement receive similar documents from subpoenas and thought the NYAG had outdated material?

Chapter 8: The Name’s Chalopin. Jean Chalopin.

On p. 91 he writes:

Tether’s lawyer, Stuart Hoegner, had a little bit more to say to me. In a video chat, he called Tether’s critics “jihadists” set on the company’s destruction and said their market-manipulation claims didn’t make sense. And, in an email, he said my reporting was “nothing more than a compilation of innuendo and misinformation shared by disgruntled individuals with no involvement with or direct knowledge of the business’s operations.”

It is not clear when Hoegner had the change of heart, or maybe it is just in external communications? You can always fire your client to save your book credibility.28

On p. 93 he writes:

That October, Businessweek published my account of what I found, with the headline “The $69 Billion Crypto Mystery.” (By then, Tether had issued 69 billion coins.)

Portions of the ~5,000 page article was reused throughout the book. Perhaps because the photo is black & white Jean Chalopin kind of looks like Chuck Norris.

On p. 93 he writes:

People read into the story whatever they wanted to believe. To crypto fans, it showed that Tether did in fact have at least some money, which was a positive. To those who were skeptical, the information about Chinese commercial paper was damning. I wasn’t sure what to make of the financial records myself. I tried digging into the details of their holdings. Many of the loans appeared to be legitimate loans to real companies. Others I couldn’t verify at all. But that was unsurprising given the low quality of data on Chinese corporate loans. Rather than a smoking gun, the records felt like another inconclusive clue.

He hasn’t received a smoking gun so far. Other authors on the beat take note, it’s okay to say you don’t have conclusive evidence one way or the other.

On p. 94 he writes:

“I’m betting a shit-ton of money on them being a crook,” Fraser Perring, co-founder of Viceroy Research, told me. “Worst case is, I can’t lose hardly anything. I’m already rich, but I’m going to be fucking rich when Tether collapses.”

In Easy Money, the authors obliquely refer to a hedge fund (when interviewing James Block). I hypothesized it could have been Hindenburg Research or Citron (the former is mentioned later in this book). How many hedge have active trading positions on Tether solvency (one way or the other?)

On p. 95 he writes:

More recently, in March 2023, California’s Silicon Valley Bank collapsed after worry about its investment portfolio, amplified by a prominent podcaster, caused its customers, mostly start-up executives, to freak out.

Faux references a Financial Times article highlighting Jason Calcanis, who is a co-host of the All-In Podcast. Calcanis’ hysteria has led to a number of memes (and at least one bankrupt bank):

Source: Twitter

On p. 96 he writes:

But none of the analysts seemed much better informed than “Andrew,” the conspiracy theorist I’d met who posted as “Bitfinex’ed.”

Oof. Watch your notifications: FactFreeh, WillyBot, and other anonymous accounts will troll you if you point that out on the bird app.

On p. 97 he discusses the $1 million bounty from Hindenburg Research:

In November, we met in front of a hot dog cart by an entrance to Central Park. Anderson showed up wearing a hoodie. As we strolled down a path past children playing baseball, tourists taking photos, and a steel-drum band, he talked about what he could do with detailed documents on Tether’s holdings. Anderson said the bounty announcement hadn’t produced any great tips so far. I told him I might be able to help. Without revealing any details, I described the documents that I’d received.

I feel a little vindicated because in the past I have asked Tether Truthers, such as Jorge Stolfi, if they were so certain that Tether was acting in a fraudulent manner, why not collect the $1 million bounty. I have no affinity for Tether LTD (or Hindenburg) but I suspect it is because Stofli, and others, do not have actual evidence. Perhaps Tether LTD is still operating in a fraudulent manner, but using innuendo or hearsay is not a valid argument.

On p. 98 he writes:

“This book is going to be called Jay Is Wrong and Zeke Is Right: The Cryptocurrency Story,” I said. “As a writer, you don’t want to be compromising in any way, you know? You don’t want to have ulterior motives.”

This is basically the opposite approach to Ben McKenzie, who in Easy Money writes about his $250,000 bet shorting the coin market… but doesn’t publicly disclose the bet until after the book is published. Conflict of interest?

Chapter 9: Crypto Pirates

This was a really solid chapter on SBF and FTX. In fact, I only had one quibble with it.

On p. 117 he writes:

Owning an exchange (FTX) and a firm that trades on it (Alameda) was an obvious conflict of interest. On Wall Street it wouldn’t have been allowed, due to the risk that the trading firm would be given preferential treatment or access to confidential information.

While I agree with the author, that this should not be allowed, it technically is not true in the U.S.

As mentioned in the review of Easy Money, an uneasy arrangement has been allowed at various eras in traditional markets: Glass-Steagall separated commercial banking from investment banking and was enacted in 1933. Fast forward sixty six years later, in 1999, most of it was repealed. Some economists such as Joseph Stiglitz and Paul Krugman opined that this set the stage for the 2007-2008 financial crisis. Even after the financial crisis and a myriad of debates, Glass-Steagall was still not restored. Even today, too big to fail banks still have these conflicts of interest.

So yes, some U.S. stock exchanges may not have that specific conflict of interest, but a number of other intermediaries do.

Chapter 10: Imagine a Robin Hood Thing

On p. 120 he writes:

There was one other thing that was incongruous with Bankman-Fried’s public image: the itty-bitty matter of U.S. law. If Bankman-Fried had stayed in Berkeley, many of the bets FTX offered would’ve been not quite legal. Or entirely, deeply illegal. Nearly all the coins it listed would have been deemed unregistered securities offerings, like MasterCoin. The exchange itself didn’t comply with SEC trading rules either.

That could be true, but it probably would have been a stronger statement if the author had quoted or cited a U.S.-trained securities lawyer on that matter.

On p. 122 he writes:

“You’ve built up a good reputation,” I said, needling him a bit. “You could probably run some crypto scam and make a few billion dollars right now. By your logic, wouldn’t that make sense?” “Charities don’t want that money,” he said. “Reputation is so important for everything you do. And as soon as you start to think about the second-order effects, it starts to look worse and worse.”

It has been interesting to read this book and write the review during the SBF criminal trial. The book itself was introduced as evidence when SBF took the stand. While the passage above didn’t make it into testimony, in retrospect it was a pretty big self-own.

On p. 126 he writes:

In fact, by then, Tether had grown to 79 billion coins. And it was becoming clear that Bankman-Fried was a big enough user of Tether that he wasn’t likely to tell me if something worse was going on. The short sellers and conspiracy theorists kept promising to reveal some big secret, but it hadn’t happened.

I have my own theory as to why some of the conspiracy theorists went off the deep end, turning their notoriety into a cottage industry for continual media engagement. But putting that cynical view to the side, reporters should ask these folks to provide the receipts. And move on to other sources if they do not.

On p. 127 he writes:

The funds were not in the possession of shadowy North Koreans or some other group of cyberterrorists. The stolen billions were traced to a couple in their early thirties who lived in downtown Manhattan, not far from my place in Brooklyn. Their names were Ilya Lichtenstein and Heather Morgan. Judging from social media, the two didn’t exactly appear to be criminal geniuses.

I recall the first time I saw those names in the press and I asked a couple (trader) acquaintances in NY if they had ever heard of them. No one had. The next chapter illustrates why this book is a solid entry into the True Crime genre.

Chapter 11: “Let’s Get Weird”

On p. 135 he writes:

In 2021, a total of $3.2 billion in cryptocurrency was stolen from exchanges and decentralized finance (or DeFi) apps, in which crypto traders make deals directly with one another. That’s a hundred times more than the total stolen in all bank robberies in an average year in the United States.

Bank robbers need to step up their game, those are rookie numbers.

On p. 135 he writes:

Back in 2015, Bitfinex had set up a new security system after it lost about $400,000 of cryptocurrencies in a hack. Other exchanges generally mixed users’ coins together and stored the private keys on computers that weren’t connected to the internet, a practice known as “cold storage.” Bitfinex’s new system kept each user’s balance in a separate address on the blockchain, allowing customers to see for themselves where their money was. It used software from the crypto-security company BitGo.

Some background: the day Bitfinex was hacked (a 2nd time), some anti-government commentators, such as Andreas Antonopoulos falsely claimed that it was the fault of the CFTC. Recall that a few months prior, the CFTC fined Bitfinex for violating the CEA.

Source: Twitter

There is only so much time of in the day to fact-check, so hats off to Faux for not stumbling down the well-worn “its the governments fault” excuse. Maybe it is sometimes, but not that day.

On p. 135 he writes:

Michael Shaulov, a former coder for the Israeli Intelligence Corps and co-founder of the crypto-security firm Fireblocks, told me hacks like these generally don’t require a high level of technical expertise. Often, he said, the hardest part is crafting an email that tricks an insider into opening a malicious attachment. “The social-engineering vector is key,” he said.

Over the years I’ve had a chance to speak with people involved at a couple of the companies mentioned in this chapter. And while I have heard a single person singled out, it was a little disappointing that the criminal case against Ilya Lichtenstein and Heather Morgan didn’t say who or what was compromised.29

On p. 138 he writes:

They returned after a few weeks and then a third time a few weeks after that. “You sure you’re in the right building?” the doorman asked. (At the time, police were investigating the death of a prostitute in the tower across the street—surveillance video had shown men rolling a 55-gallon drum that concealed her dead body out of the building.) The agents assured him they were.

Faux’s never ending attention to detail strikes again.

On p. 142 he writes:

The arrest was national news. It was the largest seizure of stolen funds ever. “Today, the Department of Justice has dealt a major blow to cybercriminals looking to exploit cryptocurrency,” Deputy Attorney General Lisa Monaco said at a press conference. The TikTok commentariat tore through Morgan’s music videos, and within hours Razzlekhan was already a social media legend, having air-humped her fanny pack into the ranks of famous grifters. “The Bitcoin crimes are nothing compared to calling this shit rap,” Trevor Noah said on The Daily Show.

The amount of podcasts, videos, and obscure magazines and newspapers that Faux must have digested is impressive. Pretty solid zingers elsewhere too.

On p. 143 he writes:

Years after the Bitfinex heist, a fifth of the missing Bitcoins were still unaccounted for. Roughly $70 million worth had been sent to Hydra Market, a Russian dark-web site. No one knew where the money went from there, but on Hydra, vendors called “treasure men” were known to exchange crypto for shrink-wrapped packets of rubles that they buried in secret locations. It was possible there were underground bundles somewhere in Russia, waiting for Morgan and Lichtenstein to dig them up.

Is it just a matter of time before people randomly start digging for bundles of burried rubles? Shouldn’t there be a prediction market for this type of degen activity?

On p. 144 he writes:

The Bitcoins had been worth about $70 million when they were stolen. Devasini and his crew stood to recoup billions of dollars. It gave me little confidence in their abilities to safeguard money that their Bitcoins ended up in the hands of a pair of idiots, but having the coins sitting locked up in the couple’s wallets was probably a lucky break.

Based on the numbers mentioned in this book, there is a possibility that those high up Tether LTD are quite well off at this stage. Although clearly not at the same strata as Colin Platt.

On p. 144 he writes:

I quickly found that Mashinsky had an interesting history. I’d found a 1999 article in a defunct tech publication in which he listed a few very different businesses that he’d tried out after moving to the United States: “importing urea from Russia, selling Indonesian gold to Switzerland, and brokering poisonous sodium cyanide excavated in China for use by gold miners in the U.S.” He also said in the article that he wanted to get into the business of whole-body transplants. “Give an old person a new body—keep the head, keep the spine, and re-create the rest,” he said.

In another universe Mashinsky has taken Brains-in-a-vat mainstream. There you get a free whole-body transplant on the condition that an hour a day you solve captchas. Years later he is sued and charged with digital tomfoolery, for stealthily making it 20 hours a day; he accidentally created the plot of The Cookie Monster.

Chapter 12: “Click, Click, Click, Make Money, Make Money”

On p. 149 he writes:

Stone took his money out of stocks and went all-in on Ethereum, eventually starting Battlestar, which was supposed to help investors earn a return on their crypto holdings through what it called “institutional grade Staking-as-a-Service.” (Don’t ask.)

While I like some technical nitty gritty, rather than bore readers (or botch it like other authors have), Faux punts on describing what “institutional grade Staking-as-a-service” is. And that’s okay. With that said, he does mention “yield farming” a couple of sentences later but doesn’t really define it in the book.30

On p. 150 he writes:

By then, the ICO boom was over. It was no longer plausible for someone to announce they were going to create Dentacoin, a cryptocurrency for dentists, and raise millions of dollars —a real thing that happened in 2017. DeFi was different. It was based on “smart contracts.” These are, basically, simple programs that run on the blockchain. Remember that the Bitcoin blockchain is a two-column spreadsheet, and MasterCoin, Ethereum, and the like allowed for adding new columns that represented new coins. Now imagine if the spreadsheet added functions. Instead of just allowing users to add Bitcoins to one person’s row and subtract them from someone else’s, these smart contracts enabled them to swap one kind of coin for another, or make a loan to another user.

I think this could be a little unclear for readers and a paragraph break should be made with “DeFi was different.” Also, while users can create and deploy new assets via Mastercoin (renamed Omni), it doesn’t have a virtual machine like other “modern” chains do so its functionality is very limited compared with Ethereum.31

On p. 151 he writes:

DeFi used these smart contracts to create decentralized, anonymous versions of exchanges like Sam Bankman-Fried’s FTX.

Probably more accurate to say pseudonymous.

On p. 151 he writes:

“DeFi may not exist in January,” Mashinsky wrote. “What we want is for every DeFi player to have a Celsius account, so when the Ponzi runs exhaust themselves they will all park their coins with Celsius.”

Wow, just wow.

On p. 154 he writes:

His description of life in Puerto Rico sounded like a montage from a crypto version of The Wolf of Wall Street: “dancing, partying, drugs, beach.” Stone set up two big screens at the dining room table. He rarely looked up from them, even when his host threw weekly parties. As people danced around the room, he’d stare at the screens and snort lines of ketamine. Other crypto traders would bring their laptops too. Some preferred Adderall or cocaine. Stone liked to say he was one of the largest players in DeFi, a friend who hung out with him then told me, often yelling about hacks or how much money he was making. “He’d type loud, like he wanted people to know,” the friend said.

On p. 155 he writes:

Because it was crypto, all that money was stored on Stone’s laptop. It was as if Stone kept a billion dollars in bundles of hundreds, just sitting on his friend’s dining room table. The account was protected by a password, but Stone grew paranoid. He couldn’t sleep for more than a few hours at a time. He’d stay up until three in the morning trading, then start again at six or seven.

I’m not a master of memes but pretty certain an appropriate one for the passage above is: are ya winning, son?

On p. 155 he writes:

Mashinsky was claiming Celsius was safer than banks, but the company didn’t even have a system for tracking what Stone and its other traders were doing with the money. As one Celsius executive wrote in an internal email in December 2020: “As things stand currently, Celsius does not have a clear, real-time, and actionable view of our assets and liabilities.”

SMH.

On p. 157 he writes:

Mashinsky argued that crypto was better than dollars, because inflation would inevitably erode the value of all government-issued currency. I told Mashinsky I didn’t have any savings in cash, so it wasn’t like I was sitting on a pile of money that was getting less valuable. And I wasn’t worried about the safety of my bank account.

That old chestnut. J.P. Koning wrote a pretty good debunking of a similar narrative.

Chapter 13: Play to Earn

On p. 162 he writes:

Lapina started using his earnings to buy more teams of blobs, and he hired other people in town to play with them on their own phones. He let them keep 60 percent of whatever they won in the game. Before long, Lapina had more than a hundred people battling for him, including teachers, his grandmother, and even a police officer, who Lapina had to talk out of quitting the force.

Wow, had no idea how “viral” Axie was at that time.

On p. 162 he writes:

“It’s actually the beginning of the metaverse, in our opinion, just hiding in a very cute little game,” Aleksander Larsen, the Norwegian co-founder of Sky Mavis, said on a podcast. “I actually believe that Axie has the potential to impact the globe very heavily with letting people interact with the global economy, actually exiting their prisons, where they are born.”

Filtering through podcasts for this gem. Sounds like something VCs Congratulating Themselves would find.

On p. 163 he writes:

The returns didn’t strike the Filipinos I talked to as unreasonable. But a more sophisticated investor would have realized the daily rate of return was 8 percent—way, way too good to be true. At that rate, with earnings continually reinvested for ten months, Lapina and everyone else who bought a single set of Axies would be trillionaires.

Finally, a scheme on par with PTK.

On p. 163 he writes:

The only thing that kept the Axie economy afloat was new players buying in.

Because I’m overly pedantic I would probably have written, “the only thing that kept the Axie economy afloat at this price level” because technically Axie (the game) is still alive today.

On p. 166 he writes:

Quigan told me she and her husband were considering going abroad to Dubai to seek better-paying jobs. But she still checks the price of potions daily. “I don’t get angry,” she said. “I’m still optimistic that sometime, somehow, it will still go up.”

Probably could print that quote on a shirt and sell it a coin conference.

On p. 166 he writes:

QUIGAN MIGHT NOT have been angry, but I was. Crypto bros and Silicon Valley venture capitalists gave Filipinos false hope by promoting an unsustainable bubble based on a Pokémon knockoff as the future of work. And making matters worse, in March 2022, North Korean hackers broke into a sort-of crypto exchange affiliated with the game and made off with $600 million worth of stablecoins and Ether. The heist helped Kim Jong Un pay for test launches of ballistic missiles, according to U.S. officials. Instead of providing a new way for poor people to earn cash, Axie Infinity funneled their savings to a dictator’s weapons program.

Not a good look Bob.

Chapter 14: Ponzinomics

On p. 170 he quotes Anthony Scaramucci:

“These people are unbelievable the way they dress,” he said. “I’m here in a Brioni, these guys are in Lululemon pants. These guys are moving into the future. These are some of the worst-dressed people I ever met in my life.”

Yea, it’s not the fly-by-night scams to be concerned about, it is the clothing choices.

On p. 171 he writes:

As Lewis went on, Bankman-Fried tapped the toes of his silver New Balance sneakers, sometimes pressing his legs with his elbows as if to hold them still. It seemed like Lewis saw him as another one of the truth-telling, system-disrupting outsiders he liked to write about. But the author’s questions were so fawning, they seemed inappropriate for a journalist. Listening from the packed auditorium, I started to question whether Lewis was really writing a book, or if FTX had paid him to appear. (Lewis later told me that he had in fact come to report for his book and that he was not compensated.)

Was Lewis provided flights on the FTX jet? Either way, Michael Lewis was unhappy with Faux’s reporting on this topic, telling The New York Times in its review of Going Infinite:

I’ve never met Faux but I do not think he is on trial for defrauding customers for ~$8 billion in losses. Who knows, maybe Faux has been moonlighting as a North Korean hacker. How else could he track down VIPs at art shows?

On p. 172 he writes:

At a party for a project called Degenerate Trash Pandas, I asked one coder if crypto would ever be helpful for regular people. “Why is it that you think that is important?” he said to me, in a tone of total sincerity. “I really would like to know.”

Socially useful dapps? Get out of here.

On p. 173 he write:

Another crypto executive showed me a digital image of a sneaker that he bought for eight dollars, which he said had grown to be worth more than $1 million. He told me that recently, all owners of these imaginary sneakers had been issued an image of a box, which was itself worth $30,000. When he opened the box, he found another picture of sneakers and another box, each of them valuable in their own right. “It’s this never-ending Ponzi scheme,” he said, happily. “That’s what I call Ponzinomics.”

Reminds me of that SNL sketch with Tim Meadows and Will Ferrell with a Bible and a bar of gold:

On p. 175 he writes:

It struck me that almost any of the companies I’d heard about would be good fodder for an investigative story. But the thought of methodically gathering facts to disprove their ridiculous promises was exhausting. It reminded me of a maxim called the “bullshit asymmetry principle,” coined by an Italian programmer. He was describing the challenge of debunking falsehoods in the internet age. “The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it,” the programmer, Alberto Brandolini, wrote in 2013.

Source: Twitter

Another solid Tweet reference. Unfortunately Community Notes was not around in 2014-2016 which I think could have headed off some of the nonsense narratives.32

On p. 180 he writes:

Van der Velde seemed annoyed. He hinted that there was something in Tether’s past that he couldn’t reveal. “It’s very easy to invite a journalist into your office when you don’t have any battle damage,” he said. “Tether saved the whole industry. We had to carry those heavy loads. Sam had the luxury of making a nice clean start. Sam never had to deal with that.”

I think this is partly why Tether LTD has been given a free pass by much of the industry: it has provided the necessary lubricant to cross the chasm. It is systemically important for the coin world.

On p. 182 he writes:

He refused and accused me of being insufficiently committed to my project. “How do you expect to write a book about crypto if you have only dedicated $600 to crypto?” Loney said. I told him it was pretty common for writers to write about, say, presidential politics without serving as president, or baseball without being able to hit a fastball. But he wasn’t convinced.

That reminds me of this interaction from a few years ago:

Source: Twitter

Six years later there is still a problem with conflating holding a de minimis amount of coins in order to test out say, how limit orders work on UniSwap V3 versus making it the bulk of your portfolio. You do not need to own an airplane to be a pilot or stewardess or flight instructor. It’s possible to be a blockchain researcher without having to own massive quantities of the coin you are studying.

Chapter 15: All My Apes Gone

On p. 186 he writes:

A common misconception about NFTs is that the buyer owns a unique, verifiable digital image. That’s not the case. There’s nothing stopping anyone from simply right-clicking Justin Bieber’s ape and downloading the image file to their computer. The replica is indistinguishable from the $1.3 million original, and perfectly usable for a profile picture. What a Bored Ape buyer pays hundreds of thousands of dollars for is not a digital ape cartoon—it’s the ability to prove they are the one who paid hundreds of thousands of dollars for a digital ape cartoon.

So I partially agree with the premise here: the way many art-related NFTs were marketed the past few years was if there was a unique digital image. In most cases however – such as with BAYC – the owners had to refer to URL pointers. But not every art-related NFT project followed that path; there is a small category called “generative art” that as the name suggests, is generated and/or store fully on-chain. See Slide 9 for some examples of projects whose assets reside fully on-chain.

On p. 193 he writes:

The process of buying the ape didn’t make me feel any better. It could only be purchased on an NFT marketplace using the cryptocurrency Ether. (That’s what the Ethereum blockchain’s coins are called.)

A pedantic rewording of the parenthetical: the word native should probably be inserted between blockchain and a singular coin.

On p. 193 he writes:

Once my money was on Coinbase, I had to trade it for Ether, which was easy enough. Coinbase works just like E-Trade, except that instead of Apple stock, you’re buying and selling cryptocurrencies. It’s not exactly what Satoshi Nakamoto had in mind when he invented the first peer-to-peer electronic cash system—Coinbase is simply taking the place of your online trading site.

The irony of many intermediaries involved in that trade lifecycle.

On p. 195 he writes:

Each offer charged me a “gas fee” of about three dollars, an annoying sum for a technology advertised as an improvement on credit cards. These are paid to the operators of the Ethereum network—similar to the rewards paid to Bitcoin miners—and vary with demand, sometimes spiking past a hundred dollars per transaction.

It would have been a massive distraction, but I think readers would have liked to know why there was a spike. Not that there needs to be a future edition, but a hypothetical footnote could discuss maximal extractable value (MEV), which is sometimes the cause for these spikes.33

Source: Flashbots

Chapter 16: It’s the Community, Bro

On p. 199 he writes:

The Mutant Cartel was his effort to build a community around the Mutant Apes, which he felt had been a bit overlooked by their creators. “It’s all the good stuff about being in a cult without any of the negative,” Messika said. “It’s genuinely beautiful to see this deep camaraderie.” I wasn’t sure about what he was saying, but I have to admit it felt cool to be part of his crew.

This is the closest Faux describes becoming part of a crew. This stands in contrast to Easy Money where the authors arguably lost objectivity by becoming too close to their sources.

On p. 200 he writes:

Comedian Amy Schumer’s set early in the evening was not a hit. She seemed embarrassed to be there and called the attendees nerds. “I don’t know what NFT stands for,” she said. “I’m assuming it’s, looking out, not fucking tonight, is that correct? Do I have that right?”

Nerds just gonna stand there and take that? Didn’t make an NFT of that NFT joke?

On p. 202 he writes:

Even assuming one was made, the licensing fees would likely be barely enough to cover the cost of one Bored Ape. To make everyone’s investments pay off, 10,000 movie studios would have to make 10,000 deals to make 10,000 cartoons about 10,000 similar-looking animals.

On p. 204 he writes:

The bestselling writer Neil Strauss wrote an impenetrable ape-themed book that was itself released as a limited-edition NFT. At least 2,000 copies sold for about $250 each. “Captain Trippy lay in his hammock at the back of a room, holding a Shaving Ape cigarette loosely in his right foot,” he wrote. “Some say it’s the reason for his brightly colored psychedelic skin and captain’s hat, so that he can be seen through the smoke.” I’m not sure if anyone has actually read the whole thing, but I made a $300 profit when I sold my copy.

Someone call the purity police: the author is flipping NFTs for big bucks!

On p. 205 he writes:

A month before ApeFest, Ripps had started to sell his own NFTs. He called them RR/BAYC. They were exact replicas of Bored Apes—in fact, since NFTs don’t actually contain images, just links to them, Ripps’s NFTs contained links to the exact same images. He offered his for way cheaper, about $200 each. Ripps told me he hadn’t ripped off Bored Apes—he’d created a new artwork by placing them in a new context. “The NFT isn’t the image,” Ripps said. “The NFT is a cell in the spreadsheet that’s in the blockchain that links to an image. No one is mistaking their apes for my apes.”

Well when you say it out loud that way, it does sound a little ridiculous. But… the pedant in me must protest: not all art NFTs require an external link (but most of them do).34

On p. 207 he writes:

I later learned from a legal document that Snoop allegedly owned a stake in Yuga Labs. I was almost relieved to find out he may have been shilling his own investment.

I lied, here’s another zinger.

On p. 207 he writes:

But I felt angry on their behalf. I wondered if Fallon felt any responsibility for promoting Bored Apes in his segment with Paris Hilton.

I empathize with the authors anger. I’ve attempted to confront people I felt were responsible for actively misrepresenting some scheme. But, and I say this as someone who has never owned a ritzy Ape or Mutant: those are Veblen goods. The only way to buy them was to fork over $20,000 for the cheapest. Unsophisticated retail (who apparently got raked on Axie) couldn’t meet that threshold. That’s not an excuse for Fallon but it’s in a different league.

Chapter 17: Blorps and Fleezels

On p. 212 he writes:

Kwon’s main coin was called TerraUSD. It was a stablecoin like Tether, intended to always trade for one dollar. But Kwon didn’t promise to back his coins with dollars in a bank account. Instead, TerraUSD was backed with a second coin that Kwon made up, called Luna. Since Kwon controlled the supply of Luna, he could simply create as many as needed out of thin air.

This is mostly true, except the part where Kwon controlled the supply of Luna. He may have engineered its parameters at genesis, but post-launch he did not appear to unilaterally control Luna’s supply any more than Satoshi unilaterally controlled the Bitcoin supply.35

On p. 212 he writes:

If you’re having trouble following this, that’s actually a good sign about your investing instincts. Comedian John Oliver later summarized Do Kwon’s nonsensical business plan: “One blorp is always worth one dollar. And the reason I can guarantee that is I’ll sell as many fleezels as it takes to make that happen. Also, I make the fleezels.”

Part II is great episode. Coincidentally I referred to Part I in the review of Easy Money.

On p. 212 he writes:

The reason people bought into Kwon’s Terra-Luna plan is that TerraUSD coins could be deposited in a special crypto bank called Anchor, also controlled by Kwon, which paid a 20 percent annual interest rate. This raised obvious questions, such as “Where does the money to pay those interest rates come from?” and “This is a Ponzi scheme, right?”

I probably would describe Anchor as a lending protocol, so maybe a shadow bank? My autopsy of that collapse: Not all algorithmic stabilization mechanisms are the same.

On p. 213 he writes:

The Tether critics were getting excited. Bitfinex’ed, the anonymous critic who asked me to call him Andrew when we met at the bayside pool, tweeted more than sixty times that day.

I think after 50 tweets in a day the state of Florida requires social media users to go outside and touch grass.

On p. 216 he writes:

Kyle Davies, Zhu’s high school friend and co-founder, later said the lenders were so desperate to make loans that they asked for almost no proof that Three Arrows would be able to pay. “One of the last calls we did someone lent me almost a billion, off a phone call,” he said. “That was uncollateralized. That’s where the system was. People needed to get dollars out the door.”

In my review of Easy Money, I pointed out that the authors criticism of lending was shallow because it didn’t discuss how the centralized lenders were rehypothecating funds and/or providing uncollateralized loans. Faux found a podcast with one of the borrowers saying as much. This filtering of information from disparate media is part of the reason why Number Go Up is a superior book.

On p. 217 he writes:

Even companies that hadn’t lent to Three Arrows themselves took a hit. Gemini, a well-regarded exchange, turned out to have lent users’ money to a company called Genesis Global, which lent it to Three Arrows.

Source: Twitter

As mentioned in the Easy Money review, the tweet above (Barry Silbert is the founder of DCG) did not age well. During the process of writing this review, the NYAG sued Genesis, DCG, and Gemini for allegedly defrauding investors.

On p. 217 he writes:

As crypto skeptics David Gerard and Amy Castor wrote, the industry was like an inverted pyramid whose tip rested on a box of hot air—Kwon’s Ponzi scheme. When the box crumpled, the pyramid came falling down.

What are crypto skeptics? This is the first and only time the author uses that phrase. There a number of other people who have provided critical views without marketing themselves as “crypto skeptics.”

On p. 216 he writes:

The losses hit everyone in crypto. Michael Saylor, the laser-eyed crypto prophet who was the star of the Bitcoin conference in Miami, stepped down as CEO of his company, MicroStrategy, after it lost almost $1 billion on its Bitcoin bet.

And was charged with tax evasion by the DC AG four weeks later.

On p. 221 he writes:

Like Chappy, many of the investors I talked to said they were still committed to crypto. It seemed to me like they just didn’t want to admit they’d been wrong. “To me it’s not about the money at all, it’s about the future,” an emergency room doctor in Lafayette, Louisiana, told me after he lost $800,000.

I’ve already used the Michael Scott cringe meme, it would be pretty apt here.

On p. 223 he writes:

I wondered why more people hadn’t cashed in their Tethers. There was clearly at least a small chance Tether might fail. Even someone who mostly trusted the company, despite all the reasons not to, would have reason to cash theirs in. Investors wouldn’t even have to leave the crypto world. Tether could be easily swapped for a competing stablecoin, called USDC, which was based in the United States and didn’t have the same checkered past.

This is the only time in the book where the author mentions another centralized pegged coin (which is one more than either of the previous two books did). I don’t think it is as cut and dry as Faux makes it out to be, for reasons discussed by J.P. Koning.3637 It would be a distraction for the reader, but if we were really to drill into this issue, could be worth looking which centralized stablecoin-issuers executives lobbied against the STABLE Act proposal. And who needed a bailout after SVB, Silvergate, and Signature banks collapsed.

Chapter 18: Pig Butchering

This is another must-read chapter in a must-read book. For instance, I learned that some of the scammers who randomly send beautiful pictures via the phone, are effectively slaves held in compounds in towns scattered around Cambodia. Yea, that stranger guy (or gal) that you have been sending messages to, might just be buttering you up for a coin-related scam.

On p. 231 he writes:

After being allowed to place a few winning bets or trades, the victim, feeling emboldened and thus vulnerable, would be convinced to make a really big gamble. That one they’d lose. Once the mark was gone, the store would be packed up. If the police came, they’d only find an empty room. It was, as the linguist David Maurer wrote in his 1940 classic The Big Con, “a carefully set up and skillfully managed theater where the victim acts out an unwitting role in the most exciting of all underworld dramas.”

TIL. Has Faux been holding that info nugget in his back pocket to be used in the right book?

On p. 232 he writes:

Icetoad and other volunteers from the Global Anti-Scam group told me that Tether refused to help them by freezing accounts or seizing stolen money, even when presented with evidence that an account held the proceeds of fraud. Tether clearly had the capability to help. In some cases, like hacks, Tether had frozen accounts and seized money. But when contacted about pig butchering, Tether would fall back on the excuse that it didn’t control the blockchain. Another Global Anti-Scam volunteer provided copies of several victims’ email exchanges with Tether.

This particular passage, while well-written, just seems a little difficult to follow because Tether probably should be written Tether LTD. Or maybe it is just me.

On p. 233 he writes:

To me, that sounded like a cop-out. When I sent my eighty-one Tethers to Vicky Ho’s platform, there was an entry in Tether’s database representing how much money I had, and another one representing how much Vicky Ho had. Another way of looking at it would be that Vicky Ho had an anonymous, numbered account at the Bank of Tether.

This is not quite true. Unless Vicky (or ZBXS, the platform she used) directly minted or redeemed USDT, then it is unlikely that particular unit ($81) ended up in a database managed by Tether. According to the book, ZBXS seems to be a fly-by-night exchange, and might not do any surveillance sharing. Also, as mentioned earlier, pseudonymous is probably more accurate than anonymous.

Source: The Block

But I do think Faux raises a good point. Tether LTD does actively blacklist addresses (see chart above).

What is the rhyme or reason for why some activity is permitted and others are not?

Source: Twitter

On p. 233 he writes:

I couldn’t believe that Tether was getting away with making its own rules for when it would cooperate with police. Imagine if the cops told a bank that it was holding stolen money and the bank said it wouldn’t return it because the thief didn’t shoot anyone. And, from what Icetoad and other members of his group were telling me, the criminal syndicates who ran pig-butchering scams were actually extremely violent. They told me that many of the people sending spam texts to potential victims like me were themselves victims of human trafficking.

I’m going to say something a little unpopular: I agree with what the author has written but I am not sure his analogy with banks refusing to cooperate with the police is correct.

In speaking with lawyers about this topic, one of the relevant concepts in property law is “nemo dat.” Physical cash is exempt from nemo dat because if every transaction required the cash holder to trace the provenance or lineage of the physical cash, then commerce would grind to a halt. Are centrally-issued pegged coins given the same exemption? I do not know. Perhaps someone could argue that because the coins utilize a public chain, we can (more) easily see the provenance to determine if they are a bona fide purchaser.

Again, I agree with the thrust of Faux’s argument and incidentally it is one of the reasons I surmised that centrally-issued pegged coins would become white-list only. But so far that prediction has been barely partially correct.

On p. 234 he writes:

I’d provided Vicky Ho’s address to Sanders before the meeting. Sanders pulled up a flowchart he’d made tracking transfers to and from the numbered account.

Source: CipherBlade

Above is a short flowchart included in the book. Strangely, neither Easy Money nor Popping the Crypto Bubble included any type of chart. I think readers will find this type of chart helpful, especially since many blockchains can provide those types of linkages by default.

Speaking of which:

Source: Blockseer

Above is a chart illustrating coin movements from Bitfinex to miners in August 2016.38 There is no need for a second edition of the book, but if there was for some reason, then this could fit into chapter 11.

Chapter 19: “We Have Freedom”

It’s a tight race with several other chapters, but this was perhaps the best chapter in the book, in part because it elicits a range of emotions for readers. Including anger and despair. Faux got on an airplane to investigate the leads he had identified. If there is one chapter that will make readers want to go full-on Rambo mode in the hills and valleys of Cambodia, it’s probably this one.

On p. 245 he writes:

Videos like these captured millions of views in Vietnam and turned Phong Bui into a local star. They had gruesome pictures of victims’ injuries and lurid titles like “The Story of Thuy Escaping from Hell on Earth and the Midnight Screams.” I’d paid to have them transcribed and translated. It seemed distasteful to turn human suffering into YouTube content. But they were one of the best sources of information on crypto-fueled human trafficking that I’d found. That’s how I located several of the victims I’d been interviewing.

I have heard content moderation at video sharing sites can really do a number on you. If I had to filter out this type of (flagged) material not sure how long I’d last on the job.

On p. 251 he writes:

“When they want to send to overseas, it’s convenient to send USDT,” he said. “It’s anonymous and it’s quite safe.”

Who am I to argue with a clerk at a money-exchange shop? A pedantic person, that’s who. It’s pseudonymous. If it were truly anonymous then ransomware operators and exchange hackers would demand it instead of Monero.

On p. 251 he writes:

This guy doesn’t care if Tether is backed by Chinese commercial paper, or anything at all, I thought. He just wants to trade crypto for bricks of cash, and not tell anyone about it.

Oof.

On p. 251 he writes:

Then, without asking for identification or even a name, he handed me a crisp $100 bill. I’d turned my crypto into cash, with no paper trail.

Faux point reminds me of something similar from J.P. Koning:

Source: Twitter

On p. 252 he writes:

Before we left, I spoke with Richard Jan, a veteran Taiwanese police officer who worked on the Big Fatty case. He said the Taiwanese government had rescued more than four hundred victims of human trafficking in Cambodia in 2022.

Jesus H. Christ. How many remaining victims were there?

On p. 254 he writes:

I wanted to do something, but Danielle and Dara had told me it was useless to report forced labor to the authorities. Local potentates were generally getting paid off by the traffickers. Rather than aid escapees, Cambodian officials would detain them for immigration violations.

Chapter 20: No Acceptamos Bitcoin

On p. 263 he writes:

I wanted to see the effects of Bitcoin in El Salvador myself. Before going, I met with Jack Mallers, the boyish crypto executive who’d introduced Bukele’s Bitcoin plan for El Salvador on stage at Bitcoin 2021 in Miami. Only ten months had passed since he burst into tears and told the crowd: “I’ll be there. We die on this hill. I will fucking die on this fucking hill!” But when I asked him how the experiment was working out, he said he couldn’t remember the last time he visited. He didn’t seem to be too torn up about it. “It’s very important to know that it’s not my project, you know,” he said.

Do we still use the term “poser” to describe these people?

Speaking of posers, a few weeks ago Faux did a reddit AMA. This response is germane:

Source: reddit

On p. 264 he writes:

Bukele was more committed to the bit. The forty-one-year-old president had become a crypto influencer, with four million followers on Twitter, where he dubbed himself “The Coolest Dictator.” He used government funds to buy $100 million worth of the cryptocurrency, and promptly lost half of it when the price of Bitcoin fell.

Not so fun fact: when Bukele was the toast of the Bitcoin world, Nic Carter uncritically hosted him in a Twitter Spaces, along with Alex Gladstein and Balaji Srinivasan.39 To my knowledge, the only high profile ‘coinfluencer’ to publicly condemn Bukele – and his association with cryptocurrencies – was Vitalik Buterin.

On p. 266 he writes:

When I mentioned Bitcoin at the first store I entered, the clerk snatched the bottle of water I was trying to pay for out of my hands. “Trash,” he said. “I will never use it.”

On p. 266 he writes:

García didn’t have much to say about Bitcoin. It was a way of drawing in tourists, he said. He converted their payments to dollars as quickly as possible. But he did have a story to tell about a different Bukele initiative: the gang roundup. It turned out being an unofficial Bitcoin mascot was not enough to protect him.

There is a similar (sad) story in Easy Money. What do Bitcoin promoters who point to El Salvador as a “success” have to say when these stories are highlighted?

On p. 267 he writes:

Bukele refused to speak with me. I texted with the legislator who’d posted the photo with Devasini, but he refused to talk about Tether, sticking to praising the president for his successful Bitcoin project, all the evidence to the contrary notwithstanding. “Our president is a brave visionary,” wrote the legislator, William Soriano. “El Salvador now leads the monetary revolution that will transform the world as we know it. Not just economically, but culturally as well.”

My Spanish is rusty but I believe Soriano is a sicofante?

On p. 269 he writes:

Bukele’s most prominent, if unofficial, Bitcoin advisers appeared to be Max Keiser, the podcaster who’d screamed “Fuck Elon!” on stage in Miami in 2021, and his wife and co-host Stacy Herbert. A few years earlier they were producing a conspiracy-theory-heavy news show on Russia’s state-owned RT network. Now, judging from social media, they were living large as champions of the state, eating at El Salvador’s best restaurants and flying in military helicopters to tour government crypto projects. Before my trip, I’d watched a segment on YouTube where they celebrated El Salvador’s Bitcoin law.

Oh it’s worse than that.

Source: Twitter

Shortly after his manuscript was sent for publication, an official “Bitcoin Office” Twitter account for El Salvador was established.

The greatest minds of their generation sitting in the official Bitcoin office of El Salvador. No problem is too small for these former Russia Today hosts.

On p. 269 he writes:

Herbert was cheerful and slightly less unhinged in person. She called Bitcoin “perfect money,” Bukele a “super-genius-like mathematician,” and said that Bitcoin City was part of how he would transform El Salvador into the next Singapore. But she wouldn’t share much about Tether and Devasini. She did mention there was one tangible sign of Tether’s presence in El Salvador: a mural that featured a Bitcoin volcano eruption and a tree with leaves shaped like Bitfinex’s logo. It was designed by Devasini’s much younger partner, an artist named Valentina Picozzi, and it was painted on a large wall near the entrance to a gang-controlled neighborhood. She said this was a sign of the commitment by Devasini and Tether’s other executives to helping the Salvadoran people.

Take that salty naysaysers and non-believers! “Perfect money” is going to rock your world.

Chapter 21: Honey is Better

On p. 272 he writes:

As I waited, the Italian critics and I respectfully contemplated Picozzi’s work: a blister pack of large orange pills with the Bitcoin logo on them—Bitcoiners like to say they’ve “taken the orange pill”—and a piece of white paper embossed with the phrase “Son of a bit.”

This is an example for why I contend – despite having been labeled a “critic” or “skeptic” for years – do not think it makes sense to market oneself as a “crypto critic.”

An “art critic” does not deny the existence of many different art forms, or materials used to create cart. In contrast, I have linked to threads above by folks like Jorge Stofli who contend that smart contracts mechanically do not work. The authors of the previous two books each market themselves as a “crypto skeptic” or “crypto critic” but painfully show in long form that they do not understand the subject matter they are writing on.

On p. 276 he writes:

Nearby, I spotted Tether’s chief technology officer, Paolo Ardoino, who was explaining his diet to another attendee. He looked fit, in a tight T-shirt tucked into slim gray dress pants. “I eat once a day. Only red meat,” he said. But he wasn’t willing to speak with me, even about the wonders of beef. “He’s the one that is writing bad things about us,” he told his wife, who was standing next to him. “Hello!” I said. She wouldn’t talk with me either.

A quick quasi related anecdote: when I confronted Chris DeRose for the first time at an American Banker event in 2015, I told him his (brighton36) harassment techniques on reddit were loathsome:

Source: reddit

Now obviously I’m aware that Faux is nothing like the misogynistic DeRose, certainly not a harasser. But I do know what it is like to be in social situations with people you disdain. My wife probably would’ve said the same thing to DeRose after she told off Marc Hochstein. 40

Chapter 22: Assets Are Not Fine

On p. 281 he writes:

FTX had seemed to me like a crypto casino, which lured investors to gamble on made-up coins and scams. But I hadn’t suspected that the casino’s counting room was short on cash.

To be fair, aren’t most cryptocurrencies made up, not just the ones at FTX? Arguably the only “non-made-up” coins are those that claim to link to real-world off-chain assets?

On p. 283 he writes:

The company, valued at $32 billion earlier in the year, was finished. Anyone who had left money on the exchange was completely wiped out.

Ackchyually, while Faux was correct when he submitted the manuscript, due to ongoing developments in bankruptcy FTX customers might now get 50 cents on the dollar.

Chapter 23: Inside the Orchid

On p. 290 he writes:

Talking in detail to journalists about what was certain to be the subject of extensive litigation seemed like an unusual strategy, but it made sense: The press helped him create his only-honest-man-in-crypto image, so why not use them to talk his way out of trouble?

During his house arrest this past year, SBF spoke with a variety of reporters and leaked Caroline Ellison’s journal to a pair of NYT reporters in order to discredit here and build up public sympathy.

Source: Twitter

We never find out which reporter it was (it was only two). The duo also wrote a couple of softball pieces on SBF earlier in the spring and summer. SBF did try to talk his way out of trouble, but ended up getting convicted on all 7 counts anyways.

On p. 292 he writes:

“As an individual, to make a bet where it’s like, ‘I’m going to gamble my $10 billion and either get $20 billion or $0, with equal probability,’ would be madness,” Rob Wiblin, host of an effective-altruism podcast, said to Bankman-Fried in April. “But from an altruistic point of view, it’s not so crazy.”

Another podcast to filter through. Imagine all the tweets the author could have written instead of listening to podcasts!

A year ago, just days before SBF is arrested, Faux interviewed some of the hangers-on left in the Bahamas. Here is one exchange on p. 301:

I threw out an easy question. “Why are you still here?” I asked. He started off by saying he wanted to help FTX’s customers. Then, unprompted, he told me that he thought there wasn’t much risk Bankman-Fried would ever get in trouble. “I firmly believe once somebody becomes a certain level of rich, they’re never poor again,” he said. “They don’t go to jail. Nothing bad happens to them.” I tried to keep a straight face as I imagined him telling that to the congressmen and prosecutors investigating FTX. His supercilious attitude and slovenly appearance reminded me of the disagreeable know-it-all Comic Book Guy from The Simpsons. His answer was so bad, it felt almost unfair to ask him tough questions. I gave him a second chance to say something nice about Bankman-Fried. “Are there specific things that make you think Sam is honest?” I asked. “Oh, I didn’t say he was honest,” the man said.

Unfortunately we do seem to have a two-tier justice system in the U.S., especially when it comes to prosecuting white-collar crime. However in this instance, SBF was arrested, extradited, and found guilty by a jury within a period of 12 months.

Epilogue

On p. 311 he writes:

Traveling around the world investigating crypto had given me a new appreciation for my Visa card. It worked instantly, with just a tap, charged no fees, and never asked me to memorize long strings of numbers, or to bury codes in my backyard.

No one has to like cryptocurrencies but this seems like sample size bias. I purposefully attempt to get credit cards that waive international transaction fees, some people may not qualify for those so they do get charged fees.

I mentioned this in the previous two book reviews: Visa and Mastercard are centralized entities operating centralized infrastructure. In the U.S., Visa and Mastercard operate a duopoly that is good only for their shareholders. For instance, following news that the Federal Reserve has proposed lowering the interchange (swipe) fee, the CEO of Mastercard slammed it.41

Not that there needs to be another edition, but a future footnote could include a conversation about the friction-filled payment infrastructure that allows private companies to extract rents on retail users in the U.S.

For instance, five months ago a bi-partisan bill was introduced in both the House and Senate: “the Credit Card Competition Act, which would require large banks and other credit card issuers with over $100 billion in assets to offer at least two network choices to process and facilitate transactions, at least one of which must not be owned by Visa or Mastercard.”

On p. 313 he writes:

Were we really throwing the full weight and resources of the U.S. government to prosecute some kid for manipulating the price of a coin named after a fruit? The situation seemed especially ridiculous given that I didn’t see any cases relating to money laundering for Chinese gangsters or facilitating human trafficking in Cambodia.

This is a good point. For instance, “Bob” is a dual citizen who used to be an executive at a large Bitcoin exchange based in China (not Binance) who knowingly allowed users from sanctioned countries (specifically North Korea) to trade on the platform in order to boost trading volume. He is still very active in this space as an executive for a mining company and regularly posts on social media. Yet Virgil Griffith went to prison.

On p. 313 he writes:

For most banks, this also meant that they had to start paying higher interest rates to their depositors. But Tether doesn’t pay interest to the people who own its coins. Whatever the company earns on its reserves is pretty much pure profit.

This is a good point. I mentioned this in a footnote for Chapter 8 but it is worth surfacing here: Circle shares revenue with partners (large holders), does Tether LTD do the same with large holders of USDT such as centralized exchanges?

The affable J.P. Koning recently pondered something similar:

Source: Twitter

It bears mentioning that in the “permissioned” blockchain world, the concept of passing interest onto holders becomes messy because depending on the jurisdiction paying cash holders (or CBDC holders) would result in the asset possibly being deemed a security which could create onerous reporting and taxing requirements.42

On p. 315 he writes:

Most of the short sellers betting against Tether gave up. Nate Anderson of Hindenburg Research, who had once tantalized me in Central Park by dangling his $1 million prize for information on Tether, failed to turn up the bombshell he was looking for.

Oof. Maybe there is a bombshell, but the problem with Easy Money in particular is that there is so much innuendo around Tether you could slice it with a toy butter knife.

NGU Notes

On p. 350 he writes:

Tether was presented with a 187-point fact-checking memo prior to publication and declined to respond to any specific questions about its history, its reserves, or its use by scammers and human traffickers. “The huge volume of corrections required would be tantamount to our rewriting Mr. Faux’s book for him, which is not our job,” a spokesperson for the company wrote. “Our attention is better focused on our customers and the success of the Bitcoin community.”

Wow, a 187 point memo. Did the authors of the two previous books provide Tether LTD with a similar memo?

Conclusion

This book was nearly flawless, and unlike the previous two books reviewed there are no fatal errors and certainly nothing that would be need to “rewriting” this book.

Unlike Easy Money, which seemed to have a substantive error every three pages, Number Go Up was a breeze to read. It was funny, it was witty, and most importantly it informative!43 In one book the author – who was relatively new to this space – scooped mainstream press as well as the conspiracy circles of Tether Truthers.44

I rarely recommend books, but in this case, have no qualms in doing so.

Endnotes

  1. I also recently reviewed Popping the Crypto Bubble by Diehl et al, which was the worst book on the topic, just filled with evidence-free polemics. It did include 41 pages of references but since the book relied entirely on second-hand information, its references should have been significantly longer. []
  2. Unless your name ends in Ellison or Singh or Wang, best to sit this one out. []
  3. In fact, his BusinessWeek article on Tether was published the month before so I probably would have changed the wording to un-short-change oneself. []
  4. One wonders if November 2018 was too early to seek a book deal to expand on: Systemically important cryptocurrency networks []
  5. One reviewer of this review said: “There are better examples of Taco Bell. For the analogy of useless overhyped food, he could have used protein shakes.” []
  6. Economists use aggregates such as M0, M1, and M2 to measure the expansion and contraction of the money supply. []
  7. Also, not a big deal, but by convention uppercase B is used to describe the network and lowercase b is used to describe the medium-of-exchange/unit-of-account. []
  8. Although, Tether LTD is actively investing in Bitcoin mining operations, including in Uruguay and Oklahoma. Perhaps the topic for a new chapter in the paperback version? []
  9. That’s all McKenzie and Silverman had to do: explain the history concisely. They scarcely even mention what was in the Riot mining facility, let alone how much resources it consumed. []
  10. Analysts and commentators have been discussing this with some Bitcoiners for years. []
  11. One day when I have some extra time, perhaps I will post the older newsletters that had some golden tweets of theirs. []
  12. The case has not gone to trial yet, but Saylor did lose a bid to quickly quash the suit. []
  13. For more on this topic, readers are encouraged to peruse the academic writings of Morgan Ricks and Rohan Grey. []
  14. Recall that Silvergate and Signature Bank both operated infrastructure – SEN and SigNet – that enabled participants to immediately transfer funds 24/7/365. When the parent banks collapsed, this infrastructure was turned off. []
  15. As mentioned in Easy Money, I am not sure who coined the term “Tether Truther” but I have used it in the past to describe people who still claim – post-CFTC settlement – that Tether LTD is still acting in a fraudulent manner. The “Truther” modifier is similar to the scheming intrigue of other “Truther” movements. USDTQ is a riff on the conspiratorial TSLAQ. []
  16. When I worked in Shanghai I met a guy who introduced himself as “John Teddy” who relied on using other people’s bank accounts because he didn’t want to go through he KYC process himself. In the summer of 2011 he did offer to sell me a few thousand bitcoins for a few thousand dollars; whoops on that missed opportunity, right? []
  17. Specifically Faux is probably referring to the “Travel” rule. See also: Gemini UK to Block Bitcoin Transfers To and From Non-Approved Exchanges []
  18. This quote actually first appeared in Faux’s BusinessWeek piece on Tether. []
  19. One reviewer of this review thought this could be because the authors of Easy Money arrived late to the scene and seem to have also relied on sources who were unfamiliar with certain large scams, hacks, and fraudulent schemes. []
  20. Both IBM and Microsoft have been actively involved in blockchain-related projects for years, but to my knowledge, nothing directly intersecting with an ICO. []
  21. Easy Money does not mention Centra at all, even though it could have helped strengthen the authors arguments. Coincidentally, Nathaniel Popper was the first mainstream reporter who wrote an exposé on how influencers such as Floyd Mayweather were being paid to endorse coins (without disclosing they were being paid). For instance, five months after his article appeared, the two founders of Centra were arrested. []
  22. I.e., someone inside was helping them navigate the controls and approval process. []
  23. It is worth pointing out that prior to its publication, I changed the title to the post due to possible reprisals from a now former colleague at R3 who wanted to control all external communications. []
  24. I previously mentioned his real name back in February 2022 in section 5. []
  25. He sometimes calls himself Andrew. Are there more aliases? []
  26. For what it is worth, I too have proposed scenario 2 in the past, and made a bet with Bitfinex’ed that it was a possibility. []
  27. It is unclear what revenue sharing agreements are in place. Recall Circle shares revenue with partners (large holders), does Tether LTD do the same with large holders of USDT such as centralized exchanges? Obviously this assumes that Tether LTD are telling the truth and/or not exaggerating. Perhaps they are fibbing. They claim to be publishing real-time reserve data next year. []
  28. I’m kind of joking, his book was decent for its time. And outside counsel can drop a client, but I believe he was inside counsel (GC even). A reporter should ask him what changed after his Bitcoin book was published. []
  29. Earlier this year, Wired published an interesting article on this topic, but the individual named by others does not appear in it. Maybe I was provided incorrect information? []
  30. Probably not a big deal considering some readers might have tried opening new checking accounts to take advantage of teaser rates, or attempted credit card churning. []
  31. Years ago I wrote a paper critiquing the notion that metacoins, specifically those that used Bitcoin, were fit for purpose for securing off-chain assets. []
  32. Although the fact that Jack Dorsey became a Bitcoin promoter kinda sorta feeds my tin foil hat theory for why “crypto” related activity was not heavily moderated. []
  33. Based on the authors description of how he acquired the art NFT, it is not apparent where additional MEV would have been extracted; he didn’t use a fungible token swap which is typically what gets reordered. []
  34. Ordinals, a Bitcoin-based tokenization protocol, received a lot of attention at the beginning of the year from the art NFT world due to the ability for users to “inscribe” data on-chain. []
  35. At least, that’s not an allegation made by law enforcement at this time. In a court filing, Jump Trading is stated as buying large quantities of UST to prop up its value during an earlier de-peg; still not the same thing as controlling the supply of Luna. []
  36. In the process of writing this, the FCA, the top financial regulator in the U.K., outlined proposed stablecoin rules that would effectively make issuers into narrow banks. []
  37. See also: Will the real stablecoin please stand up? by Anneke Kosse, Marc Glowka, Ilaria Mattei and Tara Rice []
  38. As mentioned in a footnote in Easy Money, I was a formal advisor to Blockseer which was acquired by DMG Blockchain. One of the prominent “crypto critics” amplified false information about myself last year including that I was not an advisor. A quick googling could prove that, why don’t they do it? []
  39. Probably not a huge surprise since both Carter and Srinivasan have publicly stated they are betting against the U.S. []
  40. For some reason Hochstein – who was editor at American Banker at the time – invited DeRose to provide A/V help at the event. Later Hochstein, among other things, unfortunately helped mainstream the nocoiner pejorative. []
  41. The Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction. []
  42. In 2017-2019, Project Jasper, World Wire, and the USC consortium, all had to tackle these thorny issues. []
  43. A reviewer of this review has a strong opinion on selective enforcement: “Overall, the book should have explored a central question: why the U.S. government with its correct and massive focus on money laundering, human trafficking, and terrorism financing is not proactively shutting down new crypto whenever it appears they way it would do if it was a physical dollar printing press. Why Tether, Ripple, Stellar and numerous other coins are allowed to propagate with no public disclosure of how they make money. Or why the PayPal stablecoin was allowed but Facebook’s Libra wasn’t. Other governments obviously don’t have the same moral imperatives to stop those types of activities, but why is the U.S. continually being reactive. I.e., the book doesn’t answer the question of how this was allowed to happen and how it will prevent it from happening again.” []
  44. It’s not a coincidence that a reporter relatively new to the space was able to accurately describe some of the tech: Fais Khan provided feedback and he is the author of another great book, The Billionaire’s Folly. []

Book Review: “Easy Money”

I recently finished reading the Kindle version of Easy Money by Ben McKenzie and Jacob Silverman. Simultaneously, I also read Number Go Up from Zeke Faux, another blockchain-focused book that came out about two months after the publication of Easy Money. These would make the 10th and 11th blockchain-specific books I have reviewed. See the full list here.

Easy Money was not the worst blockchain-related book I have read, that award would go to Popping the Crypto Bubble. Easy Money had a lot of potential, in fact, several chapters had some pretty good prose and first-hand reporting.

But for some inexplicable reason – unlike most of the other blockchain books I have reviewed – the authors insert Ben McKenzie into the story for no apparent reason.

Previous books written by reporters might explain in first person how difficult it was to use a wallet or how difficult it was to explain mining to someone – but McKenzie finds a way to insert himself into every chapter even if he is irrelevant.1 And that takes a lot away from what could have been a powerful book.

For instance, Chapter 7 was probably the best written and interesting chapter of the book. The two authors flew down to El Salvador to investigate what kind of traction Bitcoin-based payments was having in the small Central American country. And as the authors describe the plight of one of the residents who is unlucky to live on land that was to be turned into an airport, they write:

Here was a famous Hollywood actor who wanted to film and interview him, to tell his story, yet no one in his own country could tell him when he would be kicked off his land or where he might go.

The reader is constantly reminded of how McKenzie was in several popular TV shows. In all but one other blockchain book I have reviewed few authors attempt to regularly remind people of who they are. The main exception is Fais Khan who wrote The Billionaire’s Folly, which was an insiders account of working at ConsenSys.

McKensie was not an insider. In his own words, he was stoned and out of work in late 2020, and came to the conclusion that he should pivot careers and write a book about crypto. Yet because he did not get really started until late 2021 – near the height of the recent bubble – it all comes across as Johnny-come-lately ambulance chasing self-serving plot filler to boost his PR so he can appear in the Netflix adaptation.2 It is both poor form and cringey.

Furthermore, the dual authors make a number of elementary mistakes. For instance on p. 36 they write: “In 2016, Tether was hacked. More than 100,000 Bitcoin (worth $71 million at the time) was stolen, and the company was in desperate straits.”

What they meant to write was that Bitfinex, the centralized exchange, was hacked. It was actually hacked twice in 2016, the second time 119,756 bitcoins were stolen.

Later, on p. 264 they write: “The other major player left standing was Tether. The stablecoin company, valued at $71 billion as of March 1, 2023, had miraculously survived while the industry around it bit the dust.”

This is not an accurate way of describing the company. The valuation of a bank – or in this case, a shadow bank – is usually determined by its book value of equity (BVE), not by how large its deposit base is. If we took its self-disclosed quarterly reports at face value, Tether LTD itself is worth several billion dollars. In contrast, the aggregate value of USDT spread across all chains, as of this writing, is around $86 billion. Academics such as Stephen Kelly, have publicly analyzed these claims, a future edition should include such remediations.

It is also worth pointing out that the book quickly glosses over any deep or detailed technical discussion and that is likely to help the reader move through the pages. Yet there is no glossary for further explanations and the Appendix consists of a single page copied from the SEC website regarding Ponzi schemes.

This is kind of strange considering even Diehl’s book at least paid some lip service towards the technical bits. To be fair though, unlike Diehl’s book, McKenzie and Silverman do not repeat the same refrain over and over again. But that should not be the bar. With the resources of a real publisher (Abrams), this should have been a top shelf book. But instead it is 1-star quality book and a hard pass.

As usual, all transcription errors are my own.

Chapter 1: Money and Lying

On page 1 the authors write:

These get-rich-quick speculative schemes were merely the latest iteration of casino capitalism. Political economist Susan Strange populated the term in the 1980s, but its roots stretch at least as far back as the 1930s.

This may seem pedantic but I am pretty certain the authors meant to write “popularized” and not “populated.”

On page 1 the authors write:

You may have noticed something about cryptocurrencies: They don’t do anything. Sure, you can trade them, betting that one will rise or fall, but they aren’t used for anything productive. Cryptos aren’t tied to anything of real value, unlike shares in a company or a commodities future. They’re computer code uncorrelated with any actual asset.

This requires nuance, something the book does not really have.

For instance, not every cryptocurrency is the same. Some, such as non-fungible tokens (NFTs), attempt to represent off-chain assets. A myriad of financial institutions and other large enterprises have attempted to tokenize a plethora of atoms, often in toy experiments that do not last a year or so. However there is an entire category of “real world assets” (RWA) that do in fact represent “real value.”3 We can argue about the particulars – should Paxos USD or PYUSD be allowed to exist? – but the authors cannot ignore the existence of tokenized assets identified by Centrifuge.

A better, a stronger argument they could have used involves “self-referential assets” — which many major cryptocurrencies are considered.

On page 1 they write:

In crypto, this comes from the fees charged by the exchanges, as well as the costs associated with validating the transactions. In Las Vegas, it’s called the rake, the amount the house takes from every pot. This means that, given enough time, the average gambler will lose. It’s how casinos keep the lights on.

I actually agree with one of their points here (regarding opportunity costs) but without evidence it is just another random opinion. A future edition could also cite the musings of Jack Bogle, the founder of Vanguard and creator of the index fund. He often characterized the excessive speculation that benefited financial intermediaries as the “croupier’s take.”

On page 2 they write:

When I first started paying attention to financial markets in the fall of 2020, I came to a similar conclusion, a troubling sense that graft and deceit had penetrated all aspects of the economy, operating with political and legal impunity. It made me want to scream in anger—and to make a wager of my own.

McKenzie is a couple of years older than me and it is hard to imagine how he thinks this helps his credibility.

How can you go your adult life – as someone with an economics degree – without paying attention to financial markets until three years ago? What were you doing in 2008 during the financial crisis? How did you miss the craziness of the ICO boom in 2017-2018 that John Oliver ridiculed?45

On p. 3 they write “crypto-currency” with a dash and then inexplicably use “cryptocurrency” without a dash later. And back and forth. The same happened with the word “block-chain.” Where was the proof reading?

On p. 3 they write:

A few thousand cryptos in 2020 grew to 20,000 two years later, and their purported value swelled in tandem, from some $300 billion in the summer of 2020 to $3 trillion by November 2021.

The authors use this 20,000 figure throughout the book. It comes from reference #4 for Chapter 1 which refers to CoinMarketCap (CMC) but in going to the website, there are currently 9,213 cryptocurrencies.6 For comparison, CoinGecko currently catalogues 10,812 coins. There probably have been significantly more than 10,000 coins or tokens created – many of which have died – but the author’s figure seems like an outlier.7

On p. 4 they write:

Narrative Economics was published in 2019, prior to both the current viral spread of cryptocurrency and the COVID-19 pandemic.

That seems like a weird tie-in especially since there was a mountain of PR for cryptocurrency projects during 2017-2018 in the U.S. For instance, between December 2017 to January 2018, you could turn on CNBC to hear some guest promoting a random coin they liked.8 More than likely, Narrative Economics was published before the viral spread of cryptocurrencies that the authors paid attention to.9

On p. 5 they write:

Two of its biggest drivers were financial deregulation and low interest rates—a decades-long, mostly bipartisan political effort to grow the financial sector combined with a policy intended to stimulate the economy in the wake of the first dot-com bubble.

This is partially true. A future edition should include a conversation around just how leveraged banks were, both foreign and domestic. This would have also been a good spot for the authors to discuss systemically important financial institutions (SIFIs) such as ‘too big to fail banks’ (TBTF) which even Diehl’s book paid lip service to once.

Why are SIFIs and TBTF banks worth discussing? Putting aside the ever present rent-seeking and moral hazard issues, the infrastructure that these organizations rely on often is highly centralized and dependent on a specific vendor thereby creating single points of trust and single points of failure. The book largely ignores legacy infrastructure operated by incumbents.

For example, a future edition could highlight one area the U.S. financial system (specific banks) could be improved: make banks public utilities.

On p. 7 they write:

Coordinating with other countries’ central banks, the US government offered $700 billion in bank bailouts and trillions in loan guarantees, managing to stem the worst of the contagion.

Probably worth telling the readers that this controversial bailout package, frequently referred to as TARP, failed to pass the initial House vote.

On p. 8 they write:

Public key encryption plays a vital role in modern life. For example, all https:// websites (nearly all the ones the average person uses) employ public key encryption. It does things like protect users’ credit card information from being stolen when making online purchases. Public key encryption has two useful properties: Anyone can verify the legitimacy of a transaction using publicly available information (the public key), but the people/parties conducting those transactions are able to keep their identities hidden (the private key).

While this is not a bad explanation, the authors should have used “public key cryptography” because that is usually how it is referred to. In fact, Bitcoin – like most cryptocurrencies – does not use any form of encryption.

On p. 9 they write:

This time-stamped, append-only ledger is the blockchain. In 1991, computer scientists Stuart Haber and W. Scott Stornetta, building off the work of cryptographer David Chaum, figured out a way to timestamp documents so they couldn’t be altered. Each “block” contains the cryptographic hash (a short, computable summary of all the data in it) of the prior block, linking the two and creating an irreversible record, a ledger composed of blocks of data that can be added to a chain (blockchain), but never subtracted from.

This is good. In fact, one of the problems with Diehl et al.’s book is that the trio completely whiffed on the Haber & Stornetta references in the original Bitcoin whitepaper. Worth pointing out that pages later, McKenzie and Silverman reuse this archaic blockchain as a strawman, hold your breath!

On p. 9 they write:

So far so good, but one issue remained: what’s known as the double spend problem. If you remove a centralized authority from the equation, how do you make sure people aren’t gaming the system by spending money that’s already been sent somewhere else? How do you secure the network against manipulation? “Satoshi” relied on what’s called a consensus algorithm.

Pedantically Bitcoin – and its progeny – use what is called Nakamoto consensus. For comparison, Diehl et al.‘s book briefly mentioned it in passing. A future version should incorporate that.

On p. 9 they write:

The network targets a new block every ten minutes or so, by dynamically adjusting the degree of difficulty required in the winning block; the more participants, the harder the process gets, and the more energy is required to guess the next block correctly. This is the proof of work behind Bitcoin: lots and lots of computers (“miners”) performing relatively simple mathematical calculations over and over again endlessly.

This is not really accurate:

(1) There are many proof-of-work based coins. Bitcoin (and some of its clones) have a readjustment period of 2,016 blocks, roughly two weeks. Adjustment does not take place every block as the authors write above.

(2) The resources consumed in a proof-of-work network like Bitcoin rises and falls directly proportional to the coin price. If number go up, then so too does the difficulty level and vice versa. They cite him later in Chapter 5 but it would be helpful to include analysis from Alex de Vries here as well.

What this means is that more energy is not necessarily required to guess the next block correctly. In fact, in its early years, Bitcoin could be solo mined on a normal laptop. Proof-of-work coins that never see much price appreciation can be solo mined by simple computers too.

There is another issue with their statement above: it does not explain the nuance, the difference between a Bitcoin mining pool (which is the block maker) and Bitcoin hashing farms (which generate the proofs-of-work). But more on that later.

On p. 9 they write:

After about an hour, participants in the network are convinced about history six blocks deep; they know that it is extremely unlikely anyone will rewrite that history.

This is not accurate. By social convention – not code – intermediaries such as coin exchanges will allow users to trade their newly deposited bitcoins between 3-6 block confirmations. Centralized exchanges like Coinbase, may require some coins such as Ethereum Classic to have hours of blocks built in order to protect against reorgs. But in both cases, this is social convention, not code.

On p. 9 they write:

As you may be able to tell, Satoshi’s vision is both immensely clever but also cumbersome, practically speaking. As more competitors enter, the hash rate increases and more energy is expended to agree upon a block of data that remains roughly the same size. This is what’s called a Red Queen’s race, a reference to Lewis Carroll’s Alice in Wonderland.

There are a couple of problems with this:

(1) During each transition from CPUs -> GPUs -> FPGAs -> ASICs, whoever was able to access to the newest generation of equipment first has had a material advantage from an energy usage perspective.10 For instance, four pages later the authors mention what Laszlo Hanyecz did – but fail to mention who he is and how he got his bitcoins. Note: Hanyecz was one of the first (if not the first) person to scale bitcoin mining with GPUs. His hashes per watt were likely lower than anyone else up until that point in 2010.

(2) I looked in the refences but do not see the authors point to any article that mention the Red Queens’ race. I myself referred to the Red Queen’s race multiple times in papers and articles between 2014-the present day.11 Would be interesting to see who it originated from (I believe I first saw it on a /r/bitcoin post in 2013); echoes of John Gilmore?

On p. 10 they write:

Ethereum also led to the introduction of NFTs, which are basically links to receipts for JPEGs stored on blockchains (shh, don’t tell that to anyone who owns one).

This is false. Both tokenization and non-fungible token projects existed several years before Ethereum turned on. For example:

Source: ChainLeftist

It bears mentioning that even before Spells of Genesis was released on Counterparty (in 2015) several different colored coin projects attempted to tokenize off-chain assets. See my short presentation on this topic from last year.

In fact, if we are going to be really pedantic, perhaps the original idea behind “crypto art” (and NFTs) was inspired by Hal Finney in 1993?

Source: CryptoSlate

On p. 10 they write:

The number of cryptos exploded around this time, rising tenfold in five years, from less than one hundred in 2013 to more than a thousand by 2017. There are now an estimated 20,000 cryptos, most of them small and insignificant, their ownership concentrated in the hands of a few “whales,” much like penny stocks.

There could be 20,000 coins and tokens, but as mentioned earlier, it is unclear where they arrived at that specific estimate since both CoinMarketCap and CoinGecko currently show around 10,000 each.

On p. 11 they write:

Remember, blockchain is at least thirty years old and barely used by businesses outside of the crypto industry. Since at least 2016, hundreds of enterprises have tried to incorporate it into their business models, only to later scrap it because it didn’t work any better than what they were already using. Ask yourself a simple question: If blockchain is so revolutionary, after thirty years, why is its primary use case gambling? Ironically enough, the more important technology is the one that predates it: public key encryption.

Nearly every sentences in this paragraph has an inaccuracy.

(1) Yes, the “blockchain is at least thirty years old” is really how McKenzie and Silverman are going to spin things. Even if we take their claim at face value the other problem is that not every blockchain is the same.

The Haber & Stornetta “chain” is limited in functionality. What is its throughput? How decentralized is it? Were the authors aware that this archaic chain places attestations once a week in The New York Times? That’s arguably not the best security property.

Source: Twitter

(2) Since there were hundreds of enterprises that have tried to incorporate a blockchain into their business, could the authors provide one example next time?

We are beginning to see a troubling pattern from the authors, lots of strawmen and few specifics.

They could be right, in fact, I even agree with part of their statement. But as Hitchens’s razor states: that which is asserted without evidence can be dismissed without evidence.

What kind of evidence could they have provided?

Source: Twitter

Above is a line chart illustrating Stack Overflow posts per quarter for three different ecosystems: Ethereum, Corda, and Hyperledger (Fabric). The latter two were primarily targeted at enterprises. R3, the major sponsor for Corda, recently announced layoffs impacting more than 20% of the company headcount. Does the decrease in Stack Overflow activity translate to less commercial activity? Maybe.

Since we are already doing their homework for them, here’s another example they could use in a future edition: in the process of writing this review Citi announced that it is offering a pilot service that turns customer deposits into digital tokens, for use use trade finance and cash management. Is this the type of blockchain project the authors think will ultimately be scrapped? Maybe it will, but next edition the authors could give specific examples.

(3) I actually kind of agree with their comment about how popular gambling-type of activities are within the various major chains.12 But strangely, the authors do not beef up their argument by providing any stats or charts.13 Stranger: while there are a handful of graphics in the book, there are zero blockchain-related charts, some of which could have helped strengthen their arguments. A quick googling found a bunch of crypto casino stats. Are the veracity of the numbers reliable? Sounds like something the authors could include next time.

On p. 11 they write:

The original story—that Bitcoin represents a response to the devastating failures of the traditional financial system—holds significant power because we all agree on its premise: Our current financial system sucks. But is the story of Bitcoin actually true? Does it do what it purports to do, create a peer-to-peer currency free of intermediaries? Was a trustless currency relying only on computer code even possible?

I have no affinity for Bitcoin but this is a strawman argument because it uses a retconned narrative from a number of Bitcoin maximalists. Satoshi herself explained that she started coding Bitcoin 18 months prior to the release of the whitepaper, which chronologically places its origin before the financial crisis of 2008-2009. I think the initial motivation was more aligned with securing (and funding) an online poker community, which the authors discuss later in the book.

On p. 11 they write:

Bitcoin may be the most popular digital currency, but it was not the first. In a 1982 paper, cryptographer David Chaum theorized the intellectual scaffolding of blockchain, upon which cryptocurrency would emerge some quarter of a century later.

They do not talk much about “blockchains” later in the book but it is worthy pointing out that in 2023 we typically use an article such as “a” or “the” in front the word blockchain. There was a period of time (mostly around 2016-2017) where consultant-types tried to push an articleless blockchain, but the grammar pendulum has shifted once more.

On p. 11 they write:

DigiCash was a legitimate project, without the conflicts of interest and other red flags surrounding many current crypto ventures. Unfortunately, it failed to take off and in the late 1990s the company declared bankruptcy before being sold.

Who died and made these authors king? By what standard was DigiCash “legitimate” or “illegitimate”? Maybe it was both or neither? But they provide no rubric, just dictum. According to legend, at one point Microsoft considered paying $75-$100 million to acquire DigiCash and integrate into Windows but Chaum wanted $2 per license sold. Also, in 2018 Chaum announced a new blockchain platform, Elixxir. Is this legitimate? It’s a public blockchain so obviously not?

On p. 11 they write about eGold:

It lasted until the mid-2000s before being shut down by the feds for violating money transmitter laws.

Throughout the book the authors describe activities from the FBI but this is the only time they lowercase feds.

On p. 13 they write:

PayPal and other payment services existed, but they were beholden to annoying gate-keepers like the law, national borders, banks, and terms of service agreements.

PayPal provided the MSB-centric model that a couple centralized pegged coin issuers have emulated.

While they make a lot of bluster over Tether LTD, this is the type of statement that impeaches the authors credibility: because neither seems to understand how certain fintechs have skirted U.S.-specific laws they cite in the book. This is nearly identical to Diehl et al. who approvingly namechecks PayPal a couple of times too, all while trying to dunk on “stablecoin” issuers. That is not consistent.

Source: Twitter

On p. 13 they write:

Bitcoin seemed like a solution, but at first no one outside the small Bit-coin network ascribed any worth to its tokens. In a story that has become memorialized in Bitcoin lore

Why is there a hyphen/dash in the 2nd Bitcoin but no hyphen/dash in the other two?

On p. 13 they write:

on March 22, 2010, 10,000 Bitcoins were used to pay for two pizzas, worth forty dollars

Without mentioning his name, or more importantly how he got 10,000 bitcoins, the authors are describing Laszlo Hanyecz. They do cite a relevant Forbes article but I think the readers would enjoy learning how disappointed Satoshi was when she first heard about GPU mining on the Bitcoin Talk forum.

On p. 13 they write:

Sure, the stuff was nearly worthless, but it was open to all, as early adopters could mine Bitcoin with their home computers without racking up enormous hardware and electricity costs.

This is accurate. But it conflicts with a number of their comments on page 9. A future edition should reconcile these conflicting statements.

On p. 13 they write:

Until it was shut down by US law enforcement in October 2013, the Silk Road was the most successful onboarding mechanism in Bitcoin’s history.

This might be true, but how did the authors determine or quantify “the most successful on boarding mechanism”? In looking at the citations and references, there are none. Maybe they are correct but a future edition probably should include a highly cited relevant paper: A Fistful of Bitcoins: Characterizing Payments Among Men with No Names by Meiklejohn et al.

On p. 13 they write:

If it didn’t work as a currency, perhaps a new story could be told. In the coming years, coiners started talking about Bitcoin as a potential store of value (despite its wild volatility) or as the basis of a new, parallel financial system, free of state control.

There are a couple of issues with this:

(1) They include the word “coiners” without providing any definition.14 “Coiners” appears nine times altogether in this book, yet not once do the authors explain what might mean. It is only by looking at the surrounding context that we can guess they have conjured up a word to describe “the outgroup.”

And here is where the story becomes even stranger. McKenize and Silverman arrived relatively late to the coin thunderdome. For some reason, they quickly fashioned themselves as “nocoiners” a term that readers of this blog understand was intended to be a slur. Yet these two market themselves with it as a badge of honor to The New York Times. Bananas.

Recall that the etymology of “nocoiner” arose in late 2017, coined by a trio of Bitcoin maximalists who used it as a slur. I was on the receiving end of coinbros lobbing the unaffectionate smear for years.15 The fact that McKenzie, Silverman and other prominent “anti-coiners” use it as a way to identify themselves – and their “in-group” – is baffling because it is the language of an intended oppressor. Do not take my word for it, read and listen to the presentations from those who concocted it.

If there is one take away from this book: do not willingly use the term “nocoiner” to describe yourself or use the term “coiner” to describe others. It is identity politics.

(2) The authors are somewhat correct: certain Bitcoin promoters, specifically a group that often refers to themselves as “Bitcoin maximalists” did in fact shift the narrative from disintermediated payments to a store-of-value.

Samuel Patterson went through everything Satoshi ever wrote. Unsurprisingly Satoshi discussed payments significantly more than a “store of value.”

Source: Twitter

I do not have a horse in this race, especially since I have no particular affinity for Bitcoin. But I do think the authors should have been more nuanced and specific about who was pushing specific narratives. 16

On p. 14 they write:

This was the beginning of DeFi (decentralized finance), in which tokens would be routed through complex, mostly automated protocols that added leverage and risk to the system—and a chance at huge rewards.

This is the introduction chapter but readers expecting more in-depth nuance will be disappointed because this is pretty much how they describe “DeFi.” It is not really accurate but let us wait a few more chapters to discuss why.

On p. 15 they write:

In late 2020, I came down with a serious case of FOMO. The entertainment business was on ice thanks to the pandemic, and I was bored and depressed. I saw a bunch of average Joes making money in the stock markets, so I dusted off my long-neglected degree in economics and started paying attention to them for the first time in my life.

Look, 2020 sucked for a lot of people. 17 But the statement above does not really help your credibility. Wouldn’t… you want to portray yourself as an expert?

On p. 19 they write:

Cryptocurrencies didn’t do any of these things well. You couldn’t buy stuff with them—the guys at my deli would look at me like I was nuts if I tried to pay for my bagel and coffee in Bitcoin. Advocates say this is a temporary problem; if more people would just buy Bitcoin, eventually it will become a currency you can actually use.

There are at least two issues with this:

(1) Readers have probably noticed the pattern wherein the authors conflate “cryptocurrencies” (broadly) with Bitcoin (specific). This is a strawman. Also, on social media the people who frequently push this particular narrative they are criticizing are often Lightning Network aficionados. Those are a subset of the Bitcoin-specific world.

(2) A lot of cryptocurrency / cryptoasset-related projects are not attempting to tackle payments or reinvent money. According to the book, the authors sample size for “industry events” I believe was just two? SXSW and Bitcoin Miami. That’s not exactly a robust sampling. Sure, you can conduct market research remotely but their unnuanced language has room for improvement.

On p. 19 they write:

The technology behind Bitcoin sucks. It doesn’t scale. Satoshi’s solution to the double spend problem was innovative, but also clunky. The more miners who entered the competition the more energy was used, but the blocks were the same. Bitcoin is able to handle only five to seven transactions a second; it can never go above that.

There are some good criticisms of Bitcoin out there but this rant is just bad, it sounds identical to Diehl et al.

(1) Bitcoin is just one implementation of a blockchain. The authors claimed earlier in this chapter that the “original” blockchain arose thirty years ago. But they never provide any metrics on how fast that one is/was. What is the throughput of the Haber & Stornetta “chain” versus Bitcoin 0.1 in 2009?

(2) The authors conflate the limitations of Bitcoin with every blockchain, and that is intellectually dishonest. There are several different Layer 1 (L1) chains – such as Avalanche – that clearly show the world is not limited to the throughput of Bitcoin. If anything, the omission of other chains shows a lack of market research and due diligence by the authors. Yea, sifting through claims is tiresome work, that’s my day job and often isn’t fun.

(3) Nakamoto consensus (proof-of-work) is not the only game in town when it comes to solving the “double-spend problem.” For just under a decade, different teams of researchers have successfully engineered and productionized proof-of-stake-based chains which overcome some of the limitations that proof-of-work-based chains had. The authors mention “proof of stake” a couple of times later on in passing but do a disservice to readers by effectively ignoring it.

(4) As mentioned a couple of times before: just because someone attempts to mine on a proof-of-work chain does not automatically mean extra resources are immediately required to mine additional blocks. For instance, if I started a new proof-of-work chain tomorrow, a fork of Bitcoin, then a variety of older USB-mining devices could easily generate hashes while consuming relatively little amounts of electricity. Energy (or resources in general) are typically only expended if the coin value goes up. Crab price action is often not attractive miners, especially those who own warehouse facilities filled with hashing equipment.

(5) In the references they cite one paper, On Scaling Decentralized Blockchains, which was presented in February 2016. A lot has happened in the past 7+ years. In fact, the paper primarily focuses on Bitcoin which again, is no the only blockchain in the world. Surely there are more relevant technical papers exploring the challenges and limitations of other chains?

On p. 19 they write:

Visa can process 24,000. To operate, Bitcoin uses an enormous amount of energy, the equivalent in 2021 of Argentina—the entire country. Visa and Mastercard use comparatively miniscule amounts of electricity to serve a customer base orders of magnitude greater. Bitcoin’s energy consumption is enormously wasteful, and poses a massive environmental problem for the supposedly cutting-edge technology (and really, for all of us).

This type of rant is similar to the kind you would find in Diehl et al. book, where there is a kernel of truth surrounded by apples-to-oranges comparisons.

I actually agree with their criticisms of (proof-of-work) energy consumption, and have written about it many times. But their other arguments above are incorrect in at least two ways:

(1) Visa and Mastercard are centralized entities operating centralized infrastructure. In the passage above, the authors endorse and defend rent-seeking incumbents. In the U.S., Visa and Mastercard operate a duopoly that is good only for their shareholders. For instance, following news that the Federal Reserve has proposed lowering the interchange (swipe) fee, the CEO of Mastercard slammed it.18li

The next edition of this book could include a conversation about the friction-filled payment infrastructure that allows private companies to extract rents on retail users in the U.S. For instance, five months ago a bi-partisan bill was introduced in both the House and Senate: “the Credit Card Competition Act, which would require large banks and other credit card issuers with over $100 billion in assets to offer at least two network choices to process and facilitate transactions, at least one of which must not be owned by Visa or Mastercard.”

(2) A better comparison would be between proof-of-work networks (like Bitcoin) and proof-of-stake networks such as Avalanche or Cosmos. The latter two do not require enormous amounts of energy to operate. By continually conflating Bitcoin with all blockchains as a whole, weakens their credibility.

On p. 19 they write:

So if cryptocurrencies weren’t currencies, then what were they? How do they actually work in the real world? Well, you put real money into them and hope to make real money off of them through no work of your own. Under American law, that’s an investment contract. More precisely, it’s a security.

The authors – neither of whom are lawyers – throw this hand grenade towards the end of Chapter 1 and do not even provide a citation in the reference section.19 Maybe they are right, but that which is asserted without evidence can be dismissed without evidence.

Also, anyone can create a (ERC-20) token and pair it with another token on a decentralized exchange, such as an automated market maker (AMM) like Uniswap.20 You can do it without raising external capital from anyone too. That’s precisely what Colin Platt did a few years ago.

On p. 20 they write:

There were now potentially 20,000 unregistered, unlicensed securities—more than all the publicly listed securities in the major US stock markets—for sale to the general public.

You would think they would provide specific examples of coins or tokens, and the facts-and-circumstances as to how they are unregistered and/or unlicensed securities. But they do not. Maybe they are right, but that which is asserted without evidence can be dismissed without evidence.

On p. 20 they write:

Worse, these unregistered, unlicensed securities were primarily traded on crypto exchanges, which often served multiple market functions and, therefore, had massive conflicts of interest.

The first part of the sentence can be correct, but they again do not provide any citation. I whole-heartily agree with the 2nd half of the sentence. I even gave a speech a few years ago, discussing these types of conflicts of interest.

On p. 20 they write:

And perhaps most disturbing, most of the volume in crypto ran through overseas exchanges. Rather than being registered in the United States, they were often run through shell corporations in the Caribbean, apparently to avoid falling under any particular regulatory jurisdiction.

This is a partially valid argument. Although they do not provide specific examples here, anecdotally it is likely that some centralized exchanges attempt to use regulatory arbitrage to avoid specific jurisdictions. But the next edition should provide a couple here (they do a little later).

One other quibble with this passage is that traditional financial institutions do precisely the same thing. They pioneered the playbook of lobbing for regulatory changes and structures in specific jurisdictions. For instance, the entire reinsurance industry is headquartered out of Bermuda.

On p. 21 they write:

When you buy a share of Apple, you are effectively a portion of the revenue stream, as well as the brand equity, market share, intellectual property—all of that. But cryptos don’t make stuff or do stuff. There are no goods or services produced. It’s air, pure securitized air.

This could have been a stronger argument if the authors used nuance. As mentioned earlier, there are “real world assets” (RWA) which tokenize off-chain wares. Instead of making a blanket statement, they should have honed in on the self-referential nature for most other cryptocurrencies. Also, the burden-of-proof is on them when they claim each and every cryptocurrency is a security.

On p. 21 they write about “Dave”:

We came up with a side bet of our own: I bet him dinner at the restaurant of his choosing that Bitcoin would be worth $10,000 a coin or less by the end of 2021. To my mind, it was easy money.

We never find out if Dave is a real person or not but that is unimportant. What is important is that prior to the publication of this book, McKenzie had an undisclosed financial interest: a large bet.21

As another book reviewer pointed out:

In a recent Guardian profile, the actor disclosed he lost as much as $250,000 trying to short the market. Allegedly he got the timing wrong. The article doesn’t share many details, so we can only speculate but this wager could undercut much of what McKenzie has been saying over the years. In other words, the self-declared paid liar is also a hypocrite.

Is McKenzie a liar? He definitely cherry picks but I’m not sure I would use liar to describe him yet. He is definitely inconsistent for not disclosing on social media that he was actively shorting cryptocurrencies.22 Later in the book he kind of defends this behavior by saying he does not invest in public companies so perhaps he justifies it all by claiming the coin projects are private? Again, we do not know exactly what the short(s) were so it is kind of just guesswork.

On p. 23 they write:

I decided to do something. I decided to get stoned.

When I was reading the book, I did an audible chuckle. It may be authentic, but why do the authors think this adds credibility to the story? Why should we take him seriously at this point? This is not the last time we hear about his marijuana usage.

On p. 24 they write:

I needed to do something other than drink to help me cope. Pot did the trick. While high, I stumbled upon an ingenious notion: I would write a book! It would be a book about crypto, fraud, gambling, and storytelling, as told by a storyteller who was himself gambling on the outcome. To my THC-inspired brain, it all made perfect sense. I had stumbled on something profoundly original! The next day, I woke up a bit groggy and realized the obvious: I don’t know how to write a book.

This is not even the silliest thing in the book. By now readers expecting a deep-dive into the nitty gritty should temper their hopes. Easy Money is basically a self-promotion book that takes a serious set of topics and superficially touches on each while giving the authors an excuse to play blockchain tourist. It is a disappointment to those of us who actually filled out whistleblower forms and sat down with prosecutors.

Chapter 2: What Could Possibly Go Wrong?

While every book has an origin story, for some reason the authors felt the backstory for this book was compelling enough to include in the actual book. While there are some amusing parts, most of it should have been left on the cutting board. It all comes across like Entourage wannabes. A good journalist needs a team but that team – and the journalist – do not have to become part of the story. Here they force themselves onto the reader and it is pages that could have otherwise been used to describe more of what happened in El Salvador. For instance, Zeke Faux – and other journalists – show you do not have to continuously insert yourself into the story line just because you have a hot take.

On p. 27 they write:

It was August 13, 2021, and I was perspiring more than I would have liked outside my local bar. It wasn’t the sweltering heat of that summer night making me nervous; it was the stupidity of what I was doing. You know how it goes, what had seemed sensible to propose via Twitter DM after some edibles seemed somewhat less so now. I had invited a journalist I’d never met to pitch him on writing a book I didn’t know how to write about events that hadn’t happened yet. What could possibly go wrong?

If you’re keeping score at home, this is the third time in as many pages that the author mentions he is consuming some form of marijuana. Sure it is just edibles, no big deal right? It is neither classy nor does it add credibility. If anything it reinforces stereotypes of the entertainment industry.

On p. 27 they write about McKenzie’s first interactions with Silverman:

I told him about my econ degree and my interest in fraud. I talked about my friend Dave, and about our little bet that a crypto crash was imminent, and that I felt I had a duty to warn others before it was too late. And then I told him I wanted to write a book about it all.

I genuinely appreciate his sincerity on wanting to warn others but the timing – and self-serving motivations – are ridiculous. Coin prices peak about two months after this meeting. The time to warn, and act, was arguably a couple years before hand. What were you doing in 2018-2019?23

On p. 26 they write:

I could summon my own superpowers as an econ dork and mid-level celebrity and spread the gospel of “crypto is bullshit.” I could call out the liars and thieves, write it all down, and put it out there for the people to see.

This is incredulous.

Pages ago the authors explained how McKenzie had ignored finance until the fall of 2020 and needed to dust off his economics degree. Was the Netflix version of this book going to show a montage of McKenzie pouring over the works of John Nash or Keynes’ General Theory and writing equations on a chalkboard that quickly turn him into an “econ dork?”

To his credit, McKenzie does look a bit like Russell Crowe, so that scene is a possibility.

More seriously: the fact that the authors literally state spread the gospel of “crypto is bullshit” undermines their credibility. How can you be objective while oozing so much self-righteousness? If you are going to self-deputize, shouldn’t you at least go through the motions of ascertaining the facts-and-circumstances like an actual prosecutor must?

On p. 28 they write:

I tried my best to be civil but firm toward my fellow celebrities, some of whom had made a lot more money and had much bigger bills than I did. I get it: Life’s a hustle. But let’s not be gross about it, or lack any discernment or critical thinking. There’s a bridge too far and crypto is past that.

We have no idea how much money the authors made from the book advance but we already saw McKenzie mention he had FOMO and was looking for work. The solution was that he hustled “crypto is bullshit” to anyone including reporters.

For example, last year in that same interview where he wore the “no-coiner” identity as a badge of honor he says:

Trolls still tell me to “have fun staying poor” and I have yet to react by saying “look at my bank account.” That is juvenile.24 And this is not the only time the authors humblebrag.

Chapter 3: Money Printer Go Brrr

This is could have been an interesting chapter, if the authors had spent time explaining to readers how the market structure of the coin world worked. For instance, they could have explained what pegged stablecoins were.25 Who were the major issuers. What market makers were. How centralized cryptocurrency exchanges typically fold together custody, trade execution, and clearing all in one. Instead, we are introduced to a cast of characters that do not seem fully integral to the story (e.g., they are not insiders).

On p. 31 they write:

For skeptics like Jacob and me, there was one corporation that reigned supreme when it came to our suspicions about the cryptocurrency industry: the “stablecoin” company Tether and its assorted entities such as the exchange Bitfinex.

Before diving into this, one thing that was a slight (grammatical) distraction was “Jacob and me” which is used 3 times altogether in the book, versus “Jacob and I” which is used 24 times. Again, not a big deal, just a little copyediting nitpick.

Anyways, much like “coiners,” the authors never define what “skeptics” are. Are they the same as “critics” – another vacuous word they frequently use? Strangely still, they commandeer a word that has been used to describe an assortment of people the past few years.

For instance, I have also been labeled a “realist,” “critic,” “skeptic,” “nocoiner” — oh and a “gadfly.” Terms I have rejected and the authors should have rejected too. For example, on June 30, 2015, CoinTelegraph described me as:

Source: CoinTelegraph

Several years later The Financial Times labeled me as “realist”:

Zeke Faux did not attempt to co-opt a term, his loss, right?

Sure we have “food critics” and “movie critics” but neither of these practitioners deny the existence – or potential utility – of the thing they are critiquing. Over the past 24 months the terms “critics” and “skeptics” seem to be used as a way to market newsletters, podcasts, and books. For instance, David Gerard and Molly White – people the authors namecheck in the Acknowledgements – have built careers out of the “nocoiner” identity – they are fully invested in it. And it shapes their coverage on this topic.

At a minimum can we all agree that fervently marketing oneself something contrarian sometimes devolves into tribalism?

On p. 31 they write:

Founded in 2014, Tether claims to be the first stablecoin ever created. (A stablecoin is a cryptocurrency pegged to an actual currency such as the US dollar.)

Three issues with this:

(1) The authors really should have used “USDT” to describe the token itself and Tether LTD to refer to the company that issues tether tokens. It gets confusing later on.

(2) In a future edition the authors should add a nuance around what a pegged and non-pegged stabilized coin are. For instance, while centrally issued stablecoins like USDT attempt to maintain a pegged value, others such as Rai drift a bit but are relatively stable (due to a controller system and CDPs). There is a small but growing category of assets that are stabilized relative to some external value, by definition they are not pegged-coins.

(3) Back in 2012-2014 during the heyday of “colored coin” projects, there were some toy experiments that attempted to tokenize (link) USD to a discrete amount of satoshi.26 On Counterparty, there was an actual product – Digital Tangible Gold – that tokenized gold held in custody by Morgan Stanley. For history buffs, Pierre Rochard, one of the maximalists who coined the term “nocoiner,” contacted Morgan Stanley directly who then closed the custody account.

On p. 31 they write:

And if you were making huge gains or moving money between jurisdictions, Tether helped avoid the imposition of regulated banks with their pesky reporting requirements.

As previously mentioned it is unclear if the authors are referring to tether (USDT) or Tether (the company). If it is the latter, according to the company they have implemented some KYC / AML requirements. It would be interesting to know how rigorous those were. Also a future edition could explain the difference between banked and bankless exchanges and how USDT acts as a type of shadow bank for latter as well.

On p. 31 they write:

On October 19, 2021, we published “Untethered” in Slate.

At this point I had already interacted with Silverman via Twitter, sending him mining-related links. They reached out to conduct an interview for the article above, here’s what they penned:

Source: Slate

Those were indeed my words, but it does feel a bit like cherry picking for sensationalism. I pointed this out on Twitter too. I also provided a lot of other color that they did not use. Obviously it is their column but I don’t think it was a fair representation of the totality of my conversation.

On p. 31 they write:

We hadn’t cracked the company’s mysteries, but the piece, which built on past investigations by Bloomberg, the Financial Times, and writers like Cas Piancey, Bennett Tomlin, and Patrick McKenzie, was consistent with our proselytizing mission. We were here to ring alarm bells and make sure the lay public could hear them.

This is a little revisionist history and misses some important people such as J.P. Koning. Since the authors have done such a good job at self-promotion, let me give it a shot.

Back in 2017 I introduced “Bob” to reporters including Bloomberg and later the NYT. Bob later went on to speak with the CFTC (this is not to take credit for what became the CFTC lawsuit).27 The most popular post I wrote that year was Eight Things Cryptocurrency Enthusiasts Probably Won’t Tell You which identifies Bitfinex and Tether as the number one glossed over aspect of the ecosystem.

In December 2017, I was quoted in Bloomberg:

“Is there anything backing this?” said Tim Swanson, who does risk analysis for blockchain and cryptocurrency startups. Swanson, also director of research at Post Oaks Labs, said he fears problems with tether could hobble exchanges that trade it. “If these aren’t backed 1-to-1, then what is the contagion risk if one of these exchanges goes down?”

And I was far from the only person curious about Tether in 2017.

While a future edition does not need to cite me, they should at least expand the list of people who openly discussed the role Tether (USDT) played in the coin world beyond the three they mention above, starting with Koning. For bonafides, the oft-cited Money Flower Diagram from the Bank for International Settlements (BIS) specifically mentions Koning’s Fedcoin idea.

On p. 32 they write:

The second red flag for Tether was its size relative to its workforce. Twelve employees (maybe even fewer) are running a business that deals in tens of billions of dollars? Forget the absurdity and ask yourself why. If you were running a legitimate, huge business dealing in big-dollar transactions, wouldn’t you want, and need, more than a dozen people helping you run it?

This would not be a top three red flag for me. The authors are saying: managing that size of money should involve more than a dozen. But does it necessarily? What is the average size of a money manager or hedge fund? According to IBISWorld the average U.S. hedge fund has 10.7 employees.

Ah but Tether LTD is not a hedge fund, or at least should not be, right?

And this is how we arrive at what the top red flag should be and one that Rohan Grey forcefully argues thusly: a case against centrally issued pegged-USD issuers – such as Tether – should be rooted in first principles. Tether LTD intentionally operate as shadow banks and/or a shadow payment provider. Everything else – while perhaps important – is a knock-on of that.

This is why we should put aside conspiracy theories – if Tether LTD owns Evergrande commercial paper – because a first principles analysis would conclude that U.S. regulators should use the tools available to them to bring Tether LTD into compliance irrespective of what Tether LTD has as reserves. If that means Tether LTD is required to form a state or national bank, then that is one (unlikely) outcome.28

However a persistent problem in this book is that the authors spend more time discussing possible hypotheticals rather than what we can easily confirm. The CFTC and NYAG have already provided evidence that backs up the concerns academics such as Rohan Grey previously articulated. Strangely, while the authors namecheck Grey in the Acknowledgements, they do not cite any of his work. A future edition should also include a discussion on shadow banks that explores any similarities between PayPal and Tether LTD.

On p. 34 they write:

They hid that fact from the general public, only to have it revealed with the release of the Paradise Papers, a trove of confidential financial documents that were leaked to journalists in 2017.

It was Nathaniel Popper, then a reporter at The New York Times, who first connected overlapping ownership between Bitfinex and Tether LTD via the Paradise Papers. The reason I highlight this is because Jacob Silverman dunked on Popper on Twitter during the writing of the book. Then later deleted the tweets.29 Despite his stellar reporting on the topic, Popper is notably absent in the book including the reference section.

On p. 36 they write:

To pick one more bizarre factoid from an extensive list, their primary bank mentioned above, Deltec, was headquartered in the Bahamas and run by Jean Chalopin, the guy who co-created the Inspector Gadget cartoon series. If it wasn’t a giant scam, it was at least marvelously entertaining.

In November 2018, I got heckled on stage by a Tether promoter, Josh Olszewicz. Here is part of what he yelled at me from the audience:

Source: Twitter

It wasn’t even the first time I was harassed at a fintech event (John Carvalho stalked me at Consensus 2017).

Putting aside the colorful personalities this space attracts, I still do not understand the Inspector Gadget fascination. 30

On p. 36 they write:

In 2016, Tether was hacked. More than 100,000 Bitcoin (worth $71 million at the time) was stolen, and the company was in desperate straits.

As mentioned at the beginning of this review, this is incorrect. In August 2016, Bitfinex – the cryptocurrency exchange – was hacked and 119,756 bitcoins were stolen.

On p. 36 they cite a paper: Is Bitcoin Really Un-Tethered? by John Griffin and Amin Shams.

But then they wrote something kind of strange in parenthesis:

(Griffin’s blockchain forensics firm has also had contracts with a number of government agencies, indicating that he is advising on crypto investigations.)

Why speculate on what Griffin’s analytics firm may or may not be working on? Surely you could just contact them and ask? It is called Integra FEC.

On p. 36 they write:

Wash trading is the practice of buying and selling an asset back and forth among accounts you control in order to give the appearance of demand for that asset. Crypto is perfectly suited for this sort of manipulation.

To strengthen their argument they could have cited the CFTC settlement with Coinbase before its direct listing two years ago. Its senior engineer, Charlie Lee (who was the creator of Litecoin), was accused of wash trading on the GDAX platform.

On p. 38 they write:

While Tether might have been a last resort for people in need, it carried with it massive costs. Trading in crypto often means incurring heavy fees, and it’s difficult to cash out into real dollars via legal means, pushing people into relationships with unsavory characters who are, at a minimum, not motivated by charity.

How much are those heavy fees?

On p. 38 they write:

In addition, the use of Tether can be seen to further undermine already weak currencies, contributing further to their downfall.

I should be in their small-tent camp, right?

For instance, on November 2, 2018 in an op-ed for FinTech Policy, I labeled Tether (USDT) a systemically important utility for the crypotcurrency world. On March 3, 2021 I gave a presentation to the Fed’s DLT monthly meeting and ended by saying they should look into pegged-coin issuers like Tether LTD.

The authors could improve their arguments by providing specific details because they miss the entire discussion from first principles: centralized pegged-coin issuers acting as shadow banks.

For instance, in their one sentence claim above, how does using Tether (USDT) undermine weak currencies? Which currencies? Is there a nation-state that has adopted USDT? Who knows, the authors do not provide those details.

On p. 38 they write:

I couldn’t believe what I was hearing. On the other end of the line was a male voice I only knew as belonging to a pseudonymous Twitter handle calling himself Bitfinex’ed. He had been on the Tether case for years. Bitfinex’ed had long suspected the company was a fraud, and had paid the price for his obsession with harassment, ridicule, and, he claimed, an attempt to buy him off. On crypto Twitter, some hailed him as a conspiratorial crank while many others, including people in the industry and in mainstream media, had learned to trust his tips.

There are a couple of issues with this:

(1) Bitfinex’ed real name has been in the public for a few years, all you have to do is a bit of googling. It is Spencer Macdonald. How did I find this out?31 Back when I wrote long newsletters he was on my private mailing list and sent me the link to a Steemit article of a guy who “doxxed” him because Macdonald had re-used the same catchphrases “Boom. Done.” under an alias Voogru on reddit.

While the Steemit article mentions his name it is not fully accurate either. At the time, some of Tether LTD’s supporters were pretty bananas online (just look at how one heckled me IRL). For instance, Stephen Palley helped provide legal assistance when there were issues with Macdonald’s Twitter account being locked. CoinDesk ran an article about it.

The other area where that Steemit article is incorrect relates to Jeff Bandman and the CFTC. The entire bottom quarter of that post is a guilt-by-association. Maybe Bandman is bff’s with both Palley and Macdonald, maybe they play golf and tennis together each weekend. There was no evidence presented that they are all in cahoots. Either way, ~2.5 years later we learned the results from the CFTCs subpoenas: that at certain periods of time Tether LTD did not have reserves they claimed backing the USDT (among other things) and some of the executives lied both publicly and privately about that.

(2) What tips did the authors assess were right and wrong?

For instance, Macdonald and I made a bet almost two years ago. And I won. But he blocked me months ago and never sent me the scotch. Sad days.

Source: Twitter

Maybe Macdonald and the group of “Tether Truthers” (USDTQ) are correct, maybe Tether LTD still operates as a fraud today.32 If readers are expecting some kind of “smoking gun” from reading this book, they will be disappointed. Bitfinexed – and some others in his circle – act as if they have some kind of secret knowledge.

When you ask them to simply reveal it, they post to more twitter threads.33 When you ask them to file whistleblower forms, they do not.

For comparison, Zeke Faux met with Bitfinex’ed in-person and wrote the following on p. 77:

When I asked for his sources or evidence, Andrew didn’t have anything new to provide. That was where I was supposed to come in.

[Andrew is one of the nom de plume of MacDonald/Bitfinex’ed]

Nothing secret was revealed in this book which is a disappointment. For instance, Bitfinex is an investor in Blockstream and USDT was directly issued onto Liquid (a quasi permissioned chain operated by Blockstream).34 At least two of the executives, Adam Back and Samson Mow, regularly promote and defend both Tether and the current president of El Salvador. Did they really own a Gulfstream IV?35 Nary a mention of Blockstream in the book.

In my view there are two distinct phases of Tether-related criticism with the divergence before and after the settlements with the CFTC and NYAG:

Phase 1 – concluded in early 2021 where the CFTC and NYAG both proved that Tether LTD did not operate in full reserve and some of the executives lied
Phase 2 – 2021 to the present day, post-settlement Tether Truthers claim that Tether LTD still does not operate and back USDT in full (reserve).

I stand by my previous criticism of Tether LTD and Bitfinex from phase 1.

But the onus is on the Tether Truthers to provide evidence that Tether LTD is still operating as a fraud and/or scam. Maybe it is, but what we typically see on Twitter is innuendo. Are both the CFTC and NYAG missing something? I posted this question on Twitter the other day and was called low IQ. Great feedback, I’ve been called much worse!36

On p. 38 the authors write:

Bitfinex’ed, whose real identity remained a mystery to us

The first search result for googling “Bitfinexed identity” is to a five year old article that links to the Steemit article.

On p. 38 they write:

Despite attempts to dox him—and a temporary Twitter suspension—Bitfinex’ed managed to maintain his anonymity, while developing a growing audience online. His fixation on Tether has bordered on obsession.

Again, the first search result for googling “Bitfinexed identity” is to a five year old article that links to the Steemit article.

On p. 38 they write:

Crypto partisans dismissed him as being salty because he hadn’t gotten in early enough on Bitcoin. But more sober observers pointed out the fact that Bitfinex’ed had been right about many of his claims. Some just took longer to prove.

That could be true, but which specific claims was he right about? Off the top of my head, based on direct communications with him I believe he had two correct predictions:

(1) That USDT was at times not fully backed

(2) That Tether LTD and Bitfinex shared common ownership

And while not a prediction per se, at the time he also transcribed ad hoc interviews that executives, such as Phil Potter, publicly gave on issues surrounding banking access. Speaking of which, did the authors try to reach out to Potter? Because Faux gets a direct quote from Potter regarding the origins of Tether.37

On p. 38 they write:

And few people had done more to educate journalists, critics, and the larger public about the perfidy lurking underneath crypto’s wildly anarchic market activity.

How do McKenzie and Silverman know this? They did not start covering this space until just under two years ago. Did they sit down and tabulate who educated who?

On p. 38 they write:

Bitfinex’ed was the angry, roiling conscience of crypto Twitter, always ready to swoop into a conversation and expose the dark underbelly of the latest industry spin. To some that made him a threat.

Macdonald did not and does not have a monopoly on “exposing the dark underbelly.” For example, did the authors contact ZachXBT?


On p. 42 they write:

SPACs, or Special Purpose Acquisition Companies, were often nothing more than blank checks issued to aggressively self-promoting “investment gurus” who would pocket a huge fee in exchange for gambling with their investors’ money.

This is a good point.38

On p. 43 they write:

My portfolio of short bets was, to put it generously, in shambles. I started with $250,000 that summer, by November it was down to $38,931. While I had bet on other frauds, the main culprit was simple: I had wagered too much on crypto’s collapse too soon, and blinded by my certainty, I nearly lost it all. By the time I got out of my initial crypto positions, they were almost worthless. What had been a lot of money was now very little. To be blunt, it was an unmitigated disaster—the kind of thing that provokes an uncomfortable conversation with your spouse.

We learn a few more details scattered around the book. As mentioned earlier, he began this bet with a friend “Dave” but we are never told its composition. Did McKenzie attempt to short some futures contracts on CME? Also, at least he is honest about his “blinded by my certainty” — something that other book authors on this topic failed to reflect on (such as Michael Casey’s dubiously title: “The Age of Cryptocurrency” reviewed 7 years ago).

On p. 43 they write:

The financial press was practically in lockstep about the inevitable crypto-fied future of money. Politicians, their pockets brimming with donations from industry moguls like Sam Bankman-Fried of FTX, were preaching the Bitcoin gospel. They were also openly contemplating passing industry-written legislation to further legalize these rigged casinos.

This is another decent point. But later in the book, we are only provided a cursory set of examples which we will discuss later. Also, the main quibble readers should have with the 2nd sentence is that the authors conflate “Bitcoin” with “crypto” as a whole. SBF may have been many things, but he did not frequently give off maximalist vibes.

On p. 44 they write:

Since in my analysis crypto was only speculation, it would fall like a rock once the Fed raised rates. Unfortunately for me, I had been just a bit early in making that call.

As my friend Colin Platt – the richest person in the world – is wont to point out: being early is effectively the same thing as being wrong. He says this from experience (with DPactum)!

On p. 45 they write:

In the interests of objectivity—and not wishing to be a participant in the kind of market manipulation I’ve denounced—I’ve never written about the companies I’ve shorted. You don’t have to trust me on this; you can look at my work. I’ve never written about publicly traded companies, only privately held ones. I’ve never traded or owned any cryptocurrency. My bet on crypto was simpler, and bigger than any one company: I thought the whole thing—all $3 trillion of it—was a speculative bubble. That part was obvious to me. The thing I couldn’t prove yet was that it was a bubble predicated on fraud. Hence, my journey with Jacob.

As mentioned above on p. 21, another book reviewer labeled McKenzie a liar and a hypocrite for failing to disclose this bet. The disclaimer above doesn’t really absolve the lack of disclosure: he has a vested interest in seeing the coin world go kaput.

I empathize with McKenzie.

For example, during the rapid rise in coin prices in December 2017, I was quoted as a “skeptic” in The Wall Street Journal:

That was published just days before the Bitcoin price peaked. Yet as certain as I was, I still did not short the market primarily because of counterparty risk and timing. Do I get book deal with Abrams now?

One last comparison, in Number Go Up, Zeke Faux describes a multi-million dollar offer he received to provide some purported Tether-related documents to a short seller. He turned it down, reasoning:

“This book is going to be called Jay Is Wrong and Zeke Is Right: The Cryptocurrency Story,” I said. “As a writer, you don’t want to be compromising in any way, you know? You don’t want to have ulterior motives.”

Unlike Faux it’s pretty clear from the book – and tweets – that at least one author has an ulterior motive: McKenzie discusses his short selling bet a number of times.

Overall this chapter made several interesting observations (such as the abuse around SPACs) but it seems like portions of the chapter could have been removed (e.g., most of the commentary around Bitfinex’ed) and instead re-used to discuss more of the celebrities like Matt Damon who acted as a public spokesperson for crypto-related companies.

Chapter 4: Community

A portion of this chapter hones in on McKenzie’s desire to have an entourage, a crew. It comes across as sappy and cringey and not something a made-it actor or journalist would strive for.39 As mentioned at the top, in no other book on this topic (that I have reviewed) have the writers explicitly stated as much because it should not be necessary.

In fact, because of the never ending drama-per-second the coin world generates, copy-paste Twitter accounts like Web3isGoingGreat, are able to rely on continuous streams of mainstream reportage on this topic to copy-paste from. McKenzie and Silverman did not need a crew of podcasters, and the next edition of the book probably should reclaim these pages to discuss what is going on in say, El Salvador, which was interesting and novel.

On p. 49 they write:

Bitcoin maximalists proudly boast that “Bitcoin has no marketing department,” which is technically true, but in practice dead wrong. Multibillion-dollar corporations—at least on paper—spent real dough to convince people to buy crypto. Sometimes the appeals were explicitly about Bitcoin, leveraging the brand awareness of the best-known cryptocurrency.

While we are never provided a full definition of what “Bitcoin maximalism” or who specifically makes that claim, I have heard this claim before from Andreas Antonopolous during his halcyon days. And while the authors do list off a series of A-list celebrities and entertainers who shilled something coin-related, it would be great to see specific tweets of endorsements in a second edition.

On p. 50 they write:

It also felt appropriate that I found myself on the opposite side of the proverbial line of scrimmage from the Hollywood consensus, but seemingly without a squad of my own. To counter the feelings of isolation and depression in my quest for truth in crypto, I needed to finally meet some fellow skeptics in the flesh. I needed a team of my own. Crypto-skeptic nerds assemble!

You do not need a squad to be a (investigative) reporter in this space.

Sure, building up a reliable rolodex of contacts is part-and-parcel to what reporters covering a beat will accrue over time, but journalists are encouraged not to get too close to sources otherwise you compromise your objectivity.

For instance:

Source: Twitter

I have not had a chance to read Michael Lewis’s new book, but according to his 60 Minutes interview, Lewis still has some affinity for SBF.

Source: Twitter

On p. 51 they write:

HODL is hold on for dear life, meaning that you should cling to your crypto no matter the price.

I have pointed this out in several other book reviews but the etymology, the genesis of “hodl” did not originate as an acronym or portmanteau. It came from a drunk poster on the BitcoinTalk forum, there are many articles discussing this. However, what the authors describe “hodl” to mean is correct.

On p. 53 they write:

Surveying the landscape in 2022, it was hard not to notice the myriad similarities between crypto and pyramid schemes. Both depended on recruiting new believers rather than buying anything with an actual use case.

This is an adequate comparison (for many cryptocurrencies).

I currently think a decent description of Bitcoin itself is how J.P. Koning categorizes it as a game akin to a decentralized chain letter:

Source: J.P. Koning

On p. 54 they write:

Bitcoin ownership is highly concentrated in an extremely small number of whales who wield enormous power in the highly illiquid market. According to an October 2021 study conducted by finance professors Antoinette Schoar at the MIT Sloan School of Management and Igor Makarov at the London School of Economics, .01 percent of Bitcoin holders control 27 percent of all the coins in circulation. Some community.

Anecdotally this is probably true, for Bitcoin at least. Is it the case that every cryptocurrency / asset is the same way?

On p. 54 they write:

The eccentric community of crypto skeptics also fits in that category, and I was proud to call myself a member.

We are over 50 pages into the book and the authors still have not provided a succinct definition of what a “Coiner” or Skeptic” or “Maximalist” or “Critic” are. What are these tribes? What are their etymology?

On p. 56 they write:

many coiners really do feel that they are part of a like-minded community

What are coiners?

On p. 56 they write:

Practically everyone I spoke to at crypto conferences and other public events both admitted to being scammed and accepted it as if it was almost obligatory, a character-building exercise and bonding agent. Few spoke about stopping scammers in general.

This is a really good point, and I completely agree with the authors.

McKenzie’s experience reminded me of the meme from The Ballad of Buster Scruggs:

It is still unclear why this rugging behavior is perceived as a rite of passage and normalized.

On p. 57 they write:

In the case of the 20,000 cryptos other than Bitcoin, it should be simple to categorize them under the law. Most were securities made by real companies with real employees.

Maybe that is true, did the authors cite a securities lawyer? Did they quote a U.S. judge?

This is the same problem that occurred in Diehl et al., book: lots of opinions but few references. I am a certain there are U.S.-trained lawyers who share the same views as the authors, why not quote them here? For instance, later in the book they chat with John Reed Stark; this would have been a good spot to introduce him.

On p. 57 they write in parenthesis:

Ethereum also used proof of work to mine its cryptocurrency, until turning to proof of stake in September 2022. In proof of stake, owners of the crypto validate the blocks, making the system far less energy intensive, but incentivizing even more centralized ownership.

Two issues with this:

(1) As mentioned earlier, while there is some discussion of proof-of-work-based mining (the authors visit a hashing farm in Texas), the conversation or discussion around alternatives — such as proof-of-stake — are few and far between.

(2) Did the authors provide evidence that proof-of-stake systems are even more centralized? Maybe they are, but no references were provided. What can be asserted without evidence can also be dismissed without evidence.

This also reminds me of Matthew Green’s evergreen tweet:

Source: Twitter

On p. 57 they write:

What started as simple speculation and peer-to-peer exchange became a web of derivatives markets, DeFi protocols (a set of rules governing a particular asset, often using so-called smart contracts, run on blockchains), lending pools, and other newfangled features of digital finance.

What are derivatives markets? What are DeFi protocols? What are lending pools?

On p. 58 they write:

Under this arrangement, buying Dogecoin on a crypto exchange like Binance was indeed an act of trustlessness, but only in the sense that it was hard to trust any offshore crypto entity.

This is a strawman. Why? Because Binance is a centralized exchange, it is a trusted-third party. No one is arguing that Binance or other centralized exchanges are… decentralized.

On p. 58 they write:

“Not your keys, not your coins,” was the mantra thrown around by die-hard crypto fanatics, meaning you should keep your crypto in a “cold wallet” that didn’t touch an exchange—or even the internet. But that kind of advice did not reflect the reality of the markets. It defeated the primary purpose of money, which is to make buying and selling stuff convenient and fluid.

I mostly agree with their observation and have written about all of the “friction” that coin-related intermediaries often add. But there does need to be a nuance with private keys because various controllers in traditional finance also have key (recovery) management involving hardware wallets, cold wallets, an so forth. Traditional finance has incorporated the modern iteration; see Thales on slide 9.

On p. 58 they write:

Unfortunately, creating money that’s trustless is impossible in practice, for it goes against the very nature of money itself. Adopting it as a mission can only lead to disappointment.

There are a couple issues with this:

(1) This seems to be an a priori argument. By definition, a priori arguments are the opposite of empirical arguments. So no matter what evidence someone could provide, it seems like the authors have made up their mind.

(2) Not every cryptocurrency or cryptoasset project is attempting to reinvent money.

On p. 59 they write:

In the United States, the nation with the largest economy in the world—as well as the issuer of the world’s reserve currency since 1944, the US dollar—we often take this consensus for granted. Everyone wants dollars, especially in times of crisis.

What is a reserve currency?

There are several reasons why the U.S. is the issuer of the world’s reserve currency. While the authors do mention a couple of authors, experts such as professor Michael Pettis and Brad Setser, attribute the U.S. dollars current reserve status due largely to the (im)balance of trade. The U.S. runs large trade deficits. And mercantilist economies such as China are either unwilling or unable to shift to running large trade deficits. Until something dramatically changes, the U.S. dollar will continue to remain the key reserve currency.

On p. 59 they write:

In that sense, the stated goal of cryptocurrency—to create a trustless form of money—is literal nonsense. You cannot create a trustless form of money because money is trust, forged through social consensus. As Jacob Goldstein writes in Money: The True Story of a Made-Up Thing, “The thing that makes money money is trust.” Saying you want to create trustless money is like saying you want to create a governmentless government or a religionless religion. I think the words you are searching for are anarchy and cult. The bartender should cut you off and make sure you get a ride home.

This is a strawman. Not every cryptocurrency or cryptoasset project is attempting to become “money.”

There are a number of coin promoters who regularly echo comments similar to Zero Hedge, that the U.S. dollar is doomed. Maybe it is, and maybe that is who the authors are thinking about, but we are not provided specific names of people who make the argument that a specific cryptocurrency is going to become a “reserve currency” let alone “money.”

On p. 60 they write:

The failures of our current system to do so have no doubt lent the story of cryptocurrency much of its power. A severe, and very understandable, lack of trust in the financial system reflects a wider loss of faith in democratic governance. Wealth inequality is at near record highs and many working people feel that the economy is rigged against them. But that doesn’t mean the story of cryptocurrency is true, or offers a better alternative to the present situation. You cannot replace people and flawed institutions with magical bits of computer code.

There are a couple of issues with this:

(1) What are some of the failures of the current system? Are the authors referring to too big to fail banks? Systemically important financial institutions?
(2) What is the story of cryptocurrency? Which one? This is a problem with generalizing without looking at the facts-and-circumstances of each.

On p. 60 they write:

That code was written by human beings who themselves are far from perfect.

This seems like an inconsistent argument. Is the claim that “smart contracts” and/or “blockchain” projects are inherently prone to error because humans wrote the code? If so, shouldn’t we be equally concerned about all digital, automated financial infrastructure created by humans? Why single out cryptocurrency?

On p. 61 they write:

A decentralized financial system seemed less like an inherently noble pursuit than an alternative structure that, just like TradFi, further enriched those at the top.

What is TradFi? They tell us later but should have mentioned it here.

On p. 61 they write:

I will inevitably be attacked by crypto promoters as advocating for nation-state supremacy or excusing the myriad failings of this or that government, but that is missing the point entirely.

In the past I have jokingly referred to myself as a statist shill. Looks like we all could have been fellow travelers at some point!

On p. 61 they write:

Consider a familiar example: our banking system. Why do you trust that the money you put in a licensed US bank is going to be there when you want to use it? Because the federal government guarantees it in the form of the FDIC (Federal Deposit Insurance Corporation).

While true this seems a bit of cherry-picking because we also have too big to fail banks that are regularly penalized for screwing their customers. I think there are better arguments to describe the utility of trust that has been created by public institutions like the U.S. Mint or the Federal Reserve without having to describe prudential regulators such as the FDIC.

For instance, earlier this year Bank of America agreed to pay $250 million in fines and compensation to cover “junk fees” it had levied on customers. Last December, the Consumer Financial Protection Bureau (CFPB) fined WellsFargo $3.7 billion for rampant mismanagement and abuse of customer accounts.

On p. 61 they write:

Is our financial system perfect? Of course not! In fact, it is deeply, deeply flawed. It cries out for more reform and democratic accountability. But it at least includes guardrails that protect consumers and a legal framework that acknowledges the role of trust in binding people together, whether in social life or commerce.

There has got to be a better way of defending “trust” and “consumer protections” than defending private incumbents.

That passage also sounds strikingly similar to what Diehl et al., wrote in their own book:

While our existing financial system is undeniably profoundly flawed, not optimally inclusive, and sometimes highly rigged in favor of the already wealthy; crypto offers no solution to its problems other than to create an even worse system subject to unquantifiable software risk, profound conflicts of interest, and an incentives structure that would exasperate wealthy inequality to levels not seen since the Dark Ages. Put simply, Wall Street is bad, but crypto is far worse.

When I tried to explain to friends that this book unnecessarily carries water for incumbents, this is the reoccurring meme that came to mind.

There is no reason the authors have to defend incumbents or the a cartel that regularly is fined for the very activities that the authors abhor. Guess who invented all of these criminogenic concepts in the first place?

Rather, it is possible to critique both the coin world and the traditional financial world. You do not have to join one camp or the other.

On p. 62 they write:

But nonetheless, the private banking era was not a success, and eventually central banks were created to better manage the franchisee banks and ensure the safety of customer deposits.

Agreed, and there is a long line of commentators, researchers, and academics who favor policies allowing retail to directly gain access to central bank money (bypassing commercial banks). 40 There is no technical reason, in 2023, for retail to be intermediated from central bank money. If this comes in the form of a central bank digital account and/or digital currency is a separate discussion and one worth having.41

On p. 62 they write:

Among the many butcherings of language in cryptocurrency, historians may find this the cruelest cut of all. The purported “future of money” is in fact the past of money, a failed experiment and one we revisit at our collective peril.

At least two problems with this:

(1) It generalizes all cryptocurrencies as attempting to build a “future of money” when this is not the case.
(2) It is an a priori based argument so by definition it is not evidence-based.

On p. 62 they write:

I have to address one last false story that Bitcoin maxis—the people with the laser eyes who aren’t Tom Brady—have been spreading.

That is a shallow explanation of a Bitcoin maximalist. While some prominent maximalists may have added laser eyes to their profile pictures, that’s more of a degen meme than anything else. Many of the original Bitcoin maximalists – the guys and gals who coined the term – hate me and made it abundantly clear on Twitter each quarter from mid-2014 until the present day. They did not have laser eyes until the past couple of years.

On p. 63 they write:

In economics, supply does not determine scarcity. Supply is simply the amount of something available to be bought or sold. Scarcity occurs only when the demand for that thing exceeds the supply at the price of zero.

I whole heartily agree! This is a good point.

On p. 63 they write:

Imagine I own the rights to all the dogshit in Brooklyn. I have approached each and every dog owner in the fair borough, and they have agreed to sell me their dog’s poop. I do not own the dogs, mind you, merely the rights to their fecal matter. Now, there are only so many dogs in Brooklyn, and there is only so much they can defecate. The supply fluctuates by the number of dogs—despite how it may appear, there is an upper limit here on the number of dogs, certainly lower than twenty-one million—and the amount of times they poo. But is dogshit scarce? Are people clamoring for it because it is prized and useful? Will my cornering the market make me a rich man? Unfortunately for my empire of shit, the answer to all those questions is no.

Much like smoking pot and consuming edibles earlier in the book, is it really classy to use this specific example? Surely there are less crude ways of explaining supply and demand?

On p. 64 they write:

By now, more than 90 percent of the Bitcoins that can ever exist have already been mined. That makes Bitcoin’s supply almost perfectly inelastic, a fancy word meaning it can’t grow or shrink in response to changes in price.

The fact that over 90% of bitcoins total supply has been mined is not why bitcoin is perfectly inelastic. What makes it perfectly inelastic – a topic I have written on a few times before – is that fact that irrespective of the labor force applied, no extra units of bitcoins can be extracted. With proof-of-work networks like Bitcoin, the marginal productivity of labor is zero. It does not matter how many more units of labor are added to the income generation (mining) process as the network will always produce the same amount of economic output. In contrast with traditional commodity extraction, deploying more equipment or a larger labor force, could result in large production of say, a precious metal.

There is one caveat: Bitcoin mining may be considered perfectly inelastic due to the code that prevents extra units from being extracted, but the way block propagation works in practice, block makers (mining pools) have accelerated halvenings.42 That is to say, when Bitcoin was first released, the halvenings were expected to coincide roughly every four years. However because of how mining works in practice, the next halvening is expected April 2024, about 8 months ahead of schedule.

On p. 64 they write:

It’s basically fixed. This makes the price of Bitcoin even more susceptible to changes in demand.

Agreed! I – and several others – have written about this before.

On p. 65 they write:

The problem with the Bitcoin-as-digital-gold argument runs even deeper when we examine economic history. Bitcoin maxis are often “gold bugs,” meaning they want us to return to the gold standard, when you could exchange paper money for a certain amount of gold.

Anecdotally this seems to be true, many maximalists I have met and/or interacted with often are some form of goldbug.

On p. 65 they write:

But elasticity is crucially important in times of crisis.

Agreed!

On p. 66 they write:

But that does not mean returning to the gold standard would be any better.

Agreed!

On p. 66 they write:

The day after the Super Bowl, I finally met in the flesh my first fellow crypto skeptic not named Jacob Silverman. Cas Piancey and Bennett Tomlin host a podcast called Crypto Critics’ Corner that proved a lifeline when I first stumbled into the seemingly lonely world of crypto skepticism in the spring of 2021. Sensing something was off about the industry but hoping to educate myself, I searched for decent podcasts on the subject.

(1) I am not going to say do not listen to their podcast, but McKenzie is correct: it was (is!) hard to find a good podcast that isn’t 100% shilling the listener something. Can recommend Epicenter which regularly hosts technical-focused guests. And despite my disagreements with her in the past, I think Laura Shin’s Unchained is often quite good too. For instance, here is her recent interview with Zeke Faux.

(2) How did McKenzie conduct a “literature review” or due diligence during 2021? Although tough to navigate, there were plenty of active “skeptics” or “critics” that the authors never even mention, such as Mark Williams, Yakov Kofner, Angela Walch, and J.P. Koning.43 We will discuss this again later.

On p. 68 they write:

Appearing on Crypto Critics’ Corner alongside Jacob, who joined remotely from Brooklyn, would mark my first long-form interview in my bizarre career pivot. Cas, a sideways-baseball-cap-wearing SoCal native, welcomed me generously, showing me around the studio owned by an artist friend whose elaborate wood carvings decorated the walls.

It is unclear why the authors are using this nom de plume when Cas Piancey revealed his identity last year. His real name is Orson Krupnick Newstat.44

On p. 69 they write:

Leaving Cas’s studio, I realized I had found my community. It had nothing to do with a coin we were pumping, a company we believed in, or some utopian technological vision that, in practice, came with a heavy side of dystopia. We wanted to understand this crazy new financial system, especially its dark side. And it helped that we liked each other.

This book seems like it is veering into auto-biography territory, was that the intent?45

On p. 69 they write:

The crypto skeptic community that Bitfinex’ed, Cas, Bennett, Jacob, and others brought me into became my team, friends, and trusted colleagues. A few of them I regarded as heroes—or at least the closest thing to it in an industry in which it seemed most people would sell a Ponzi scheme to their mother if it would help pump their bags. Bitfinex’ed—whoever he was!—was our initial ambassador to this new community, but he was soon joined by other pseudonymous online sleuths, as well as economists, computer scientists, indie journalists, cynical former bankers, straight-laced former regulators, stoner podcasters, Scandinavian businessmen, and a few untrustworthy cranks.

Maybe this is one “crypto skeptic community” but certainly not the only one. Also, for years I have been referred to as a “crypto skeptic” — a title I thought was shallow and one I never adopted. Does this make me a crypto skeptic, skeptic? Crypto skeptic skeptics, assemble!

On pgs. 69-70 they write:

To say I learned a lot from them would be a vast understatement, and it quickly became apparent to me why a community like this was valuable. The world didn’t need just one crypto critic, it needed a thousand of them, of diverse backgrounds, interests, and motivations, spelunking through the industry’s darker corners and sharing what they found. When everyone was selling something, we needed a few people to say, “I’m not buying, but I’m curious how you do it.”

Apart from the fact that the authors still do not define what a “critic” is or is not, I agree with nearly everything in this statement. With one major caveat: let’s try to forego purity tests, especially if you just became interested in this space. See for instance, this clique of “no-coiners” acting as if there wasn’t a wider universe of coin “skepticism” or “criticism.” Let’s be Big Tent and include actual technical experts, not just people we may agree with.

On p. 70 they write:

At least now, with Cas, Bennett, and a delightful crew of eccentrics behind me, I had a corner of my own to retreat to in between rounds. Admittedly, it was a David and Goliath battle—a random group of skeptics up against a multi-trillion-dollar industry. But I came back from Los Angeles with more pep in my step. Maybe it was just the gambler in me, but I liked my chances.

Repeating it over and over does not make it sound more objective. Readers might ask: are you moonlighting as a reporter or as a social club manager? Can’t be both. Plus, there are a number of investigative reporters operating at this point, did you reach out to any of them for potential collaboration?

Chapter 5: SXSW, the CIA, and the $1.5 trillion that wasn’t there

This chapter should have been split into two, with the visit to the Bitcoin mining facility pulled out. Also, because of the uneven tone of the book up until this point, it wasn’t clear who the authors felt would narrate this in the movie adaptation. You might think think this is facetious but the entire conversation with the alleged CIA agents does not give a reader any sense of conclusion, there is no bowtie on it. What purpose do the agents fill besides page filler?

But let’s start with one of the two events they attended.

On p. 71 they write:

In early 2022, South by Southwest (SXSW), a big tech and music conference in my hometown of Austin, Texas, invited me to organize a panel of crypto skeptics. I was pretty fired up. SXSW would mark our first venture into the real world; everything Jacob and I had done thus far was online or remote. We recruited Edward Ongweso Jr., a razor-sharp journalist for Motherboard, Vice’s technology site, to join us on stage. I decided to record the whole thing, hiring a local director of photography, Ryan Youngblood, to film whatever hijinks might transpire.

What are crypto skeptics? Are they the same thing as critics or realists? Why did they choose Ongweso?

On p. 72 they write:

“Well, there’s another DAO that helps with that,” he said. His dream was to move to Portugal, a burgeoning crypto tax haven.

That was probably true while the book was being written, however in October 2022, the Portuguese government said it will start taxing short term gains on digital assets. It is unclear if this has reduced the desirability or appeal for crypto-related projects from domiciling.

On p. 73 they write:

Bad actors are everywhere—certainly in so-called TradFi, or traditional finance—so why should crypto be different?

Ah, gotta love the “so-called” modifier. While the authors do interview a number of coin promoters and coin “skeptics” they don’t make much room for anyone who works in traditional finance. Strange because there are credible people within the world of “tradfi” that probably agree with their views. A second edition should interview experts at the DTCC (the largest CSD in the world) or say, Tony McLaughlin from Citi, he’s no coin shill.4647

On p. 75 they write:

The guy who had approached us, whom I will call Charles, led us over to a group of six people with SXSW name tags that read USG in the spot reserved for their employer. Most of them were unassuming: close-cropped hair, dress shirts, fleece vests—the typical uniform of law enforcement people playing at casual dress.

For approximately four pages the authors describe a strange interaction they have with a couple of alleged spooks.

For example they write on p. 76:

Charles was a couple years from early retirement. “I can’t wait to smoke weed!” he said. “It’s great,” we assured him.

Yet more weed smoking by the authors. Why is this in the book?

On p. 78 they write:

“You need to be a borderline sociopath to do this work,” Charles said. “Ryan is probably too normal,” he added, referring to our local cameraman, who said he had been rejected years earlier from the CIA. Ryan smiled uncomfortably.

It was never fully clear why the authors hired a cameraman for many of their interviews. Are they planning on releasing a video as well? For instance, last year Alex Gladstein asked the authors to release the video interview of SBF, which they declined.48

On p. 78 they write:

It went like this all night, Jacob and I exchanging occasional looks that indicated our mutual disbelief. At one point, Jacob gawked as Charles explained that the NSA had found “a small bug” in Signal—the encrypted messaging app used by journalists, activists, and millions of other people, including the spies at our dinner table—but if you restart your phone once a week or so, it wasn’t a problem. It was hardly a sophisticated technical explanation, and maybe it was all bullshit braggadocio, but a Signal exploit would be incredibly valuable—easily seven figures on the open market—and a closely held secret by any intelligence agency.

In my typed notes on Kindle I wrote “Isn’t this burying the lede?” Surely a big story here is that a U.S. intelligence agency used an exploit in Signal?

The only reason I can think of not to include this earlier is because we never learn if these two people – Charles and Paul – actually were spooks. I’ve met people at conferences who claimed to work for a branch of the government and I would google them afterwards and often it was true. What did the authors find out about these two?

On p. 82 they write:

There are more than 20,000 cryptocurrencies out there, sophisticated exchanges, decentralized finance protocols that allow billions of dollars of crypto to change hands without human intermediaries, and financial products that resemble less regulated, riskier versions of their Wall Street equivalents.

What are sophisticated exchanges? What type of decentralized finance protocols? What are human intermediaries? Which financial products resemble less regulated, riskier version of their Wall Street equivalents? It is unclear.

On p. 82 they write:

At least in the gambling-like realm of financial speculation, there’s a lot you can do with crypto. With few guardrails in place, it’s easy to borrow money and add leverage in order to increase one’s odds of winning big or losing everything. Many of these financial products and transactions are extremely complicated, and difficult for the average investor to navigate. Nearly all of them are extraordinarily risky.

I agree with the majority of these comments apart from the leverage element. At the time it was written leverage in the coin world was primarily procured by going through a centralized intermediary like an exchange (Binance) or lender (Celsius).49

On p. 82 they write:

By some measures, Celsius was a successful going concern, but with investment backing from Tether (they loaned Celsius over $1 billion), strange lending activities, sky-high interest rates on offer, and some murky movement of its tokens, it was an object of extreme speculation and rumor within the crypto-skeptic world.

If there is a second edition the authors must cite Maya Zehavi for being the first “Celsius skeptic.” Among other firsts, she was the first person to publicly put a magnifying glass on Hogeg before and after he was removed as CFO. Is she a “skeptic”? She was often labeled as one before the term was co-opted.

On p. 83 they wrote:

I took a breath, told myself that I wasn’t hungover from a night of drinking with CIA operatives, and, trailed by my cameraman, did my most confident walk over to Mashinsky and his confederates.

But were they actual spooks? Is the reason Charles and Paul were in this book just so the authors could say they drank with some alleged spooks?50

On p. 84 they wrote:

We got it on camera. There were moments that astonished me. Talking about scams, he took the usual tack and said people needed to educate themselves.

So are you going to release the video too? Seems spicy no?

On p. 84 they wrote:

Toward the end of our conversation, when the video was off but with audio still rolling, Mashinsky told me something that made my blood run cold. I asked him how much “real money” he thought was in the crypto system. I didn’t think he would actually answer the question, but he did.

Is that common? To turn off the video but keep the audio rolling? I have no affinity for Mashinsky but was that an accident?

On p. 84 they wrote:

“Ten to fifteen percent,” Mashinsky said. That’s real money—genuine government-backed currency—that’s entered the system. “Everything else is just bubble.” The number seemed straightforward and eminently believable. But it was still shocking to hear it from a high-level crypto executive, who seemed totally unconcerned about it all. Mashinsky acknowledged that a huge speculative bubble had formed. If the overall crypto market cap was about $1.8 trillion at the time we spoke, that meant that one and a half trillion or more of that supposed value didn’t exist.

Everyone new to this space is entitled to be shocked, that the “market cap” is probably not an actual “market cap.”

For instance, five years ago, I cited an estimate from Nikolaos Panigirtzoglou at JP Morgan entitled “Flows & Liquidity: The emergence of cryptocurrencies.”  According to his analysis:

The net flow into cryptocurrencies is very much a function of coin creation which is controlled by computer algorithms and in the case of bitcoin is diminishing over time. Figure 6 shows the net amount of money invested every year since 2009. The cumulative amount has totaled around $6bn since 2009, well below the current market cap of $300bn.

Panigirtzoglou illustrates this over time with the bar chart below:

Around the same time Citi published a note with similar estimates:

In 2017, cryptocurrencies grew from a market cap of less than $20bn to around $500bn. We estimate this surge was driven by net inflows of less than $10bn.

What was the estimate five years later?

That’s a good question and something the authors do not readily provide an answer for apart from citing Mashinsky and later SBF. Maybe the two operators are/were correct but definitely a missed opportunity and one that should be included in another edition.

Graph 1 (above) comes from Project Atlas, a new initiative coordinated by the BIS in partnership with several other central banks. Figure C is likely something the authors would find of interest.

On p. 84 they write:

And given the general lack of liquidity in crypto markets—that a billion dollars’ worth of Ethereum isn’t redeemable for a billion dollars of cash without tanking the market—that meant that the crypto economy was dancing on a knife’s edge. One bad move by a major player might tip the industry into freefall. An illiquid market based on irrational speculation, it was all essentially vapor.

Well that could be true, what references did they cite? Nothing in the works cited at the end. That which is asserted without evidence can be dismissed without evidence.

On p. 85 they write:

Crypto critics call it “hopium,” and it’s a powerful drug.

What is a crypto critic? Who was the first crypto critic to call it hopium? It might actually be difficult to identify because there is a French automobile brand called “Hopium” founded in 2019. I believe the first time I heard the term “hopium” as it related to coins – was after the 2017 bubble imploded. People were making memes of “copium” and “hopium” but perhaps I am misremembering and it was more recent.

On p. 85 they write:

As OG crypto critic David Gerard would say, “You lost your money when you bought the tokens.”

Gerard may have said that and he might be right but let’s not hand over trophies to people who market themselves as “crypto critics” or call someone an “OG” when they are not.51

Whose shoulders did Gerard and others stand on? In addition to J.P. Koning and Angela Walch (mentioned before) there was Ray Dillinger. If we were to make a chronological argument, then a “godfather” of ‘crypto critics’ (in the English-speaking world) is professor Mark Williams. Who is Williams?

Williams’ op-ed appeared about 6 days after the price of bitcoin peaked. Despite arcuately describing its volatility, some Bitcoin promoters labeled him “Professor Bitcorn.” Why wasn’t he mentioned in this book?

In April 2014 Williams even provided public testimony at a U.S. House committee. Definitely worth referencing in the next edition.

And since we are being very specific, if the authors really wanted to label something “OG” then we might want to hand a trophy over to the annual Financial Cryptography and Data Security conference whose attendees include a crossover from the cryptocurrency and blockchain world (remember, “crypto” used to mean “cryptography.”) What kind of crossover? Just look at the 2023 program.

Inexplicably the authors continue this chapter and include an unrelated topic: a visit to a Bitcoin mining facility.

You know what is a tad weird? The authors are about to visit the largest U.S. based Bitcoin mining facility – operated by Riot Blockchain – and they miss the opportunity to speak with Pierre Rochard. Yes, that Rochard – the co-creator (popularizer?) of the “no-coiner” pejorative works for Riot. In fact, Rochard hasn’t missed a beat, pushing out nonsense that is indistinguishable from satire (he’s the one walking in a field with a hard hat).

On p. 85 they write:

If you drive for about an hour northeast from Austin, past the scrub brush and the quota-driven traffic cops, you reach a former Alcoa aluminum smelting plant on the outskirts of the tiny town of Rockdale (pop 5,323). It was the kind of old-school corporate holding that’s so big they built a lake to service it (Alcoa Lake). The facility, sold in 2021 for $240 million to an obscure real estate firm, had mostly gone fallow. But its mere existence—the mothballed warehouses, silent smokestacks, miles of fencing, the power substation on site—was a reminder of a not-so-bygone era when large industries operated in the United States and factories, perhaps even staffed by decently compensated union workers, actually made stuff.

This is good prose, this part of the chapter is pretty good. Readers deserve an entire chapter – heck, a whole book – discussing the zaniness of the mining world. For instance, Riot earned $31 million in energy credits from ERCOT (the energy regulator in Texas) in the month of August. That is right, a Bitcoin mining company got paid not to mine. This isn’t a brand new subsidy either and it deserves (ridicule!) mention in the next edition.52

Continuing on p. 86 they write:

Money was coming in, ambitious building projects were planned, people were getting steady construction work—all the supposed hallmarks of basic economic progress. But to what end and at what cost? I had come to Whinstone to find out, accompanied by Jacob and David Yaffe-Bellany, a reporter from the New York Times who wanted to write a piece on me.

We never did find out to “what end” or “what cost” — we are left wondering. We have seen a widely circulated video inside one of the Riot’s facilities so that gives us some idea of how large, but the authors should have provided an answer to these. Also, was that a humblebrag?

On p. 87 they wrote:

We wanted to hear their pitch: how Bitcoin mining brought jobs, stimulated development, and would be an asset for the whole community. To hear that pitch, they asked us to sign what amounted to nondisclosure agreements. David, the Times reporter, assured us that he couldn’t, his job wouldn’t allow it. None of us felt comfortable. What was the point of signing something that might limit our ability to write and report on what we might see? It made no sense to do so when we were going in with cameras—if they were going to let us in with cameras.

Oddly enough, we as readers, never did get to hear that pitch described in words even after the authors did not sign the NDAs. What are the jobs numbers?

On p. 87 they wrote:

Eventually we confronted a more urgent reality: Jacob really had to pee. Standing practically cross-legged outside the car, his face radiated the barely withheld anxiety that comes after a long car ride after a morning guzzling coffee. I was a bit out of sorts, too. We were supposed to be featured in the New York Times as intrepid crypto critics, and here we were unable to get into our featured location while self-urination seemed to be a non-zero possibility.

Look I was born and raised in Texas, spent about 25 years there. And I fail to see how this passage is interesting. It’s like the marijuana consumption, probably should cut it out.

On p. 87 they wrote in parenthesis:

We’d met a lot of strident Bitcoin critics but not anyone interested in attacking a Bitcoin mine.

Well at least this time the authors provided a little nuance “Bitcoin critics” and not just “critics.” And if we were to guess why the site has the security measures described it is likely because Riot doesn’t want someone to come in and steal the mining (hashing) gear. Those are effectively money printers. The golden goose as it were.

On p. 88 they wrote:

We chopped it up for a few more minutes, and then, after the typical alchemy of bureaucratic authority parceling out permissions, we were told that we could go in the gates and drive to the main office. “I left my NDA in the bathroom,” said David as soon as we piled into the car. Jacob announced his paper was under his foot. Others had disposed of theirs quietly in their pockets. Either some Whinstone official had forgotten about the agreement during our time in the office or perhaps had been overruled. It didn’t matter. We weren’t signing anything. They waved us through the gate and we drove in.

I am not a huge fan of NDAs but I have signed my share of them, and/or my bosses have which made me bound by them (at time of employment). Readers have no idea what was in this specific NDA either. Maybe it was all just theater?

Either way how does it help the authors credibility to show that they will wiggle around to avoid signing an NDA? Just tell them you won’t sign an NDA and see what happens.

Pages earlier you mentioned turning off the video but keeping the audio on in the Mashinsky interview. Are you guys trying to do “gotcha” interviews in an industry filled with people (criminals) making cringy music videos?53

On p. 89 they write:

While I agreed that, everything else being equal, employment was a good thing, I couldn’t help but notice the flimsy underpinnings of this otherwise sturdy mining operation. This company was using enormous amounts of electricity to mine speculative digital assets to keep a zero-sum game of chance going. Texas’ notoriously over-worked electric grid, also known as ERCOT, had gone down after a winter storm in February 2021, contributing to the deaths of 246 people. Mining Bitcoin hardly seemed worth the potential harm to the population.

While I agree with much of this statement, I don’t think it is completely fair to connect Bitcoin mining with mismanagement by ERCOT in February 2021. Maybe that argument is stronger in November 2023 but 30 months ago this large facility was not fully operational.

Also, the authors should be clearer: Riot currently only contributes proof-of-work hashing for one specific chain, Bitcoin. Digital assets should probably be singular, not plural, in the next edition.

On p. 90 they write:

What benefit did any of this produce for the rest of us? Was it worth the cost? In 2021, the greenhouse gasses released to produce the energy consumed by Bitcoin and fellow networks more than offset the amount saved by electric vehicles globally.

This is a good point muddied by “fellow networks.” What are the fellow networks? For example, in my February 2021 paper I provided estimates not just for Bitcoin but also for Ethereum (pre-Merge), Litecoin, Bitcoin Cash, Monero, BSV, ZEC, and Dogecoin. Are these what the authors had in mind when they mentioned “fellow networks”?

On p. 90 they write:

It was all ridiculous, but I kept coming back to the same thing. Economically, the parabolic rise and fall of bubbles was well established. But what would crypto’s downfall do to this community?

This is a great question that is never answered. How many jobs does Riot contribute to Rockdale? How many jobs do Bitcoin mining (hashing) operations contribute to across the U.S.? It’s probably negligible but the authors raised these questions and never answered them.

Despite the issues with the nuances of mining, I still think this particular section could be the foundation for a good future chapter focused on proof-of-work mining in the U.S. To date no one outside the coin industry has written a long-form non-hagiographic explanation of how large hashing operators hone in on specific regions due to subsidies and/or acquisition of say, a retired coal power plant that becomes unretired. For instance, how Stronghold Digital Mining bought two languishing coal-fueled generating facilities in Pennsylvania and ramped up their production.

We have seen organized greenwashing from coin lobbyists such as Coin Center but only piecemeal pushback from investigative journalists. For instance, here’s one of the all-time greatest (leaked) RFPs:

Source: Twitter

The second edition has a lot of potential when they dig into what the lobbyists have tried to whitewash and greenwash. Environmentalist Ketan Joshi has documented some of these attempts.

Chapter 6: The Business of Show

This chapter had some interesting potential, to discuss the ‘Brock Chain’ (Brock Pierce)! The authors visited Bitcoin Miami, albeit the 2022 edition and not the arguably more-coke-filled 2021 edition. Alas, while they do discuss El Salvador at the end there is no mention of former Russia Today host, Max Keiser and his wife (Stacy Herbert), who are official advisors to Bukele… and was a bit bananas at Bitcoin Miami 2021.

Anyways, let’s start off with a humblebrag on p. 91:

On April 1, 2022, our months-long investigation into the world’s largest crypto exchange, Binance, was published in the Washington Post.

Their Washington Post article was good albeit a little short, clocking in at around 2800 words. And most of that Washington Post story is reused – word for word – in the first part of chapter 6 (specifically the bits about Francis Kim and Fawaz Ahmed). That’s perfectly fine and common by the way (I myself reused portions of articles and papers in one book). Readers looking for some more depth might be interested in reporting by Tom Wilson from Reuters who was actively investigating the same topics at the same time.

On p. 92 they write:

The second, and perhaps more important, reason crypto took off in China was to avoid capital controls. The official limit of $50,000 in overseas foreign exchange per year is an attempt by the state to restrict wealthy Chinese from moving their money out of the country. If you are a Chinese billionaire, there are numerous ways to get around this, but one of the less expensive ones is crypto. Either buy crypto with yuan and cash out into dollars or other currencies overseas, or perhaps better yet, invest in Bitcoin mines (often using electricity stolen from the grid) and then move the mined Bitcoin via crypto trading elsewhere.

They reference a 2020 article from South China Morning Post, but I think it is a bit of a stretch to make a couple of the specific inferences that McKenzie and Silverman do. For instance, the article does not mention billionaires at all or that Bitcoin mines “often use electricity stolen from the grid.” Maybe both of those are true, but neither are mentioned in the article. Scrolling through my archives, I quickly found one example in Hunan province.

In fact, the article specifically mentions how USDT became popular in China:

Ironically, Beijing’s ban actually fuelled the adoption of Tether in China. Chinese users started replacing the yuan with Tether as the de facto currency in cryptocurrency trades, purchasing it under the table from unregulated “over-the-counter” brokers.

I have no affinity for Tether LTD but that detail wasn’t mentioned in the chapter. Wonder why?

On p. 93 they write:

Binance allows its customers to employ enormous leverage—at one point up to 125-to-1 (now down to 20-to-1 for most customers, comparable to other exchanges). That means retail traders can gamble with far more chips than they actually bought. The upside is large, but so is the downside: At 125-to-1, for every 1 percent move, your one-hundred-dollar bet could net you a fortune, or wipe you out instantaneously. Kim was trading with 30-to-1 leverage. In mainstream financial markets, offering extreme amounts of leverage to retail traders—not accredited investors who must prove they have the funds to withstand a margin call—is not allowed

That is mostly accurate and fair but with one nuance: foreign exchange (FX) trading platforms do offer – and advertise – high leverage, even beyond 125x. For instance, according to Benzinga, at least three FX platforms allow higher than 125x leverage.  Whether cryptocurrencies / assets like bitcoin are the same as FX is a different matter, but Diehl et al., made the same error.

As of this writing, the global FX market is the largest most liquid market in aggregate (and filled with oodles of retail punters).54 This is not a defense of Binance rather it is to highlight how wording and nuance are important. High leverage is allowed in certain “mainstream financial markets.”

On p. 94 they write:

If that weren’t enough, Binance itself trades on its own exchange. In traditional markets, this kind of arrangement would never be allowed, as the conflicts of interest—and potential for market manipulation—are glaring.

This is a good point, and I agree with it. However contrary to the authors conviction, this kind of arrangement has been allowed at various eras in traditional markets: Glass-Steagall (which the authors briefly mention later) separated commercial banking from investment banking in 1933. Fast forward sixty six years later, in 1999, most of it was repealed. Some economists such as Joseph Stiglitz and Paul Krugman opined that this set the stage for the 2007-2008 financial crisis. And guess what, even after the financial crisis and a myriad of debates, Glass-Steagall was still not restored. Yes, even today, too big to fail banks still have these “glaring” conflicts of interest.

On p. 94 they write:

Imagine the New York Stock Exchange or Nasdaq taking positions on different sides of trades it facilitates. No financial regulator would allow it, for obvious reasons.

I agree with the thrust of their argument, even though it is not really accurate.55

What is incorrect? While the NYSE and Nasdaq do not custody user funds and in theory – only provide order matching – the parent companies of both are equity holders of a handful of clearinghouses in the U.S. 56

What would have been helpful in this book (and others post-FTX collapse) would be to describe the similarities and differences in clearing and settlement (C&S).57 These socially useful activities (C&S) are operated by systemically important financial institutions (SIFIs), which in the U.S. are overseen by the Fed Board of Governors. And at an international level, the Financial Stability Board (FSB). Post GFC, post-Dodd Frank we actually have a more concentrated set of SIFIs with conflicts of interest throughout the entire trade life cycle because of how interconnected ownership has become.58 One of the best articles that concisely describes this convoluted relationship is How a Lone Norwegian Trader Shook the World’s Financial System.

Again, I agree with the point the authors are trying to make, but they could have used a better example.

On p. 96 they write:

At one point, according to a screenshot of a chat with a Binance customer service representative that Kim shared, he was offered a voucher for $60,000 in Tether and another $60,000 in trading credits as an inducement to keep him on the very platform that he felt had robbed him.

Perhaps it is just me, but I do think the authors to describe “Tether” as both the unit-of-account and the issuer is confusing. USDT would have sufficed.

On p. 97 they write:

Liti staked $5 million to support the suit, which was being led by international law firm White & Case. Binance’s user agreement requires litigious customers to submit to arbitration at the Hong Kong International Arbitration Centre. With a minimum cost of $50,000 for the services of the court and a qualified arbiter, this clause in the agreement creates a prohibitive barrier for traders who lost a few hundred or thousand dollars seeking restitution. By pooling millionaire day traders with mom-and-pop claimants, and using the backing of Liti Capital, White & Case got around that hurdle.

What is the status update for this? The official website of the Steering Committee for the Binance Claim does not seem to have been updated for a couple of years. The last tweet from the account was September 18, 2021.

On p. 98 they write:

According to their analysis, Binance has become the perfect playground for professional trading firms to clean up against unsophisticated retail traders. Using state-of-the-art algorithmic trading programs and access to the latest market-moving information, these firms are both faster and more powerful than the regular Joes they compete against.

This is probably true, professional high frequent trading (HFT) operations have an edge versus retail in traditional finance so maybe the same odds (or worse?) in the coin world?

On p. 98 they write:

Ranger compared what was happening on crypto exchanges to the online poker craze of the mid-2000s. Back then, you had a sense of the stakes and could see who was beating you at the virtual table. “At least poker’s kind of honest,” said Ranger. “You’re losing to this guy named, like, Penis420, and he bluffed you out of your cash, and you’re here.” But for average crypto investors/gamblers trading on Binance, there was no such clarity. Across the table could sit an advanced computer trading program. Regular traders don’t stand a chance; when the professional firms easily outmaneuver them, they can get wiped out in seconds.

This passage is a little confusing. The poker analogy makes sense in poker but what persona are the authors describing in the last sentence? Day traders? Leveraged traders? How to “regular traders” who buy and hold and do not have leverage get wiped out in seconds? Maybe they gobbled up some junk coins?

On p. 99 they write in parenthesis:

Zhao himself said that Binance may eventually lose out to more nimble and harder-to-regulate DeFi, or decentralized finance, exchanges.

We are nearly a hundred pages in and still no cohesive explanation of what “DeFi” is or what examples of a decentralized exchange is.

On p. 99 they write:

It was hard to see how this “democratization of finance” was going to lead to a fairer economy rather than a more chaotic one, with a vast gulf between winners and losers. The liberatory rhetoric and experimental economics of crypto could be alluring, but they amplified many of the worst qualities of our existing capitalist system while privileging a minority group of early adopters and well-connected insiders.

This is a really good point, I agree with it. The one caveat I would make is that not every intermediary operator claims to be trying to “democratize finance” so a future edition should provide a specific name.

On p. 100 they write:

Surprisingly, the press passes actually came through. We received an official invitation to make a pilgrimage with the true believers.

Why was that a surprise? How many events / venues / interviews rejected press pass requests while writing this book?

On p. 100 they write:

Peter Thiel, the arch-capitalist fifty-four-year-old cofounder of PayPal, was throwing one-hundred-dollar bills from the main stage, trying to signify their unimportance. When members of the crowd rushed to grab them, Thiel appeared shocked. “I thought you guys were supposed to be Bitcoin maximalists!”

Welp, I chuckled at something Thiel said, time to call it a day.

On p. 101 they write:

But first, I wanted some merch. Across the sprawling Miami Beach Convention Center, the product and sales pitches ranged from free NFTs to getting in on the ground floor of the next ICO that seemed a lot like the last ICOs. A DAO promised an investment scheme to “democratize yachting.” Crypto mining machines sold for thousands of dollars each.

This chapter would have been solid if it simply described the crazy claims made by the kiosk participants. One nitpick though: which crypto mining machines sold for thousands of dollars each? Because Bitmain has sold hashing equipment for years that cost roughly that. Is that a lot or a little money?

On p. 101 they write:

If you ignored the formal hysterics and instead talked to regular folks milling about the conference, Bitcoin Miami sometimes felt like just another trade show. Big and energetic, full of boozy salesmen talking about how Bitcoin had changed their lives, with sponsorships adorning every surface, it was a Potemkin village of American consumerism and gambling addiction masquerading, in typically humble crypto fashion, as the future of the entire financial system.

Excellent prose!

On p. 102 they write:

“In Miami we have big balls,” said Francis Suarez, Miami’s Bitcoin bro mayor, who has toyed with the idea of abolishing taxes and funding the city through a nearly worthless token known as MiamiCoin.

The authors missed a golden opportunity to dunk on MiamiCoin, which lost more than 95% of its value in the span of 9 months and Suarez himself lost $2,500 on it.  

On p. 102 they write:

The local faithful, while zealous, were peaceful. No one yelled at me at the Bitcoin Conference or denounced me as a nonbeliever. Some people overflowed with solicitous generosity—there was at least one strip club invitation that I believe wasn’t a covert marketing stunt. The lack of open conflict was almost a letdown—and an indicator of my own latent narcissism, perhaps. Everyone was just excited to talk to some guy from TV that had cameras following him around.

You all should come with me sometime because I’ve had plenty of threats made against myself both online and offline! Someone even called my wife a chink. Classy! Also, why was McKenzie expecting open conflict?

On p. 103 they write:

There are many different ways one could define the crypto community, but the cynic in me would say there were none, not really. The majority of the people in Miami seemed only loosely tied to one another through commerce. They had few other bonds to speak of besides a utopian vision of financial freedom. To me, they were a projection of the timeless American fantasy: getting rich for free as quickly as possible. They flew to Miami to perform the rituals of multi-level marketing-style salesmanship and gladhanding. Also, there were parties.

Excellent writing.

On p. 103 they write:

From his home base in tax-friendly Puerto Rico, Brock maintained numerous crypto business interests and had become one of the industry’s most colorful spokespeople. I hadn’t expected to stumble upon him like that, but Brock—an insider with a sketchy past—was an ideal interview subject.

On the topic of crypto colonialism and Brock Pierce, readers might also be interested in an article five years ago: Making a Crypto Utopia in Puerto Rico. A new paper from Olivier Jutel, “Blockchain financialization, neo-colonialism, and Binance” is also a must-read.

On p. 104 they write:

The goal of interviewing Brock was to talk about Tether, the company he cofounded in 2014. While Brock had no current involvement with the company, we had heard from a source that he had at one point tried to buy back into Tether’s ownership group for the laughably low amount of $50,000. A source had also told us Brock dangled his political connections to the Trump White House in the hopes of getting back into the good graces of Tether executives like CFO Giancarlo Devasini.

Strangely, at least in the subsequent dialogue provided in the book: neither of those rumors were confirmed or denied. Did the authors ask him about buying back into Tether LTD in the video?

On p. 105 they write:

“I talk to more world leaders, probably, than our secretary of state,” he said. “I’m talking to forty-plus governments.” These statements seemed absurd, the kinds of exaggerations told by a particularly imaginative friend in grade school, but I smiled and nodded. It would take a little forbearance to eventually steer the conversation toward Tether.

Isn’t another logical follow-up: what are you talking to these world leaders about? Are these dialogues with other governments set up by Pierce’s team or solicited by the governments themselves?

On p. 105 they write:

“Why hasn’t Tether been audited?” I asked. His response was telling: He simultaneously claimed that they “probably” were working with a major accounting firm while bemoaning that they had tried and failed “hundreds” of times to get an audit. His reasoning was that no firm would touch them because of the lack of “regulatory clarity” around crypto, invoking a common industry complaint. For us crypto skeptics, this didn’t even rise to the level of cliché. There was plenty of clarity. It was just that companies like Tether tended to operate offshore and outside the ambit of American law. Tether’s executives, who never stepped foot in the United States, were reportedly being investigated by the Department of Justice for bank fraud.

I think it is a fair question that should be asked.59 But what did the authors expect Pierce to respond with? He’s no longer an insider, right? And while I mostly agree with the authors commentary, none of us are lawyers so maybe next edition a reference or quote from a lawyer would be better? Oddly, there is nothing in the reference section even though there are probably are a number of U.S. trained lawyers who would say something similar on the record.

Lastly, during his interview with Laura Shin, Zeke Faux provides an answer on the auditing question too, one that McKenzie or Silverman would probably disagree with. Can investigative reporters agree to disagree?

On p. 105 they write:

Given their role as essentially crypto’s unacknowledged central bank, with a few multimillion-dollar settlements already behind them, the company’s behavior potentially violated all manner of security, banking, and financial laws and regulations. Some even argued that by minting a dollar-denominated digital token, Tether was engaged in counterfeiting. As Jacob liked to joke, one sign that Tether was a fraud was that the company had never sued anyone for calling it a fraud. (As Tether’s leadership surely knows, the discovery process goes both ways.)

Maybe all of this is true, and maybe they are finally hammered by a series of law enforcement actions, but the question I ask Tether Truthers (USDTQ) is: why doesn’t the NY AG re-sue Tether LTD/Bitfinex?

Recall that there was a two year monitoring period after the settlement; the authors are alleging that Tether LTD continues to operate in a fraudulent manner during this time. Maybe that company is indeed up to no good. But the onus is on the authors to provide evidence in this book, and they don’t.

Matt Levine sorta does. If anyone claims to have direct evidence, shouldn’t the logical question be: have you submitted it to law enforcement and/or informed the CFTC and NY AG of possible violation of settlement terms? What about the fact that there is no major price discrepancy between CEXs that do not allow pegged coin trading versus those that do?

Also, why would Tether LTD sue Spencer Macdonald (Bitfinexed) or myself, for having publicly asked what the reserves were prior the settlement agreements with both the CFTC and NYAG? What would they get from either of us? BitPay never sued me after a couple of analytics-based posts. I don’t think a lack of lawsuits is necessarily a strong argument. 60

On p. 107 they write:

“Of innovation in general. I can’t really share the conversations I’ve had . . . National Security Council and things . . .” I may have involuntarily laughed at that point. Obviously Brock Pierce would not have attended an NSC meeting!

Great line, why would Pierce brag about something that didn’t happen? Bananas.

On p. 107 they write:

Risk-tolerant crypto traders and exchanges owners were stacking leverage on leverage (or fake dollars on top of fake dollars) to extract returns—in real dollars—on their investments.

The bigger story probably was undisclosed / unknown rehypothecation occurring at centralized lenders. But they only touched on Celsius so far. Also, what is a fake dollar? If the authors mean that collateral backing loans wasn’t there then that’s probably true, if so, would that be undisclosed rehypothecation?

Source: Twitter

The tweet above (Barry Silbert is the founder of DCG) did not age well. During the process of writing this review, the NYAG sued Genesis, DCG, and Gemini for allegedly defrauding investors.61

On p. 107 they write:

Tethers were being printed by the billions and issued to a very small group of important players like crypto mogul Justin Sun, who issued a token called TRON, along with sophisticated trading firms like Cumberland and Alameda Research, the Bahamas-based outfit owned by Sam Bankman-Fried, known in the crypto world (and now beyond) as SBF.

Would be helpful to have a diagram explaining the USDT minting / redemption process and who allegedly participates.

For example:

Source: OfNumbers

Above is a rough stab at a flow of funds of user behavior in April 2015. What do those flows look like in 2023?

On p. 107 they write:

Those players then gambled with the Tethers. The supposedly democratizing, decentralizing currency of the future had come full circle: a way to enrich the few at the expense of the many, in opaque games of chance the public couldn’t hope to understand.

This is a strawman. You don’t have to like cryptocurrencies or blockchains but portraying USDT – which is centrally issued – and Tether LTD as “democratizing and decentralized” is disingenuous.

The final few pages of this chapter are great, the authors interviewed two exiled Salvadorans in Miami: Mario Gomez and Carmen Valeria Escobar. Rather than quoting portions here, I do recommend grabbing a copy of the book for those final interactions plus the next chapter.

Overall this chapter had some good gems, such as the interview with Brock Pierce and the Salvadorians. But the authors also made some unforced errors that were a real distraction, such as not knowing that there are existing conflicts of interest within U.S. banks that regulators continue to allow (post Glass-Steagall).

Chapter 7: The World’s Coolest Dictator

This was the best chapter in the book and unfortunately it was also one of its shortest, clocking in at just 12 pages. While it weaves some good prose in with first-hand reporting, the authors still use terms like “coiners” without providing a definition.

Let’s start off with the obligatory reminder that one of the authors was/is a TV star. On p. 113 they write:

He was easy to spot. He held a placard with the alias I use when traveling, Don Drysdale, and wore a Batman T-shirt. Napoleon turned out to be a fan of Gotham, the Batman prequel TV show I starred in that centered on a young police lieutenant (and future commissioner) named Jim Gordon.

Most of the remaining part of the chapter is significantly less cringy and the description of Bukele and how he rose to power is pretty solid.

For instance, on p. 119 they write:

Unfortunately for his people, the young leader refused to accept defeat, instead doubling down on his Bitcoin wager. Bukele changed his Twitter handle to “world’s coolest dictator,” and his profile picture sported laser eyes favored by Bitcoin maximalists, or maxis, who believed that Bitcoin was the one true cryptocurrency and the rest imposters, mere shitcoins. Bukele bragged that he bought Bitcoin, using the state treasury, on his phone while sitting on the toilet.

This is the closest we get to a working definition of a “Bitcoin maximalist,” it is not horrible but does not really encompass the nuances that one the first maximalist extolled.62

Pages 120-122 have some solid interviews with Salvadorians who ended up on the wrong side of Bukele, including a family who lived in a house that unfortunately would be demolished to make way for the new airport for Bitcoin City. What is Bitcoin City and why does it need an airport? Read the book.

One nitpick (timing wise) has to do with one of their comments on the bottom of p. 122:

By the time we visited in May 2022, the issuance of the bond had been delayed, seemingly indefinitely. Despite the ill-conceived scheme, there were still consequences for the local population.

To be fair, if I were in their shoes, I probably would have written the same thing. However following the book’s publication there was a 180% rally in El Salvadorian government bonds. The following month, in August, Bloomberg ran a headline Bitcoin-Touting Bukele’s Bond Rally Draws JPMorgan, Eaton Vance. And as of this writing, the rally has not cooled off.

On p. 123 they write:

Despite the tense environment, Wilfredo welcomed us to his home with open arms. I immediately noticed what I would come to understand as his signature expression: a broad, easy smile revealing several gold-capped upper teeth. As we fumbled to communicate, first through my poor Spanish and then by way of Nelson translating, he was patient and wry with his replies. Here was a famous Hollywood actor who wanted to film and interview him, to tell his story, yet no one in his own country could tell him when he would be kicked off his land or where he might go.

As mentioned in the beginning of this review, McKenzie’s remark comes across as a little tone deaf. Why not use your notoriety to stop Wilfredo’s home from being demolished? The purpose of the book – according to the Author’s Note – is to condemn those who committed fraud. And what about helping the victims too?

Overall a decent chapter and one that could be expanded in a future edition or even used as a standalone spinoff.

Chapter 8: Rats in a Sack

This is one of the weaker chapters because it relies almost entirely on repeating news from other sources. And unlike the previous chapter, nothing really knew is revealed that we couldn’t learn from other books or mainstream news sources.

There is also an introduction to some important concepts that once again, are not explained.

For instance on p. 128 they write:

The two were bound together via an arbitrage system designed to keep Terra, a so-called algorithmic stablecoin, at one dollar.

What is an algorithmic stablecoin? Are all algorithmic stablecoins the same are are there differences?

On p. 128 they write:

Or so went the plan. There was also a “staking pool” called Anchor, which was also created by Do Kwon and his company, Terraform Labs.

What is a staking pool? Is that the same thing as a validating pool used by some proof-of-stake networks? Or are there differences, like a whitelist maintained by a 3rd party?

On p. 128 they write:

Sure, there was the occasional bit of criticism. The economics of Terra, Luna, and Anchor were clearly Ponzi-like, involving the circular flow of money common to such schemes. Where was the 20 percent return on Anchor coming from?

Strangely, with so much written on Anchor from other sources, they never answer their own question. The short answer is the 19.5% – 20% yield marketed for Anchor was an unsustainable subsidy based on a combination of ANC (the governance token for Anchor) and bLUNA staking yield. Here’s my long form explanation of what happened to Terra last year: Not all algorithmic stabilization mechanisms are the same.

On p. 129 they write:

That the whole thing smelled like a Ponzi was no secret, but rather a fact discussed by some big industry names on Twitter, podcasts, and in other media.

Probably the most prominent Terra critic during that time was a trader, Kevin Zhou, who publicly described the fundamental issues of UST (and ANC) with just about anyone willing to listen. A second edition should include him or at least refer to his interviews.

On p. 129 they write:

But on Mirror, people weren’t trading real stocks in a regulated market. They were trading synthetic copies of real stocks on a market overseen by, well, Do Kwon.

Even the SEC lawsuit does not use this as an argument, because it is not true. Mirror was many things but it was not “overseen by Do Kwon.”

On p. 129 they write:

Can you imagine the gall it takes to set up a fake copy of the New York Stock Exchange, one that, given its shaky underpinnings and nonexistent oversight, might attract who knows what kind of shady players? And then to refuse to even account for it?

Again, this is not the argument the SEC made when it (1) subpoenaed Terraform Labs and Do Kwon and (2) sued them.

This is important because it hurts the credibility of the authors: right now there are more than a dozen stock exchanges operating in the U.S. These stock exchanges are not all the same, some offer traders different functions and different products. Some purposefully attempt to mitigate the advantages of HFTs. Some process significantly more volume than others.

But a key similarity is that say for equities, a share of Apple stock, none of these exchanges has a monopoly as the trading venue for that stock.

In contrast, some exchanges, like the commodities-focused ones, have a monopoly on specific futures contracts: you can only trade it on one exchange. For example, the WTI Crude futures contract that is frequently quoted in financial press is only tradable at the New York Mercantile Exchange (NYMEX).

The SEC sued Terraform Labs for selling unregistered securities. Not for making a new trading venue.

And in June 2022, a U.S. court rejected Do Kwon’s appeal:

The court stated that business arrangements with U.S. companies to trade assets from the Mirror Protocol justified the SEC’s investigation, where “a $200,000 deal with one U.S.-based trading platform” was made. Furthermore, the Terraform Labs “indicated that 15% of users of its Mirror Protocol are within the U.S.” during negotiations.

It’s unclear why the authors thought the appropriate analogy was a “fake copy of the New York Stock Exchange” when that type of example does not appear in the complaint. 63

On p. 130 they write:

Almost a year later, one LUNC was worth about one thousandth of a cent, but the token’s overall market cap was still in the top fifty of all crypto tokens. That signaled two things: Crypto was dominated by what were essentially penny stocks, and even in a disaster like TerraLuna, a lot of people hadn’t given up hope. They were holding on.

To be fair to the coin world: penny stocks originated the pejorative, penny stocks. Maybe the next edition can use “Lunatics” as a coin-specific pejorative?

On p. 132 they write:

In the midst of all this, Terraform Labs’ entire legal team quit at once.

The authors missed the opportunity to find specific tweets to dunk on, such as one lawyer who mentioned how they lost everything including their significant-other… just weeks after bragging about how wealthy they now were.

On p. 132 they write about the cascading collapse of centralized lenders in the wake of Three Arrows Capital (3AC) insolvency:

Blockchain.com, a crypto exchange, was due $270 million. The contagion had spread.

The authors were pretty miserly when it came to graphics and images, one they should include in the next edition is this whammy:

Source: Twitter

It is a self-attestation from Kylie Davies, co-founder of 3AC to Blockchain.com. This was basically all the due diligence the lender did. Check out my March presentation for more doozies.

On p. 134 they write:

After devouring tech talent the previous year, big exchanges like Crypto.com (usurpers of the naming rights to Staples Center) and the Winklevoss twins’ Gemini conducted multiple rounds of layoffs, sometimes without any public announcement, in just a few months.

Usurpers? They are naming rights not a birth right and Staples had a 20 year deal beginning in 1999. What should the stadium be called?

On p. 134 they write:

One of them was BlockFi, another crypto lender that offered huge, and unsustainable, interest rates on customer deposits.

Pretty easy to say after the collapse of the bubble. For what it is worth, I publicly questioned BlockFi’s yield in 2019 and got lampooned by Andrew Kang, Nic Carter and Rob Paone.

Source: Twitter

Deep analysis!

Spongebobbed!

What were the books authors doing in March 2019?

It is all too easy to come after the bubble and publish a mostly second hand account about “huge and unsustainable interest rates” after the lender filed for bankruptcy, the harder part was publicly discussing where the yield comes from prior to the bubble.

Source: Bloomberg

On p. 134 they write:

The curtain was being slowly peeled back through a steady diet of leaks, bankruptcy filings, and the first wave of lawsuits. Important revelations were emerging, some of which confirmed earlier criticisms from skeptics.

What specific criticism? Which “skeptics”? Please provide the receipts.

On p. 135 they write:

The entire crypto economy depended on Tether’s stablecoin—it was by far the most traded token each day. But its murky operations, uncertain financial backing, and bloviating executives—to say nothing of those executives, like CEO Jean-Louis van der Velde, who were almost never heard from—didn’t seem like the makings of an organization that could weather a major industry downturn. At some point, I believed, the bill would come due for Tether, and it would be one it couldn’t afford to pay.

The first sentence is probably true for some (most?) spot exchanges, but not necessarily for on-chain trading.

For instance:

Source: The Block

The color-coded bar chart (above) visualizes the different on-chain volumes of USD-denominated pegged coins. While USDT-based volume is large, USDC is often much larger. Strangely the book doesn’t discuss other centrally issued pegged coins at all.

On p. 137 they write:

And all the while, scams, rug-pulls, hacks, and Potemkin crypto projects proliferated, adding billions more to the toll that comes with being part of the web3 community.

Since “web3” is never formally defined in the book, this dunk doesn’t really bite. Are readers supposed to assume anything blockchain-related suffered from billion dollar scams and hacks during this time frame? Or did the damage primarily impact intermediaries? Where’s the shade for Certik?

On p. 137 they write:

Perhaps the most disturbing part of the crypto crash of the spring of 2022, which wiped out more than $2 trillion in notional value and wrecked the nest eggs of everyday traders all over the world, was the utter lack of humility shown by the industry’s leading figures. Materially, most of them were fine: Their predictions might have been ludicrous, and perhaps they lost oodles of money—but it was usually someone else’s money, and they had made enough insider profits along the way to simply hop over to the next project, should the current one fail. Many had also bought in early to Bitcoin, which still held some value, even if it was 60 percent or more below its peak.

There is a lot to unpack here. I agree with the authors, that a lot of the shills and prominent promoters lacked humility. Coinesia writ large.

But the authors are playing fast and lose with the word “most.” How many were fine? How many bought bitcoin early? How many had made “enough insider profits”? I’m sure some coinfluencers check all of those boxes, but readers are never given even a ballpark estimate.

On p. 138 they write:

As trillions of dollars of wealth evaporated

If we take “market cap” at face value, the aggregate coin market cap peaked just north of $3 trillion in November 2021 and dropped to around $1 trillion where it currently gyrates. Saying “trillions” seems like an embellishment.

On p. 139 they write:

The truth is that most of the scammers and con men were tolerated—or even encouraged—by the wider crypto industry because there was no economic incentive to do otherwise.

This is a fair point. Though not everyone encouraged or tolerated these bad actors. Some even publicly called them out.

On p. 139 they write:

While I had been shouting to the Twitter rafters trying to warn people of the impending financial disaster I sensed looming, seasoned academics were articulating a more nuanced version of the same.

Buddy, you didn’t start tweeting about any of this until after the bubble peaked in 2021. The time to warn people was in 2018-2019.

On p. 139 they write:

Hilary Allen, professor of law at American University, wrote a paper in February 2022, just three months before the crash, referring to cryptocurrency and its assorted DeFi products as effectively a new form of shadow banking.

Allen’s paper, while sincere in its concerns, made several major errors.64 A number of people, including myself, attempted to explain some nuances that she missed. For instance, she claimed that lending protocols effectively provide unlimited leverage. However, in practice not only do all of the major lending protocols implement a form of whitelisted assets but each of those assets has a loan-to-value cap.

For instance, p. 938 of her paper is factually incorrect in a couple of areas, she did not incorporate the suggestions from experts. That part of the paper should not have passed peer review. Empirically, while many centralized lenders collapsed in 2022, none of her predictions she made came to pass specifically regarding DeFi lending protocols. 65

On p. 139 they write:

Broadly speaking, shadow banking refers to a company offering banking services while avoiding banking regulations.

The authors are finally discussing what a shadow bank is. If you recall, in the first chapter they mention PayPal but fail to mention it was one of the first prominent fintech “shadowbanks.” A number of centrally-issued pegged coins issuers (like Tether LTD) have modeled their operations after the path pioneered by PayPal, as a shadow payment and shadow bank provider. None of that is mentioned by the authors (or Allen).

On p. 140 they write:

We know this happened during subprime, but as Professor Allen points out, the leverage in crypto, especially DeFi, is far higher. “The amount of leverage in the system can also be increased by simply multiplying the number of assets available to borrow against,” she writes. “That is a significant concern with DeFi, where financial assets in the form of tokens can be created out of thin air by anyone with computer programming knowledge, then used as collateral for loans that can then be used to acquire yet more assets.”

Allen and the authors are not only incorrect but they do not even provide a number, what is the leverage? That which is asserted without evidence can be dismissed without evidence.

Specifically the part where Allen is wrong is claiming that any amount of tokens can be created out of thin air and used as collateral for loans.66 In practice, only about thirty different coins and tokens have been whitelisted on DeFi lending protocols such as Aave or Compound.

Fun fact: the authors never mention specific lending protocols in the entire book.

On p. 140 they write:

The people behind crypto coins can create endless amounts of fake money. Crucially, the exchanges themselves can also do so, in the case of coins like FTT (FTX) and BNB (Binance). If folks can use that fake money to borrow real money, that’s a problem, as the leverage is potentially unlimited.

This is absurd.

If the authors were right, then none of the centralized lenders would have gone bankrupt last year because they would have just created endless amounts of fake money and continue to lever up and up. They could not because there is no such thing as unlimited leverage in either DeFi or centralized lending.

Why make this up? There was real provable criminal activity taking place, why resort to exaggerating like this?

This again reminds me of another evergreen tweet from Matthew Green:

Source: Tweet

On p. 142 they write:

Crashes happen in regulated markets, but at least there is some flexibility built into the system—whether it be negotiations between the parties, court cases, or even government bailout—that can mitigate the damage. At the end of the day, licensed banks in the United States are backstopped by a trusted third party, the US government. Cryptos are famously trustless, so no such third party exists. Not only that, but rigidity lies at the very foundation of crypto itself in the form of so-called smart contracts.

This is a pretty shallow explanation of how the U.S. financial industry is overseen and regulated by different state and federal regulatory bodies. Sure due to time and space constraints the authors need to be brief, but there is no delineation between state-chartered and nationally chartered banks. Or the role that the FDIC or OCC play. Or how in times of crisis the Federal Reserve acts as the lender-of-last resort. Or what role international bodies, such as the Financial Stability Board, play “at the end of the day.”

Also cryptos, which by now is the catch-all term the authors use to capture all cryptocurrencies / cryptoassets, are only “trustless” in the on-chain realm (assuming the chain is actually decentralized). Most of the criticism in this book, so far, seems to be around activities of off-chain intermediaries such as centralized lenders.

On p. 142 they write:

Smart contracts are basically small computer programs designed to execute their functions immediately, without the interference of a financial intermediary, a regulator, a court, or the parties themselves. The irreversibility of the blockchain—it’s an immutable ledger that can only be added to, never subtracted from—and the smart contracts built around it means DeFi is far more rigid than TradFi. Most actions, once performed, cannot be undone. When an interconnected system falls apart, this is not a good thing.

I wrote an entire (outdated!) book in March 2014 on this topic and the definition above is superficial at best. For instance, smart contracts do not have to execute all of their functions immediately. On permissioned chains – or even permissionless chains – intermediaries can even play a role. In fact, that’s precisely what real world asset (RWA) issuers due via black listing and white listing of addresses such as Aave Arc.

When the authors say “DeFi is far more rigid than TradFi” that could be true but they do not follow-up with any evidence. That which is asserted without evidence can be dismissed without evidence.

For instance, you would think an easy slam dunk example they could provide is the fallout from The DAO hack in 2016, such as a hard fork. But that famous hack is not mentioned anywhere in the book. Are the authors aware of what happened? If so, surely that would be a good way to steelman their view in the next edition.

On p. 142 they write:

Complexity leads to fragility. The more complicated the financial mousetrap you build, the more likely it is to fail.

What evidence or source do they cite to back up these claims? Nothing. They are just opinions. That which is asserted without evidence can be dismissed without evidence.

On p. 142 they write:

Blockchain, consensus algorithms, smart contracts, and cryptographic signatures are all real human creations whose value we can debate. As individual components, they may all have positive attributes, but combining them together in a more or less unregulated marketplace has become self-evidently problematic. Unless, of course, you were just trying to use that complexity as a smokescreen to commit fraud.

If a large commercial bank, such as J.P. Morgan were to start using smart contracts for a blockchain-based project, does that a priori mean that JPM is “using that complexity as a smokescreen to commit fraud”? That is how weak the authors arguments have become in this book.

Onyx may fail, but it serves as a counterfactual to the a priori arguments used by the authors. Launched in 2020, this blockchain-based project from J.P. Morgan exists. Is the bank using it to commit fraud? Who knows, maybe the authors could weigh in.

On p. 143 they write:

Remember my initial thesis: When a bubble pops, the most speculative things fall fastest. Since crypto was entirely speculative, the investment equivalent of gambling, it was bound to go poof when the Fed started raising interest rates.

Perhaps he tweeted it but it is unclear when McKenzie publicly stated this thesis. I actually partially agree with it. But without receipts, he can’t really do a victory lap.

On p. 143 they write:

On March 17, 2022, seeking to counteract inflation, the Fed raised interest rates by a quarter point (or 25 basis points if you want to sound fancy). On May 5, they raised half a point and the carnage began. On May 8, crypto had a nominal market cap of $1.8 trillion. By June 18, it was $800 billion. A trillion dollars evaporated in less than six weeks. The joke was the lie that it had ever been there in the first place.

The whiplash is strong here. Just 13 pages earlier the authors chronicled the collapse of Terra which led to a cascading collapse of centralized trading entities (like 3AC) and lenders (such as Celsius). No one, including the authors, have connected the collapse of Terra with the rise in interest rates. This is a spurious correlation.

Now I would agree with part of the authors arguments that in November 2023, with rates at 5.25%, it is likely that “risk free” investments (such as U.S. Treasuries) are attracting some speculative funds that would otherwise go into riskier assets like cryptocurrencies. But the implosion of Terra – and the subsequent unwind and cascading domino effect onto centralized lenders was mostly self-imposed due to poor risk management (e.g., rampant rehypothecation). In other words: Jay Powell and the Board didn’t pop the bubble, the Board just has stymied that spate of exuberance for now.

On p. 144 they write:

Democratic politicians were taking huge donations from the crypto industry—most notably, from Sam Bankman-Fried—and spending far too much time with industry lobbyists. (We saw the photos on Twitter before you deleted them, guys.)

This is one of just a small handful of times the authors mention coin lobbyists which is a little strange considering how much air cover the coin lobbying industry provides.

Not only did the authors not name names, they did not even reference the Tweet or the date, here it is:

Source: Twitter

Mark Wetjen never registered as a lobbyist for FTX which he is required by law to do (see the Lobbying Disclosure Act). This is considered a big no-no. Wetjen was also on the advisory board of Coin Center as of ~3 years ago (unclear when the lobbying org changed it). Following the collapse of FTX, Pham deleted the picture and Wetjen deleted his Twitter account.

On p. 144 they write:

But crypto, in practice, was nearly always the opposite of what it claimed to be, so of course it ended up becoming a tool for political influence. And because crypto was foremost a way to get rich, crypto investors celebrated the billionaires, like SBF, who were showering politicians with donations in order to legitimize crypto and shape its regulatory future.

This is a great point.

On p. 144 they write:

The previous fall, Bitfinex’ed told us the crypto industry was vanishingly small, controlled by only a handful of players. At the time it seemed far-fetched, but the more bankruptcy filings forced the opaque sector into the light, the more he was proven right.

Unless Macdonald named names, this is just a he-said-she-said. For instance, on October 16, 2021 Macdonald DM’ed me that “Even disclosure of reserves can be catastrophic” and nine days later that “Get ready to buy me that scotch don’t worry I’ll share.”

I have no affinity for Tether LTD or Bitfinex but Macdonald’s predictions above were wrong. And he didn’t even buy me the scotch he wagered.

A couple of times he was, that’s why I stayed in touch with him. But he ended up blocking me for holding him to the same standard we all hold promoters: verify don’t trust. Maybe Tether LTD’s attestations are bogus, maybe they operate in the same fraudulent manner as they did in 2016-2018, but the onus is on Macdonald and others to provide that evidence. And right now, none of the “disclosure of reserves” has been catastrophic.

On p. 145 they write:

Crypto critics and good governance advocates worried about Bankman-Fried’s growing political influence.

Specific examples before 2022? Such as?

On p. 146 they write:

“Help you avoid things that won’t age as well.” It wasn’t the first time a powerful person had tried to shape our reporting, but few were higher on the food chain than SBF. As in all relationships like this, the important thing was to not succumb to that influence, however it might be exerted. As a newly minted journalist, I had begun to realize that competing agendas were all around me, that sometimes we had to mingle with some unsavory people in order to find the truth while still keeping our ethics intact.

This is hard to buy because one of the things readers (at least U.S.-based readers) are aware of is Hollywood entertainers are represented by an agent(s) and have connections with PR firms whose goal is to help promote the entertainer in a flattering light in order to land the next big gig. Competing opinions and agendas are all around Tinseltown, they make movies about it.

On p. 146 they write:

At the same time, I realized something: If these crypto bros were really as cocky as they appeared to be, maybe stirring some shit up on Crypto Twitter would yield results. To use a poker analogy, why not splash the pot a bit, piss some people off? On May 14, I fired off a tweet egging them on: “Anyone in the crypto industry wants to come at me, feel free. Fwiw, I have spent 20 years in showbiz, I can take a punch. Just a couple words of advice: don’t miss.”

It’s nearly impossible to McKenzie seriously since he openly admits to shitposting on social media to trawl for engagement. That is what Instagram influencers do for more attention, not a serious investigative reporter. Zeke Faux didn’t, that’s your peer.

All in all this was one of the worst chapters in the book primarily because it relies on and amplifies Hilary Allen’s false predictions. And also because the authors continue to make a priori arguments instead of evidence-based ones.

Chapter 9: The Emperor is Butt-ass Naked

Despite the adolescent chapter title, the chapter is one of the better ones. Unlike most chapters, this one involved some first-hand reporting on FTX and Sam Bankman-Fried. For readers unfamiliar with SBF, the chapter does a decent job of painting the scene. But for those already steeped in the lore surrounding SBF, nothing new is really revealed.

But there were still a number of unforced errors made by the authors who used unnuanced language.

For instance, on p. 151 they write:

Hong Kong benefited from being close to mainland China, where cryptocurrency had exploded in popularity, due in no small part to the desire of wealthy Chinese to avoid state capital controls.

This may be true, but what is the reference or citation for this? Nothing in the back of the book. If the authors are relying on the South China Morning Post article from earlier, recall it did not specifically mention wealthy people (millionaires or billionaires). Again, anecdotally I think it could be true, but the burden of proof rests with the authors.

On p. 152 they write:

The first was potential conflicts of interest. Sam owned an exchange and a trading firm that operated on that exchange. Imagine if J.P. Morgan owned an unregulated version of the Nasdaq. What was stopping him from manipulating the value of assets on his exchange via Alameda and pocketing the proceeds?

I agree with the thrust of what the authors are saying, but it is not a particularly good example. Recall earlier the discussion around revoking Glass-Steagall. Today J.P. Morgan operates the largest commercial bank in the U.S. which is fused with an investment bank.67

In 2015, J.P. Morgan paid a combined $307 million fine to settle cases with the SEC and CFTC, admitting wrongdoing in part because certain banking units failed to tell clients it favored in-house funds, clear conflicts of interest. In 2020, J.P. Morgan paid $920 million to settle DOJ, SEC and CFTC charges of illegal market manipulation or “spoofing” in the precious metals and Treasury markets.

If the authors were looking for a large unblemished regulated financial institution, there probably is none. So the next edition could just describe why these “conflicts of interest” are abused by CEX operators.

On p. 152 they write:

The second was his company’s deep ties to Tether. In November 2021, Protos, a crypto media company renowned for its skepticism, revealed that Alameda Research was one of the largest (perhaps even the largest) customers of Tether.

Strangely there is no link or reference to the Protos article. Also Protos is sometimes hit-and-miss. While I have found myself nodding in agreement with a couple of their op-eds, they also have a notable few duds.

(1) This past summer they published a byline-free xenophobic article: Uncovering Ethereum’s close ties to Chinese money.68 One of the shadowy reasons is because Vitalik Buterin’s interest in speaking Chinese! Since I worked in China for five years and my wife is Chinese just waiting for a xenophobic hitpiece to drop.

(2) A year ago, Protos published the “Tether Papers” which they billed as being as important – and revealing – as the Paradise Papers. Upon closer inspection it was a dud because the authors – some of the same people that McKenzie and Silverman put on a pedestal in this book – did not reveal anything about market makers you couldn’t already get from a subscription of The Block Pro or Messari or The Tie Terminal. In other words, the investigation was standard market research wrapped in a cloak-and-dagger marketing foil.

On p. 152 they write:

The notoriously shady stablecoin company had printed $36.7 billion for Alameda. We’re supposed to believe Alameda gave over $36 billion to buy thirty-six billion Tether? Where would Alameda have gotten $36 billion from? According to public reporting, they had raised a few billion from VC firms and others, but nothing like what Protos found. If Alameda didn’t give Tether the full amount up front, how did the arrangement work?

These are good questions, none of which are answered anywhere.69 The next edition should explore how this arrangement worked.

The line chart (above) visualizes Alameda’s balance on FTX for the duration of 2022.70 It is negative for all but one day. A second edition should include these types of charts to help readers understand the magnitude of loses.

On p. 152 they write:

The ties between Tether and FTX/Alameda went even deeper. Daniel Friedberg was the former general counsel of FTX, and now its chief regulatory officer. He once worked alongside Stuart Hoegner, the general counsel of Tether, at Excapsa. Recall that Excapsa was the holding company of Ultimate Bet, the online poker site that had a secret “god mode” where insiders could see other players’ cards. So FTX/Alameda’s top lawyer worked with Tether’s top lawyer at the parent company of the card cheating website. Huh.

This is guilt by association and is lazy. I have no affinity for Stuart Hoegner, have even publicly stated so. I’m not going to carry water for Friedberg, but it is disingenuous to slam him without at least referencing his side of the drama.

On p. 152 they write:

Sam posed for a picture with CFTC Commissioner Caroline Pham and was a regular at CFTC offices.

What is the context for that photo? The authors do not provide a reference or link. Scroll up to page 144.

On p. 153 they write:

But banks in the Caribbean were often more willing to engage. And whether coincidentally or not, Tether’s bank happened to be nearby. Deltec Bank, the one run by the cocreator of the Inspector Gadget cartoon series Jean Chalopin, was based in Nassau. Chalopin boasted of assisting the Bahamian government in drafting the DARE Act.

This is an interesting point. I had not heard the part about Chalopin boasting before. Is there a reference or a citation I can learn more about this? Not in the back section unfortunately.

Also, when the authors say “banks in the Caribbean were often more willing to engage” how much easier is it to open an account in an Caribbean bank? Are there some stats to quanitfy this engagement level?

On p. 154 they write:

Still, I was glad he was there, as we quickly realized the room I had rented was too small to fit much more than the five of us in addition to the two cameras. But that also gave me an idea.

It’s never really addressed in the book but: why did the authors need to video tape every interview? There is no separate web page for Easy Money where readers are directed to for additional content, like video interviews. In fact, to the chagrin of SEO, there are at least two films with the same name (released in 1983 and 2010). Did the authors think it adds more weight or seriousness to the F2F interview? Also, as mentioned earlier, last year Alex Gladstein asked the authors to release the video interview of SBF, which they declined.

On p. 156 they write:

I pointed out that Sam himself had publicly stated that most cryptos were in fact securities. He tried to duck it, saying he hadn’t done a “thorough review of tokens 10,000 to 20,000.” This was a common talking point from crypto evangelists; they all knew (or should have known) the bottom 10,000 coins were the functional equivalent of penny stocks, with ownership of the coins heavily concentrated in the hands of a few whales who could manipulate the market for them. Nonetheless, Sam conceded that “the majority are maybe securities by count.”

Pigs flew past my window: I actually agree with SBF on his point. In the U.S., prosecutors conduct an investigation based on the facts-and-circumstances of a coin or token. At a minimum the authors should include a citation or quote from a U.S.-trained securities attorney, which SBF is not. It is unclear why the authors do not cite any attorney in this chapter when there are more than a handful of U.S. trained and practicing attorneys who likely agree with the authors position on the matter.

On p. 157 they write:

Sam pointed out that Bitcoin can only process 5–7 transactions per second. By his own admission, Bitcoin was “four orders of magnitude” away from accomplishing this. It was never going to happen. Finally we agreed on something! But then Sam pivoted. He argued that other blockchains were faster.

Why set up a strawman for the readers? This is not a secret. Historically it was Mike Hearn, the Bitcoin Core developer, who initially came up with that calculation. Subsequently, Hearn wanted to conduct a hard fork to increase the Bitcoin block size so that there could be more transaction throughput. Disagreement with other developers led to the famous blocksize “civil war” in 2015-2017.

And twice in two pages: SBF is right, there are other blockchains on this planet, some that are significantly faster than Bitcoin.

On p. 159 they write:

The Solana blockchain suffered numerous outages since its launch in 2020, with fourteen in 2022 alone. It also had an unfortunate tendency to be hacked, including a hack that would occur just weeks after our interview that cost users at least $5 million.

This is untrue. While there have been outages, as of this writing, the Solana blockchain itself has never been hacked. Since they did not provide a citation, a quick googling found that several thousand wallets were indeed compromised. But conflating wallets with the blockchain hurts their credibility.

On p. 159 they write:

I asked Sam what percentage of crypto was being used for payments. He agreed the “majority of people today are not using it as a payment method” but instead as a “financial asset.” He guessed “$4 billion” of crypto was being used as payments. Crypto’s market cap was roughly $1 trillion on July 20, 2022. Four billion would represent 0.4 percent of that number. Seemed pretty insignificant to me, but then again, could you even trust that Sam’s number—or the market cap number—was real? That gave me an idea.

That estimate could be correct. But of all the things to drill into with the SBF, why burn any oil on this? Central banks and universities researchers regularly publish surveys on the motivations of coin ownership.

For instance, in the process of writing this review:

Source: Twitter

But Tim, this survey was published after the book was done. Yes, but there are similar surveys published each year by different central banks, this wasn’t the first.71

Or more to the point, if the authors wanted to improve their argument, at a minimum they should have sliced some data: asked some analytics providers for flows into payment providers.

For example, in January 2015 I published a paper that included this line chart (below):

Source: Slicing Data

The dataset above came from the WalletExplorer dataset. Because BitPay reuses addresses, it is a visual of what BitPay has received over a two year time frame (2013-2015). It clearly shows that at the time, retail activity was not seeing huge growth that certain promoters claimed.

On p. 160 they write:

Sam expressed cautious optimism that eventually customers in Celsius and Voyager would get some of their money back. I was skeptical but I wasn’t there to argue bankruptcy law.

Fair point, but why argue about securities laws when he isn’t a lawyer either?

On p. 160 they write:

Eventually, Sam got back to the original question. He estimated that there were $100 billion of stablecoins left and that they were “roughly backed” 1:1. (No, I don’t know what “roughly backed” means either.)

Since he is actively responding to your DMs, why didn’t you ask him a follow-up question later?

On p. 161 they write:

“You could say the same of stocks,” Sam said. I pointed out I can go in and out of stocks in seconds via an app on my phone.

This is not particularly good argument because it implies to readers that McKenzie is talking about market orders, which over the past decade are not necessarily good for retail on any type of trading platform. This connects with payment-for-order-flow (PFOF), a controversial business practice implemented by Robinhood (and other fintechs) with its high-frequency trading partners such as Citadel. Robinhood earns the majority of its revenue from PFOF which isn’t necessarily good for the users. Is this the app that McKenzie is referring to?

On p. 161 they write:

We moved on to stablecoins. SEC Chair Gary Gensler called stablecoins the “poker chips at the casino,” I said. Tether was the biggest stablecoin in terms of trading volume by a country mile. “Your company Alameda is one of Tether’s biggest clients.” “Alameda does create and redeem Tether. We’re one of the larger ones doing so.”“Okay, so there was an article from Protos, the crypto publication, from last year that said that Alameda and Cumberland, another trading firm, received $60 billion of USDT (Tether) over the time period they analyzed, which is equal to 55 percent of all outbound volume ever.” “Yep.” “Does that sound right to you?” “Sounds ballpark correct.”

The insinuations and innuendo are getting a bit long in the tooth at this point. The authors should either introduce the “smoking gun” or try a different angle. Because even in the current SBF court case (jury just convicted as of this writing), Tether LTD does not seem to play a major role in the collapse of FTX.

Maybe Tether (USDT) is a key enabler and systemically important infrastructure, I would agree with that. I think there is sufficient on-chain data to show it is a key lubricant to trading in several ecosystems (via Mastercoin, ERC-20, and TRC-20). But readers are not even presented charts or stats that illustrate these points.

On p. 167 they write:

Most people who had ever purchased crypto entered the market in 2020 and 2021, and most of those people had lost money. Sam argued that the people who invested before then had made money, which didn’t refute my point.

This could be true but the authors do not provide any reference or citation. That which is asserted without evidence can be dismissed without evidence.

On p. 168 they write:

Sure, a minority of people who got in early did well. He tried to pivot away from a discussion of price and toward an “ultimate use case.” I was fine with that. One of my biggest problems with crypto was that it didn’t actually do anything anything productive. To that end, I repeated my ask from earlier: Give me one use case for crypto.

Anyone asked this question by the authors should be aware the authors are a priori anti-blockchain. Throughout this book they repeatedly use the same evidence-free approach that Diehl et al., used. McKenzie literally states his view in the paragraph.

So it is hard to have a good faith discussion when they do not seem to recognize the existence of RWAs.72 Also, SBF should have had a better answer considering all of the pitches he had heard.

On p. 169 they write:

In a roundabout way, Sam had gotten to the heart of the matter. While getting a wire transfer can be a major pain in the ass, and I agreed we could improve our payments system and our broader financial system, one of the reasons a wire transfer is cumbersome is that it runs through our banking system, which has safeguards in place: anti–money laundering laws, know-your-customer laws, the ability to protect against fraud. These regulations exist for a reason. We can and should argue over how to improve our system and amend those regulations when necessary, but claiming crypto was better simply because it was “cleaner” and moved faster was either disingenuous or deeply ignorant. Sure, it moved fast, but at enormous cost. Crypto opened the door to facilitating all sorts of criminal activity, and “trusting the code” often meant having to live with hacks, scams, and fraud as a cost of doing business. Plus, the irreversibility of the blockchain meant you couldn’t correct an honest mistake. You lose money? DYOR, man.

This strawman is similar to the type found in Diehl et. al., book. Not every cryptocurrency or blockchain project is attempting to create a bank, or a payment system, or “money.” The next edition needs to be more specific about which projects the authors are referring to here. Or what existing infrastructure they are comparing the strawman with.

For instance, how does McKenzie propose “we could improve our payments system”? Does a wire transfer take three days to move because of KYC and AML processes? FedNow flipped on a couple of months ago, it introduced another real-time payments (RTP) system in the U.S.

Does FedNow cut through the 3-day wire by removing or ignoring regulations? No. The poorly named “The Clearing House”, which operates the other RTP, must be super fast because it bypasses these KYC and AML processes, right?73 No.

The authors inexplicably defend the status quo – including slow incumbent intermediaries – without explaining why it takes a specific unit of time for funds to transfer. Saying that “crypto moved fast but opened the door to all sorts of criminal activity” is sensationalistic writing and not serious investigative reporting.

On p. 170 they write:

I was searching for some semblance of heartfelt contrition on his part, some gesture of sympathy toward the naive crypto-buying masses, but mostly I came up empty. Sam reiterated a generic need for federal oversight. I expressed a hope that, at a minimum, we skeptics could find common ground with industry players like him and work toward eliminating the myriad scams and pervasive fraud in crypto. Sam nodded, his head hanging low.

What are skeptics? Does McKenzie speak on their behalf? Is there a card membership form?

On p. 171 they write:

We said our perfunctory thank-yous. But Sam kept talking. “And always if you guys have any thoughts or questions about the ecosystem. Feel free. And Tether, there’s a lot more I could say off-the-record.” (Off-the-record is by mutual agreement; we never agreed to it.) “Frankly, they’re emotional guys. And I don’t want to piss them off. Weird fucking dudes. Like really fucking weird. They’re honestly not scammers, but they are difficult people. And I think the FT article on Giancarlo is an amazing article . . .”

This is the third time the authors have shown a lack of compunction towards off-the-record conversations. It all sounds like “gotcha” journalism, not investigative journalism. The ends do not justify the means. Worse for the authors, the hot mic does not reveal anything new.

It also reminds me of that same tweet from Matthew Green:

Source: Tweet

On p. 172 they write:

Jacob asked if USDD, a new stablecoin, could be an eventual replacement for Tether. Recently Alameda had announced a financial partnership with Justin Sun, the entrepreneur behind USDD. Sam responded as if he had never heard of USDD. “USD what?” “USDD.” “Which is DD?” “The new Justin Sun algorithmic stablecoin.” “No, no. I don’t know where on the scale from DAI (another algorithmic stablecoin) to LUNA it is, but I think it might be on the bad end of that spectrum.”

What is an algorithmic stablecoin? Still no definition or description or categories. Also, like most of Justin Sun’s projects, USDD did not take off. For example, a year ago its “marketcap” was about 10% higher than it is today.74 Speaking of which, the paragraphs on Sun were pretty solid, a second edition could mention the SEC lawsuit announced in March 2023.

On p. 176 they write:

But if there was one thing that everyone could agree on, it was that Sam Bankman-Fried had it all figured out. Even among the most die-hard crypto skeptics, it was broadly assumed that Sam was making money hand over fist, and whatever shenanigans he might be up to, he would most likely get away with it.

That’s why the victory laps – by anyone – after the demise of FTX, make no sense. As Faux and these authors pointed out, no one knew besides 4-5 people.75

On p. 177 they write:

For example, “every year there was a 25 percent chance that [Terra] was going to crash to less than 50 percent.” Where did that number come from? Interviewing Sam was like punching against air. If this was the king of crypto, was it a kingdom made of sand?

That’s a good question. The next edition should try to track down the answer.

All-in-all this chapter does not provide any crazy revelations. Based on the questions in the SBF interview, the authors revealed they too had no idea what was happening between Alameda and FTX. For instance, if the authors knew what the inner circle knew, then one of the questions that would have been asked is: is Alameda exempt from liquidations on FTX? Instead it was a lot of innuendo around Tether LTD which as of this writing, does not appear to been a major culprit in the downfall of FTX.

Lastly, based on theirs actions, it appears the authors are willing to not only use the content of a hot mic, but also publish content that the interviewer said was off-the-record. The ends justify the means? In this case, the hot mic didn’t reveal anything interesting, so why include it?

Chapter 10: Who’s In Charge Here?

A future version of this chapter has the potential to be very interesting at it could discuss how the coin lobbying world works. Instead, the current chapter is pretty shallow. While one piece of specific legislation is mentioned, readers are not informed of who’s-who in the coin lobbying world, or what spin doctoring they have achieved.

On p. 179 they write:

But to skeptics, and to people unlucky enough to have invested more than they could afford to, the implosion represented something more severe. Crypto was on life support. A market worth $3 trillion in November of 2021 had been reduced to less than $1 trillion—and even that number seemed aspirational at best. As some bankrupt crypto companies stopped allowing customer withdrawals, it was hard to know how much real money was left to back the fake stuff. When I spoke to him in March, Alex Mashinsky of Celsius had estimated that number at less than 15 percent—and that guy was allegedly running a Ponzi scheme that soon went bankrupt. He might have been exaggerating; it was probably even less.

What is a skeptic? The authors still have not provided a concrete definition. Also, the authors state “it was probably even less.” How much less? They never provide a ball park estimate of what they think the “real money” inside the coin world is.

On p. 179 they write:

Michael Saylor, CEO of MicroStrategy, and the guy who encouraged people to mortgage their houses to buy Bitcoin, resigned his position in August.

Inexplicably the authors missed a key event. Michael Saylor resigned on August 2, 2022. On August 31, the Attorney General for DC announced it was suing Saylor for evading more than $25 million in taxes. Surely readers would find that interesting?76

On p. 180 they write:

What was clear was just how widely the crypto virus had infected the general public. Most Americans who bought into crypto did so in 2020 and 2021, when the market was at its peak, having been lured by promises of mind-boggling profits in the crooked casinos. That same majority, on average, lost money as the price of virtually all of these cryptocurrencies had crashed, most by 70 percent or more from their all-time highs.

They could be right but there are no references or citations in the back. That which is asserted without evidence can be dismissed without evidence.

On p. 181 they write:

How in the world was this massive speculative bubble in an industry rife with fraud—and built upon an incredibly shaky economic foundation—allowed to metastasize to such a degree?

Because in part, actual whistleblowers were ignored? And the prosecutors left the government and joined the counsel for the defense? There is a world worth looking into circa 2017-2019 that the authors missed.

On p. 181 they wrote:

In the midst of all this, crypto lobbying expenditures were at an all-time high, and politicians from both parties were touting pro-industry legislation.

What is an estimate for how much these expenditures were in the U.S.? How much was spent lobbying in other developed countries?

One notable example that comes to mind was an intense effort to lobby specific senators, such as Kyrsten Sinema, during the debate around the Infrastructure Investment and Jobs Act in 2021:

Source: Twitter

A future edition should include specific examples.

On p. 182 they write:

The stateless, peer-to-peer currency that would avoid all intermediaries and democratize and decentralize the future of money now needed to kiss Washington’s ass in the present and throw some of the real stuff around. It was either that, or watch their industry go bye-bye.

This is a strawman, not every public blockchain project is attempting to build “the future of money.” But with the second sentence, I fully agree.

Here are a couple times I lampooned the phenomenon specifically with Bitcoin:

Source: Twitter
Source: Twitter

On p. 182 they write:

Ironically, even Michael Lewis, author of Liar’s Poker and The Big Short, was in thrall with the boy wonder, according to reporter Zeke Faux of Bloomberg.

Oh a trifecta of streams almost crossed! Three books published within four months of one another on the same topic.

On p. 184 they write:

Toomey spun his ownership of Bitcoin and the potential conflict of interest as a source of important “expertise” when deciding on regulatory policy. He argued that Washington needed to offer “respect for consumers” to make their own investment choices, despite the fact that the very lack of disclosures inherent in cryptos not being classified as securities kept investors in the dark as to how they might be getting swindled.

I partly agree with the authors view point here. But – and to be clear I am not a lawyer – I do not think the “lack of disclosures inherent in cryptos” is why some might not be classified as securities. The entire facts-and-circumstances exercise that a U.S. prosecutor conducts involves several prongs that the authors mention a couple of times. Disclosures – or lackthereof – is tangential.

On p. 184 they write:

A representative example was Brian Brooks, who was chief legal officer of exchange Coinbase before he became Acting Comptroller of the Currency, only to leave that governmental position to become the head of Binance’s US division. He lasted all of three months at that job, before resigning due to “differences over strategic direction.”

It is worse than that. Brooks was never confirmed by the Senate, he served as an Acting Comptroller and days before leaving he unilaterally published guidance – which he did not request public comments on – that has since been partially rescinded. His next gig was as the CEO of Bitfury, a notorious mining company whose machines at one point consumed 10% of the electricity in the Republic of Georgia.

On p. 186 they write:

Unfortunately, like the majority of crypto investors, most people of color entered the market near its peak in the bull run of 2020/2021 and were now among the ones left holding the bag.

This could be true but what is their source? There is no reference in the back either. That which is asserted without evidence can be dismissed without evidence.

On p. 186 they write:

Many of these issues were known to them, in some form, even if they hadn’t been publicly acknowledged, much less acted upon.

It could be worth the authors time for them to investigate which non-lobbyists spoke to policy makers and regulators in the 2017-2019 time frame. I know I was not the only one.

On p. 187 they write:

The United States of America is unique in the way it separates its regulation of securities from its regulation of commodities. It’s basically a historical fluke.

Actually if the authors had looked into it, they would have discovered it is nearly all political. There have been multiple attempts to merge the SEC and CFTC, including shortly after the 2008 Financial Crisis. The most recent attempts always hit the same road blocks: powerful lobbying forces from the banking industry and their interlocutors: the members of the House and Senate Banking Committees and the House Agriculture Committee. For instance, in 2012 a bill was introduced in the House to merge the two and in 2017 the Treasury department – then led by Mnuchin – weighed in on a proposed merger.

On p. 190 they write:

For many coiners, it was taken as good news, a way of legitimizing the first cryptocurrency by enshrining it under the existing regulatory regime.

What is a coiner?

On p. 190 they write:

There was no fine or criminal prosecution. CFTC Commissioner Wetjen, in the grand revolving door tradition, later entered the crypto industry. In 2021, FTX US hired Wetjen to be its head of policy and regulatory strategy—the mirror to his former governmental position. To recap, the first derivatives exchange in crypto to be classified as such under American law was later found to have engaged in illegal activity, got off the hook, and then later another exchange hired the regulator who oversaw that decision to help guide their maneuverings on Capitol Hill. You can’t make this stuff up.

In the next edition the authors should include the part mentioned above on page 144 that Wetjen did not register as a lobbyist (like he was supposed to) and was also an advisor to Coin Center, another coin lobbying organization. To be fair, the revolving door crosses both ways: probably worth mentioning that after leaving the CFTC, Wetjen joined the DTCC as head of public policy and later the Miami International Holdings which is a holding company that owns several exchanges.

On p. 190 they write:

But the reality is that Bitcoin’s ownership is actually extraordinarily centralized, concentrated in a tiny group of whales and mining pools. In fact, just two mining pools account for 51 percent of its global hash rate, meaning just two large groups control the majority of new Bitcoin created.

This is not a good argument, as it lacks two things: (1) references and (2) nuance. Without references it can be dismissed out of hand as just another opinion; there are some ways to verify the claims but why should I keep doing their homework for them?

In terms of nuance: while mining pools have become important for proof-of-work chains, it takes two to tango. I agree with the thrust of the point, I have made it myself about GHash voluntarily “self-limiting” in 2014. But unlike GHash (which provided a hosted mining service too), the largest pools do not usually run the hashing equipment, those are typically operated by 3rd parties (such as Riot who the authors visited). Thus, it is not technically sound to say that two mining pools control the majority of the new Bitcoin created, because they need the hashing equipment (that generates the proofs-of-work) in order to build a correct block.

On p. 190 they write:

Whoever Satoshi Nakamoto is, it’s a real person or real people. Once again, code does not fall from the sky. One day we may well find out who started this whole nonsense. If so, break out the popcorn, law nerds.

It’s not clear from the rest of the chapter what the authors are implying. Do they mean Nakamoto would be liable for something and therefore sued or charged by a government? If so, why not just say that?

In fact, while I doubt she agrees with the authors modus operandi, Angela Walch authored a paper that they might want to cite in the next edition: In Code(rs) We Trust: Software Developers as Fiduciaries in Public Blockchains. 77

On p. 190 they write:

One meeting included one of Pham’s former colleagues who had gone over to the crypto industry and now was publicly lobbying her.

Who? Name names next time.

On p. 191 they write:

That’s not to overlook the efforts of SEC Commissioner Hester Peirce, whose enthusiasm for the industry is legendary.

The authors missed the opportunity to use the “subprime mom” and “subprime dad” analogy from Lee Reiners:

Source: Twitter

Curiously, while the authors namecheck Lee Reiners in the Acknowledgments, they misspell his name and worse, they don’t actually cite any of his work. Notably, Reiners was the first person to write a long form discussion on the revolving door as it relates to the coin world. In fact, five years ago he wrote a widely circulated article entitled: The Revolving Door Comes to Cryptocurrency. It is a strange omission, credit where credit is due.

On p. 194 they write:

“There really is no legitimate side to crypto,” said Stark. To him, crypto had simply repackaged the traditional get-rich-quick scheme in a shiny, fraudulent wrapper.

While Stark might be correct, what evidence did he provide? If it is asserted without evidence it can be dismissed without evidence.

On p. 195 they write:

“For me it’s all so obvious,” said Stark. “When you ask anybody, ‘Give me one legitimate use for crypto. Give me one thing you can use crypto for?’ I just don’t see it, and nobody can ever tell me anything.”

Why is Stark the final arbiter for what is and is not a legitimate use for crypto? Who died and made him king? If you have already predetermined there are no legitimate use cases, what can someone tell you?

For instance, in the process of writing this review J.P. Morgan announced its Tokenized Collateral Network. They weren’t the first organization to deploy a new chain with “enterprise” customers.

In any case, the authors need to be more consistent in the next edition: are they a priori handwaving all blockchain-related projects out of hand? Or are they going to conduct market research and lots of interviews to drill into say, 100 dapps (categories) from DeFi Llama? Cannot simultaneously be evidence-based and use an a priori cudgel.

On p. 195 they write:

What I found most refreshing about Stark was his concern for people who got caught up in crypto. “You can blame the victim if you want. But the reality is, it’s really not the victim’s fault. They’re being taken in by really sophisticated hustlers.”

What victims has Stark helped? Which hustlers did he bring to justice?

On p. 195 they write:

It was up to critics like Stark—who had no skin in the game, who didn’t make money off of his crypto criticism—to put forward that argument.

What are critics? Are they the same as skeptics?

How do the authors know Stark hasn’t made any money off of his notoriety? Is that really the litmus test? Are the only people worth talking to those who write long LinkedIn posts? If the authors are willing to entertain the idea that “critics” and “skeptics” come in all shapes and sizes, they’d find that there are a ton of industry folks who are quite openly critical and probably even agree with some of the authors views. There is no reason to be insular or have some kind of purity test on these topics.7879

On p. 197 they write:

In combating a false economic narrative, it is crucial to put forth an alternate true one, to reveal the hucksters and con men for who they really are. But Kardashian and her fellow celebs were, at least for the most part, not those fraudsters. They were just a tool, a megaphone used to spread the lies of crypto more effectively.

I agree with this view, whole heartily. But in the next edition could the authors use more precise language? For instance, Kim Kardashian was sued by the SEC and fined $1.26 million in penalties for failing to disclose she had been paid to advertise EthereumMax (EMAX). It was unlawfully touting, not fraud that she was charged with. This is sloppy polemics just like the Diehl et al., book.

Overall this chapter was a wasted opportunity: the authors could have dug into specific coin lobbying organizations, an idea I encouraged them to do. Instead readers are not informed of who’s-who in the coin lobbying world and are twice referred to a Tweet that is never provided (which Pham deleted but others saved). While we are given an overview of specific piece of legislation, the DCCPA, we aren’t informed that an industry insider – Gabriel Shapiro, a lawyer – leaked a draft that put SBF on damage containment mode and contributed to ending its legislative hopes.

As a consequence, readers are not informed of who’s actually in charge here.

Chapter 11: Unbankrupt Yourself

This is one of the better chapters, largely because it involves a bit of first-hand reporting. We learn about Dr. James Block (aka DirtyBubbleMedia) who used Etherscan to identify suspicious transactions. Yet one oversight was not including Maya Zehavi anywhere in the discussion of Celsius. She is an Israeli-based blockchain-focused entrepreneur who was the first person to publicly sound the alarm on Celsius and Hogeg in particular. She should be interviewed in the next edition.

There is not much to nitpick in this chapter. For instance on p. 206 they write:

At the time, before many industry players turned on one another, there was a collective omertà against bad-mouthing competitors.

Omertà is a great word and I want to agree with the authors here. But tribalism is still quite common irrespective of market conditions, especially the uno coin maximalism variety. Heck, I got yelled at last year for talking about the etymology of “nocoiner” tribalism. Talk about social media wasting your time!

On p. 207 they write:

Soon, James discovered that Chain.com, a murky startup with a lot of crypto but seemingly only one employee, may have been behind it. James and Jacob had been looking into Chain, and James wrote a piece about the CEO’s extravagant purchases of multimillion-dollar NFTs. It turned out that after James published his Dirty Bubble Media article about Chain, someone had created similar, competing articles that, while containing much of the same content, painted Chain in a more positive light.

I previously mentioned this to Jacob Silverman: Chain.com today is not the same entity (or people) that ran Chain.com ten years ago. For the bulk of the 2010s, Chain.com attempted to play its hand in the “enterprise” blockchain world and eventually was acquired by Stellar. Someone else bought the domain name a couple years ago. But that’s not clear from the the language in the passage above. For example, is Adam Ludwin still involved? Seems unlikely.

On p. 209 they write:

Jacob confronted Chain’s CEO via Telegram. He denied ever having heard of Mevrex or hiring them. Eventually, after a fair amount of badgering and pleading with communications people at the respective companies, James’s Twitter and Substack accounts were restored.

What did Jacob say? What did James say?

On p. 210 they write:

They also treated their critics—some of them simply well-meaning customers who wanted to know how their assets were being handled—with utter derision.

This is a good point. One notable example was Mashinsky responding to Mike Dudas.

Source: Twitter

On p. 210 they write:

Every time Mashinsky accused his evil critics of spreading FUD, I assumed that DBM was probably on the right track. The proof was often in the block-chain data, waiting to be interpreted.

Why is there a hyphen in blockchain?

The discussion on KeyFi’s revelations on p. 211 was good, seems like everyone was happy when NGU but when it doesn’t, they spill the beans on social media.

On p. 214 they write:

As for James Block, who eventually revealed his name after journalists began peppering him with requests for tips and commentary, he was offered a job by a hedge fund shorting crypto. He decided to stick to medicine.

Out of curiosity was the hedge fund Hindenburg Research? The same ones who announced a $1 million bounty on Tether that as of this writing no one has claimed? Or was it Citron Research, the fund that announced it was shorting Ethereum and then days later deleted their thread?

I’ve often wanted to short a variety of coins and tokens but the counterparty risk was one of the main reasons I haven’t.80 Perhaps this is part of the reason why Perpetuals are popular?81

On p. 216 they write:

James sounded the alarm on Celsius, but few wanted to listen.

I think James Block did a great job highlighting numerous red flag as Celsius. And there were others, including Maya Zehavi, who publicly questioned Celsius’s model. Nearly two years ago Protos even highlighted one of Zehavi’s tweets.

And one on Hogeg that could be in the book:

Source: Twitter

Zehavi has at least a dozen Hogeg-related tweets pre-2020. A second edition should give her a well deserved podium.

What would have made this chapter in particular stand out is if it included some diagrams showing the flow of funds that James Block and others identified. The prose was decent too. Definitely seems like the chapter with the fewest errors or mistakes.

Chapter 12: Chapter 11

Source: Kindle

There was a minor technical glitch in the Kindle version, it is missing the subtitle.

Overall this chapter is a bit dry in large part because it relies almost entirely on second-hand reporting. They do have a few new original quotes from SBF but none of those seemed particularly incriminating.

The authors also missed a couple of comparisons when it comes to evaluating intermediaries.

For instance, on p. 217 they write:

Accounts on FTX US were of course not FDIC-insured, as FTX US is not a licensed US bank but rather a money services business, which doesn’t offer customers the same protections.

This is a good point. A similar (misleading) claim was made by Robinhood five years ago. In December 2018 the CEO publicly claimed that user deposits in new checking accounts were insured by the SIPC only to have to walk back the claims after the head of the SIPC (and others) pointing out that this was not technically true.

On p. 217 they write:

Like so many interactions in crypto, it was a messy and unsatisfying affair. However, it did reinforce one thing: Sam was desperate to stage-manage his public image. The dark arts of PR were part of any actor’s Hollywood education, and Sam clearly needed more lessons.

What are the dark arts of PR? Is McKenzie saying he too was involved in the “dark arts of PR”?

On p. 219 they write:

Over Twitter DM, Sam spoke darkly to me of a coming conflict dividing the industry. Binance was pushing its customers to convert their stablecoins into BUSD, Binance’s own dollar-pegged token. “It’s the beginnings of the second great stablecoin war,” he messaged me on September 5. “All the stables are gearing up for it. Taking this as a declaration of war.”

This is interesting. For illustrative purposes a timeline could be helpful to readers to understand when the first, second, third, etc. “stablecoin wars” supposedly took place. Also, when SBF said “all the stables are gearing up for it” did he provide any evidence for this? For instance, was TUSD or Dai backers involved?

On p. 220 they write:

That financial perpetual motion machine looked a lot like the Celsius “flywheel” concept that James had previously investigated, and that Professor Hilary Allen had warned about in February of that year.

It bears repeating: Celsius was a centralized lender. Connecting that with what Allen wrote about (“DeFi”) last year is disingenuous.

In contrast, here’s what I had to say in June 2022:

There’s not need to cite me, but if you are going to critique the coin world, at least try to accurately describe what is and is not centralized.

On p. 220 they write:

According to bankruptcy filings, FTX/Alameda lost $3.7 billion before 2022. Quite impressive to lose that much in a bull market!

This is a good point.

On p. 227 they write:

As last month’s scammers came in from the cold to yuk it up on social media, the post-SBF positioning became frantic—who was to blame, who supported him, who failed to warn the public. Even us crypto skeptics got our turn in the dock—apparently our frequently repeated claims that the entire industry was built on bad economics, bad incentives, and outright fraud wasn’t enough.

What is a “crypto skeptic”? Do the authors speak on all of their behalf?

On p. 228 they write:

Some claimed to have held back for fear of angering a powerful industry player. Bitcoin maximalists blamed Sam for all their problems, rightfully pointing out SBF’s cozy relationship with mainstream media publications, regulators, and lawmakers (some of which he gave large sums of money). But then, as maxis are wont to do, they wandered off into wackadoodle land, painting conspiracy theories that Sam was working with Biden to send money to Ukraine via crypto.

What are Bitcoin maximalists? What are maxis? I have seen it but in the next edition can the authors provide a reference for the conspiracy theory?

On p. 229 they write:

Rep. Emmer was hopeful that further discussions might let them proceed with legislation that would allow for a “light touch” when it came to crypto regulation. The Blockchain Eight encapsulated so much of what was wrong when it came to Washington’s cozy ties to the industry. Evenly divided between Democrats and Republicans, five of the eight members received campaign donations from FTX employees.

I mostly agree with this. But I think there is arguably an even more damning example: a couple of the “Blockchain Eight” attempted to overturn the results of the 2020 presidential election. To use blockchain parlance, those would be Byzantine actors.

On p. 230 they write:

Legitimate technology companies like Microsoft belatedly summoned the bravery to admit that actually, when you really think about it, blockchain sorta sucked. It had no substantive use case. All the money spent to explore how maybe crypto might actually do something in the future had been wasted. Numerous other blockchain “pilot projects” quietly folded, including one by the Australian Securities Exchange.

There is a kernel of truth in this paragraph. For instance, in May, ASX said it would not use a blockchain for its CHESS-replacement endeavor (which was spearhead by Digital Asset). And there have been quite a few pilots and experiments that tried and failed to gain product-market fit or infrastructure-market fit. I’ve written about several of these cases (including the Chain.com of the 2010s).

But the rest of it is just polemical in the same vein as Diehl et. al. When did Microsoft belatedly say “blockchain sorta sucked”? As of this writing, their Azure department has an entire Web3 team still actively involved in the blockchain world.

But let’s take the authors unreferenced claim at face value, that there is no substantiative use case discovered by Microsoft or other “legitimate technology companies.” So is that the end of the blockchain story?

Putting aside for the moment that the authors have shown an affinity for incumbents, why should readers be led to believe those are the only participants allowed to have opinions on the matter? One of the key weaknesses of this chapter, and book, in general is that the authors attempt to have it both ways: they sometimes attempt to use evidence when it helps their argument but then resort to an a priori cudgel in other instances. The next edition needs to have consistency (e.g., remove the a priori arguments).

A better argument would have been to reach out to the “head of blockchain” at Microsoft (currently Yorke Rhodes) and do some first hand reporting about what that organization has done and why they apparently think “blockchain sorta sucks.” Maybe it does! But let’s at least be methodical about dressing it down.

On p. 233 they write:

The chairman of FBH was none other than Jean Chalopin, the chairman of Deltec Bank, whose most infamous client was Tether. As the New York Times noted, “Farmington’s deposits had been steady at about $10 million for a decade. But in the third quarter this year [2022], the bank’s deposits jumped nearly 600 percent to $84 million.” The bank was renamed Moonstone. Its digital director was Janvier Chalopin, son of Jean.

So what exactly is the crime? That there is nepotism at a bank called FBH (Moonstone)? Should sons or daughters be able to run banks their parents previously ran? If not, should the Rockefeller and Morgan families be looking over their shoulders? Insinuation and innuendo is all the authors have here?

On p. 235 they write:

On December 16, just over one week after releasing its report on Binance’s holdings, Mazars announced—via Binance—that it was exiting the business of auditing crypto companies “due to concerns regarding the way these reports are understood by the public.” The company deleted its website with its reports on Binance and other crypto firms.

Oof, that’s a good point. I think one of my favorite audit-related stories was shortly after Bitfinex was hacked (the 2nd time) Michael Perklin was brought in to conduct an audit. But then he quietly left and joined Shapeshift. No audit was made available to the public.82

On p. 237 they write:

The Trump NFT collection—45,000 silly cartoonish portraits of the former prez looking cool and badass—sold out in a day at ninety-nine dollars apiece, likely netting him millions.

“Likely”? Perhaps Donald Trump lied in his filings, but according to a CoinDesk story in April 2023, he earned between $500,001-$1 million on NFT sales. Is that a lot or a little?

On p. 237 they write:

That system eventually became an engine of economic inequality and political alienation. Crypto was right about that. But their solution—to create a private, trustless financial system based on code, unstable digital assets, and a new class of intermediaries—fell apart under its own contradictions, including rampant opportunities for fraud. Crypto had indeed produced something no one could trust, and Sam Bankman-Fried, their knockoff J. P. Morgan, would be remembered as one of its architects.

This is not a strong argument. For example, what happens if incumbents end up using blockchains in the future? Are intermediaries okay so as long as they are incumbents?

It’s also unclear why the authors keep using a false dichotomy. Investigative journalists don’t have to carry water for anyone. And in this instance, it is perfectly fine to critique both the cryptocurrency world and traditional finance.83

This could have been a good chapter. For example, they did do a decent job concisely chronicling some of the drama (and beef) between Binance and FTX. But the tone of it all feels like self-promotional “told ya so” which is strange because neither author was actively investigating this space until late 2021, after the alleged crimes began at the various centralized intermediaries. A future edition could fold this together with the outcome of the current SBF criminal case.

Chapter 13: Preacher’s Father

This chapter probably should have come much earlier because it told a really interesting, sad story that the authors did some first-hand reporting on. The problem is that its somber tone is polar opposite of the stoner tone of the first few chapters. While the authors were quite glib about discussing McKenzie’s pot smoking/edible habit, at the end of the book the readers get some whiplash with McKenzie sitting in church listening to a sermon from a son of a fraud victim. Although to be fair, I’m not religious so maybe I’m being overly sensitive relative to other readers.

A future edition could probably keep the entire chapter intact, as it was well-written and involved a relatively unknown (alleged) fraudulent operator: Stallion Wings.

With that said, there are a few nit picks.

On p. 246 they write:

They come in wanting to limit their downside, but end up doing the exact opposite—they chase their losses until the money is gone. The vast majority end up losing money because the forex market, just like a casino, has a negative expected value.”

This could be true – and anecdotally I think they could be right – but the authors do not provide any references (in fact, there are only 2 references for the whole chapter). That which is asserted without evidence can be dismissed without evidence. Also, as mentioned earlier, some trading platforms in the forex (FX) market also allow high leverage to retail (beyond 125x).

On p. 247 they write:

The volatility of crypto and the high leverage offered to retail customers add to its addictiveness. With wild swings in price, a well-placed crypto bet can be intoxicating, euphoric. Add to that leverage—essentially the ability to borrow large sums to bet with—and the highs get even higher. Recall that Binance offered regular customers 125-to-1 leverage, a ratio unheard of in regulated markets.

A future edition should include the meme of Mark Karpelès, former ex-CEO of Mt. Gox:

Again, there are regulated markets (FX) that allow for that type of ratio, just google: Forex leverage. MultiBank Group immediately pops out, are they legit? Should FX markets be more tightly regulated?

On p. 252 they write:

The original computer code that would become Bitcoin included a poker lobby, a framework from which a virtual poker game could be built. Whoever Satoshi Nakamoto was, in early 2007 they were clearly interested in methods of creating non-confiscatable digital money and how they might be used in online poker.

I agree with this point. And over the years, there are at least five cryptocurrency developers who have publicly said something similar, albeit for different reasons: Matt Corallo, Greg Maxwell, Jeff Garzik, Alex Waters, and Jackson Palmer. There are a number of threads on reddit and Bitcoin Talk that also discuss this scenario.

Their concluding paragraph of the chapter, on p. 255 reads:

Each generation of tech and financial “innovators” promise their own form of utopia, and crypto advocates have had their turn to demonstrate theirs, with all of its attendant failings. Like so many of its Silicon Valley venture capitalist forebears, the crypto industry’s vision is fundamentally a selfish one, divorced from any real sense of how the world works and what is required to bring us together rather than pull us further apart. We cannot eradicate the need for trust, and it is not just wrongheaded, but fundamentally nihilistic to aspire to do so. In the end, we have only ourselves and each other on whom we can rely.

I agree with the first sentence and have written about “Innovation Theater” before. But it is a strawman and inaccurate to portray “the crypto industry vision” as a unified something. Sure there are a variety of camps that sometimes lobby together, but they can’t claim to speak “on behalf of crypto” anymore than the authors can claim to “speak on behalf of critics.” It’s disingenuous and happens throughout the book.

Ironically while the authors attempt to hammer home the importance of “trust,” throughout the book they do not cite sources for a number of their claims. Verify, not trust.

Overall it was an okay chapter, albeit a bit preachy which is sort of fine considering it partially takes place in a church. Perhaps the biggest drawback from this chapter and the book altogether at this point is that the authors do not provide any solutions to prevent fraud or restore those who have been defrauded. That is a missed opportunity.

Epilogue

This epilogue is pretty self-serving, it is basically describes McKenzie as some kind of maverick who tells truth to power. It’s cliché and does not really cover new ground. It makes sense to have an epilogue for this type of book but its tone seems out of touch with the victims described in the previous chapters.

On p. 257 they write:

It was December 14, 2022. I was testifying before the Senate Banking Committee on the collapse of FTX/Alameda and what it meant for crypto, and for the millions of investors who had lost money in the process. On the other end of the panel was Professor Hilary Allen, whose February paper had anticipated crypto’s collapse.

How many millions of investors lost money from the collapse of FTX and Alameda? Did they mean to write customers?

Also, Allen’s paper did not anticipate “crypto’s collapse.” She incorrectly predicted DeFi lending protocols would collapse, and they did not whereas centralized lenders did. Maybe Aave and Compound will eventually face some kind of existential cataclysm, but as of this writing they have not.

On p. 257 they write:

Professor Allen and I had been invited to describe the myriad ways in which crypto’s epic collapse was entirely predictable and why the time for such shenanigans is long past.

I think the readers would be interested to know who invited McKenzie and Allen, just like we would like to know who invited Schulp and O’Leary. There are an endless amount of folks who probably want to testify to a Congressional committee. There are also a number of experts worth adding to the dais that have unimpeachable on this topic, including J. P. Koning and David Andolfatto.

On p. 258 they write:

“Mr. Wang created this back door by inserting a single number into millions of lines of code for the exchange, creating a line of credit from FTX to Alameda, to which customers did not consent,” claimed FTX lawyer Andrew Dietderich. The innovative wonders of “trustlessness” and “decentralization” were on full display.

This is a strawman. FTX and Alameda were centralized intermediaries, by definition neither were decentralized.

On p. 258 they write:

Add a single number to millions of lines of code, and voilà, one can siphon billions in “loans” from accounts held by regular folks oblivious to the swindle. Trust the code, indeed. Dietderich continued: “And we know the size of that line of credit. It was $65 billion.” Bernie Madoff’s Ponzi was $64.8 billion.

Another strawman. The code that ran this part of FTX was written for the intermediary, not a blockchain, and it was managed on github. And again, both Alameda and FTX are centralized intermediaries. Neither was a blockchain nor a smart contract. The authors are insinuating that the code that runs DeFi protocols, such as Aave, have some kind of giant exploitable whole on par with Madoff’s Ponzi or FTX. Maybe they do, but the authors need to be specific next edition. That which is asserted without evidence can be dismissed without evidence.

On p. 259 they write:

I’d gotten into several public Twitter spats with journalists at The Block who questioned my understanding of the industry they supposedly covered honestly. They were less voluble now.

Is it possible that both are true? That certain coin reporters are shills and that the authors do not have a good understanding of the subject matter?84 For instance, in all but one chapter the authors conflate Bitcoin with “crypto” (broadly) and do not provide definitions or examples of “DeFi.”

On p. 263 they write:

While the speed of the failures was alarming, I couldn’t help but notice that two of the three collapsed banks had significant exposure to the volatile world of cryptocurrency, and the third (SVB) counted as clients the crypto companies Ripple, BlockFi, Circle, Avalanche, and Yuga Labs, among others.

Steven Kelly and Todd Phillips are academics that should be included in a future edition as they discussed these bank failures in real-time.85

Readers may be interested in the Appendix of my March 2023 presentation on the topic as well.

On p. 264 they write:

The other major player left standing was Tether. The stablecoin company, valued at $71 billion as of March 1, 2023, had miraculously survived while the industry around it bit the dust.

As mentioned at the beginning of this review, this is not the correct valuation of the company. The authors mistakenly conflate the aggregate amount of USDT issued with the book value of equity of the issuing company (Tether LTD). Tether LTD is worth a fraction, in the low billions

On p. 264 they write:

Per Bloomberg, “Bitfinex Chief Technology Officer Paolo Ardoino said in an interview he sees enough demand for El Salvador to issue the full $1 billion it is seeking.” Where this demand would come from was anyone’s guess.

I am skeptical of that claim too but the authors are reporters: they are supposed to find out where that demand is. For example, in Chapter 7 I noted that following the book’s publication there was a 180% rally in El Salvadorian government bonds. The following month, in August, Bloomberg ran a headline Bitcoin-Touting Bukele’s Bond Rally Draws JPMorgan, Eaton Vance.

On p. 265 they write:

The issuance of the Bitcoin Bond was itself fraught with consequences for the local population. Wilfredo Claros, the fisherman I visited the previous spring who lived in the hills above La Unión, would soon be forced to abandon his home and his land so the airport servicing Bitcoin City could be built. According to Wilfredo, the government offered him one-tenth the amount he had requested in exchange for his property.

This is probably what the epilogue should have centered around: the victims. The people who got screwed by the SBF and Mashinsky.

A future edition of the Epilogue could focus more on “where are they now” — the stories of the El Salvadorians are interesting!

Acknowledgements

Even at the end, we still do not have a precise definition of a “critic” or “skeptic.”

On p. 269 they write:

To the members of the crypto skeptic community, I want to thank you for your friendship, tutelage, and guidance along the way. Unfortunately, it would be impossible to list all the skeptics who have helped me over the past two years, but I do want to thank a few of them specifically.

Is there a formal organization for supposed “crypto skeptics”? Or the “cryptos skeptic skeptics”?

The authors then list off eight names, none of whom are blockchain technical experts (although one worked for a smart contract-related company, which he removed from his LinkedIn). Did the authors reach out to any of hundreds of engineers that eagerly respond to social media questions on this topic? If not, why eschew actual experts?

Why interview actual experts when you can chat with social media influencers!

On p. 269 they write:

Thank you to Hilary Allen, Lee Reneirs, Rohan Grey, Eswar Prasad, and John Reed Stark for helping me understand American law as it relates to cryptocurrency, as well as the history of financial regulations in the US.

As mentioned in Chapter 10, they misspelled Reiners last name and didn’t cite any of his work. Strangely, even though they name check Rohan Grey, they don’t cite any of his work either, despite having co-authored the STABLE Act and opined on centrally-issued pegged coins on numerous occasions.

Appendix

This is a copy/paste from the SEC website.

Conclusion

In retrospect, seeing as how much it has been used as a marketing term, perhaps I should have trademarked both “crypto critic” and “crypto skeptic” back when I was first called them.

This was not a good book. It should have been, as it had a good publisher and the market clearly needs a book exploring what went wrong during the bubble years. But the authors made a lot of unforced errors, including getting too close to their sources, that could have been fixed through independent fact-checking.

What’s one example?

Let’s start with the Author’s Note at the very beginning:

What follows is my opinion of the events as I perceived them over the nearly two years I spent down the crypto rabbit hole. Throughout the book I use terms like “fraudsters,” “conmen,” “swindlers,” and “scammers” in reference to various actors in the crypto industry. These descriptors are nothing more than shorthand for my opinion. I don’t mean to imply that any particular person, in fact, broke a law or violated a regulation. In a similar vein, not everyone who works in cryptocurrency has poor intentions. While we may disagree wildly as to crypto’s usefulness, they have not committed fraud. It is my hope they will join me in condemning those who have.

Despite this disclaimer, the authors regularly claim – without facts – that such and such is a security or some entity broke a law. Sure everyone is entitled to an opinion, but using nuance-free language, and strident certainties is at odds with this Author’s Note.

There was no substantive technical criticism.86

For example, the authors missed the opportunity to discuss the critical role Lido currently plays in the Ethereum universe. What role is that? That’s what the authors should have figured out.

Or how centralized and dependent L2s currently are on sequencers. What’s a sequencer?

Or how MEV has evolved overtime. What is MEV? How do frequent batch auctions (such as those used in CoW Swap) reduce the impact of MEV?

Source: Threads

I mostly agree with Benedict Evans observation above. It seems clear from this book that the authors misunderstand the subject matter, otherwise they wouldn’t have made as many mistakes. This includes conflating all “crypto” with Bitcoin or failing to provide a single example of a DeFi dapp or not explaining what staking is or what a block maker is or not knowing that PayPal operates as a shadow bank (now with two types of “dollars”).8788

Furthermore, by endorsing Hilary Allen’s thesis, this also dings their credibility. Recall Allen predicted that DeFi lending protocols would collapse during a crisis. Aave and Compound did not collapse like she predicted. In fact, it was the centralized lenders that blew up last year. Perhaps these DeFi lending protocols will face a day of reckoning, but they do not suffer from the rehypothecation problem in part because all of the collateral is locked on-chain.

The authors routinely impeach their credibility by purposefully crumbling up NDAs and intentionally keeping the audio recording after an interview is done. This smells more like gotcha journalism which is lazy especially since nothing new was revealed in the process.

As a consequence, the book should probably be renamed: Blockchain Tourists. Is that unfair?

The jaunt down to Rockdale Texas seems to have resulted in little more than a photo-op for the authors. Did they help close down Riot’s Bitcoin mining facility?  Have they subsequently attended any of the local hearings or spoken with anyone during the “week of action” like Peter Howson did?89 Note: Howson is the author of the newly released: Let Them Eat Crypto

And while you can’t always time the publish date of the book, Easy Money had the misfortune of being released just before Zeke Faux’s Number Go Up, which was superior in all dimensions. 90 If you have to choose between the two, I can definitely recommend Faux’s version of events. See my review of that book here.

Endnotes

  1. In Number Go Up, Zeke Faux also writes his book in first-person, but doesn’t make the story about him. []
  2. For example, were the authors aware that one of the events McKenzie attended was a front for BSV? []
  3. By the end of Q3 2023, tokenized U.S. Treasuries hovered around $665 million. []
  4. In contrast, Zeke Faux noted this episode on p. 212:

    If you’re having trouble following this, that’s actually a good sign about your investing instincts. Comedian John Oliver later summarized Do Kwon’s nonsensical business plan: “One blorp is always worth one dollar. And the reason I can guarantee that is I’ll sell as many fleezels as it takes to make that happen. Also, I make the fleezels.”

    Strangely the authors did not include any history – abridged or otherwise – on the zany world of ICOs. This is puzzling because the infrastructure enabling Tether (USDT) was Mastercoin, one of the first projects to use the ICO model to kickstart itself. In contrast, Zeke Faux discusses it at length on page 49. []

  5. Fun fact: in January 2018 I spoke with one of the producers of that John Oliver episode and provided some fact-checking and clarification. []
  6. CMC also has a little 2m+ figure in the top left, that clearly is larger than the figure the authors use. []
  7. Hayden Adams, co-creator of Uniswap, has previously mentioned that on an average day 5-10 new coin pairs are added to Uniswap by random developers. []
  8. For instance, Meltem Demiror’s appeared on CNBC in a now deleted segment mentioning XRP. All of that was memoryholed, promoters ended up with coinesia. []
  9. Speaking of which, does everyone remember when Anthony Pompliano stopped using “The Virus is Spreading” as his catch phrase circa March 2020? []
  10. Jeff Garzik got on an airplane in order to receive one of the first Avalon ASIC miners. []
  11. For instance, Chapter 4 of my 2014 book literally is titled: The Red Queen of Mining. In Chapter 6 of “The Age of Cryptocurrency,” Michael Casey made a similar mistake. []
  12. In 2014, during a now deleted podcast episode (#116), I had a chance to debate co-hosts Stephanie Murphy and Adam B. Levine regarding on-chain activity, including gambling from Satoshi Dice. See: A Marginal Economy versus a Growth Economy []
  13. The authors could have easily dunked on garbage metrics such as cumulative addresses or wallets, two figures that only goes up no matter what. For instance, over eight years ago I published: A brief history of Bitcoin “wallet” growth. A few days later, an employee at BitGo contacted me for help to identify which wallets were “real” versus one-time burners. That was a job for an analytics company. []
  14. For comparison in Number Go Up, Zeke Faux uses the term “crypto bro” (15 times) which is a term I and other writers have used to describe specific coin promoters. []
  15. Marc Hochstein unfortunately normalized its mainstream usage. []
  16. For instance, during the block size civil war in 2015-2017, a number of the the Bitcoin Cash/XT developers wanted to significantly increase the block size in order to pursue a payments-focused roadmap. Who was right or wrong? Well empirically we have seen Bitcoin Cash successfully upgrade to 32 MB blocks, but these are mostly empty blocks because in practice, most BCH holders seem to want to hoard their coins instead of use them for payments. []
  17. We moved three times in the span of ten months, all with a one-year old in tow. []
  18. The Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction. []
  19. Readers may enjoy: Everything Everywhere Is Securities Fraud by Matt Levine. []
  20. In theory, AMMs could be used in traditional finance too. See: Automated Market-Making for Fiat Currencies by Alex Lipton and Artur Sepp. []
  21. It is likely that the authors of several other books I reviewed also had some undisclosed investments. One that comes to mind was Chris Burniske in Cryptoassets. []
  22. For what it is worth, there have been dozens of times where I wanted to short a specific coin or token, but it was hard to trust the counterparty (the CEX), so I never did. I empathize with his motivation, but he should have disclosed the bet(s). []
  23. I wrote long newsletters outlining the antics and shadiness of parts of the coin industry. []
  24. This past summer, McKenzie trolled the birdapp by saying “have fun staying poor” as well. []
  25. See also: Will the real stablecoin please stand up? by Anneke Kosse, Marc Glowka, Ilaria Mattei and Tara Rice []
  26. Tokenization attempts have expanded beyond precious gems and metals. In 2021, Poolin, at the time one of the largest multi-cryptocurrency mining pools, released a “hashrate token” which as the name suggests, attempts to tokenize a discrete amount of hashrate generated by mining hardware. At the beginning of the year, Navier, a Bitcoin hosted mining services company, announced a similar effort for “qualified investors.” []
  27. On p. 96 the authors mention White & Case. Coincidentally, this was the law firm Bob – a U.S. trained lawyer – worked at prior to joining the coin world. []
  28. The STABLE Act, co-authored by Rohan Grey, provides legislative latitude for the erection of a narrow bank-like structure that currently does not exist but likely best fits the needs of an entity like a pegged-coin issuer. []
  29. For some reason Silverman has deleted every tweet he ever engaged with me on as well. Unclear when this occurred; is this common for reporters at The New Republic to do? []
  30. For instance, two months ago, the U.S. Secret Service seized around $58 million belonging to Deltec from MUFJ. Why does it matter if the creator of Inspector Gadget founded Deltec? Is there only a specific category of people who are allowed to create banks? It is a distraction for readers who should have been informed more pertinent details like what Forbes reported in January. Perhaps this is a little unfair, as the authors had to ship a book and missed some news (they were still updating this book in January and the Epilogue appears to be written in March). Either way, the book was light on details for Deltec which does seem like an interesting bank to look into and Zeke Faux did so in Number Go Up. []
  31. I previously mentioned his real name back in February 2022 in section 5. []
  32. I am not sure who first coined the term “Tether Truther” but I have used it in the past to describe people who still claim – post-CFTC settlement – that Tether LTD is still acting in a fraudulent manner. The “Truther” modifier is similar to the scheming intrigue of other “Truther” movements. USDTQ is a riff on the conspiratorial TSLAQ. []
  33. “Cut to the chase” is an apt expression here. In contrast to Faux’s book (which does discuss Tether at length), McKenzie and Silverman linger and beat around the bush. Part of the issue likely stems from the fact that they have cultivated sources, such as Bitfinex’ed, who have no insider information. []
  34. It seems USDT-related development is about the only thing active on Liquid at the moment. []
  35. See 40 cointroversies to look into over the summer []
  36. Gee, I wonder what cowardly “Boston Celtics” fan who loves to setup alt accounts saying the same thing “This You?” to the same exact people, could be. []
  37. On p. 50 Faux writes: Phil Potter, an executive at an offshore Bitcoin exchange, Bitfinex, was developing a similar idea. They teamed up and adopted Potter’s name for it: Tether. (Potter told me he was actually the one to first approach Sellars with the idea. “I’m sure Brock will tell you he came down from Mount Sinai with it all written on stone tablets,” he said.) []
  38. Many SPACs deserve scorn because in part, some screwed over retail and it was odd that Diehl et al. treatment on this topic did not mention SPACs at all. []
  39. One response could be that Zeke Faux, on p. 199 of Number Go Up, mentioned being part of the “crew” for The Mutant Cartel, but it was clear to readers that the mutant ape he purchased was to be temporarily used as a guest admission ticket, not some permanent band-of-brotherhood. []
  40. For instance, I have publicly stated many times that I am in favor for allowing anyone that wants to opt-in to have an account with the central bank. See section 2 in Was 2021 the year the coin world went from edgy to banal? []
  41. It is worth looking at the E-Cash Act too. []
  42. According to Bowden et al., actual block propagation (arrivals) do not follow the (theoretical) homogenous Poisson process that was expected upon its release in 2009. []
  43. Kofner is the author of the widely cited comparison between transferring funds with Bitcoin versus several “traditional” wiring services. It debuted in 2014 and is still updated on a regular basis. []
  44. Newstat tweeted out his identity and then did a “reveal” podcast with Tomlinson wherein he made a number of false statements about myself. Unfortunately neither McKenzie nor Silverman reached out to verify if any of the claims that Newstat had made were valid (or not). And subsequently McKenzie falsely accused me of harassment. Then he blocked me. It would be a massive distraction to this book review if we were to litigate all the finer points of this drama. In reading this book it is clear that they were all pals, so closing ranks makes sense, but that is not what a reporter is supposed to do. Verify, not trust. []
  45. I recall a DC-based reporter recently tweeting that if a reporter feels the need to befriend their sources, they should probably just get a pet instead. []
  46. An interesting post-trade infrastructure story – about the DTCC and Cede and Co. – was written more than six years ago: Dole Food Had Too Many Shares by Matt Levine. []
  47. Coincidentally, in the process of writing this review the DTCC acquired Securency, to help with their tokenization efforts. []
  48. Note: I strongly disagree with Gladstein on many things but do find it strange that the SBF segment wasn’t released, surely it would be good promo material? []
  49. While it is possible to lever up with white-listed collateral on DeFi lending protocols such as Aave and Compound, the amount thus far is magnitudes less in part because of capped LTV ratios. []
  50. Between 2014-2019 I met a whole sundry of people claiming to work for some kind of agency including the FBI and InQTel. Didn’t drink with them though. []
  51. Seems like this purity contest over who is the most OG “critic” is stolen valor. And the supposed award nominations? Jumping the shark. []
  52. Dozens of U.S.-based Bitcoin mining companies recently visited Washington D.C. to lobby and spin the narratives away from P-o-W being an environmental blight. A second edition could look at these types of efforts. []
  53. The authors could have highlighted that some bad actors never leave the coin world. For instance, Michael Patryn – co-founder of defunct exchange Quadriga – was revealed to be Sifu. Patryn/Sifu were in the news last year for forking Aave. []
  54. Coincidentally, in the process of writing this review, FX retail trading in Japan – which accounts for the largest market share globally – hit a record high. []
  55. Not an endorsement but there are attempts to build self-custodial exchanges in the DeFi world, such as C3. []
  56. Look no further than the Board of Directors at registered clearing agents to illustrate possible synergies and conflicts. []
  57. Derivative liquidations in traditional finance is now less brazen in how it screws end users. For instance, in the UK, retail traders of spread-betting and CFD products often lose all capital in 3-6 months. As a consequence the FCA has honed in on changes to advertising CFDs the past four years which includes restricting the sale and how they are marketed. []
  58. Coincidentally, I co-authored a peer-reviewed paper that intersects with this topic: Decentralized Financial Market Infrastructures: Evolution from Intermediated Structures to Decentralized Structures for Financial Agreements []
  59. I have publicly asked it as well, for instance, on November 30, 2017. []
  60. Also, doesn’t the former Chief Strategy Officer – Phil Potter – live in New York City? []
  61. Laura Shin recently interviewed two creditors of Genesis who deposited more money following assurances from Genesis. []
  62. See Tribes of maximalism []
  63. To hammer this point home, nearly two years ago, BSTX, a joint venture between tZero and Boston Options Exchange (BOX) Digital Markets, received approval from the SEC to operate a blockchain-based securities exchange. Maybe BSTX fails to gain traction, maybe the market doesn’t care about blockchain-related exchanges. But the issue at the heart of Mirror wasn’t “the exchange” existed; the problem was the fraud, not the existence of a new trading venue. []
  64. Allen also made a number of incorrect claims regarding Ethereum’s “Merge” last year. []
  65. Allen was wrong in part because according to her acknowledgements she seems to rely on Stephen Diehl for technical assistance. Here is a my book review on Diehl’s book, the most inaccurate blockchain book I have ever read. []
  66. I sent an email to Hilary Allen on February 20, 2022 that included a number of comments in her draft, it does not appear that she incorporated any of the suggestions including the correction to the false claims about new tokens being used as collateral for loans. []
  67. Over the past 15 years it acquired Lehman Brothers, Washington Mutual, and WePay. The former two during the duress of the financial crisis. J.P. Morgan is also a partial owner in Maxex, a mortgage clearinghouse; payments consortium “The Clearing House”; Cboe Clear (in Europe); and other infrastructure that might meet the criteria of “conflicts of interest” albeit at arms length. []
  68. Lack of by-lines: one of the reoccurring themes within the Protos world is to dunk on anonymous Tether promoters and shell companies, yet the publication allows anonymous contributions. This is a double-standard, having your cake and eating it too. []
  69. According to its Chapter 11 bankruptcy filing last year, Alameda had outstanding liabilities of $5.1 billion. But putting aside those loses, I could conjure several explanations. []
  70. One interesting nugget the public learned during the SBF criminal trial is that Caroline Ellison testified that she produced multiple different balance sheets, all of which were false. The one that was leaked to CoinDesk in 2022 was one of the rosier balance sheets, yet was itself fudged too. []
  71. See also Crypto adoption in America by J.P. Koning []
  72. This is not an endorsement of RWAs. At least one lawyer has argued: that the point of blockchain is to reduce trust assumptions/requirements and in almost all current cases, “tokenizing RWA” increases trust assumptions far above those even required for normal off-chain ownership. As a researcher this is why I have found it strange that some DeFi dapps parasitically rely on off-chain collateral (centrally issued pegged coins). Readers may be interested in this relevant thread from Andrea Tosato. []
  73. Zelle is operated by Early Warning who partnered with The Clearing House a couple of years ago. []
  74. On October 10, 2022 the USDD “marketcap” was about $795 million, a year later it was roughly $728 million. In contrast, according to ChainArgos, “Overall USD stablecoin market cap on ethereum down roughly $4 billion on ethereum and up more than $5 billion on Tron over the last 90 days.” []
  75. Some of the people the authors cited in this book did some grave stomping when FTX collapsed. But as we have seen in the criminal court case of SBF, apart from a handful of insiders no one actually knew what was going on. []
  76. The case has not gone to trial yet, but Saylor did lose a bid to quickly quash the suit. []
  77. Having spoken to Walch about the current batch of “skeptics” and “critics” – which she has been labeled in the past – it is pretty clear why neither of us amplify people who market themselves as such on social media. []
  78. Following the Hamas terrorist attacks, Stark dinged his credibility in a pair of sensationalistic tweets. He states that “crypto is not traceable” yet relies on ChainArgos which uses analytics to link addresses. Contra Stark, in this case, something is indeed traceable. Two chain analytics companies wrote rebuttals to this specific sensationalism: Chainalysis and Elliptic. Also, the authors of The Wall Street Journal article Stark cites mistakenly counted an entire exchanges’ trading volume (~$82 million) for a terrorist group’s address. Even the U.S. Deputy Treasury Secretary Wally Adeyemo weighed in on the topic. []
  79. One example of the “Horseshoe theory” in practice — the observation that some Bitcoin maximalists and anti-coiners both use an anti-empirical, a priori cudgel — is to look at say, Stephan Livera’s list of guests. At one point the running joke was that his dozen repeat guests each had podcasts whereby the only invited one another, because that was the size of their maximalist clique. In some ways we see that form of insular “in-group” dynamic in this book wherein the majority of “critics” or “skeptics” are the ones who pass one another’s purity tests. []
  80. In Number Go Up, Zeke Faux spoke with several hedge funds that wanted to short USDT. On p. 92 he writes: “I’m betting a shit-ton of money on them being a crook,” Fraser Perring, co-founder of Viceroy Research, told me. “Worst case is, I can’t lose hardly anything. I’m already rich, but I’m going to be fucking rich when Tether collapses.” []
  81. Perpetuals has become a catch-all term for a category of futures. These products often have higher daily trading volume that spot trading on centralized exchanges. Cam Harvey put together a quick primer on the topic. The original idea dates back three decades, from a paper by Robert Shiller. []
  82. As I mentioned at the time: For instance, on August 17, 2016, Bitfinex announced that they had hired Ledger Labs who, “is undertaking an analysis of our systems to determine exactly how the security breach occurred and to make our system’s design better going forward.” According to one post, Michael Perklin was the Head of Security and Investigative Services at Ledger Labs and part of the team leading this investigation. However in January 2017 a press release announced that Perklin was joining ShapeShift as the Chief Information Security Officer; his profile no longer exists at Ledger Labs. 18 Thus the question, what happened to the promise of a public audit? []
  83. The authors point out that during highly volatile periods, some CEXs suffer delays and/or shutdown entirely. They highlight a couple of possible reasons, including exchange operators being up to no good, which historically is a real possibility. To be even handed, even mature exchanges in traditional finance have (partial) shutdowns. For instance, in the process of writing this review the London Stock Exchange had a major technical incident which impacted (trading delays) small cap stocks for around 80 minutes. []
  84. Will certain crypto reporters from The Financial Times be held to the same standard they often criticize coin reporters of not reaching? []
  85. Coincidentally, during the process of writing this review, Phillips published a new paper directly related to the “securities” issue the authors referred to: Crypto Skeptics’ Supreme Risk. []
  86. Another missed opportunity was a discussion around privacy and confidentiality. For instance, the Zcash Foundation had its implementation of a threshold signature system reviewed by security professionals. Throwing the baby with the bath water, as this books authors frequently do, seems short-sighted. And this germane topic is not just relevant in the blockchain world either. For instance, Plaid normalized man-in-the-middle attacks. Will Akoyab continue this MITM normalization process? []
  87. A low-hanging point they could have made with proof-of-work mining: the block rewards are often value leaking from the ecosystem, to the benefit of state-owned energy grids and semiconductor companies. []
  88. Speaking of PayPal: is PYUSD just a marketing stunt? Which of the two different PayPal dollars is safer than the other? Will the frequency of the audit of the assets backing their other PayPal dollar be increased? []
  89. See also: Texans versus bitcoin: Jackie Sawicky and the Texas Coalition Against Cryptomining []
  90. For instance, while both books discuss Tether at length, Faux reached out to and received direct quotes from: Phil Potter (former CSO of Bitfinex) and from J.R. Willet (who created Mastercoin which is the infrastructure the USDT used on Bitcoin). Faux even corresponded with Arthur Budovsky, the creator of e-gold, who wrote back from prison. Did McKenzie and Silverman attempt to speak with these sources? []

Book Review: “Popping the Crypto Bubble”

Last year a friend sent me a copy of “Popping the Crypto Bubble.” I read the first few chapters before life got in the way and recently re-discovered it while unpacking and finally finished reading it.

This is a book I should have liked, after all, for years I have been labeled as a “crypto critic” or as a “no-coiner” terms that I thought were inaccurate or even slurs.1

In fact, for several years I wrote a private newsletter that was circulated among many now prominent anti-coiners. So if there is someone who should have wanted this book to be great, it is me. But it is not. It is actually a bad book.

I have formally written eight book reviews for “blockchain-related” books and I would rank this at the bottom. Part of it is the poor editing which has been highlighted by at least one other commentor. For example, the bibliography section is out of sync and is missing an entire chapter.2

But the bulk of the feedback is that the chapters are sloppily assembled with a hodgepodge of polemical rants. The substance comes across as a broken record of anger and angst.

In addition, the book is typically associated with a singular author, Stephen Diehl, but there is no unified voice throughout the book. Instead, many passages read as though they were carved out in a Google Doc by one of his two co-authors (co-workers actually).

As a result, a reader will find themselves ploughing through some semi-technical explanation of a financial product only to hear Diehl’s voice wedge itself at the very end, claiming it was all a scam or fraud or both. It is tiring because it happens so often.

Before diving into the book, worth mentioning that unlike virtually every other book on this topic, the authors do not provide their background or motivation in any section, although the tone is clear as early as page 1.

For readers unfamiliar, the three co-authors worked together at a US-based company called Adjoint, a tech firm I was introduced to in July 2017 when it was involved in doing something with smart contracts which Diehl has removed from his LinkedIn bio.3 Adjoint announced “Uplink” a couple months after that call.

WBB of Adjoint’s now deleted Press Release from October 2017 regarding Uplink.

Obviously it is okay for people to change their minds. Some people do not like the local sports team when they move to a different state or province. Some people fall out of love for avocado toast. Some people like working on “the next generation of distributed ledgers.”

So what changed Diehl’s mind between 2017 and 2022? According to Diehl’s presentation in December 2017 he was all-in on blockchains; then in a group presentation in April 2018, the co-founders were still on-board the blockchain train. It is not clear from the book (perhaps he has said somewhere else?) but he leaves no doubt that he is not a fan of cryptocurrencies or blockchains or smart contracts or web3.

Below is a breakdown of issues with each chapter. Note: all transcription errors are my own.

Chapter 1: Introduction

In the second paragraph on p.1 the authors write:

The overarching idea of cryptocurrency is based on a complex set of myth-making built on a simple unifying aim: to reinvent money from first principles independent of current power structures.

Where is the citation or source to back up that claim? Perhaps some Bitcoin maximalists hold that core view as their raison d’être to “reinvent money” but if we were to say, use the title of popular conference panels, it isn’t actually as common in 2023 or probably even June 2022 when the book was published. However the onus is on Diehl et al., to provide evidence for the claim and it is not presented.

Grammar: in the same paragraph there is a glaring grammatical issue on the first page of the book. It was also highlighted by one Amazon review:

Source: Amazon review

On the same page the authors write:

While a software is political, some software is more political than other.

Not only is there a missing “s” at the end, but it is not really clear what this means even with the following sentences related to the 2007-2009 Global Financial Crisis. Is Solitaire political? Is Excel political?

The concluding sentence of that same paragraph concludes:

The divisions over cryptocurrency are based on a philosophical question: Do you worry more about the abuse of centralized power, or about anarchy?

Again, no citation or anything to surmise why this is the philosophical question.

For instance, there seems to be a range of motivations for why a regulated financial institution operates a trading desk involved in the cryptocurrency world, or why that same organization might have a different business unit that builds a custodial product for their tokenization efforts. I have sat in meetings with these types of entities and I do not recall hearing anarchy mentioned, but maybe my sample size is too small or outdated.4

Chapter 2: The History of Crypto

On p. 3 the authors put in a pullquote:

Cryptocurrencies were intended as a peer-to-peer medium of payment but have since morphed into a product whose purpose is almost exclusively as a speculative investment.

Perhaps Bitcoin and some of its immediate clones were intended for payments (at least according to the original whitepaper) but again, no citation for the latter claim about speculative investment. Maybe that is true. Either way, later in the book the authors change their tune and say that cryptocurrencies are a reimaging of money. There is little consistency from beginning to end.

The first couple pages describing “the Cypherpunk Era” are okay but the authors slip up stating:

In the 21st century, most money is digital, represented as numerical values in databases holding balance sheets for bank deposits.

This may seem pedantic but the authors do not state what part of the world they are describing in the 21st century. If it is the U.S. then they probably mean to use “electronic” not “digital.” There are no digital dollars in circulation yet as the Federal Reserve has not issued a central bank digital currency (CBDC).

Instead, users are often left with siloed representations of non-fungible dollars “issued” by a menagerie of entities, typically intermediaries such as commercial banks. The e-Cash Act and STABLE Act were a couple of proposals to move in that direction, but as of this writing we do not currently have a “digital dollar” in the U.S.

On p. 5 the authors write:

To most consumers today, this is transparent, although it was first, in the early 2000s that, consumers became aware of the digitization of their money in the form of increasing online banking.

Who are these consumers, where are they based? If the authors are describing the U.S. a future edition of the book should be specific.

Continuing on p. 5 they write:

However, in the early days of e-commerce, there was still apprehension around receiving and making payments over the internet with credit cards. To fill this gap, PayPal emerged as a service to support online money transfers, which allowed consumers and businesses to transact with a single entity that would process and transmit payments between buyers and sellers without the need for direct-to-bank transfers.

On the one hand it is clear why PayPal was used as an illustration for this evolving time period, yet it should not be trotted out as a “success story.”

As highlighted by legal scholars such as Dan Awrey, PayPal has always operated as a “shadow bank” and “shadow payment” provider.5 Its management shoe horned the company into the bedrock of U.S. e-commerce all while dodging banking regulators calls for the erection of a state or national-chartered bank.

While some readers may be okay with that outcome, Diehl et. al., explicitly deride this specific type of behavior from pegged coin issuers (stablecoins). Incidentally, in the process of writing this review, PayPal announced the release of a pegged, centrally-issued stablecoin – PYUSD – on the Ethereum network. How does PayPal operate now? The same as it always has: which happens to be very similar to how centralized stablecoin issuers.

Source: Twitter

On p.7 they write:

The mechanism described in the bitcoin whitepaper proposed a novel solution for the double-spend problem, which did not require a central trust authority.

This part of the chapter is fairly straightforward and dry and lacks any of the hysterical commentary. Since there is no unified voice, perhaps it was written by one of the two fellow co-authors?

Either way, it is not explored or mentioned in this chapter (or anywhere else) but of the eight references in the Bitcoin whitepaper, three of them cite the works of Haber & Stornetta, whose digital signing concepts illustrate that there are indeed “useful” things that the blockchain world has contributed (see slides 22-24). Of course that would be contrary to the narrative this book is attempting to defend.

Worth mentioning that the writers typically use lower case b and e for both bitcoin and ethereum even when they are discussing the networks and protocols. This is a little confusing because conventionally, it is fairly common to use lowercase b to describe the unit-of-account, whereas uppercase B to describe the network or code.

For instance on p. 8 they write:

Moreover, the bitcoin algorithm took a particularly interesting approach to consensus by attempting to create a censorship-resistant network where no participants is privileged. The consensus process was eventually consistent and tied the addition of new transactions to the solution of a computational problem in which computers that participated in the consensus algorithm would need to spend a given amount of computational work to attempt to confirm the writes. This approach, known as proof of work created what is known as a random sortition operation in which a network participant would be selected randomly and probabilistically based on how much computational power (called hashrate) was performed to attempt consensus.

A couple of nitpicks:

(1) There is no singular “bitcoin algorithm.” Arguably the best explanation of the moving parts that Bitcoin uses is from Gwern Branwen: Bitcoin is Worse is Better. This is not the only time the authors incorrectly describe a bundle of technology.

(2) The authors should be clearer that “proof of work” itself is a concept that pre-dates Bitcoin by more than a decade (Dwork & Naor 1993). Over the past five years, more of the technical-inclined papers on this topic typically refer to the way proof-of-work is used in Bitcoin as Nakamoto Consensus. The authors mention Nakamoto Consensus a few chapters later however they are strangely very thrifty when it comes to footnotes or citations so a second edition should include this nuance.

On p. 8 they write:

Therefore the bitcoin architecture created a computational game mechanic in which the computers in this network (called miners) competed to perform consensus actions and successfully confirming a block of transactions gave a fixed reward to the first “player” to commit a set transactions.

This is not quite right. A phenomenon called “orphaning” (similar to uncles in Ethereum) occurs when more than one miner simultaneously solves (discovers) a block. At some point one of the branches is orphaned (pruned) when other miners build on one but not the other tree.

This is part of the reason why a hardcoded 100 blocks (roughly ~17 hours) is required before a miner can issue themselves a block reward (e.g., the coinbase transaction has a block maturity time box).

A typo occurs on the last sentence of that paragraph:

The critical ideas encoded in the protocol are the predetermined release schedule, fixed supply, and support for those protocol changes that have support off a majority of participants.

This has a typo: off –> of

On p. 8 the authors write:

One of the core algorithms used in most blockchains is a hash function.

While reading this it was:

(1) unclear why they used ‘algorithm’ and;

(2) which blockchain does not use a hash function?

On p. 9 they discuss difficulty adjustments:

This mechanism allows the difficulty of bitcoin mining to be artificially adjusted proportionally to the rewards.

It is not quite clear what “artificial” means here. In Bitcoin, the supply schedule for the issuance of new bitcoins halves roughly every four years (actually less than four years but we will discuss that later).

Those with commit access could theoretically modify the fixed rewards / supply schedule, and miners could update their node software to increase or decrease that amount. But none of this action is artificial, so why use that word?

We could argue that chronologically early miners received a disproportionally higher amount of rewards relative to the frequent empty blocks they built and processed for the first ~5 years. Is that fair? Probably not. Is it artificial? Probably not.

On p.9 they discuss censorship resistance:

The censorship resistance of this algorithm was the critical improvement over existing eCash systems which previously had a single legal point of failure, in that the central register or central node would have to be stored in a single server that could be targeted by governments and law enforcement. In this trustless peer-to-peer (P2P) model–the same mechanism that powered Napster and BitTorrent–all computers participated in the network, and removing any one node would not degrade the availability of the whole network. Just as previous P2P networks routed around intellectual property laws, bitcoin routed around money transmitter laws.

There are a few issues with this:

(1) Which algorithm are the authors referring to as an “algorithm,” the entire Bitcoin codebase circa 2009?

(2) Napster was quasi-centralized, it provided an index of files and that is why it was a relatively easy target for lawsuits by the music industry (RIAA) and law enforcement.

(3) The authors have a habit of wading into legal and regulatory territory without providing much in the way of definitions or what jurisdictions they are describing.

For instance, in the last sentence they are probably referring to the U.S. In the U.S., each individual state has laws and regulations around money service businesses (MSB), of which money transmission (MTL) is a subset of. Some states do not. At the federal level some entities are required to register with FinCEN which enforces the Bank Secrecy Act (BSA). A second edition should include specific jurisdictions to strengthen the authors arguments.

(4) This may be perceived as pedantic, in section 1 of the original Bitcoin whitepaper it describes the motivation of building a network for participants to engage in online commerce without having to rely on financial institutions. Conventionally this is more of a stab at know-your-customer (KYC) collection gathering requirements.6

On p.10 they write about how Bitcoin was first marketed, stating:

This new era marks a rapid expansion of a cottage industry of startups and early adopters who would build exchanges, mining equipment, and market network to proselytize the virtues of this new technology. The culture around the extreme volatility of the asset created a series of memes within the subculture of HODL (a portmanteau of the term “holding,” standing for “hold on for dear life”), which encourages investors to hold the asset regardless of price movement.

Couple of issues:

(1) It is clear later in the book that the authors have a gripe about how blockchains are proselytized. I deeply sympathize with their disdain towards shilling. I violently agree with them in some parts. But, like in the rest of the book, they miss the opportunity to provide the reader with specific examples.

(2) I have pointed this out in several other book reviews but the etymology, the genesis of “hodl” did not originate as an acronym or portmanteau. It came from a drunk poster on the BitcoinTalk forum, there are many articles discussing this. However, what the authors describe “hodl” to mean is correct.

On p.11 they start a new section on the “grifter era,” stating:

In addition to bitcoin, a series of similar technologies based on the same ideas emerged in the 2011-2013 era. The first movers were Litecoin, Namecoin, Peercoin, and a parody token known as Dogecoin based on an internet meme.

Several issues with this:

(1) Why did the authors use uppercase for four cryptocurrencies instead of lowercase?

(2) A second edition should probably arrange the first three by chronology or alphabetized. For instance, Namecoin was an evolution of BitDNS (a project that was spun up just as Satoshi stopped formally contributing to Bitcoin). It was launched in April 2011 and due to its utility usually is not placed in the same category as Litecoin or Dogecoin.

In the same paragraph they note that:

As of August 2018, the number of launched cryptocurrency projects exceeded 1600.

It is unclear why the authors chose that specific time frame. For instance, according to CoinGecko, they have identified 10,052 coins as of this writing. The infrequently updated “Deadcoins” database lists 1729 entries as of January 2023.

The next sentence is a little quizzical:

In 2015 a significant extension to the bitcoin model called the ethereum blockchain was launched with the aim to build a “world computer” in which programmable logic could be expressed on the blockchain instead of only simple asset transfers.

It is only eleven pages into the book but we still have not been provided a clear definition of an “algorithm” versus a “model” versus a “protocol.”

Ethereum (which the authors do not capitalize either) is significantly different than Bitcoin so to call it an extension is a bit of a stretch.

Also, Bitcoin uses a transaction model called unspent transaction outputs (UTXOs) whereas Ethereum uses a different model called Accounts. The former is unable to actually transfer assets per se, hence the creation of “colored coin” schemes starting in 2012 to enable other assets to be created (nearly all of the original “colored coin” efforts have disappeared and heterogenous assets that use the Bitcoin blockchain are currently conductible via the Ordinals protocol).7

Two sentences later the authors change the capitalization again:

In addition to fully visible transaction models of previous tokens, chains such as Monero and Zcash would incorporate privacy-enhancing features into the design, allowing participants to have blinded transactions that would obscure the endpoint details for illicit transactions with no public audit record.

A second edition needs to explain why the authors flip capitalization around. Is it only uppercased if the chain is mentioned just once?

Later in the book the authors do go on to describe some of the privacy and confidentiality approaches but only with the context of criminogenic behavior. It could be helpful for readers to have some citations of relevant papers or articles since the topic intersects with securing accounts, assets, and transfers in traditional finance.8

The next paragraph jarringly switches gears to proof-of-work mining (without mentioning PoW):

Early entrepreneurs realized that they could gain an advantage over traditional server farms if they built faster and more specialized hardware to compute these hashes. These entrepreneurs began to build ASICs (Application Specific Integrated Circuit), custom hardware circuits that could do the computations required for the bitcoin network more efficiently than traditional CPUs offered by companies like Intel and AMD.

For some reason this section omits two intermediate steps between CPU mining and ASIC mining. These would be GPU mining and FPGA mining. More importantly it misses the opportunity of pointing out that Satoshi herself was surprised and sullen when she learned that miners had figured out how to scale GPU mining the way ArtForz and Laszlo Hanyecz revealed.

A few sentences later they dive into mining pools:

These mining pools became a centralized and very lucrative business for early investors. An example is, the Chinese company BitMain, which began to centralize most of the computational resources, resulting in 70% of all bitcoin mining being concentrated in mainland China by 2019.

The authors skip a few years and neglect to mention key figures in the creation of commercialized ASICs such as Yifu Guo. Nor do they mention, in dollars or some other figure, how lucrative these pools were. Or which the first public ones were (Slush and Eligius were among the first).

This section also conflates mining hardware (used in farms) with pools which provide the block building itself for an aggregation of mining farms. Lastly, the capitalization of BitMain is incorrect (the company markets the hardware in either all caps – BITMAIN – or Bitmain).

On p. 12 they write:

The underutilization of coal-fired power production and Chinese capital restrictions on renminbi outflows offered a unique opportunity for enterprising Chinese citizens to move capital outside of the mainland beyond government controls. In 2018 the Chinese government officially declared cryptocurrency minig an undesirable activity. The same year, Bloomberg reported $50 billion of capital flight from the Chinese state using the Tether cryptocurrency.

This is not the correct chronology. Because the authors do not provide many citations it is unclear what they were referring to in 2018. A quick googling found a possible related article but the actual real big ban took place in two separate actions in May and September 2021. As their book was published in mid-2022, the authors could have used more recent figures here.

Note: later in Chapter 25 they do reference a more up-to-date story. They also not explain the specific legal and regulatory woes that miners faced in China which led them to move hardware overseas in the second half of 2021.

In addition, the authors only mention energy generation in passing but neglect to mention a key culprit for why Bitcoin (and other PoW-based coins) flocked to specific regions of China: subsidized electricity from hydroelectric dams due to overcapacity / overproduction of dams. This has been widely documented by others.9

Some of the miners literally packed up their machines onto trains after the rainy season was over and decamped for provinces in the north such as Xinjiang and Inner Mongolia, where coal-fired plants powered their wares for the remainder of the dry season. A crazy phenomenon and one the authors should consider adding in the next edition.

On p. 12 they write:

The Grifter Era period also saw the introduction of stablecoins such as Tether, aiming to be a stable cryptoasset with its price allegedly pegged to the US dollar and theoretically backed by a reserve of other assets. This is followed by a 2019 period of market volatility and market consolidation of cryptocurrencies, during which many unfounded ideas fell off and left a handful of 20 projects which would dominated trading volume and developer mindshare.

In this section the authors never really define what time the “Grifter Era” takes place. Based on the actual words they wrote up until this point we have years: 2011-2013, 2015, 2017, 2018, and 2019. Yet they specifically mention a “stable cryptoasset with its price allegedly pegged to the US dollar” which sounds like a “stablecoin” such as Tether (USDT). But Tether was actually launched as Realcoin in 2014.

Also, the authors do not mention any of the “20 projects” which dominated volume and mindshare. Seems like a curious omission. Does that include Binance and Cosmos then?

The chapter comes to an abrupt end, with the final paragraph:

In 2021 China outright banned all domestic banks and payment companies from touching cryptoassets and banned all mining pools in the country. At the same time, the United States continued to be hit by an onslaught of cyberterrorism and ransomware attacks that began to attack core national infrastructure and the country’s energy grids.

What is the reader supposed to take away from this chapters concluding remark? Later in the book the authors dive into ransomware but readers are not provided any citations or sources for where we can learn more about these specific cyberattacks.

For example, prior to being blocked by him on Twitter, I briefly corresponded with Diehl regarding ransomware. I even agreed (and still agree) with some of his points he has made on the specific topic. Yet here he misses the opportunity to connect liquidity (and banked-trading venues) with ransomware payouts. The next edition to clarify the current non sequitur.

Chapter 3 Historical Market Manias

This is one of their stronger chapters. It succinctly discusses the history of past manias and subsequent crashes including the South Sea Bubble, the Mississippi Bubble, the Railway Mania, Wildcat banking, the 1929 stock market collapse, Albanian pyramid schemes, Enron, and others.

While most of the prose is in a unified voice, at the tail end of the Wildcat section on p. 26 they write:

The wildcat banking era is an important lesson to learn from the past, given the recent fringe efforts to return to a digital variant of private money with stablecoins and cryptoassets.

It is followed by three citations all related to the topic at hand. Yet the authors fail to distinguish – as they fail to distinguish later in the section on stablecoins – that in the U.S. all commercial banks issue the equivalent of private money and credit.

In fact, it is the expansion of this credit (and leverage) by private banks and other lending institutions that often leads to booms and busts in the modern era. During this time frame both M1 and M2 aggregates – publicly money – basically grew linearly apart from the recent COVID-era emergency responses.

This distinction is important because to be consistent, the authors should recognize that in the U.S. credit expansion from non-banks and certain fintechs like PayPal, fall under the umbrella of “shadow banking” and “shadow payments” which predates the creation of Tether (USDT) and other centralized pegged coins by decades.

Source: Wikipedia

To be consistent, the authors need to update their priors and at a minimum reconcile for the audience what they prescribe all “shadow banking” and “shadow payments” should be required (or not) to do. Singling out “private money” without recognizing the very important nuance that most money and credit retail users interact with is private, is disingenuous.

While talking about the history of Beanie Babies, on p. 33 they write:

Buyers of Beanie Babies could never find the whole collection in one store, and the artificially limited supply meant it always appeared that the products were selling out. By limiting the distribution channels, creating the toys as part of a broader collection and simultaneously creating a variable artificial scarcity within the collection, the company bootstrapped a collectible item seemingly based on a small children’s toy which had very little intrinsic value unto itself–Not unlike the crypto market for non-fungible tokens (NFTs) today.

This is not necessarily a bad example but there are two more germane examples with respect to collectible NFTs:

(1) In the U.S., baseball card production is a licensed activity based on I.P. that Major League Baseball (MLB) has a monopoly on.10 The manufacturing arrangement effectively states who can and cannot produce the likeness of players, coaches, teams, logos, etc. on memorabilia.

Over the past several decades, collectible card manufacturers have remained relatively static yet these manufacturers (such as Topps and Fleer) created a glut of cards in the lates ’80s and early ’90s.11

Coincidentally, in the process of writing this review, MLB sued Upper Deck, “accusing it of trademark infringement for using its logos on trading cards without permission.”

(2) Getty Images. While they do have some non-commercial, royalty free stock galleries, Getty acquires the I.P. of images and uses an army of lawyers to sue anyone who violates or infringes on those rights. They attempt to artificially restrict the usage of easily reproducible imagery. 12

On p. 24 the discuss the Dot-com bubble of 1995-2001, stating:

The most recent bubble in living memory was is the dot-com bubble in the 1990s.

Two issues with this sentence:

(1) Grammar or typo with “was is”

(2) The very next page they discuss the subprime mortgage crisis which seems to be chronologically at ends with “most recent bubble” for the dot-com bubble. Which is the most recent?

On the final sentence of p. 24 they write:

Shortly after that, the use of the web for private commercial applications exploded. The era saw the rise of Google, eBay, PayPal, and Amazon coupled a vast Cambrian explosion of both technologies and new business models.

While all four of these technically co-existed during the time frame stated, only two of them went public before the end of 2001, the timeframe they gave.

Also, it is unclear why these Big Tech companies repeatedly receive a free pass throughout the section and the whole book. Apart from one subsection later on Occupy Wall Street and a small passage in the Conclusion, one consistency throughout the book is that the authors seem to be okay with the status quo and incumbency of both legacy financial institutions and Big Tech companies.

This seems at odds with the view of holding entities such as pegged-coin issuers accountable since cloud providers are largely unaccountable systemic utilities.

For instance, academics such as Lee Reiners have argued that cloud providers – such as AWS and Google Computer – should be regulated under Dodd-Frank Title VIII. Likewise another scholar, Vili Lehdonvirta, has argued that these cloud empires are as powerful as states yet unaccountable.

Both Reiners and Lehdonvirta are typically categorized (incorrectly?) as anti-coiners yet both of them provide a much more even handed treatment of systemic risks, such as large commercial banks, than the authors of Popping the Crypto Bubble.

Source: Twitter

On p. 37 they discuss the subprime mortgage crisis of 2003-2008, writing:

In the decade of real estate euphoria, the amount of mortgage-derived credit increased from $900 billion to $62 trillion.

That seems like a pretty big change over time, but there is no citation for readers to learn more. A second edition should provide one.

On p. 39 they describe the venture capital bubble of 2010-present, discussing WeWork and Uber blitzscaling, writing:

While these companies did achieve scale, they became mired in controversy and scandals as a direct results of their predatory and unsustainable business model. Although both WeWork and Uber went public, neither company was able to become profitable and is now trading at fractions of their inflated private valuations.

In mid-2022, when the book was published, part of that closing statement was untrue. WeWork pulled its IPO in 2019 and merged with a SPAC for a direct listing in October 2021.13

The authors missed the opportunity to dunk on SPACs which screwed over retail investors.14

Source: Bloomberg

On p. 41 the authors wrote about the Crypto Bubble 2016-present, a lot of which I agreed with. However one passage quickly falls into a rant, on p. 42 they write:

The simple undoing of this idea of a new financial system is that there is no economy in crypto; because it can never function as a currency. Nothing is priced in crypto. No commerce is done in crypto. No developed economy recognizes crypto as legal tender or collects taxes on it. The price of crypto simply oscillates randomly, subject to constant market manipulation and public sentiments of greed and fear, detached from any activity other than speculation. Crypto is a pure casino investment wrapped in grandiose delusions. As an investment, it is almost definitionally a bubble because crypto tokens have no fundamentals, no income, and correspond to no underlying economic activity.

A second edition could reword and cut out half of the rant and turn it into a much stronger statement all without using broad sweeping a priori cudgels.

For instance, saying “never” implies the authors know the future. But they, like the readers, cannot know the future of every cryptocurrency or blockchain to come. We need to use the facts-and-circumstances, an evidence-based approach, to determine which cryptocurrency (or token) currently has legs and which ones do not. Saying they all cannot is sloppy and lazy polemics. It is soothsaying.

Another area for improvement: in 2014 Yanis Varoufakis may have been the first economist to articulate – in long form – that a cryptocurrency like bitcoin (with an inelastic supply) will unlikely to be part of a circular flow of income. The authors could add that reference to make their argument stronger, after all, they are no stranger to Varoufakis who they cite in the next chapter.

They could also make the distinction between an anarchic cryptocurrency such as bitcoin or litecoin, which have inelastic supplies versus Dai or Rai, which are only minted when collateral is deposited into a contract. This would take an additional explanation of dynamic supply via collateralized debt positions (CDP) but would help inform the reader that there is another world beyond fixed supply coins such as bitcoin and its antecedents.

Another example they could use to buff up their argument is to provide references of jurisdictions that did attempt to accept cryptocurrencies as a form of payment for taxes, but then later stopped the effort. Ohio is one example of this occurrence.

Chapter 4 Economic Problems

The first few pages of this chapter start off strong. I even found myself nodding in agreement when the pointed out on p. 46 the euphemism some coin promoters use “cryptoassets” in lieu of “cryptocurrencies” to make the former more palatable. We highlighted that in the book review of an equally bad book, Cryptoassets by Burniske and Tatar.

But then it begins to go off the rails, again, starting on p. 52 they write:

In addition, without any nation-state recognizing cryptocurrencies as its sole legal tender, there is no demand for the currency to pay one’s taxes. The demand for cryptocurrency is only based on either criminality or speculation.

The book is full of these opinions stated as facts.

Again, if there is one person who wants to agree with Diehl et. al., it is me. I have written a slew of posts and papers, most of which are linked to on this site, which have attempted to dive into these very topics. But they are not doing themselves any favors by being so stingy on citations or explaining how they arrived at only two categories: criminality or speculation.

And this hurts their credibility because their claims could be stronger by simply googling or asking experts if they know of a citation they could add. Right now, their bold confidence comes across identically as coin promoters who claim – without evidence – the central banks are going to collapse in the face of Bitcoin’s choo-choo-train.

To both groups of people we can respond with Hitchen’s razor: what can be asserted without evidence can also be dismissed without evidence. And unfortunately for Diehl et. al., a large portion of the book could simply be dismissed due to a lack of evidence (or citations).

While discussing deflationary assets, they write on p. 52:

The US dollar has the deepest and most liquid debt markets mainly because the dollar has a relatively predictable inflation rate on a long time scale, and its monetary parameters remain predictable up to the scale of decades. Thus the risk of servicing loans is readily quantifiable, and banks can build entire portfolios of loans to their communities out of their reserves.

A future version should explain that specifically the authors (likely) mean the market for U.S. Treasury bonds, not dollars themselves.

On p. 53 they write:

Unlike in the fiat system, where the market conditions for debt products organically determine the supply of money in circulation relative to demand, a cryptocurrency must determine both supply and demand prescribed in unchangeable computer code. This would be like if the United States Federal Reserve decided what the monetary policy of the United States would be from their armchair in 1973 and into the future, regardless of any future market conditions, pandemics, or recessions.

This is a bit of a strawman and lacks needed nuance.

(1) In the U.S. the majority of money and credit expansion (and contraction) comes from private, commercial banks and other lending institutions, not just the Federal Reserve.

(2) The authors criticism is valid with respect to coins with fixed supplies that are purposefully attempting to replicate “money” but not every cryptocurrency or token is attempting to do that. In fact, as mentioned above, both Dai and Rai are dynamically issued based on collateral deposited, there is no fixed supply of either.

(3) There seems to always be debates around “unchangeable computer code” but most of this ideological debate has been sidestepped by issuing new smart contracts with upgrades (or downgrades or sidegrades).

Either way, the authors could strengthen at least one of their arguments by referencing David Andolfatto’s 2015 presentation (at the time, Andolfatto was a vice president at the St. Louis Federal Reserve).

On p. 55 they write:

A positive-sum game is a term that refers to situations in which the total of gains and losses across all participants is greater than zero. Conversely, a negative-sum game is a game where the gains and losses across all participants sum is less than zero, and played iteratively with increasing participants, the number of losers increases monotonically. Since investing in bitcoin is a closed system, the possible realized returns can only be paid out from funds paid in by other players buying in.

Even though I largely agree with what they wrote here (and throughout much of the chapter), the authors introduce a new concept (a ‘closed system’) without defining what that is. And then they move on to the next thing to rail against.

It is frustrating because they could have explained to readers how, in proof-of-work networks such as Bitcoin, value leaks from the ecosystem: to state owned energy grids and semiconductor companies who typically do not reinvest the value (capital) back into the network.

Occasionally you will hear about a mining operator sponsoring a Bitcoin Core developer or helping with a lightning implementation, but by and large, the block rewards in Bitcoin are value that is extracted from the network by non-participants, or dead players.15 The authors do so somewhat later, but this would be a good place to drop a foreshadow towards that section, or at the very least define what a “closed system” is.

On p. 56 the authors inexplicably alternate between writing “a cryptoasset” and “crypto assets” within one paragraph.

Another example of a rant that takes away from the story they have built up through the chapter, on p.56 they write:

Crypto assets are completely non-productive assets; they have no source of income and cannot generate a yield from any underlying economic activity. The only money paid out to investors is from other investors; thus, investing in cryptoasssets is a zero-sum-game from first principles. If one investor bought low and sold high, another investor bought high and sold low, with the payouts across al market participants sum to zero. Crypto assets are a closed loop of real money, which can change hands, but no more money is available than was put in. Just as a game of libertarian musical chairs in which nothing of value is created, participants run around in a circle trying to screw each other before the music stops. This model goes by the name of a greater fool asset in which the only purpose of an investment is simply sell it off to a greater fool than one’s self at a price for more than one paid for it.

The voice of this author does not flow with the voices of the other authors. It sounds a lot like a long tweet and should be excised due to is repetitiveness. We get it, you hate cryptocurrencies / cryptoassets. It was clear the first dozen times you said it.

Another issue with this particular rant is that it inappropriately uses the term “first principles” when they probably should have used something like axiomatically. Or “by definition” which they have previously used. In addition, and more importantly, it is empirically incorrect.

There are blockchain projects, such as Onyx from JP Morgan that serve as a counterfactual to the a priori argument laid out above. A future edition either needs to reconcile with the fact that there are non-self-referential blockchain projects alive and in production, or excise the rants altogether.

On p. 58 they write:

Many economists and policymakers have likened cryptoassets to either Ponzi schemes or pyramid schemes, given the predatory nature of investing in cryptoassets. Crypto assets are not a Ponzi scheme in the traditional legal definition. Nevertheless, they bear all the same payout and economic structure of one except for the minor differentiation of a central operator to make explicit promises of returns. Some people have come up with all manner of other proposed terms of art for what negative-sum crypto investments might be called:

  • Decentralized Ponzi scheme
  • Headless Ponzi scheme
  • Open Ponzi scheme
  • Nakamoto scheme
  • Snowball scheme
  • Neo-Ponzi scheme

It would be nice if the authors came to consensus on whether it was spelled “crypto assets” or “cryptoassets.” Also, it is unclear who came up with the descriptive names above, however, it is likely that Preston Byrne should be credited with “Nakamoto Scheme.”

I currently think a decent description of Bitcoin itself is how J.P. Koning categorizes it as a game akin to a decentralized chain letter:16d

Source: J.P. Koning

Overall this chapter sounds a bit too much like a rehashed version of BitCon from Jeffrey Robinson. It could easily be improved by removing the repetitious everything-is-a-fraud refrain and adding relevant references.

Chapter 5 Technical Problems

This chapter is tied with Exchanges for probably being the weakest in the whole book. Part of the problem is the authors conflate scaling limitations that Bitcoin specifically has, with the rest of the blockchain world. There is no nuance, they make a number of inaccurate statements, and the chapter itself is assembled in a haphazard fashion.

For instance, on p. 59 they write:

The fundamental technical shortcomings of cryptocurrency stem from four major categories: scalability, privacy, security, recentralization, and incompatibility with existing infrastructure and legal structures.

That is at least five categories. Yet the book subsections include four: scalability, privacy, security, and compliance. There is no specific section on ‘recentralization’ as most of it is mentioned within scalability.

Continuing, on p. 59 they write:

In computer science scalability refers to a class of engineering problems regarding if a specific system can handles the load of users required of it when many users require it to function simultaneously. However regarding this problem, the technological program of bitcoin carries the specific seed of its own destruction by virtues of being tied to a political ideology. This ideology opposes any technical centralization, and this single fact limits the technical avenues the technology could pursue in scaling.

The entire chapter should be re-titled “Technical limitations of Bitcoin” because currently it is filled with strawmen. It appears that the authors have spent almost no time with blockchains beyond Bitcoin and Ethereum. Blockchain engineers and architects are well aware of these limitations and some have launched faster, more scalable “layer 1” blockchains in responses.

Note: these are not endorsements. Some examples include Algorand, Avalanche, Cosmos, Near, Polkadot, and Solana. All of these existed prior to the publication of their book.

Others have built “layer 2” rollups that sit-atop a layer 1 blockchain; these L2s are often significantly faster than the L1 they reside on top of. This includes Arbitrum, Base, Optimism, and zkSync. Even though both optimistic rollups and zk-rollups concepts existed prior to the publication of this book, yet they get barely a passing mention on page 63.

Continuing on p. 60 they write:

The bitcoin scalability problem arises from the consensus model it uses to confirm blocks of pending transactions. In the consensus model, the batches of committed transactions are limited in size and frequency, and tied to a proof of work model in which miners must perform bulk computations to confirm and commit the block to the global chain. The protocol constrains a bitcoin block to be no more than 1MB in size and a single block is committed only every 10 minutes. For comparison, the size of doing an average 3-minute song encoded in the MP3 format is roughly 3.5 MB. Doing the arithmetic on the throughput results in the shockingly low figure that the bitcoin network is only able to do 3-7 transactions per second. By comparison the Visa payment network can handles 65,000 transactions per second.

Working backwards, even though I agree with their point – and have even used Visa as an example – once again the authors do not provide any citations for anything above. There is no reason to be stingy across 247 pages.

But the bigger issue is that the authors fail to see how even forks and variants of Bitcoin itself – such as Bitcoin Cash – have successfully increased the block size to 32 MB, so it is possible to do it. With faster block times and a move over to proof-of-stake, block throughput on a future iteration of Bitcoin could be considerably faster than it is today.17

The problem that the authors almost identified is that between 2015-2017 prominent Bitcoin maximalists purged the Bitcoin Core community of “bigger block” views which then ossified Bitcoin development. Even so, the authors should have included the fact that SegWit and Taproot – both of which were locked in prior to the publication of this book – effectively allow for larger block sizes (to more than 2 MB).

On p. 61 they write:

An appropriate comparison would be the Visa credit card network, whose self-reported figures are 3,526 transactions per second. Most credit card transactions can be confirmed in less than a minute, and the network handles $11 trillion of exchange yearly. Credit cards and contactless payments are examples of a success story for digital finance that have become a transparent part of everyday life that most of us take for granted. The comparison between bitcoin and Visa is not perfect, as Visa can achieve this level of transaction throughput by centralizing transaction handling through its own servers that has taken thirty years of building services to handle this kind of load. The slow part of transaction handling is always compliance, ensuring parties are solvent, and detecting patterns of fraudulent activity. However, for the advocates proposing that bitcoin can handle retail transactions loads on a global scale, this is the definitive benchmark that must be reached for technical parity.

There a singular citation provided, but nothing from Visa itself. But the biggest problem with this passage is that it defends rent-seeking incumbents. In the U.S., Visa and Mastercard operate a duopoly that is good for their shareholders.

The next edition of this book needs to include an honest and frank conversation about the friction-filled payment infrastructure that allows private companies to extract rents on retail users in the U.S. For instance, two months ago a bi-partisan bill was introduced in both the House and Senate: “the Credit Card Competition Act, which would require large banks and other credit card issuers with over $100 billion in assets to offer at least two network choices to process and facilitate transactions, at least one of which must not be owned by Visa or Mastercard.”

Perhaps the bill goes nowhere, but the grievances it highlights are relevant for this book. For example, the E.U. capped interchange fees in 2015. Should Americans be granted lower fees as well?

Note: we are fortunate that public infrastructure upgrades, such as FedNow, will lower the costs to users across the country, however that is not intended as a point-of-sale or even retail-facing infrastructure (FedNow is an upgrade to the back-end). Plus its adoption may be slow.

This conversation could also discuss how commercial banks historically suffer from vendor lock-in from core banking software providers (such as FIS, Fiserv, Jack Henry), a cost that is eventually passed down to users as well.18

Also, it is worth pointing out that despite the authors celebratory mood towards Visa and Mastercard, according to the Bank of Canada many merchants do not actually like them:

Lastly, the only people who are still claiming that “bitcoin can handle retail transactions loads on a global scale” are Bitcoin maximalists. While very vocal on social media, fortunately they represent a small minority of the fintech world.

Yet the authors repeatedly build strawmen arguments to counter the maximalist viewpoint without (1) identifying an specific examples; (2) without acknowledging that there is more to the blockchain universe than an orange memecoin that is ossified.

On p. 61 they write:

The scalability issues of the bitcoin protocol are universally recognized, and there have been many proposed solutions that alter the protocol itself. Bitcoin development is a collaboration between three spheres of influence: the exchanges who onboard users and issue the bulk of transactions, the core developers who maintain the official clients and define the protocol in software, and the miners who purchase the physical hardware and mine blocks. The economic incentives of all of these groups are different, and a change to the protocol would shift the profit centers for each of the groups. For example, while the exchanges would be interested in larger block sizes (i.e., more transactions), the miners (who prioritize fee-per-byte) would have to purchase new hardware and receive less in mining rewards for more computational work and thus incur significant electricity cost. This stalemate of incentives has led to mass technical sclerosis of the base protocol and a situation in which core developers are afraid of major changes to the protocol for fear of upsetting the economic order they are profiting from.

There are plenty of good arguments to be made about challenges and issues surrounding Bitcoin, this is not one of them.

For starters, there is no citation for “bulk of transactions.” In the past, some centralized exchanges have attempted to bulk release transactions on-chain, however the authors do not give us any idea what percentage as of mid-2022.19

Chain analytics companies such as Elliptic and Chainalysis likely have some idea, it is unclear if anyone reached out to discuss it with them.20

Strangely the authors do not use a single chart or image throughout the book which is somewhat weird considering how many visuals could help their arguments.

For instance, above is a line chart from Bitinfo Charts showing the daily on-chain transaction usage of Bitcoin over the past three years. The black vertical line is the date the book was published. We can see that up until this past spring, on-chain transaction volume fluctuated roughly between 250,000 and 350,000 transactions per day.

The recent uptick in late April this year is due to the popularity of Ordinals, a new NFT-focused protocol that uses Taproot (an “upgrade” implemented about two years ago).

Furthermore, and most importantly: an increased block size does not force miners to purchase new hardware and receive less mining rewards and higher electricity costs. This is not even an argument that “small block” proponents such as Luke-Jr have made.21 It is just plain wrong.

Recall that “mining blocks” for proof-of-work networks has split the “mining” job into two separate organizational efforts: (1) mining farms, which operate hashing equipment; (2) mining pools, which aggregate the work generated by mining farms, into a block.

Larger block sizes do not create any new difficulty or work for mining farms, the entities who have to deal with changing electrical costs. Rather, block makers (mining pools) have to spend an extra few seconds validating and sorting transactions.

This is why the “small(er) block” argument was fundamentally wrong and why other blockchains, especially proof-of-stake based ones, have successfully increased block sizes and reduced block intervals. Mining farms typically only purchase new hardware when their current gear is no longer profitable to mine with, a larger block size is not one of those reasons.

Also, it is unclear which developers the authors spoke with but usually most developers that earn a salary or “profit” off of Bitcoin development are those that work at a company that operates mining equipment, such as Blockstream.

On p. 62 they discuss the overhyped lightning network, writing:

The lightning network itself introduces a whole new set of attack vectors for double spends and frauds as outlined in many cybersecurity papers such as the Flood and Loot attack. This attack effectively allows attackers to make specific bulk attacks on state channels to drain users’ funds. The lightning network is an experimental and untested approach to scaling, with progress on this scaling approach having stagnated since 2018. According to self-reported lightning network statistics, less than 0.001% of circulating bitcoin were being managed by the network, and transactions volume has remained relatively flat after 2019. No merchants operate with the lightning network for payments and as of today it is nothing more than a prototype.

I tend to agree with the authors views that lightning is mostly vaporware. Yet there are probably more accurate arguments than theirs. For starters, lightning is not “untested.” It is has been live and in the wild for years.

Second, according to Bitcoin Visuals, both nodes and channels were increasing during the first half of 2022 when this book was published. Specifically it is the network capacity and capacity per channel that have stagnated or declined (something the authors could mention). However, one counter-point that a lightning promoter could rightly make is that a small amount of bitcoin (sats) could in theory be used in a high velocity (high turnover) manner.

For instance, even though the velocity of M2 has declined over the past several decades yet we would not consider the U.S. economy as having declined over the same period of time. However we do not know what the velocity of sats is on lightning at this time. Perhaps it is negligible.

And lastly, I too am tired of the lightning promoters who used to say “it is only 18 month away.” Either way, the authors could use some other data and charts to back-up their thesis.

Source: The Block

For example, the line chart (above) is from The Block which shows the capacity of lightning measured in USD and BTC over the past three years. The vertical green line is approximately when the book was published. As we can see, while the amount of BTC has increased about 20% since the book was written, as measured in real money (USD), the value locked-up on lightning has not really changed much in the past couple of years.

Source: DeFi Llama

For comparison, above is a line chart from DeFi Llama. It shows the total value locked up (TVL) on Ethereum for the past five years measured in USD. The vertical dashed line is the date the book was published.

You can visibly see how the collapse of Terra (LUNA and UST) six weeks prior had immediate knock-on effects, sending the coin world into a bear market (as measured in USD).

On p. 63 they write:

Outside of the bitcoin network, there are similar problems in other cryptocurrencies. The bitcoin meme of technical indirection through Layer 2 solutions have been translated to other systems and their development philosophies. This perspective views the base protocol as being only a settlement layer for larger bulk transfers between parties, and those smaller individual payments should be handled by secondary systems with different transaction throughputs and consistency guarantees. The ethereum network has taken a different set of economic incentives in its initial design. At the time of writing, this network is still only capable of roughly 15 transactions per second. There is a proposed drastic protocol upgrade to this network known as ethereum 2.0 which includes a fundamental shift in the consensus algorithm. This project has been in development for five years and has consistently failed to meet all its launch deadlines, and it remains unclear when or if this new network will launch. Since this new network would alter the economics of mining the protocol, it is unclear if there will be community consensus between miners and developers that the protocol will go live or whether they will see the same economic stalemate and sclerosis that the bitcoin ecosystem observes. The ethereum 2.0 upgrade is unlikely to ever complete because of the broken incentives related to its development and roll-out.

Even in mid-2022 when this book was published, this fortune telling was a big L. Why? Because in December 2020 the proof-of-stake mechanism for Ethereum was successfully launched. It was called the Beacon Chain. Two months after the book was published, “The Merge” successfully occurred in which the proof-of-work function (and mining) were completely shut off.

Now you might be thinking that it is unfair to ding the authors and give them a loss on this prediction. But prior to The Merge, there were already about a half a dozen public Ethereum testnets that successfully transitioned from PoW to PoS. In either case, the authors should at the very least hedged their strong language.

It is worth pointing out that one of the anti-coiners that Stephen Diehl has endorsed (and cited) is Hilary Allen, who used the Financial Times to push a similar set of inaccurate predictions regarding Ethereum around the same time frame. This non-empirical, a priori approach does not help the credibility of their arguments. Reconsider citing them.22

For instance, on p. 63 they write:

The broader cryptocurrency community has seen a zoo of alternative proposed scaling solutions, these proposals going by the technical names such as sidechains, sharding, DAG networks, zero-knowledge rollups and a variety of proprietary solutions which make miraculous transaction throughput claims. However the tested Nakamoto consensus remains the dominant technology. At the time of writing, there is little empirical evidence for the viability of new scaling solutions as evidenced by live deployments with active users. Central to the cryptocurrency ideology is a belief that this technical problem must be tractable, and for many users, it is a matter of faith that a future decentralized network can scale to Visa levels while maintaining censorship resistance and avoiding centralization.

There are a few issues with this including the fact that the authors lump a bunch of technical names together without providing any context. This is a disservice to the reader who should google them to understand the nuances of say, sharding and zero-knowledge rollups.

Secondly, the authors introduce “Nakamoto consensus” for the first time without providing any context or definitions. Recall that pages ago this was noted as term that is conventionally used in long-form writing. It is good that they are aware of the term, but it is unfortunate that it came this far into the book and without any context.

Lastly, not every single cryptocurrency project or even blockchain effort is explicitly targeting “Visa levels.” Some blockchains that can process a few hundred transactions per second (TPS) are not trying to be a universal settlement layer. This is a strawman argument.

In addition, not that it should matter but Visa itself has both invested in blockchain-related companies for at least seven years and has partnered with other blockchain-related projects and even conjured up a way to pay for ETH gas fees with credit cards.23 Blockchains can be used for more than just money and payments, the authors should hedge their a priori mantra in the next edition.

For what it is worth, I am also skeptical that some of the L2s that have been announced for Ethereum will see a large amount of active users anytime soon. But it is disingenuous to throw the baby out with the bath water like the authors routinely do.

For instance, L2Beat is a frequently updated site that illustrates the total value locked (TVL) across more than two dozen L2s. It is worth keeping an eye on because TVL is one piece of evidence to back up a claim.

On p. 64 they write:

However, the inescapable technical reality is that every possible consensus algorithm used to synchronize the public ledger between participants are all deeply flawed on one of several dimensions: they are either centralized and plutocratic, wasteful, or an extraneous complexity added purely for regulatory avoidance.

This false dichotomy could easily be turned on the authors: guess who also operates centralized ledgers? Too big to fail banks. Are the participants also plutocratic and wasteful? This is not really the place to turn the tables on the authors but it is clear, one-third into the book, they have it out for public chains due to an ideology that regularly provides incumbents a free pass.

Why is that? It is possible to be both critical of cryptocurrency zealotry and also systemically important financial institutions (SIFIs). It is not one or the other. Why carry water for High Street banks? Let us not cherry pick favorites.

On p. 64 they write:

A consensus system that maps wasted computation energy to a financial return, both in electronic waste and through carbon emissions from burning fossil fuels to run mining data centers, is Proof of Work. Proof of work coins such as bitcoin is an environment disaster that burns entire states’ worth of energy and is already escalating climate change, vast amounts of e-waste, and disruption to silicon supply chains (see Environmental Problems). The economies of scale of running mining operations also inevitably result in centralized mining pools which results in a contradiction that leads to recentralization.

I agree with the authors, and have written so elsewhere.

However, a nitpick, the centralization of mining pools arose due to variance in mining rewards, and are not related to running mining farms. Pooling hashrate helps smooth out payouts much like pooling lottery tickets does in an office lottery pool.

On p. 64 they write:

The alternate consensus model proof of stake is less energy-intensive; however its staking model is necessarily deflationary; it is not decentralized, and thus results in inevitably plutocratic governance which makes the entire structure have a nearly identical payout structure to that of a pyramid scheme that enriches the already wealthy. This results in a contradiction that again leads to recentralization, which undermines the alleged aim of a decentralized project. The externalities of the proof of stake system at scale would exacerbate inequality and encourage extraction from and defrauding of small shareholders.

What is the source for everyone one of those claims? It is unclear.

The authors do provide a single reference from David Rosenthal attached to the final sentence of the paragraph. Rosenthal’s post primarily focuses on maximal extractable value (MEV) which is not a topic that comes up in this chapter or anywhere in the book.

It is possible that the authors were referring to Ethereum for some of their arguments.

For the sake of brevity, let us assume the authors are 100% correct about Ethereum having all of the failing listed above. But Ethereum was not the only public chain using proof-of-stake in mid-2022. Which of say, the top 20 PoS networks was decentralized? The authors do not even provide a metric for readers to measure or understand what is or is not decentralized.

For instance, the authors could have created a table that provides how many validators and/or validating pools per chain, or the distribution of tokens, of the percentage of token supply that is staked, and so forth.24

How are readers supposed to get on board and agree with the authors when the authors spend every other page ranting rather than providing coherent, evidence-based arguments?

On p. 64 they write:

Any Paxos derivative, PBFT, or proof of authority systems are based on a quorum of pre-chosen validators. In this setup, even if they are permissionless in accepting public transactions, the validation an ordering of these transactions is inherently centralized by a small pool of privileged actors and thus likewise involves recentralization. Any other theoretical proposed system that is not quorum-based and requires no consumption of time/space/hardware/stake resources would be vulnerable to Sybil attacks which would be unsuitable for the security model of a permissionless network.

The only reference the authors provide a single link regarding Sybil attacks to a presentation from David Rosenthal.

What is Paxos? What is PBFT? What is proof of authority? Once again the authors throw these acronyms and terms at the audience without even briefly describing them anywhere. What is proof of time or proof of space? Readers can clearly google after the fact, and find things on Chia or Bram Cohen, but why did the authors not feel compelled to provide any context?

The final sentence itself can be chucked out the window due to Hitchen’s razor: that which can be asserted without evidence, can be dismissed without evidence. This book has not created credibility for the authors, rather, just the opposite.

On p. 64 they conclude:

The fundamental reality is that cryptocurrency currently does not scale and cannot adapt itself to fit the existing realities of how the world transacts. The technology can never scale securely without becoming a centralized system that undermines its very existence.

One of the citations is to an article about how almost no one uses bitcoin for commerce – a comment I tend to agree with. The other reference is to another presentation from David Rosenthal. Even if Rosenthal endorsed their views it is still an a priori claim.

And more importantly: the onus is on the party making the positive claim. Their strident language “never scale securely” leaves no wiggle room and is tantamount to fortune telling.

On p. 66 they have dived into the privacy section, writing about Bitcoin:

This features means that while accounts are anonymous, the global transaction data can be used to infer specific properties about when, with whom, and in what amounts an address is transacting.

This is not quite true for other chains. A user (or organization) can run a node or a bunch of nodes scattered around the global and may be able to infer some information. But once the activity goes off-chain, into a custodian like a centralized exchange, then inferences become guesses without direct access.

On p. 66 they write:

The tracking and tracing of bitcoin involved in criminal activities has emerged as a standard practice in law enforcement and emerging companies such as ChainAnalysis have been able to deduce quite a bit of implied information simply from public information. Unlike with bank accounts, law enforcement does not require a subpoena of public information for an ongoing investigation. Notoriously many users of darknet services such as the Silk Road were caught because of a misunderstanding about the transparency of the bitcoin ledger used by these actors.

Couple of issues:

(1) Spelling: ChainAnalysis should be corrected to read Chainalysis

(2) While the authors are probably correct, the last sentence needs a citation or reference. For instance, a highly cited relevant paper is: A Fistful of Bitcoins: Characterizing Payments Among Men with No Names by Meiklejohn et al.

On p. 67 they discuss traditional banking, writing:

When a wire transfer is issued by a company whose corporate account is at HSBC in London to Morgan Stanley in New York City, the metadata contained within that transaction could contain commercially sensitive information. For example, if a British company is sending large amounts of funds to a newly created American division, it may indicate the intent for the company to expand into the American market. There are cases where the constellation of transactions between known entities could be used to deduce confidential information about the parties. However, this fact poses an existential question about the efficacy of cryptocurrency networks as an international payment system if pseudonymous accounts leak information.

Perhaps Flashboys is a little out-of-date but it could be worth mentioning the role high-frequency trading firms play(ed) in this scenario. This type of scenario exists in the cryptocurrency world too, as analytics firms provide granular on-chain data to trading firms (and sometimes the trading firms themselves build a boutique set of tools).25

On p. 69 they write about security:

In addition, these exchanges are some of the most targeted entities on the planet for hackers. In 2019, twelve major exchanges were hacked and the equivalent of $292 million was stolen in these attacks. Over time and in conjunction with bubble economics, these events have only increased in severity and frequency.

This could be true but where is the citation for the final sentence? Do the authors mean to also include decentralized exchanges (such as automated market makers) as well as bridges?

On p. 69 they write:

While some best practices can mitigate this risk, the fundamental design of bitcoin-style systems is that the end-user is responsible for their own keys and wallets by safeguarding their cryptographic secrets. This can be done through several strategies. So-called cold wallets are wallet key stored in physical objects such as paper and not connected to electronic devices.

Couple of questions:

(1) What is a “bitcoin-style system”? Do the authors mean blockchains in general or forks of Bitcoin or UTXO-based blockchains?

(2) Why do they say “so-called”? Private key management has been an ongoing area of trial-and-error since at least the invention of public key cryptography by Martin Hellman, Ralph Merkle, and Whitfield Diffie.

On p. 70 they write:

There are many news stories of ransom, kidnapping, and murder of crypto asset holders who attempted to safeguard their wallets personally.

Any chance they could refer to or cite one of them in a future edition?

On p. 70 they conclude with:

Of course, the natural solution to this would simply be that most users should not be their own bank; instead, they should use a “cryptobank” which holds their funds and provides them access. However, this is ultimately just recreating the same centralized authority system which cryptocurrency advocates attempted to replace. Providing cryptocurrency security for the masses either introduces more social problems that thee technology has no answer to or results in a recentralization that undermines its own idological goals. After all, we already have centralized banks and existing payment systems that work just fine.

While I agree with the first part of this passage, that a considerable amount of effort and resources has recreated the same sorts of centralized organizations but with less accountability and recourse, there are at least three problems with their patronizing tone:

(1) Typo “thee” should be “the”

(2) What jurisdictions are they writing about?

(3) Most importantly: the authors explicitly defend incumbents and legacy organization. They are defending a financial cartel without presenting any reasons to do so.

For example, because of implicit bail out expectations in the U.S., commercial banks are able to rent-seek off of society, as do private payment systems via usurious fees. While the authors pay some lip service in a section on “Occupy Wall Street” and in the “Conclusion” at the very end, it bears mentioning that executives and board directors at too big to fail (TBTF) institutions were not held directly accountable after massive bailouts in 2008-2009.

In point of fact, systemically important financial institutions (SIFIs) have become more concentrated since Dodd-Frank was passed in 2010. In the U.S., the deregulation of “midcap” regional banks in 2018, partially led to the subsequent collapse of several high profile commercial banks eight months ago, including Silicon Valley bank, Silvergate bank, and Signature bank. All of which required FDIC assistance to wind down.

Clearing houses (CCPs) are larger than ever and their systemic importance creates an implicit government bailout expectation which results in an ongoing moral hazard situation.26

In the U.S., not only are retail users stuck with a duopoly that extract rents but users are expected to regularly provide third parties with personally identifiable information (PII) to improve the user experience of sending funds in real time via fintech apps (like Venmo). This includes, normalizing man-in-the-middle (MITM) attacks through apps like Plaid, which integrate with retail banks.

I personally do not think most cryptocurrency projects or efforts solve any of these issues, but there is no reason to carry water for the status quo like the authors repeatedly do. Again, it is possible to critique both the world of blockchains as well as traditional finance. They are not mutually exclusive.

On p. 70 they start discussing compliance, writing:

The movement, storage, and handling of money are regulated, and most countries have laws on the international movement of funds. Showing up at an airport in Berlin with undeclared cash above €10,000 will and one in quite a bit of trouble.

What kind of trouble? Jailtime? No one knows because the authors drop that warning in the middle of a paragraph and go along.

On p. 72 they discuss cross-border payments and international money transfers, stating:

The inability to move money from a country is ultimately one of domestic internal infrastructure development and external international relations, rather than technical limitations Moreover, the proposed use case for cryptocurrency as a mode of international remittances is fundamentally limited because of a lack of a coherent compliance story. Even if we were to use cryptocurrency as a hypothetical international settlement medium, this system has not removed financial institutions from the equation. The system’s entry and exit points would have to perform the same checks of outgoing and incoming money flow required by many international agreements.

In general this is accurate and I even agree with the thrust of their argument. However it still lacks nuance because they do not specify which cryptocurrencies they are discussing.

For instance, SaveOnSend has chronicled the rise and fall of “rebittance” companies (Bitcoin-focused remittance providers) for years. And the graveyard for such startups is deep and wide.27

But the nuance the authors should make is that there is a clear distinction between Bitcoin (with a fixed supply) and a pegged stablecoin such as Dai or LUSD (from Liquity) which are dynamically minted, there is no fixed supply. Whether Dai or LUSD are used for international payments is something they could discuss, maybe neither are?

The passage also lacks any specifics or citations. A future edition could discuss the costs and frictions associated with correspondent banking and SWIFT’s decision to deploy gpi as a reaction to blockchain euphoria.28

Lastly, and perhaps importantly, it does not include discussions around real world asset-linked peggedcoins such as USDC and USDT.

Source: Twitter

Without detracting too much from the book itself, it is worth pointing out that the idea of commercial banks directly issuing “stablecoins” has been a topic of discussion since at least 2015.

At R3, some banks that participated in Project Argent later joined IBM’s now defunct endeavor called World Wire which used Stellar. One of the challenges that frequently surfaced during these experiments and deployments involved the legality of granting interest to token holders.

This is still a touch-and-go hot potato as we can see with the roll out of the European Union’s Markets in Crypto-Assets (MiCA).29 A second edition could also discuss this possibility in the CBDC section later on.

And since the authors seem very focused on the U.S., they might want to discuss the recent supervisory actions from the Federal Reserve regarding how domestic banks can transact with pegged stablecoins. But enough of doing their homework for them.

On p. 73 they conclude, stating:

Of course, like all cryptocurrency arguments, the counterargument is ideological: compliance is a non-issue because nation-states should not exist and should not have capital controls. This ideological goal is inexorably embedded in the design of cryptocurrency, making it an unscalable and untenable technology for any real-world application where sanctions, laws, and compliance are an inescapable part of doing business in financial services.

The sole citation is to a decent paper from Brian Hanley, about Bitcoin and just Bitcoin. The authors once again created a strawman and used it to broadly smear all cryptocurrency-related projects, even those unrelated to Bitcoin. This is lazy.

While I agree with some of their conclusions, an empirical-based investigation for arguing their position would be to tediously dissect the issues and challenges of other blockchains too. Look at the facts-and-circumstances for each, just like public prosecutors do.

Chapter 6: Valuation Problems

On p. 76 they discuss asset classification, writing:

Transactions on speculative crypto tokens such as bitcoin and ethereum are considerably more expensive than credit card networks and wire services. More over, as we know they do not scale to national level transactions volumes, and lack the most basic consumer payments protections found in nearly every traditional payment system. No economy trades in crypto, no large-scale commerce is completed in the currency, and no goods or services are denominated in crypto because of its hyper volatility. Crypto payments are uniformly worse than any other payment mechanism except perhaps for illegal purchases. Let us therefore consider these aspect separately through a number of different theories.

There is a bit to digest here:

(1) Typo: “transactions” should be “transaction”

(2) It is a bit odd that for all the water they carry for traditional finance, Diehl et al. do not provide many citations that strengthen their argument.

For instance, in December 2016, the Federal Reserve published its widely cited “DLT” paper. On p. 3 the authors of Fed paper wrote about payment, clearing, and settlement (PCS) systems: “In the aggregate, U.S. PCS systems process approximately 600 million transactions per day, valued at over $12.6 trillion.”

The authors of the Fed paper also included a citation for that figure: Average daily volume and value were calculated using 2014 data on U.S. retail and wholesale PCS systems and were approximated based on the number of business days in the year. See Committee on Payment and Market Infrastructures (2015), Statistics on Payment, Clearing and Settlement Systems in the CPMI Countries.

Yet Diehl et al. do not mention real time gross settlement (RTGS) systems at all in the book. This would help strengthen their arguments and improve their credibility in certain sections.

(3) The authors do not provide specific dollar or euro amounts for how much more expensive it is to use bitcoin or ethereum versus credit card networks and wire services. They could be right but providing specifics would strengthen their argument.

(4) Overall the paragraph comes across as being highly opinionated – especially when using subjective words like “worse,” please provide evidence next time.

On p. 77 they discuss the theory of the greater fool, writing:

Crypto tokens have no such use or organic demand and exist purely to speculate on detached from any pretense of use-value. Cryptoassets are speculative financial assets with neither use-value nor any other fundamental value, while not being monetary; and can therefore not be commodities or currencies. The demand for a crypto asset is not generated by any use-value but rather from a narrative and the the greater fool theory. A financial asset that behaves like a commodity — by virtue of a lack of underlying cashflows – but whose demand is derived purely from its self-referential exchange value or sign value, rather than use-value, is sometimes in academic literature referred to as a pseudo-commodity.

There are at least six problems with this passage:

(1) The first two sentences are fairly repetitive, they could be condensed into one.

(2) The authors use “cryptoassets” but not “crypto assets” — there is no consistency.

(3) The authors could have done a literature review to see if anyone else previously had created an ontological analysis of cryptocurrencies. They would likely find a handy paper titled: “Bitcoin: a Money-like Informational Commodity” by Jan Bergstra and Peter Weijland.

Why? Because this particular book section feels like Diehl et al., are fumbling around in trying to create categories for something like Bitcoin, especially the last sentence regarding a “pseudo-commodity.”30

(4) I do not have any strong views as to what cryptocurrency (or cyptoasset) is or is not a commodity but specific regulators in specific jurisdiction do. Why did the authors fail to include any definitions or views from relevant bodies, like the Commodity Futures Trading Commission (CFTC)?

(5) Next, regarding “pseudo-commodity” the authors do not provide any references to any academic literature. A quick googling found this entry:

Source: Wikipedia

Were Diehl et al. referring to Karl Marx’s definition of “pseudo-commodities”?

(6) Lastly, later in the book they swap “greater fool theory” with Keynesian Beauty Contest. It is unclear why they use one versus the other. Either way, the authors claims still lack nuance due to the actual usage of real world assets (RWA) such as pegged stablecoins.

While I have been critical of some of these parasitic tokens, a few do in fact exist and do in fact represent legal claims to actual (off-chain) value. This is important because by failing to recognize the existence of RWA, the authors do a disservice to their stronger argument (self-referential value). A future edition should include a discussion on different types of RWAs separate from cryptoassets such as bitcoin.

On p. 80 they conclude, writing:

Crypto assets are quantitatively a completely irrational investment, and theoretically treating them as a sensible asset class necessitates irrational assupmtions of infinities or introductions of absurdities that contradict all of established economic thought. We are thus left with the most obvious conclusion: crypto is a bubble much like tulips, Beanie Babies, and other non-productive curio that humans have manically speculated on in the past. It is a financial product whose only defining property is random price oscillations along a path that inevitably leads to its ruin.

There are three issues with this:

(1) Once again the authors flip back to “crypto assets” instead of “cryptoasset.”

(2) In the second sentence they insert a word “curio” that doe not make sense. What is a curio?

(3) Lastly, they predict a future “ruin,” they are fortune tellers. That which is presented without evidence can be dismissed without evidence.

Chapter 7: Environmental Problems

For long-time readers of this website it is probably easy to guess that I am sympathetic towards arguments surrounding the negative environmental externalities created by proof-of-work cryptocurrencies. So I should be a fan of this chapter. And I mostly am.

But one of the quibbles upfront is that as this book progresses, the chapter lengths get shorter and shorter. For instance, this chapter is less than six pages long. An editor would likely have recommended combining similar themes together, and/or truncating longer chapters. The next edition could probably combine this with Ethical Problems since there is some overlap.

With that said, there are a few issues in this chapter. On p. 81 they write:

The technical inefficiencies of cryptocurrencies are the mark of a technology that is over-extended and not fit for purpose. However, what is even more concerning is the environmental footprint these technologies introduce into the world. Bitcoin and currencies that use proof of work consensus scheme require massive energy consumption to maintain their networks. This feature is central to their operation and is the mechanism that allegedly “builds trust” in the network. No network participant has any privileged status except in the amount of energy they expend to maintain the consistency of the network itself. The amount of energy spent in this global block lottery results in an expected direct return per watt, which is statistically predictable. In a nutshell, the premise of mining is to prove how much power one can waste, and the more power one can waste, the more resources one receives in return. The system is fundamentally inefficient in its design.

While I agree with the thrust of this paragraph, it still needs some nuance. In addition, an “s” should probably be added to the word “scheme.”

What nuance is needed?

For starters, a new and even old PoW network does not automatically require massive energy consumption. Rather, what happens in practice is that miners will deploy capital (hardware) up to the point where marginal costs equals the marginal value (MC=MV) of the block reward.

That is to say, when bitcoin was trading for $10 per coin, rational miners were spending no more than $10 to mine a coin.31 If bitcoin’s value measured in USD dipped below the marginal cost of mining, it would be more rational to turn off the machines and purchase the coins themselves. Were all miners rational during the time period of say, 2011 when the prices fluctuated around that level? This dovetails into conversations around edge cases for why a miner would unprofitably farm a PoW coin (such as for virgin coins).

At any rate, in 2011 when the price of bitcoin was around $10, a block reward (of 50 bitcoins) would be worth $500 (sans transaction fees). On average roughly 144 blocks are mined per day. Thus rational miners in aggregate would spend at most $72,000 per day, this includes both hardware and operational costs.

Annualized this would amount to roughly $26.2 million in capital. That is still a lot of money, but is significantly less than the costs to maintain and operate the Bitcoin network when the value of each bitcoin is $30,000 like today.

In other words, “massive energy consumption” is not an iron clad rule. It just happens that we know the resources deployed (consumed) to maintain a PoW network grow (or fall) in direct proportion to the coin value. This same phenomenon occurs in other industries, such as mining for physical commodities including petroleum or gold.

A quick googling shows there are a couple of papers on this topic of “siegniorage” that the book could possibly cite.

Lastly, while Bitcoin’s money supply schedule is fixed, there are two reasons why returns are not statistically predictable:

(1) According to Bowden et al., actual block propagation (arrivals) do not follow the (theoretical) homogenous Poisson process that was expected upon its release in 2009. This is one of the reasons that halvenings do not fall precisely every four years but have instead been “compressed” and are slightly accelerated.32 In theory the halvings should occur on odd years during January, but the next halving will actually occur about eight months ahead of schedule.

(2) No one can accurately predict or know the future price of bitcoin. And it is the future price that determines how much additional capital miners will deploy (in aggregate) which then shapes the difficulty level. This is one of the reasons why executives at Bitcoin mining companies have to publicly put on a “bullish” persona: future price is existential to their hashing operations.

One other paragraph that should be refined is on p. 85, where they discuss environmental horrors:

Whether bitcoin has a legitimate claim on any of society’s resources is a question that does not have a scientific answer, it is fundamentally an ethical question. There are many activities where humans burn massive amounts of fossil fuels for entertainment activities or activities that do not serve any productive purpose. For example, Americans burn 6.6 TWh annually for holiday lightning. The software industry must ask whether we should sustain a perpetually wasteful activity in perpetuity.

Starting in reverse, the authors actually did a self-whataboutism. Pretty rare. Recall that a whataboutism is a technique to deflect blame or responsibility by pointing out something unrelated that is also bad.

The authors do not need to compare Bitcoin’s resource usage with anything besides other public chains attempting to provide disintermediated payments (like a proof-of-stake chain). There are a lot of activities that humanity (purposefully) wastes resources on, such as nuclear weapons research and development. But nuclear weapons R&D has nothing to do with running a pseudonymous peer-to-peer payment network. That is an apples-to-oranges comparison.

Similarly, holiday lighting, like leaf blowing, wastes resources. But holiday lighting is not an apples-to-apples comparison with running a payments network. The authors have the upperhand in this chapter but sabotage themselves midway by incorporating the logic of Bitcoin maximalists like Nic Carter.33

The bulk of the chapter does cite and use references to peer-reviewed research, which is something that should be replicated across the whole book in a future edition.

Chapter 8: Cryptocurrency Culture

This chapter could have been a lot stronger than it was. It was an okay chapter but it missed the opportunity to really dive into the crazy cult of Bitcoin maximalism. At fifteen pages it felt short but still makes some decent observations, primarily with the history and background of cypherpunks.

With that said, there are still some issues that could be ironed out. For instance, on p. 87 they write:

The intellectual center of cryptocurrency culture is the premise to reinvent money from first principles independent of existing power structures. The cryptocurrency phenomenon can therefore be viewed as a political struggle over the fundamental question of “who should exercise power over money” in a world idealized by its acolytes. There is a great insight to learn about the movement from their manifestos: How a group describes their path to utopia gives a great deal of insight into their mind and values.

They then refer to a paper from Sandra Faustino. So what is the issue with this introductory paragraph?

They unintentionally use the revisionist history and language of Bitcoin maximalists.

Not every cryptocurrency project is attempting to reinvent money. Furthermore, with Bitcoin itself, the word payment (not money) is mentioned 15 times in the original whitepaper.

In fact, Samuel Patterson went through everything Satoshi ever wrote. Unsurprisingly Satoshi discussed payments significantly more than a “store of value.”

Source: Twitter

This distinction is important because it actually hurts Diehl et al. argument, that “cryptocurrency culture is the premise to reinvent money” because that empirically is not the case as we can see with many tokens unrelated to money.

On p. 93 they write about technoliberarianism, stating:

At the same time, questions concerning digital assets and what ownership meant in a world of bytes instead of atoms were being explored. The technology to copy and disseminate files freely became available was effectively a solved problem by 2010. These technologies marked the move toward censorship-resistant platforms, where information could be shared resiliently against removal by external actors.

The paragraph continues on but readers are never provided with a citation or reference for the year 2010. What exactly happened by that year?

Are the authors referring to streaming services? Perhaps they are thinking about digital rights management (DRM)? Or oppositely, are they casually suggesting anyone can share files via a protocol like BitTorrent? Who knows.

On p. 95 they write:

A malaise has descended over Silicon Valley as an unexpected dystopia has unfolded in the wake of the hopeful disruption. In the absence of advancement in the field, many developers have retreated into technolibertarin fantasies that center around pipe-dream decentralized technologies as a panacea to the world’s problems.

On the one hand I agree with the authors observation. I worked and lived in the Bay Area for five years, my wife even worked in the semiconductor industry in Santa Clara, right at the center of it. But for all of the talk about “Silicon Valley” being head over heals for cryptocurrencies, the reality was very different in 2014-2015.

For instance, during this time frame representatives from Pantera Capital, such as Johnny Dilley, were openly antagonistic towards anything that was not Bitcoin.34

Source: Twitter

In a now-deleted tweet, Brian Armstrong (co-founder and CEO of Coinbase) exuded what was the feeling du jour in the Bay Area.35

On p. 95 they ironically dive into Austrian Economics, stating:

Austrian economics had already gained some prominence in the late-19th and early-20th century from the studies of philosophers and economists Ludwig von Mises, Friederich von Hayek, and Murray Rothbard.

The authors should tweak the chronology here because two-out-of-three did not rise to any prominence in the English-speaking world until after World War II. Rothbard was not even born until 1926.

More to the point: why is it that these authors ironically dove into Austrian economics? Because some anti-coiners, such as the book authors, often use non-empirical means to arrive at a conclusion: a priorism is their cudgel.

For instance, they write on p. 96:

The school of Austrian economics differs from orthodox economics in its methodology. Instead of proceeding from an empirical framework of observations and measurements, Austrian economics is a presuppositional framework that attempts to create a model to describe all human economic activity by purely deductive reasoning.

This is a little too bit on the nose because that is precisely what the authors do in chapter after chapter, eschewing empiricism for a priorism.

As I have pointed out on this website and on social media: the Horseshoe Theory of non-empiricism between Bitcoin maximalism and anti-coiners, both regularly use a priori arguments rather than provide empirical evidence.

Diehl et al., like Michael Goldstein and Elaine Ou before them, cannot claim to be evidence-driven while simultaneously using deduction to arrive that “all cryptocurrencies are useless.”36

On p. 96 the authors twice mention this modus operandi:

The Austrians call this line of reasoning praxeology, a pure axiomatic-deductive system that its founder Mises claims can be knowable and derived independent of experience, in the same way that mathematics can be known.

And:

Mainstream economics arises out of the empiricism philosophy in which all knowledge is derived from experience, where true beliefs derive their justification from measurements, observations, and coherence to scientific models which make falsifiable claims.

This last quote is a doozy because Diehl et al., regularly make falsifiable claims because we know empirically there are non-self-referential blockchain projects and smart contracts that actually work.

It is incredulous to trot out a strawman and deductively claim that every cryptocurrency on the planet, even future iterations, cannot work. Lord give us the confidence of strident a priorism.

On p. 99 they write about fiat money, stating:

Just as the gold supply on Earth is limited, the number of bitcoins is similarly constrained by a fixed supply.

While a lot of Bitcoiners like to make this analogy, it is untrue. The supply of gold is somewhat elastic, limited by the cost of recovery (and mining). Whereas the supply of bitcoin is perfectly inelastic.

On p. 101 they mention in passing that:

Nevertheless, cryptocurrency advocates have repackaged the Austrian arguments and rebased them with bitcoin or other cryptocurrencies as their center. Trade books central to the bitcoin movement (such as The Bitcoin Standard) proceed from an exclusively Austrian perspective to posit the notion of bitcoin as a basis for a new global reserve currency to displace the US dollar and an alleged improvement on gold.

This would have been the perfect time to discuss the antics of specific Bitcoin maximalists, such as Saifedean Ammous.

Speaking of which, earlier in the book (p. 79) the authors mentioned a paper by Nassim Taleb. Yet what went unmentioned was that in 2018 Taleb wrote the foreword to Ammou’s book, The Bitcoin Standard. Two years ago Taleb would have a public change of heart.

To tie this back to the beginning of this book review, when did Diehl et al., have a change of heart following the launch of Uplink? Was there any “last straw” moment?

On p. 101 the authors discuss Financial Nihilism, writing:

While the ideologies and ideas around crypto vary, the most common worldview held by most crypto investors is simply a complete lack of any worldview. In normal philosophy, this perspective is called nihilism: the belief that all values are baseless and that nothing can be known or communicated.

Citation needed. How do the authors know what “the most common worldview held by most crypto investors”?

Did they conduct a survey at a conference? What can be asserted without evidence can be dismissed without evidence.

Chapter 9: Ethical Problems

This chapter could have been one of the stronger ones – after all, not a month goes by without some crazy high profile hack – but instead it felt a bit like a worn shoe due to repetitive polemics.

For example, on p. 103 they write:

Slot machines are a technology, yet it is a technology that is purpose-built for financial exploitation. In many ways, cryptocurrency carries the same moral character as slot machines. Cryptocurrencies are purpose-built for avoiding regulation and facilitating illicit financing, effectively enabling a dark network for payments in which illegal transactions external to the technology can be achieved within the system. There are several major categories into which the inescapable harm of cryptocurrencies falls.

Contra Diehl et al., not every cryptocurrency, or blockchain project is the same, nor are all purpose-built for avoiding regulation and facilitating illicit financing.

The clearest examples – although boring as they may be – are the permissioned blockchains used by enterprises. 37 A non-exhaustive list includes Project Ion from the DTCC, Onyx from JP Morgan, and BSTX (powered by tZERO).38 Maybe none of these projects grow beyond a small niche market, but they each serve as an empirical counter-example to the a priori argument made directly above. Readers are encouraged to follow Ledger Insights for more in this arena.

On p. 104 and again on p. 133 the authors mention a “FATF blocklist” but that does not exist. What they are probably referring to is the FATF “black list.”

On p. 105 they discuss selling snake oil, writing:

Day-trading cryptocurrencies can negatively affect the mental health of individuals involved in this activity. The stress and anxiety associated with attaching one’s life savings and well-being to an unnaturally volatile market can be both exhilarating and exhausting. The mental energy required to maintain a portfolio exposed to this level of risk requires a great deal of time, focus, and discipline that many retail investors lack and that in the long term may have a deleterious effect on mental well-being.

The authors provide a reference to a good article from Vice that interviews specific participants. A reader might ask, how is day-trading cryptocurrencies different than day-trading other assets? This is not answered because the authors immediately move on to the next topic, illicit activity.

On p. 107 they discuss illicit activity, stating:

Even more sophisticated launders use a technique known as chain hopping in which value in one cryptocurrency is swapped in a trade with the equivalent value in another cryptocurrency and then swapped back. This technique further obscures the origin of funds commonly using privacy coins such as Monero and ZCash.

A few issues with this statement:

(1) Misspelling, it should be “launderers” not “launders”

(2) The first sentence should state that the user switches value from one cryptocurrency to a different liquid cryptocurrency. It is unclear how often this type of swap happens and the authors do not provide any stats (likely because the precise figure is based on data from centralized exchanges). 39

(3) How “common” is the swap to Monero and ZCash? They reference a paper from 2018 and on p. 40 the author, Anton Moiseienko, describes the mechanics of “chain-hopping” but no stats are provided as to how frequently it occurs. So can it really be said this commonly occurs or not?

On p. 107 they write:

In addition, self-service laundromats such as tornado.cash provide automated money laundering services on the ethereum blockchain and require no technical expertise. These services are used to launder funds stolen from ransomware attacks using chain hopping techniques.

There are a couple of inaccuracies in this paragraph:

(1) For users of Ethereum, there is no native on-chain privacy or confidentially function, everything is public by default. It is not clear how many users used Tornado Cash to launder funds but anecdotally there appears to be many people who tested out the dapp without attempting to do anything nefarious.

How do we know? Because roughly two months after the book was published, OFAC, (a unit of the U.S. Treasury department) sanctioned Tornado and there were knock-on effects that impacted bystanders who received small amounts of ether (ETH) that had originated from Tornado. OFAC later revised the sanctions guidance to make a carve-out for the bystanders who received this ‘dust.’

(2) Tornado Cash did not have the ability to do anything with chain hopping, this is factually incorrect. Users of Tornado may have moved ETH to an exchange or a bridge and then swapped the ETH for a different asset, but Tornado did not have “chain hopping” capability. Note: over the years other developers deployed clones of Tornado on other chains, these were not linked or bridged to one another.

(3) It is worth skipping to p. 245 wherein the authors make some unfounded claims about privacy. Someone needs to ask the authors: are developers allowed to create confidentiality or privacy-enhancing tech on public chains? If not, why not?

On p. 107 the authors also write about Crypto Capital, regarding Bitfinex, and Yakuza crime syndicates in Japan. Both paragraphs are good concise explanations of what occurred but neither one included any citations or sources. A second edition should provide at least one.

On p. 108 they misspell “Stellar” as “Steller.”

On p. 109 they wrote:

In 2019 an early developer on the ethereum project was arrested by the FBI for allegedly providing technical instructions to the North Korean on the technical mechanisms to launder money through the ethereum network between North and South Korea.

There are a couple of issues with this:

(1) Grammar: rewrite “to the North Korean” instead it should probably read: “to the North Korean government”

(2) This is not a fair description of what Virgil Griffith was accused of doing. The transaction between North Korea and South Korea was intended to be a symbolic peace gesture and my understanding was that Griffith’s intent was for the South Korean government to approve it. This is a poor example by the authors because North Korea was going to violate sanctions in significantly worse ways. For instance, according to Chainalysis, North Korean hackers stole around $2.2 billion in cryptocurrency during 2022. Griffith’s demonstration did not bolster the hackers capabilities.

On pgs. 109-111 they discuss the unbanked, overall this was a decent section. However there are not many citations or references. Highly recommend citing a new paper from Olivier Jutel, “Blockchain financialization, neo-colonialism, and Binance.”

On pgs. 111-113 the authors discuss the MMM Ponzi, it was well-written. However, the second to last paragraph states:

Cryptocurrency is not standing on some moral pillar, nor is it acting as some technological Robin Hood. Instead it is simply removing all the processes protecting both sides of transactions and distributing those trust mechanisms to those parties. Bitcoin ATM operators are now forced to step in to prevent the vulnerable from scams where banks would have generally served as the safeguard. Instead of protecting the vulnerable against fraud, cryptocurrency now pushes this obligation on individuals themselves.

I tend to agree with most – if not all – of this passage. But it should be written to include a couple of nuances:

(1) Not all cryptocurrencies are the same and the authors should give specific examples. After all, there are at least 10,000 coins and tokens floating around, do the know for certain each is marketed or advertised as “some technological Robin Hood”? No, this is hyperbolic.

(2) Banks are probably not the best example to use here.

Why not? Because in the U.S., commercial banks are frequently fined and penalized over abusive conduct they have towards their customers. For instance, last month Bank of America agreed to pay $250 million in fines and compensation to cover “junk fees” it had levied on customers. Last December, the Consumer Financial Protection Bureau (CFPB) fined WellsFargo $3.7 billion for rampant mismanagement and abuse of customer accounts.

A future edition should just scrub reference of banks in this paragraph because it does not help their argument.

Chapter 10: The Cult of Crypto

This chapter is one I was looking forward to. I had hoped they would dive into the seedy world of coin lobbyists and maximalists. Instead readers are given a pretty vanilla description across six pages. A second edition should build on this foundations. For instance, they mention just one of Michael Saylor’s crazy quotes when we could probably fill an entire book with his loony toons.

For instance, on p. 115 they introduce the section thusly:

Cryptoassets are inherently negative-sum and, as such, consistently hemorrhage money.

This is factually untrue. Perhaps proof-of-work coins are negative sum (for reasons discussed a few times already) but real world assets (RWA), tokens representing off-chain claims on tangible goods, are not necessarily hemorrhaging money. Their histrionics are all so tiresome.

Squid Game, but on a blockchain!

On p. 116 they discuss the golden calf, writing:

They cryptocurrency movement shares many aspects of economically-based new religious movements such as Scientology. Crypto is fundamentally a belief system built around apocalypticism, the promise of utopia for the faithful, and a process for discrediting external critics and banishing heretical insiders.

The authors provide two citations. A paper about Bitcoin from Vidan and Lehdonvirta and then a very strange article from the Financial Times.

Why is the FT article strange? Because it frames Chris DeRose as a victim when in reality he is often the predator. For example, DeRose, and his podcasting co-host Joshua Unseth, are very public about their misogyny, they denigrate women and have attacked them online.

For instance:

Source: Twitter

DeRose and Unseth have subsequently deleted their twitter accounts and started new ones.

Prior to his outspoken mysoginy, DeRose – who just happens to be a vocal Bitcoin maximalist – frequently attacked me.

For example:

Source: reddit

Eight years ago, Chris DeRose (aka brighton36) attempted to smear me on reddit (see above). He purposefully used a screenshot of a presentation, without linking to the presentation. Fortunately sanity prevailed and the world eventually learned what the maximalists (and anti-coiners) both seem to try and coverup: there are other blockchains beyond Bitcoin.

But back to the specific paragraph on p. 116: parts of it are accurate. There are purity police that purge heathens who recommend larger block sizes and propagandists who fund bot armies to dog pile perceived adversaries. But it is not fair to say that “crypto is fundamentally a belief system built around apocalypiticsim.” There certainly does appear to be a great deal of overlap between some Bitcoiners and perma-doomer communities like Zero Hedge.

But anecdotally, looking through the various projects appearing on DeFi Llama, many do not appear to use “apocalyptical” oriented language on their landing pages. Again, the onus is on those making the positive claim: the authors need to backup this view in a future edition.

On p. 117 they write:

A key differentiating factor of the crypto ideology is that it lacks a central doctrine issued by a single charismatic leader; it is a self-organizing high control group built from individuals on the internet who feed a shared collective together. An organic movement it has arisen, evolved, and adapted to be a more viral doctrine of maintaining faith in a perceived future financial revolution in which the faithful view themselves as central. The inevitability of cryptocurrency’s future is dogma that is sacred and cannot be questioned.

This is a pretty good passage and anecdotally seems to jive with my own experiences. Worth pointing out that the authors crib a bit of that content from an article written by Joe Weisenthal.

Ironically the same toxic behavior occurs within the anti-coiner community too. Several of the prominent figureheads regularly block any criticism or feedback, this includes Diehl himself.40

From pgs. 117-121 they discuss trust believers. It is a pretty good section. They also note an interesting etymology. Writing on p. 118:

The communities and ideologies for the cryptocurrency subculture are fostered through mediums such as Twitter, Telegram groups, 4chan messages boards, Reddit, and Facebook groups. In cryptocurrency culture, promoting a specific investment is shilling for the coin. The term shilling comes from casino gambling, where shills are casino employees who play with house money to create the illusion of gambling activity in the casino and encourage other suckers to start or continue gambling with their own money.

The passage continues but it was very helpful context considering how frequently people are accused of shilling for this or that coin or token. They also reference an interesting article from Vice detailing how much coin shills are paid to shill.

Near the end of the chapter they write on p. 120:

The cryptocurrency ideology provides a psychological, philosophical, and mythmaking framework that, for many believers, provides sense-making in a world that seems hostile, rigged against them, and out of their control. They crypto movement fits all the textbook criteria of a high control group: it provides a mechanism for determining an in-crowd and an out-crowd (nocoiners vs. coiners).

The passage but this part is ironic for a couple of reasons. First there is some truth to it: in 2014 there were entire threads on reddit and Twitter discussing a “bear whale” that must be slain. Someone even drew a painting of it. Cultish behavior. The authors provided two citations, one to William Bernstein’s The Delusions of Crowds and the other a relevant paper from Faustino et al.

Yet something big and important is missing: the authors use the term “nocoiner” for the first and only time. They do so without providing any explanation or definition for what it is. And this is where their credibility suffers.

The etymology of “nocoiner” arose in late 2017, coined by a trio of Bitcoin maximalists who used it as a slur. I was on the receiving end of coinbros lobbing the unaffectionate smear for years. The fact that Diehl and other prominent “anti-coiners” use it as a way to identify themselves is baffling because it is the language of an oppressor. Do not take my word for it, read and listen to the presentations from those who concocted it.

If there is one take away from this book: do not willingly use the term “nocoiner” to describe yourself.

Overall this chapter was so-so but it also has the most future potential since the antics and drama-per-second are non-stop in the coin world.

Chapter 11: Casino Capitalism

This was another short chapter (just six pages) and the tone came across as if it was written by just one of the trio. It is dry and pretty straightforward. If we were to guess, it probably was not written by whomever uses “greater fool” like it is going out of fashion.

For example, on p. 125 there is a perfect time to use it:

However, many self-described “investors” are indistinguishable from gamblers. They may be driven by the same thrill-seeking and irrational behavior in picking stocks, just like they would pick numbers on a roulette wheel. One type of this investing is known as speculation which is investing in an asset for the sole reason that one believes that someone else will buy it for a higher price, regardless of the fundamentals.

The rest of the chapter is fairly vanilla. They introduce the term LIBOR but do not mention the infamous LIBOR scandal or how LIBOR was phased out in 2021-2022.

There are still a couple areas for improvement. For instance, on p. 128 they write:

Despite pathological examples of casino capitalism in the world, these types of behavior and products are overwhelming the exception and not the rule. When companies have positive quarterly earning statements, their stock prices rises, and in contrast their stock price falls when they have negative earning statements.

This is not a natural law or something universal. In fact, forward guidance can often impact share prices too. As can euphoria that the authors described in Chapter 3.

A future edition should employ an editor to cut down on the repetition. This statement has already been made several time prior with the highlighted or italicized word being “greater fool.” Pages later, they will inexplicably use the term “Keynesian Beauty Contest.”

Chapter 12: Crypto Exchanges

Because of how many successful hacks and scams have occurred this chapter should have been a slam dunk. Instead this six page chapter was once again miserly on citations leaving the readers with little to trust besides the words of the authors.

On the first paragraph of p.131 they write:

The vast majority of investors in the crypto market go through a centralized business known as a cryptocurrency exchange.

How much is “vast majority”? We are not informed. In addition, the authors do not explain the difference between a banked exchange and a bankless exchange. Probably a more accurate intro sentence would be: Apart from miners and merchants, virtually all retail users on-board through a few dozen banked exchanges.

At the bottom of p. 131 they write:

Customers deposit funds with the exchange either through credit card payments, ACH, or international wire transfers to the exchange’s correspondent banking partners. Ostensibly crypto exchanges make money by charging transaction fees, offering margin trading accounts, and taking a percentage of withdrawals from their accounts. However, in practice, these exchanges engage in all manner of predatory behavior and market manipulation activities – a far more lucrative business.

How lucrative is market manipulation? They do not provide that answer.

And the one reference they provide is to a story by Matt Ranger that seem to use a number of spurious correlations. Putting that aside, the authors attempt to describe a banked centralized exchange (CEX). In perusing the current list of spot exchanges on CoinGecko, several dozen CEXs appear to be unbanked or bankless.

That is to say, users can move “crypto-in-and-out” but there is no way to convert or withdraw the asset balances into real money via a bank. It would be interesting to know what percentages of spot volume take place on banked versus bankless exchanges.

On p. 132 they write:

Cryptocurrency exchanges are extraordinarily profitable, as they serve as the primary gateway for most retail users to interact with the market.

Exactly how profitable they are? Who knows, we are not provided that detail.

For instance, what about the dozens of now defunct exchanges listed at Cryptowiser? Were they not profitable?

Continuing on p. 132:

The largest exchanges by volume have set up outside of jurisdictions where the bulk of their customers’ cash flow originates. There are a small number of regulated exchanges. Still, the major exchanges as a percentage of self-reported volume are unregulated and located in the Caribbean Islands and Southeast Asia.

How do they know where the bulk of an exchange cash flow originates? They do not provide a citation for that claim.

Perhaps it is true but what can be asserted without evidence can also be dismissed without evidence.

Also the authors provide a list of 9 specific jurisdictions: but only one is in Southeast Asia, four are in and around Europe, three are in the Caribbean, and one is in the Indian Ocean. So they should probably revise how state where the “major exchanges as percentage of self-reported volume” are located.

On p. 133 they write:

Many of the CEOs and founders of these exchanges are regularly seen in jurisdictions on the Financial Action Task Force (FATF) blocklist, interacting with sanctioned persons. Most personally avoid traveling to both the European Union and the United States for fear of prosecution.

How many is most? How many altogether? Any specific example of who that might be? Changpeng Zhao (CZ), founder of Binance? Kyle Davies, co-founder of Three Arrows Capital? Who knows.

As mentioned previously, they mistakenly state “FATF blocklist” when the actual term is “FATF black list.”

On p. 134, they write:

There is no regulation preventing any exchange employees from trading on non-public information or prioritizing their personal trades, manipulating the construction of the exchanges’ order book, or interfering with clients’ orders. Indeed, the ability to insider trade is seen by employees as one of the perks of working for a crypto exchange.

This chapter could have been a lot stronger if the authors simply provided specific names. It is pretty easy to do.

For instance, just before its direct listing in 2021, Coinbase paid $6.5 million to settle a suit with the CFTC over a Coinbase employee – Charlie Lee – who used his key position to wash trade. Two weeks before the book was published, the Department of Justice charged Nathaniel Chastain for insider trading while employed at OpenSea.

Enforcement may be uneven and perhaps lax, but it can and does occur depending on jurisdiction.

Also, how do the authors know that “the ability to insider trade is seen by employees as one of the perks of working for a crypto exchange”? Perhaps that is true, but where is the source?

On p. 135 they write:

However, many crypto exchanges over margin accounts allow up to 100 or 125 times, figures that are deeply predatory, and unseen in traditional markets.

There are at least two issues with this:

(1) Typo: “over” should be “offer”

(2) Perhaps in the equities market 100x or 125x leverage is uncommon but foreign exchange (FX) market trading venues frequently offer even higher rates. According to Benzinga, at least three FX platforms allow higher than 125x leverage. Is this good or bad? I do not have a strong view, and am using this as an counterexample that high leverage is unseen in traditional markets.

On p. 135 they write:

Many exchanges profit from liquidating some accounts as well as taking transaction fees on top of these insanely risky positions. Several class-action lawsuits filed in the United States allege exchange involvement. In a class-action lawsuit brought against several exchanges in the US, the plaintiffs allege:

[The defendant] acts like a casino with loaded dice, manipulating both its systems and the market its customers use for its own substantial financial gain.

Which lawsuits were these? What were the outcomes? Did the defendants (exchanges) lose and/or settle?

A quick googling discovers that the quote above came from a lawsuit naming BitMEX as the defendant. It is unclear what the status of that lawsuit but it was filed over three years ago.

Even though it is repetitive, I do agree with part of their concluding paragraph:

Crypto exchanges, just like casinos, entice customers with false promises of financial windfalls and get-rich-quick schemes. And they often omit the unspoken truth that the intermediary company sitting between investors and sellers is often a dodgy network of shell entities with predatory intentions and which could disappear with a moment’s notice – leaving customers with no legal recourse.

It is not accurate to say all crypto exchanges entice customers in that manner but putting that aside, it is unfortunate the authors previously used this same sort of verbiage many times before it finally lands.

In fact, eight years ago I gave a speech at a BNY Mellon event that highlighted some of the same issues mentioned in the chapter. Hopefully the authors publish a second edition because this chapter could be the bedrock of a good set of arguments.

Chapter 13: Digital Gold

Another short chapter (seven pages) that unfortunately only superficially looks at some important narratives.

Writing on p. 139 they state:

In the absence of cryptocurrency’s efficacy as a peer-to-peer electronic payment system, the narrative around the technology has shifted away from he use case outlined in the original paper and onto a new proposition: cryptocurrency is “digital gold” or a “store of value.”

This is revisionist history from a Bitcoin maximalist. As mentioned above, Samuel Patterson went through everything Satoshi ever wrote.

Source: Twitter

But this is besides the point: not every cryptocurrency or cryptoasset is attempting to be a new form of money or payment. CoinGecko tracks more than five dozen unique categories besides “money” or “payments.” Maybe all of the projects fail. Maybe none of them are interesting to the authors.

But the existence of these categories (and projects) serve as an empirical counterexample that nullifies the authors sweeping claims.

On p. 139 they write about fools gold:

The argument of crypto promoters is that cryptocurrency can be a store of value suitable for the world at large and form an economic basis for global economies on a long time scale.

Which promoters? Name names. Dan Held, Peter McCormack, and a slew of other maximalists might make that claim. Are their views representative of all “crypto promoters”? The second edition should be nuanced because this is tiring.

On p. 140 they write a very long paragraph, midway they state:

Cryptocurrencies are the purest exemplar of speculative investment and are one of the most volatile assets ever conceived. Cryptocurrencies have seen ludicrous price movements in response to global events such as the 2019 coronavirus outbreak, regulatory clampdowns, and exchange hacks. Drawdowns of 40-50% of value regularly occur with seemingly no underlying reason for the movements.

Is there a way to measure volatility? How about compared with say FX or a specific equity index? The authors could be right (and probably are here) but by not providing any reference or citation, readers are left in a lurch.

On p. 141 they write:

To all but the most faithful, the question “Do you see your grandchildren storing their savings in bitcoin?” is difficult to answer. A sensible answer would be probably not. To those who believe in the continuation of rapid technical progress, it is difficult to predict technology trends two to three years in advance, much less decades. As a thought experiment, if we believe in the bitcoin-maximalist (or any maximalist vision) rhetoric that “there can be only one global token,” that first-mover advantage dominates all other factors, this precludes any competitors from ever existing. In this model, the bitcoin ledger is the final authoritative store of value whose continuity is eternal.

This is the first and only time the authors mention “bitcoin maximalism.” Yet even here they do not succinctly define what it is.

Furthermore, the authors state that it is “difficult to predict technology trends two to three years in advance” yet they repeatedly not only make bold predictions in each chapter but they a priori claim that all cryptocurrencies inherently fail, are scams, cannot work, ad nauseam. This is a contradiction.

If the authors who wrote the paragraph above agree with their inability to predict the future then the next edition needs edits that reconcile with the multitude of contradictory claims.

On p. 141 they write:

Thus all subsequent technologies will either build on top of bitcoin sidechains or are fundamentally heretical in their vision.

What are sidechains? Who knows, the authors just lob it in there. For what it is worth, it is actually a topic we have discussed for nearly 9 years on this blog. Here is a slightly dated comparison.

On p. 141 they write:

The non-maximalist view argues against any single cryptocurrency universality. If we play devil’s advocate and assume cryptocurrency technology is not a technical dead end, then cryptocurrency markets can be seen as an economy of ideas in which the best and most technically efficient solutions attract the most investment. Rational investors will choose to store the most value in proportion to their merits. However, in this model, anyone’s current token can and will be replaced by a better one at some point, and this must repeat ad infinitum. Unless there is a continuity of account states between evolutions of the technologies, then the value held in deprecated chains will eventually be subject to flight to safer and more advanced chains. Under this set of assumptions, we again conclude that any one cryptocurrency cannot be a store of value. Their structure is identical to stock in companies that rise and fall tethered to humans activity and is inconsistent with the store of value model.

Working backwards, what is “the store of value model”? The authors do not say.

Furthermore, if we take a “screenshot” of any technology vertical decades apart there are shifts of who the industry leader is. From PCs, to printers, to scanners, to spreadsheet vendors. An entire category – smartphones – did not exist twenty years ago.41

Why is it so hard to fathom that there can be more than one blockchain in existence at one time? There are dozens of RTGSs deployed around the world, despite the existence of Visa and Mastercard… because they do different things.

The problem with this hypothetical illustrates how the Horseshoe Theory of non-empiricism that ties Bitcoin maximalism together with nascent anti-coin ideology. If you are a priori anti-cryptocurrency in any form, then by definition it does not matter what empirical evidence someone provides as a counterexample.

Thus the existence of more than one operational blockchain in the same time and space is futile to reconcile by definition.

On p. 142 they discuss bugs:

An advance in the mathematics of elliptic curves could theoretically yield a more efficient factoring technique that would render the specific choice of primitive used in historical wallets vulnerable to attack. While there is currently no known attack on the particular curved used in bitcoin, but however alternative technologies like IOTA have chosen combinations of specific, unverified primitives that have been proven unsound.

What unverified primitive were these? Who knows, the author does not provide a reference. A quick googling revealed that it may be a vulnerability with a hash function, Curl, that the IOTA developers created.

Speaking of bugs, if they write a second edition the authors could zero in on CVE-2018-17144, a bug that was first discovered by Bitcoin Cash developers in the summer of 2018. Bitcoin Core developers (who act as the de facto gatekeepers of Bitcoin) kept the severity of the bug under wraps until it was patched.

On p. 143 they write this whammy:

A standalone against cryptocurrency as a store of value is purely statistically. The exchange value of most cryptocurrency markets is highly correlated. As bitcoin moves, so does the whole crypto market. Both ethereum and bitcoin have a correlation coefficient of 0.9. Buying into any cryptocurrency besides bitcoin means one’s investment is overwhelming exposed to bitcoin’s extraordinary volatile price movements. Given bitcoin’s dominance and its distinction in driving the price of all other tokens, there is little reason to invest in anything but bitcoin.

Ta-da. Ladies and gentlemen, I present to you the anti-coiners who are actually Bitcoin maximalists. Re-read the paragraph above slowly.

Source: CoinMarketCap

The line chart (above) illustrates the market value of approximately 10 different cryptoassets starting in January 2016 to August 2023. While Bitcoin (BTC) typically does hover around 40-50% mark, there is no ironclad rule that says it always will. 42

Furthermore, this book review will not say what assets you should or should not buy. Will traders see higher returns over the long run by investing in a cryptocurrency that is not Bitcoin?

Unlike the authors of the book, we cannot predict the future. But you should definitely invest everything into PTK.

On p. 144 they discuss entities in control of >50% of voting/mining power:

Blockchains such as the ETC chain have recorded these events, and we have seen successful attacks frequently occur in the wild. This kind of attack would be expensive and energy-intensive. However, given the mining centralization it is already the case that four companies on the Chinese mainland control over 60% of the bitcoin hash power. This context represents a situation where four Chinese executives potentially are a social attack vector. The continuity of their interests is inexorably linked to bitcoin’s proposition as a store of value.

There a few issues with this passage:

(1) The authors do not say what ETC stands for, this is the first time it is presented to the reader. It is Ethereum Classic.

(2) How many times has ETC been successfully attacked? Who knows, the authors do not provide any details or references. A quick googling finds a news story stating that Ethereum Classic was hit by at least three successful 51% attacks in the month of August 2020. Yikes, that sounds like some evidence that could help bolster the authors claims, why did they not include it?

(3) Just above this paragraph the authors identify nine blockchains that have 1-4 entities in control of more than 50% of voting or mining power. They claim Dogeoin has 4 and Litecoin has 3.

But this hurts their credibility because Dogecoin has used “merge mining” with Litecoin since September 2014. I know this because I wrote an (accurate) prediction saying Dogecoin would eventually need to merge mine with Litecoin.

And guess what, Dogecoin’s existence is still driven by Litecoin’s existence. Dogecoin is fully dependent on Litecoin’s infrastructure. The article should be updated to include this type of information.

(4) Lastly, even when this book was published (June 2022) the aggregate hashrate coming from China-based mining farms had dropped well below 60%. The authors provide no citation so it is unclear when they were researching or writing this chapter.

For example, according to an article from May 2022, it was estimated that China-based mining farms generated ~21% of the network hashrate.

On p. 144 they write:

Additionally blockchains governed by standard consensus algorithms have regularly seen the emergence of so-called forks. A fork is when a subset of miners and participants diverge on their use of a single chain of blocks, resulting in two historical ledgers with different spending activities. Most major cryptocurrencies have seen forks, including bitcoin, which has bitcoin cash, bitcoin SV, bitcoin gold, while ethereum has ethereum classic. Economically this is an extraordinary event since the holders of wallets have active accounts on both chains, and their tokens now have two historical accounts of their provenance.

At least two issues with this:

(1) What are “standard consensus algorithms”?

Recall back in Chapter 2 they regularly swapped wordings between protocol and algorithm. And only described Nakamoto Consensus. What other consensus algorithms are there?

In Chapter 5 they casually mentioned Paxos and PBFT in passing but never conveyed any information to readers. So who knows what they are thinking here.

(2) Why do the authors have an issue with capitalizing the word bitcoin or ethereum? No one in any media writes “bitcoin SV” or “ethereum classic” because these are proper nouns. An editor would have helped them.

On p. 144 they write:

Physical commodities cannot “split” and have multiple version of themselves that pop into existence from nowhere.

This is a strawman because blockchains are not physical. Some lawyers have argued – and some regulators like the CFTC have made the case that certain (all?) cryptoassets might be “commodities.” This book review does not have the space to discuss the different external views from legal experts.

How do hardforks impact RWAs – such as pegged stablecoins – that reside on the chain?43 Are hard forks similar to “stock splits” in traditional finance?

Maybe this is something the authors could discuss in the next edition. Perhaps they can start by looking at how at least one student thinks hard forks should be taxed.

On p. 145 they discuss potential attack vectors:

State-level actors who thought bitcoin was a threat to sovereignty would be capable of causing mass disruptions or even destroying the network. If not fatal, such an attack would likely cause a massive movement in price that could effectively annihilate global liquidity. The most likely actor to engage in this kind of attack in terms of capacity and incentive is the People’s Republic of China.

Honestly, you have to use movie-voiceover-guy for that last sentence. And the authors do not provide any citation or reference to back up this cunning plan from the Chicoms!

On p. 146 they write:

Source: Breaking Bad

The question of bitcoin as a store of value in these catastrophic events is threefold: whether they are possible on short time scales, whether they are possible on long time scales, and on what time scales is the destruction of value possible. The externalities of nation-states failing or quantum computers are irrelevant to the continuity of physical commodities value. No process could cause all land, precious metals, or stones in all of the world to devalue simultaneously.

Gold’s historical claim as a store of value are a complex mix of factors: its industrial uses, decorative uses, long history of price stability, non-perishability, maintenance-free storage, and its millennia spanning narrative and collective fiction. Crypto advocates want to declare bitcoin as their new “digital gold” and yet all they bring is a weak fiction detached from the other necessary properties of a store of value.

Cryptocurrencies can never function as a store of value or digital gold. Instead, they are purely speculative volatile assets whose intrinsic value is built on nothing but faith in an expanding pool of greater fools that must expand infinitely and forever.

Is it appropriate to use the Breaking Bad diner scene template for the concluding paragraphs on chapter 13? Yes.

The authors cannot stop talking about bitcoin in a book called “Popping the Crypto Bubble.” It is not even clear who or what they are arguing with since they do not quote anyone or anything on this entire page.

Who is this rant directed at?

No other chain really exists apparently. No other use case exists beyond the one they build the strawman for (money/payments). It is all so tiring. But don’t worry, there is 100 pages more!

Chapter 14: Smart Contracts

The authors try out some “gotchas” but academic lawyers have beaten them to the punch by 5+ years.

For instance, at the beginning of p. 147 they write:

Smart contracts are a curiously named term that has sparked a great deal of interest due to the confusion of its namesake. Like many blockchain terms, a smart contract is a semantically meaningless term in the larger corpus of discussion, and its usage has been defined to mean great many different things to a great many people.

Strangely, the authors do not cite anyone or anything in the first few pages of this chapter. Yet there are “intro to smart contracts” at various law schools across the country, dozens of legal papers discussing ideas like “Code is not law” or what a “smart contract” might represent in a specific jurisdiction.44

Where is the cursory introduction to the history of “smart contracts”? The key figures or dates? Nada. Instead the authors take a deliberately dismissive tone. Because it is easier to dismiss out of hand a priori than do a literature review.

On p. 148 this is the pullquote:

Smart contracts have absolutely nothing to do with legal contracts.

Maybe that is true, where is the rigorous explanation or citation? Oh there is not any.45

On p. 150 after discussing Solidity and the EVM, they write:

Solidity was meant to appeal to the entry-level Javascript developer base, which uses coding practices such as copying and pasting from code aggregator sites like Stack Overflow. As a result, Solidity code generally has a very high defect count and has resulted in a constant stream of high-profile security incidents directly related to coding errors. Some studies have put the defect count at 100 per 1000 lines.

Which studies? Which high-profile security incidents? Who knows, there are no citations.

On p. 151 they write:

Moreover, smart contracts introduce a whole other dimension of complexity to the problem by forcing developers not only to verify the internal consistency and coherence of their software logic but also to model any and all exogenous financial events and market dynamics surrounding the price of the casino tokens used in the software. This hostile execution environment turns a pure computer science question into a composite question of both finance and software and expands the surface area of the problem drastically. At some point in the future, our theoretical models may be able to tackle such problems, but likely not for a long time as these problem are of a truly staggering complexity.

A couple of issues with this:

(1) Is there any number or percentage the author can give to illustrate how “truly staggering” the complexity is?

(2) Do some dapps have a large surface attack, yes. Do DeFi-related hacks still occur on a monthly basis, yes.

Imperfect as they may be, according to DeFi Llama there are a sundry of complex dapps that secure $24 billion of TVL on Ethereum right now, many of which were launched prior to the publication of the book. This include automated market makers such as Uniswap as well as lending protocols such as Aave and Compound.

These serve as illustrations, examples that the authors “long time” is already in the present. Their prediction was wrong.

Unsurprisingly, none of these dapps are mentioned in the book.

On p. 152 they write:

Meanwhile, the reality is that today smart contracts are an unimaginably horrible idea and it is a genuinely horrifying proposition to base a financial system on these structures. Smart contracts synthesize brittle, unverifiable, and corruptible software with irreversible transactions to achieve a result that fails in the most violent way possible when the wind blows even slightly the wrong way. They further lack a key component that most software engineering deployed in the wild requires, a human-in-the-loop to correct errors in the case of extreme unforeseen events such as fraud and software failure.

And what were the authors citations and references in the rant above?

Zilch. It is just their opinion.

I actually want to agree with them on a couple of points but each sentence has something fundamentally wrong with it, notwithstanding the hysterical language.46

The rant continues on the next paragraph:

Thus the very design of smart contracts and blockchain-based assets is entirely antithetical to good engineering practices. The idea of smart contracts is rooted in libertarian paranoia concerning censorship resisters and ignoring externalities instead of a concern for mitigating public harm.

And what are good engineering practices? The authors provide no citation or explanation, it is just their opinion.

Furthermore, recall that the authors worked on Uplink six years ago – which involved using smart contracts – was that idea ‘libertarian paranoia’?

On p. 152 they write:

The most catastrophic smart contract was undoubtedly the DAO hack. The DAO was an experimental, decentralized autonomous organization that loosely resembled a venture fund. Exampled simply, it is a program that would allow users to invest and vote on proposals for projects to which the autonomous logic of the contract would issue funds as a hypothetical “investment.” It was a loose attempt at building what would amount to an investment fund on the blockchain. The underlying contract itself was deployed and went live, consuming around $50 million at the then exchange rate with Ether cryptocurrency. The contract contained a fundamental software bug that allowed an individual hacker to drain DAO accounts into their accounts and acquire the entirety of the community’s marked investment. This hack represented a non-trivial amount of the total Ether in circulation across the network and was a major public relations disaster for the network. The community controversially decided to drastically roll back the entire network to a previous state to revert the hacker’s withdrawal of funds and restore the contract to regular operation.

In the last sentence they cited the 2017 The DAO report from the SEC.

There are at least four issues with it, working backwards:

(1) It is missing “the” between with and Ether in the 5th sentence.

(2) The community is not defined here, there were a number of key participants who were discussed in several books, including one I reviewed last year. This chapter is ten pages long, there is ample space to discuss the “most catastrophic smart contract” in more depth.

(3) How do they define “most catastrophic smart contract”? Do they mean by ETH or USD lost?

(4) Strangely, the authors do not mention that a hardfork took place and two separate networks emerged: Ethereum Classic (which was the original chain that the “DAO hack” still existed on) and Ethereum, where the hack was effectively smoothed over. Seems like a glaring omission.

On p. 153 they write:

The grandiose promise of smart contracts was for applications that build decentralized Internet applications called dApps. These dApps would behave like existing web and mobile applications but counter interface with the blockchain for persistence and consume or transmit cryptocurrency as part of their operations.

There is a big typo that make the 2nd sentence unintelligible: “but counter interface.” What does that mean? An errant “counter” in the middle?

Continuing in the same paragraph:

Much of the smart contract narrative is built around phony populism and the ill-defined idea that there is an upcoming third iteration of the internet (a Web 3.0) that will interact with smart contracts to provide a new generation of applications. In practice, none of that has manifested in any usable form, and the fundamental data throughput limitations of blockchain data read and write actions make that vision impossible.

You will never have guessed it but Stephen Diehl was a co-organizer for the anti-Web3 letter that circulated two weeks before his book was published. Imagine that, what an amazing marketing coup.

And guess what, he never defines what Web 3.0 is in that letter nor do the authors do so in this book. This despite the fact that Gavin Wood articulated one in 2014.

Sure they can disagree with Wood and other Web 3.0 promoters, but it is misleading to claim it is an “ill-defined idea.”

Furthermore, everything in their second sentence is falsifiable, they cannot make the claims a priori and just walk away.

For instance, there are a group of developers attempting to push a “Sign-in with Ethereum” (SIWE) movement, allowing users to authenticate with off-chain services by signing a message. This is one attempt to reduce the dependence on the oligopoly of single-sign-on from Big Tech firms. One live implementation comes from Auth0 and Spruce.

Don’t like SIWE? Fine, but it existed last year when the authors said nothing did any any usable form.

But how were the authors supposed to know? That is the whole point of market research and due diligence.

The authors continue on p. 153:

Most live smart contracts instead fall into a limited set of categories: gambling, tumblers, NFTs, decentralized exchanges, and crowd sales. The vast majority of code running on the public ethereum network falls into one of these categories, with a standard set of open-source scripts driving the bulk of the contract logic that is evaluated on the network. However, there is a wide variety of bespoke scripts associated with different ICO companies and high-risk gambling products that are bespoke logic and act independently of existing community standards and practices.

How many citations and references did the authors provide for each of the claims? Zero. That which is presented without evidence can be dismissed without evidence.

Maybe they are right on all accounts, but they need to bring evidence for each claim.

Furthermore, how do the authors reconcile the handful of categories they state as fact are where “the vast majority of code” can be bucketed as, versus the wider set of categories tracked by Coin Gecko and DeFi Llama?

On p. 153 they write:

The most common script is an ERC20 token, a contract that allows users to issue custom token crowd sales on top of the ethereum blockchain.

And exactly how common is it? What percentage were ERC20 token “scripts” (as they call them) in a specific year. Maybe they are right.

A quick google finds that according to Alex Vikati, in May 2018, that half of the top 100 contracts (by transaction count) were ERC20. The top non-ERC20 contract was Idex, a decentralized exchange.

Fast forward to 2022, according to Cryptoslate, Uniswap V3 was by a wide margin, the most widely used contract in terms of gas used. We should charge the authors for finding relevant citations.

On p. 154 they write about ERC20 tokens:

The total supply of these tokens in any one of these contracts was a custom fixed amount, and by interacting with the ERC20 contract, the buyers’ tokens were instantly liquid and could be exchanged with other users according to the rules of the contract. This is the standard mechanism that drove the ICO bubble and related speculation, and this token sale contract is overwhelmingly the most common use case for smart contracts.

They could be right but a citation needed for that last claim.

Later on the same page they write:

Another class of projects is the digital collectibles and digital pets genre. One of the most popular is CryptoKitties: a game in which users can buy, sell, and breed cartoon kittens.

The authors might want to rethink using CryptoKitties as an example because even in 2022 and definitely 2023 the project was a thing of the past.

Source: NFT Stats

It is too bad the authors eschewed any use of charts because they could have used public price charts such as the one above. As we can see, over the past three months trading activity CryptoKitties is pretty much for the birds, like the rest of the art and collectible NFT market.

On p. 154 they write:

Gambling products overwhelmingly dominate the remaining set of contracts.

What is their source? Citation needed.

On p. 155 they write:

The ICO bubble marked a significant increase in the interest in smart contracts arising from outlandish claims of how cryptocurrency ventures would disintermediate and decentralize everything from the legal profession and electricity grid to food supply chains. In reality, we have seen none of these visions manifest, and the technology is primitive, architecturally dubious, and lacking in any clear applications of benefit to the economy at large. The ecosystem of dApps is a veritable wasteland of dead projects, with none having more than a few hundred active users at best.

Oh?

The authors of the book on a road trip

I actually agree with at least half of what they said above but they do not provide any citations at all.

Where do they get the dapp users numbers? Maybe they are correct, but what is the source of information?

For example:

Source: DappRadar

A quick googling found an article from last year from DappRadar. The colored lines (above) shows the Number of Unique Active Wallets interacting with dapps. According to DappRadar, in Q1 2022, 2.38 million daily Unique Active Wallets connected to blockchain dapps on average.

You might disagree with DappRadar but the authors of the book did not present any source at all. Do better next time.

On p. 155 they write:

The very design of a smart contract is to run on an unregulated network which prevents it from interfacing with external systems in any meaningful fashion. This confusion around the namesake of smart contracts has been exploited by many parties to sell products and services.

Surely since it has been “exploited by many parties” the authors would be able to provide a citation or reference? Nope.

Maybe they are right but they also seem to be making up things as they go along. Don’t trust, verify is the motto, right?

Also, what exactly did Adjoint do with smart contracts in 2017-2018 time frame? Were they one of the entities trying to sell products and services around smart contracts via Uplink?

On p. 155 there is a pullquote:

Smart contracts claim to not trust external central authorities, but they cannot function without them. Thus the idea is doomed by its own philosophy.

I think there is some merit to the arguments they make around oracles in this chapter but the pullquote itself is just too sweeping and lacks nuance.

For instance, AMMs such as Uniswap use a TWAP oracle which is not an external oracle. The authors are wrong.

On p. 156 they write:

Within the domain of permissioned blockchains, the terminology has been co-opted to refer to an existing set of tools that would traditionally be called process automation. In 2018 so-called enterprise “smart contracts” were the buzzword du jour for consultants to sell enterprise projects.

Are Diehl et al., speaking from first hand experience? See also Evolving language: Decentralized Financial Market Infrastructure.

Continuing they write:

These so-called enterprise smart contracts had very little to do with their counterparts in public blockchains and were existing programming tools such as Javascript, Java, and Python rebranded or packaged in a way that would supposedly impart the “value of the blockchain” through undefined and indeterminate means. Indeed one of the popular enterprise blockchain platforms, IBM Hyperledger, provides a rather expansive definition of smart contracts.

There are a couple issues with this:

(1) The authors are describing “chainwashing” a term I coined more than six years ago. Thanks for the credit guys!

(2) The authors lack attention to detail. There was no such thing as “IBM Hyperledger” and the sole citation they provide confirms that.47 In the end notes for Chapter 14 they cite Hyperledger Fabric Documentation.

IBM is not the same thing as Hyperledger.

The umbrella Hyperledger Project is a branch of the Linux Foundation. IBM is a contributor and sponsor of some of the projects. The fact that the authors conflate the two does not help their credibility.

In fact, there is more than one base-layer blockchain currently incubated within the Hyperledger umbrella including Iroha and Besu. Besu is an independent implementation of Ethereum based on code contributed from ConsenSys called Pantheon.

Continuing on p. 157 they write about Dfinity:

Both these meaningless paragraphs are the embodiment of the blockchain meme. It is an extension of the terminology to include “infinite use cases” through a meaningless slurry of buzzwords. Smart contracts simply are not useful for any real-world applications. To the extent they are used on blockchain networks, smart contracts strictly inferior services or are part of gambling or money laundering operations that are forced to use this flawed system because it is the only platform that allows for illicit financing, arbitrage securities regulation, or avoids law enforcement.

Oh?

Again, even though I may personally agree with some of their opinions, that is all they are, opinions. They need to provide citations otherwise their claims can be dismissed.

Surely the rants will stop now?

Continuing on p. 157 they write:

The insane software assumptions of smart contracts can only give rise to a digital wild west that effectively turns all possible decentralized applications into an all-ports-open honeypot for hackers to exploit and manifests the terrible idea that smart contracts are just a form of self-service bug bounty. These assumptions give rise to an absurd level of platform risk that could never provide financial services to the general public given the level of fraud and risk management required to interact with it.

Oh?

Getting a lot of mileage out of the meme template generator and we still have 90 pages to go. And yes, still no citations.

Their concluding paragraph to the chapter states:

Append-only public data structures, permissionless consensus algorithms, and smart contracts are all exciting ideas; however, combining all three is a nightmare that could never be a foundation for a financial system or for handling personal data. The technology is not fit for purpose and cannot be fixed. To put it simply, smart contracts are a profoundly dumb idea.

They did provide a citation – for ‘nightmare’ – to a paper by Ryan Clements. But it is about algorithmic stablecoins and not about smart contracts.

We have nine chapters left and at this pace, may run out of meme templates.

Also, what is an “append-only public data structure”? The authors throw in a new term without defining or describing it in the very last paragraph of the chapter.

As we all remember from writing class: thou shall not introduce new concepts in the conclusion.

Okay, so two can play that game!

In September 2016, Adjoint put out a press release discussing how it was great honor to be selected for EY’s blockchain challenge.

A quote from Diehl:

So at what point was working on smart contracts bad? Just not during the time Adjoint was involved?

Chapter 15: Blockchainism

This is another chapter I should have liked because it describes chainwashing. But it is five pages long and lacks many examples.

On p. 160 they write:

The alchemy of blockchainism is a concept rooted in the mystique and misunderstanding of the nature of bitcoin’s original approach to establishing trust between otherwise unrelated parties over an untrusted network. Bitcoin has a partial answer to this problem for a specific data structure of a particular application. The core fallacy of blockchainism is extrapolating that cryptocurrency has solved trust in generality rather than specificity. What “solving trust” means will depend on context, but this is central to many books, including Real Business of Blockchain, Blockchain Revolution, The Trust Machine, The Infinite Machine and dozens more books.

I agree. I wholeheartedly agree with this paragraph.

In fact, I wrote two lengthy book reviews of both Blockchain Revolution as well as The Trust Machine. Both were not good but for different reasons than why this book is not good. At least the other two books had an editor go through and sync up the bibliography with the book chapters.

For instance, at the bottom of p. 160 they write:

Professor at Stanford Roy Amara once said of the software field that “we overestimate the impact of technology in the short-term and underestimate the effect in the long run.”

I believe the authors need to add at least one comma before and/or after Roy Amara.

On p. 161 they write:

In this “game-changing” paradigm shift, any existing process that requires a single authoritative source of truth has now found the ultimate vehicle for storing that single source of truth without the authority component. The blockchain (often referred to in singular form) will decentralize power and disintermediate the global economy unlocking new opportunities and building international reciprocity and trust. The seductive marketing around this cliché is that without cryptocurrency, the blockchain itself could convey the same disruptive power as bitcoin for any domain.

The last sentence references an op-ed from Bruce Schneier.

I have re-read this paragraph multiple times. In the margins of the book I wrote “What does this mean?” Is the last sentence a compliment to blockchains? Or were they saying, you could make a blockchain without bitcoin?

Also, there was a “movement” in mid-2015, led by Bitcoin maximalists (and lobbyists and VCs who only invested in or lobbied for Bitcoin) to use a singular form of “blockchain” with the explicit connotation that they were referring to the Bitcoin blockchain, the only one that mattered (to them).

For example, here is one of my all time favorite (now deleted) tweets from a coin lobbyist:

Source: Twitter

They continue on about clichés but it is all too tiring to address so let us move on to the next page.

On p. 162 they write about the blockchain meme. The section overall is good but there is something problematic with the first sentence, writing:

The form of technology that many of these ventures may build is not novel at all; cryptographic ledgers and databases that maintain audit logs have been used since the early 1980s.

This is the type of cherry-picking that maximalists such as Chris DeRose frequently used in 2015-2017. And it was wrong then and it was wrong in 2022 and it is wrong now.

Why? Because “cryptographic ledgers and databases” have not stayed stagnate since the year the Sega Genesis hit toystore shoelves. It is like saying, what is the big deal about SpaceX, Wernher von Braun launched a V-2 into space in 1944.

This type of criticism is lazy cynicism because it assumes the readers are incapable of remembering anything after the Berlin Wall came down.

For example: not all blockchains are identical to Bitcoin and even Bitcoin has moving parts invented between the time David Hasselhoff serenaded East Berlin and Lehman Brothers collapsed.

On p. 163 they write:

Considering trade journalism and press releases from 2018, we see blockchain proposed by many seemingly sensible people as the solution to everything from human trafficking, refugee crises, blood diamonds, and famines to global climate change. This despite most technologists having minimal experience working with vulnerable groups or understanding the political complexities.

100% agree with this point. Unfortunately we still see marginalized groups used for “pulling on the heartstrings” marketing efforts today.

Continuing in the same paragraph they write:

This kind of thinking that blockchain somehow has the answers to our problems has infected consultants, executives, and now even politicians. The one group of people who are not asked about the efficacy of blockchain is programmers themselves, for whom the answer is simple: just use a normal database.

The authors cite a short related blog post from Leif Gensert.

But the authors do not any kind of survey of programmers. We see this same kind of claim in Chapter 25 at the end of the book too. The authors could be correct, but they do not provide any source, it is just their opinion.

The reoccurring problem is Diehl et al. forgot that there are empirical ways to test their thesis.

For example, the line chart (above) shows three types of developers tracked by Electric Capital based on commits to public repos for public chains. In their words: “Only original code authors count toward developer numbers. Developers who merge pull requests, developers from forked commits, and bots are not counted as active developers.”

When the book was published, roughly 8,000 full-time active developers were working on public chains. Is that a lot or a little?

Has anyone asked these developers about the efficacy of a blockchain? Do they have views about whether a project or organization should use “a normal database”? I do not know but it would be disingenuous for me to reject the developers Agency.

On p. 163-164 they write:

The charitable interpretation of this phenomenon is that this is simply an inefficiency in human language that results from civilization collectively defining new terminology and expanding its understanding of technology. However, the terminology itself lends credibility to a domain that primarily consists of gambling, illicit financing, and financial frauds.

This is a bad faith argument. And it is identical to the argument that a Financial Times reporter – the same one who frequently quotes Diehl – recently made regarding central bank digital currencies (CBDC).

We have not even gotten to the CBDC section yet, but the FT article brings an a priori argument to a empirical-based debate. How dare anyone provide nuance and evidence that contradicts your priors!

A disappointing chapter overall, and we still have 80 pages.

Chapter 16: Frauds & Scams

This chapter was eight pages long but could have been a few hundred considering just how many fraudulent projects and scammy endeavors have occurred over the past decade.

On p. 166 they write:

In advanced economies, fraud is always a possibility, but it is usually a tail risk that occurs with a low probability compared to the bulk of routine transactions. Fraud controls and rigorous due diligence are expensive relative to the likelihood of the fraud and, unless other required by law, are many times discard for the sake of saving cost.

Do the authors provide a citation about how common or uncommon fraud is?

Or how often due diligence is discarded or glossed over? Nope.

A typo on p. 166: “tech” should probably be fully written out to “technology.”

A missing letter on p. 167 “onsidering” should be “Considering”

On p. 168 they write the concluding paragraph to the fraud triangle subsection:

The opportunity for cryptocurrency fraud is pervasive simply because the lack of regulatory checks and controls on these ventures is relatively lax or non-existent. In an environment where a single user can abscond or run away with large amounts of investor money, seemingly with little risk to themselves, it will create an environment that will attract less scrupulous individuals. Cryptocurrency businesses are the perfect storm in the fraud triangle, and crypto fraud is today’s most straightforward and widespread form of securities fraud.

I think most of this paragraph is correct, though they cited a book from 1953 that appears to be more about social psychology than cryptocurrencies.

Either way, they showed their hand in the very last two words of the final sentence: everything is securities fraud to these authors, they say so at least a dozen times.

On p. 168 there is a spelling mistake: “swidler” should be “swindler”

On p. 170 they write:

Pump and dump schemes were rampant leading up to the Great Depression and became illegal in the United States in the 1930s after the passing of the Securities Act.

This may be true, but that is a lot of inside baseball for readers outside the U.S.

For instance, what is the Securities Act? What section of the (1933) Securities Act deals or discusses pump and dumps? Since pump and dumps were rampant prior to 1933, any rough figures on how common they were?

On p. 170 they write:

A study of pump and dump schemes has found that 30% of all cryptocurrencies are used in 80% of pump and dump schemes. Once used on a particular crypto successfully, it is very likely that another pump and dump will be done on that same coin again. More importantly, studies show that pump and dump crypto schemes occur with low volume coins with significant wealth transfers from outsiders to insiders, and resulting in detrimental effects on market integrity and price formation.

Good news and bad news. Good news is, they cite six relevant papers. The bad news, they barely paraphrased two of them.

For example, from a blog post from Kamps and Kleinberg:

We found that similarly to the traditional penny-stock market variant, the cryptocurrencies most vulnerable to this type of attack were the less popular ones with a low-market cap. This is due to their low liquidity making them easier to manipulate. We also found that around 30% of the cryptocurrency pairs we analyzed accounted for about 80% of the exhibited pump-and-dump activity.

From the abstract of Li et al.:

The evidence we document, including price run-ups before P&Ds start, implies that significant wealth transfers between insiders and outsiders occur.

The authors did not even paraphrase Kamps and Kleinberg correctly. Notice that K&K said that “around 30% of the cryptocurrency pairs we analyzed” whereas Diehl et al., write “30% of all cryptocurrencies.”

That is not a minor difference. Maybe next edition should just use the actual quotes?

At least the authors are finally citing, right?

On p. 173 they are concluding the chapter:

In many jurisdictions, directors of the company are explicitly banned from touting the expected returns of the investment. However, if one constructs an anonymous community in which others (outside the company) market the token’s investment opportunity, this can be sufficient to drum up market interest in the security. A digital pyramid scheme structure can be encoded indirectly into the computer pogram that dictates the network’s payouts, and this can create indirect kickbacks and incentives for early promoters. This decentralized and self-organizing fraud leaves the directors’ hand completely clean as low-level employees and outside actors purely perform the actions.

Possibly two issues with this paragraph:

(1) Did the authors mean to write “encoded directly” or “indirectly.” The context reads as if they meant to say “directly.”

(2) What they seem to describe here and on the previous page (regarding “distributed control”) might be pursuable via RICO statutes. Five years ago I mentioned that angle in an op-ed. To-date it does not appear that – at least in the U.S. – any RICO-related lawsuits or charges have been filed.

This chapter should have been an amazing slam dunk – it could have included a hundred different scams and/or fraudulent efforts but instead the authors could not even properly paraphrase from a couple papers they cited. A disappointment.

Chapter 17: Web3

I did not fully appreciate how good the authors – and Diehl in particular – were at marketing until I read this book.

I will mention more in the Final remarks later below, but recall that two weeks before this book was published, a gaggle of vocal anti-coiners got a variety of mainstream publications to cover their anti-web 3.0 letter?

Unsurprisingly, there is a lot of overlap between this chapter and the 741-word page letter. To their credit, the authors of the book at least spent 9 pages brewing the soup, let us see how it tastes.

On p. 175 they write:

In recent years, the cryptocurrency project experience something of a public relations problem; leading various actors to choose to refer to cryptocurrency under a different name, “web3”. The narrative of web3 is somewhat intentionally amorphous and open to a wide variety of interpretations. Therein lies the rhetorical power of ambiguous buzzwords in that it acts like an aspirational Rorschach test where everyone will see something different, but everyone assumes it means something positive.

So in 2014 I wrote how “Bitcoin’s PR challenges” and then a year later “The great pivot, or just this years froth?” In the latter I pointed out how VCs such as Adam Draper were telling their Bitcoin-related portfolio to rebrand as “blockchain” companies. This is chainwashing.

The same can definitely be said about the “web3” rebrand to some extent. But. And hear me out: Gavin Wood write up a definition and narrative for “Web 3.0” back in 2014.

You may think Wood was naïve but that specific point is one the authors are incorrect on.

Continuing on p. 175 they write:

While web3 may not be well-defined, five technology categories loosely correspond to some new crypto products that are being marketed under the web3 umbrella term: NFTs, DAOs, Play-To-Earn, DeFi, and the Metaverse.

In the margins of the book I wrote: “What is your definition of web3? And unsurprisingly the authors did not provide one.

They also did not provide a definition of “web3” in the anti-web3 letter last year. Surely it can be done in a nine page chapter?

On p. 176 they write about NFTs:

A significant pat of the web3 ecosystem is creating digital assets known as NFTs. Unlike cryptocurrencies, which are fungible, any individual assets are interchangeable with other digital assets. NFTs are a specific type of smart contract which lives on one of the ethereum or other blockchains that allow programmable blockchain logic.

You might not believe me but not once in this entire chapter or book do they ever write out what the full acronym stands for: non-fungible tokens.

And this omission is important because NFTs existed before CryptoKitties. They existed before the construction of Ethereum.

NFTs first existed as “colored coin” frameworks on Bitcoin but have evolved onto other blockchains, including permissioned chains. The conventional term for all of these efforts is “tokenization.”

The authors can throw shade all day long regarding tokenization efforts of real estate or precious medals, but these are technically “NFTs” — a world that is much broader than the strawman they concoct in this chapter.

This notable omission hurts their credibility, especially since they do not bother explaining the history of the concept.

Source: ChainLeftist

On p. 176 they write:

An NFT is a tradable cryptoasset that internally contains a URL, like those typed into a browser (e.g., https://www.google.com), which points to an external piece of data. This external piece of data could be a document, a file, or an image, but it is stored externally to the NFT itself. Since the image or data associated with an NFT is stored on a public server, any member of the public can “right-click” on the data to access the information independent of the blockchain.

The “right click and save” critique of art and collectible-related NFTs is partially valid.

For example, Cryptopunks and Bored Ape Yacht Club (BAYC) are examples of collections reliant on off-chain 3rd parties, for what the authors describe.

But the authors fail to recognize that there are exists art and collectible NFTs that are generated and live fully on-chain. A non-exhaustive list includes: ArtBlocks, Autoglyphs, Avastars, Chain Runners, Anonymice, and OnChainMonkey (see Slide 7).

On p. 176 they continue:

Some NFTs are even purely conceptual and do not link to any data. In these situations, abstract notions and contextual narratives about the NFT are the products being sold to investors. This setup may be done as a piece of performance art or as a thinly veiled way of raising money on an unregistered secruity investment as a proxy for illegal equity raise in a common enterprise by disguising it as an “NFT project.”

The authors cite the cringey Dan Olsen video published last year. Are the authors lawyers? Not sure. Are they specialists in securities laws? Not sure.

Did they quote or cite a lawyer specialized in securities laws? Nope.

Therefore, what is presented without evidence can be dismissed without evidence.

Peter van Valkenburg has something in common with Lionel Hutz

On p. 176 they write:

Buying an NFT is conceptually similar to Name-A-Star registries in which a person pays another person to record their name in a registry, allegedly associating their name to an unnamed star in the sky. The registry conveys no rights, obligations, or rewards, but it is an artificially scarce commodity based on a collective belief in the supposed value of the registry. It is like a tradable receipt with no physical good or rights attached, which only signifies a proof of purchase based on some bizarre and logically self-inconsistent redefinition of ownership or to signal sign value or class status as a form of conspicuous consumption within the crypto community. Many people who sell NFTs are willing to make the conceptual leap that this registry with a smart contract somehow conveys some abstract digital notion of “ownership.” However, this premise has several technical, legal, and philosophical problems.

The authors cite two papers, one from Joshua Fairfield and the other from Aksoy and Üner.

While they both highlight some of the same problems the authors do, neither paper comes to the same conclusions that the authors of the book do. These are real issues but not insurmountable problems.

In fact, companies such as Mintangible have been attempting to help NFT issuers utilize existing copyright licenses to protect their users.

Another edition should not leave the readers under the impression that actual I.P. lawyers are sitting on the sidelines, this is gaslighting.

Also, what does “logically self-inconsistent redefinition” mean? Did the authors add an errant “self” in there?

On p. 177 they write about the duplication problem:

NFTs have been criticized for having no way of guaranteeing the uniqueness of the datum or hyperlink. Since multiple NFTs can be created that reference the same artwork, there is no canonical guarantee of uniqueness that an NFT purchased is “authentic”. It remains unclear what “authentic” would mean regarding infinitely reproducible hyperlinks.

Apart from its polemical zealotry, one of the books core weaknesses is that the authors clearly did not conduct much market research, they certainly did not canvas outside experts to solicit answers some of their questions. It is often tedious to do, but even asking an open question about this on Twitter (now X) would probably have helped their misunderstandings.

For example, marketplaces like OpenSea and Magic Eden allow NFT issuers to become “verified” which help reduce some of the counterfeiting that takes place. Block explorers such as Etherscan allow the general public to inspect all transactions to determine the veracity of provenance; the public can look at the metadata and track the transaction history. You could even do a reverse-image lookup on Google.

On p. 178 they write about the multiple chain problem:

The NFT definition of “ownership” has been criticized as having no single source of trust since multiple blockchain networks can be created and operated in parallel, all of which can give rise to independent and potentially conflicting suppositions of ownership for the same piece of data. The same NFT can be minted on the Tezos blockchain and the Ethereum blockchain, with the same content but with two competition definitions of “ownership.” Give this contradiction in the design, there is no canonical way to say a priori which blockchain network represents the base concept of ownership. This premise presents an intractable logical contradiction a the heart of the definition of NFT redefinition of “ownership”. Having something multiply-owned in different contexts with different sources of truth introduces an irreconcilable multiplicity to the idea of ownership, which results in a philosophical contradiction.

The authors are either straight up lying – or more likely – have never interacted with counterfeit collectibles before.

For instance, my wife and I own a Frederic Remington “Mountain Man” bronze sculpture we got at a garage sale. On the bottom it says it is unique, one of 97 made. But we all know someone who owns one. Ebay is filled with replicas. And Remington himself clearly did not make a million busts during his lifetime.

Yet according to the hyperbolic authors of this book, this replica situation results in a ‘philosophical contradiction.’

The hypothetical scenario that the authors concoct is presents their superficial understanding of how provenance can be traced on a chain.

For instance, auction houses such as Sotheby’s and Christie’s are able to quickly determine which digital collectible is the “real” one simply by using a block explorer such as Etherscan.

Lastly, it is worth repeating that the authors use a strawman at the very beginning of this paragraph. They do not provide a single reference or citation for which definition. All around tomfoolery on their part.

On p. 179 they write about market manipulation:

Finally, NFTs have been criticized for excessive amounts of market manipulation and, in particular, significant cases of wash trading that are now expected and normalized in the market. These phenomena make it challenging to ascertain what (if any) of the price formation is organic versus the work of a coordinated cartel attempting to create asymmetric information.

I agree with most of this. I was even quoted saying it was hypothetically possible. But the authors mention that there are “significant cases of wash trading.” What is their reference?

On p. 179 they write about play to earn games:

Some video game company executives saw the popularity of play-to-earn game startups, and announced that they would be creating copycat games or incorporating NFTs into their titles. Major game publishers such as Ubisoft, EA, Square Enix, and others have expressed interest in including such NFT items in their games. The backlash has been tremendous, as serious gamers see it as a shameless unethical money grab. With graphics cards pricing spiking due to crypto miners’ demand, this only added fuel to the flames. The backlash from gamers has been swift with publicly announcing their contempt for NFT and NFT-based games, which led to many apologies and reversals from these gaming companies’ executives.

How many citations and references did the authors provide? Zero.

It is hard to know how much of the public feedback was real versus manufactured anger from anti-coiners who went out of their way to tell reporters the same sort of half-truths he does in this book.

I should know, because I was quoted in a few of the articles. Which articles? Oh now you want references. Too bad, you will need to comb through my archives and google my name and scroll through my tweets.

Note: two months after the book was published the Ethereum Name Service (ENS) was at one point the most popularly traded NFT, surpassing BAYC. A year later, ENS reached the official Google cloud blog:

Source: Google Cloud

On p. 181 they write “Democratic Republic of North Korea” but the formal name is “Democratic People’s Republic of Korea” — the government in North Korea does not use the word “North” just like the South Korean government does not use the word “South” to describe itself.

On p. 181 they write about DAOs:

DAOs are a form of regulatory avoidance which attempt to recreate the regulation of creating voting shares in corporations. DAOs place this practice outside the regulatory perimeter and have no recourse for shareholders in the case of embezzlement or fraud. They are best understood as shares in a common enterprise run by potentially anonymous entities and with no restrictions on the provenance of funds held by the “corporation.” However, they may be attached to an enterprise attempting to solve a complicated public goods problem such as fixing climate change or providing universal basic income.

This is one of the few times in the entire book when the authors write something with hedged language.

With that said, the very first sentence is confusingly written. What does “recreate the regulation of creating voting shares” mean?

Did the authors mean to say that DAOs recreate the trappings of a corporation, such as voting shares? Any other examples or references?

The authors write on p. 181:

The notion that we should create unregistered corporate structures whose assets can be transferred to anonymous entities with no corporate reporting obligations is somewhat challenging from a fraud mitigation perspective, especially in a post-Enron world. It remains unclear what the killer use case is for anonymously controlled governance structures around slush funds, other than crime or projects that need avoid regulation.

Couple of things:

(1) There is a missing word in the last sentence, likely needs to insert “to” between need and avoid. Also add an “s” at the end of need.

(2) A second edition should incorporate some of the criticisms of DAOs from legal practitioners such as Gabriel Shapiro. Shapiro has written extensively on this topic.

Note: the authors cite Angela Walch’s novel paper, Software Developers as Fiduciaries in Public Blockchains. I have previously cited Walch’s works, including this paper. But it does not really back-up what the authors are asserting here. They cited it after “fraud mitigation perspective” — what part of Walch’s paper do they think helps their argument?

On p. 182 they write about DeFi

Defi is a broad category of smart contracts that loosely correspond to digital investment schemes running on a blockchain that allows users to create loans out of stablecoin and have side payouts in so-called governance tokens.

A few issues:

(1) They need to capitalize the “f” of DeFi in the first sentence (the use ‘DeFi’ throughout the remainder of this section)

(2) While there may be various definitions for “DeFi” even back in mid-2022 the authors could have easily found several overlapping definitions, maybe in the next edition they can provide one as an example.

(3) The authors probably should add an “s” to the end of “stablecoin”

(4) Not every DeFi project uses “stablecoins” for collateral. In fact, it is possible to collateralize a project in a non-pegged coin.

Lending protocols such as Aave and Compound have white-listed collateral, most of which – even in mid-2022 – is not a pegged coin. 48

(5) What are governance tokens? Who knows. They only mention it here in passing and never return to it.

On p. 182 they write:

DeFi generally refers to a collection of services that offer lending products offered by non-banks and which exist outside the regulatory perimeter as a form of regulatory arbitrage and to fund margin trading activities to speculate on cryptoassets.

The authors cite a relevant paper from Barbereau et al. In a second edition the authors could build from this foundation, because one of the weakest areas is highlighted in this specific paper: failure to achieve political decentralization (e.g., end up with a plutocracy run by a handful of venture capitalists).

On p. 182 they discuss an interview with Sam Bankman-Fried on Odd Lots, but without mentioning his name.

One of the strangest phenomenon from anti-coiners this past year is the victory laps they take when some scam is revealed, as if they helped take down the fraudsters. “See I told you so!” they type out victoriously on Twitter.

Actually, no you did not. The authors of this book – like the rest of the industry – were completely oblivious to the actual crimes committed by SBF. If they make this claim, be sure to ask for receipts.

On p. 183 they dive into the Metaverse:

The metaverse is another intentionally ambiguous term for an alleged new technology. On October 21, 2011 Facebook after having been mired in whistleblower leaks, scandals, and a near-constant press cycle of relentless adverse reporting, decided to pivot away from its controversial social media business and build what they called The Metaverse.

A couple of issues with this passage:

(1) The authors got the year wrong, it was 2021 not 2011.

(2) While Facebook did rebrand to “Meta” and allegedly went all-in on “the metaverse” — they never actually did a full pivot: the did not close down their major products (such as Instagram and Facebook). That is not really a quibble with the authors, as Mark Zuckerberg himself has mentioned a pivot (which they did again). Rather, the audience should be informed of what a pivot typically is.

The next sentence is missing punctuation, as they write:

The metaverse itself is an idea first postulated in the science fiction novel Snow Crash by In the novel, the metaverse refers to a virtual world sperate from the physical one, which is accessible through virtual reality terminals. Stephenson describes a bleak cyberpunk…”

Grammar issue: the authors should add “Neal Stephenson” after “by” and then a period.49

In the concluding paragraph of this chapter, the authors write on p. 184:

The post hoc myth-making that has emerged around the metaverse and crypto synthesis is that somehow digital assets such as NFTs will become tradable assets in Facebook’s virtual worlds and that their alleged utility in virtual reality will become a way to generate income in the metaverse, which supposedly and necessarily, needs to be denominated in crypto. The myth of the metaverse has captivated the media, who have written no end of vapid think pieces feeding the vaguely colonialist rhetoric of a new virtual frontier for a new generation to colonize and capitalize. Many tech startups have since spun up companies based purely around virtual land grabs, in which plots of land in digital spaces are auctioned based on some narrative about their perceived utility in some distant future. The irony of this premise is that virtual worlds do not suffer from any concept of scarcity, except the ones their developers artificially introduce. Even if we accept the far-fetched premise of the existence of new virtual worlds, why should those worlds inherit the same hypercapitalist excesses as our present world?

Working backward, that is a fantastic question guys! Where were your hot takes during Second Life’s heyday? Or any MMO for that matter?

Are you aware that developers still create artificial scarcity in a host of games in order to sell power ups of all kinds?

Source: Newzoo

Are the authors against digital wares by video game developers? Or only against the sale of digital wares if the acronym NFT is involved? Their inconsistency is tiring.

I personally agree with some of their skepticism of user adoption of token-based economies in future games, but they do not give a lot of reasoning as to why readers should be up in arms about it.

The two references they provide – one by Paris Marx and the other from Alice Zhang – do not add much to the authors unwavering bravado.

For instance, six months before publishing this book, Paris Marx interviews Diehl in a podcast entitled: Web3 is a Scam, Not a Revolution. It all comes across as being strong opinions, yelled loudly.

Chapter 18: Stablecoins

This six page chapter was disappointing because apart from a blurb on CBDCs at the end, it only discussed Facebook’s Libra project. It did not explain the history of pegged stabelcoins and it did not mention who other centralized issuers were.

This is strange because Libra never launched. Yet today at the time of this writing both USDT and USDC – the largest issuers of USD-pegged stablecoins – account for around 90% of all USD-pegged stablecoin supply.

Source: The Block

You would think the authors might write about how Tether Ltd – and its parent company iFinex – had been sued and settled with both the CFTC and the New York Attorney General. And how during those investigations the prosecutors learned that Tether LTD – and iFinex – executives publicly lied about their reserves. Easy slam dunk, no?

Who knows why they focused on a project that never launched, perhaps it is because David Gerard – one of their fellow anti-coiners – wrote a book about Libra during this time frame too? 50 It is an enigma!

On p. 185, their introductory paragraph states:

In the digital age, whoever owns the world’s data owns the future. To that end, in 2018, American social media company Facebook announced it was launching a cryptocurrency project known as Libra, which would form the basis of the singularly most extensive surveillance system outside of government.

The paragraph continues but they even got the timeline wrong. While there had been rumors – for months – that Facebook was doing something with cryptocurrencies and blockchains – the formal announcement did not take place until June 18, 2019.

On p. 186 they discuss “the idea of stablecoins” without mentioning the elephant in the room (Tether / USDT). Instead they state:

Facebook is its core advertising company, and its advertising business is enormously lucrative. The microtargeting of ads to consumers generated $70.7 billion in 2019. However, as a public company there are only so many sectors that would satiate the company’s expected growth. The company’s expansion into the financial services sector was the natural choice given the relative stagnation of the social media market.

There are a few errors:

(1) The authors need to include “at” between is and its in the first sentence.

(2) How do we know it was the “natural choice”? Is this speculation on the part of the authors? Are financial services the terminus for all technology companies?

(3) The authors should be clearer that Facebook generated $69.6 billion of revenue from ads in 2019. The current wording is only correct insomuch as they are detailing total revenue.

On p. 187 they write:

The degree of public scrutiny came in full force after the company announced its intentions with Libra. The project was widely criticized for its overreach, lack of compliance with existing regulations, and threads to the sovereignty of existing nations to control their currencies. European representatives nearly universally denounced the project, and several United States senators issued veiled threats to the Libra consortium members to withdraw from the project. The consortium members caved to these demands, and the more respectable companies such as PayPal, Visa, and Mastercard all withdrew from the project.

Most of the information is true but the authors do not provide any citations. In fact, David Marcus – then head of the Libra team – testified in front of a Senate committee a month after Libra was announced. And Mark Zuckerberg – the CEO and co-founder of Facebook – appeared before a congressional hearing four months after Libra was announced.

Both Marcus and Zuckerberg were publicly questioned about Libra and that is not mentioned in the book.

While that omission is strange, unsurprisingly the authors call “PayPal, Visa, and Mastercard” more respectable companies. That seems consistent with their earlier views.

As we have pointed out in this review: PayPal has operated like a centralized stablecoin issuer since it was created. And both Visa and Mastercard operate a rent-seeking duopoly in the U.S.

Speaking of which, Raj Dhamodharan EVP of Blockchain at Mastercard recently did a podcast explaining how Mastercard regarding stablecoins, bank deposits and CBDCs. Is this a scam – because it involves cryptocurrencies – or is it okay since Mastercard is working on it?

On p. 188 they write:

The mechanism proposed for maintaining consensus of the Libra ledger state was significantly revising the models found in public cryptocurrency projects. Bitcoin allows any user running the protocol to connect and participate in the consensus state and submit transactions. However, Libra being run as a business created a context in which only large corporations would be invited to maintain the consensus state and run the servers to maintain the network. These corporations would all maintain legal contracts with the Libra entity and theoretically run individual nodes of software that Facebook provided them. The governance model of the Libra consortium was a performative farce, and the engineering behind the protocol reflected the same level of theatricality.

This is incorrect in a few areas:

(1) There comment regarding Bitcoin needs clarification; in practice “participate in the consensus state” is distinct from “submit transactions.”

For example, while anyone can run a Bitcoin “mining client” on their computer at home, they will likely not generate the correct value to build a block (e.g., ‘solo’ mining is not typically profitable). While a user can run a full node at home – and certainly submit transactions – it is not really the same thing as building a block which “pools” do today.

(2) It is unclear how the authors evaluated the engineering talent and protocol itself since they do not provide any citations. Labeling everything a scam or fraud is not an argument, it is an opinion.

On p. 188 they write:

Instead of a consensus model like proof-of-work, which would have been unsuited and inefficient for the Libra case, Facebook invested in a not-invented-here form of a classical consensus algorithm known as Paxos; and named their derived implementation HotStuff. The goal of this setup served no purpose other than giving the appearance of decentralization. A closed network in which a fixed set of corporate validators maintained a faux-decentralized state was, for all intents and purposes, equivalent to a centralized setup of replicated servers. This performative decentralization permeates all levels of the Libra codebase and the project. In all aspects, the codebase is trying very hard to convince you it is like other public blockchain projects when it bears little similarity in practice.

Oh?

The authors ranted about HotStuff and were wrong.

HotStuff was created by engineers at VMware in March 2018. See the paper from Yin et al.

HotStuff is not based on Paxos but instead is based on PBFT. Some of the VMware team were hired by Facebook and others hired away by other blockchain teams, such as ChainLink and Ava Labs (the group behind Avalanche).

The authors also fail to produce a single reference for what part of the codebase was trying hard to convince you it was not a public blockchain. Perhaps the github repository was acting weird, but readers are left in the dark about what it was.

Also worth pointing out that the Sui and Aptos public blockchain projects absorbed some of the talent from the Libra / Diem team that disbanded after it was shutdown in January 2022. And Silicon Valley Bank purchased some of Diem’s (Libra) I.P. assets. All of this was concluded before the publication of the book.

Lastly, the authors still do not explain what Paxos is or what “not-invented-here” means. A second edition needs to explain what these “classical” consensus mechanisms are, at least at a high level.

On p. 189 they write:

Facebook Libra was a project of paradoxes, contradictions, and gross mismanagement, which ultimately led to its failure. However, if the project had launched, it would have enabled Facebook to engage in predatory pricing, self-dealing, and the capacity to annex adjacent markets, all while not subject to Bank Holding and Secrecy acts that protect consumers deposits by virtue of being a technology company dealing in its own allegedly “sovereign” currency. Nevertheless, Facebook remains a deeply unethical company that attracts the most deranged and opportunistic employees with no regard for the integrity of democracy or public well-being. Facebook is a company that is the very embodiment of corporate irresponsibility and depravity at every level.

I am sure there are many readers who would like to dance on Facebook (Meta’s) grave too, but at least get the facts straight.

For instance, what ultimately led to Libra (Diem’s) failure was that its banking partners (specifically the custody banks) were pressured to not support its launch.

For example, Diem had deployed a public testnet during its lifetime and the throughput numbers were considerably higher than other public blockchains, yet politically in the U.S. it was unpalatable. Which is part of the reason why some of those engineers went on to build Sui and Aptos, which are high-throughput chains.

Moving along, what is the “Bank Holding and Secrecy acts”? Do the authors mean the Bank Holding Company Act of 1956 and the Bank Secrecy Act of 1970? Which parts of the act(s) was Libra (Diem) subject to?

Lastly, the authors should probably add an “s” to the end of Facebook in the first sentence. And a second edition should briefly explain the name changes (Facebook -> Meta and Libra -> Diem) all of which occurred prior to the publication of the first edition.

Over a mere three paragraphs the authors write about Central Bank Digital Currencies, starting on p. 190:

The Facebook project and its implication as a threat to countries’ national sovereignty has given rise to a recent digital transformation trend for central banks to explore similar ideas. These projects are known as central bank digital currencies. The proposition is simple and based on the fact that central banks typically have enormous balance sheets of their lending activities and hold the accounts for many entities that interact with the Federal Reserve or the European Central Bank. Several central banks, including the People’s Bank of China and the Boston Federal Reserve, are exploring projects to this end.

There are multiple problems with this:

(1) The history is completely incorrect. Experiments and pilots with CBDCs occurred long before Libra existed.

For example, Project Jasper was a project involving the Bank of Canada and R3; phase 1 was accidentally leaked to the public in 2016. As I mentioned previously, Project Argent (another R3-led effort) partially spun-off into World Wire.

The Utility Settlement Coin consortium was launched by UBS and Clearmatics in 2015; it grew to over a dozen commercial banks and multiple central bank participants before spinning off into Fnality International in May 2019 (formalized just before the Libra announcement).

There were other separate, independent efforts taking place simultaneously around the globe. In fact, the term “Fedcoin” (created by J.P. Koning) pre-dates all of these ideas by multiple years.

A second edition should pay closer attention to these examples.

(2) The authors do not mention that there are multiple different CBDC models, some focused specifically on “retail” uses and some on “wholesale” uses.

Source: CBDC Tracker

For instance, the map (above) comes from CBDC Tracker. Each dot represents a pilot, trial, or even production implementation of a CBDC. In some cases they use a blockchain, in others, they do not.

The authors could peruse the literature from the Bank for International Settlement (BIS) as well as the Bank of England, both of which have produced research on this topic prior to the advent of Libra.

For instance, the “Money Flower Diagram” was published in a BIS publication in 2017:

Note: CADcoin was the name given to the digital asset used in Project Jasper; this was about three years before Libra was announced.

On p. 190 they write:

Advocates have generally embraced Libra and CBDCs as an “on-ramp to cryptocurrency” and praised the project for its illusory legitimacy to unrelated projects like bitcoin. However, Facebook and central banks are not building cryptocurrencies, and at best, digitizing existing accounting and payments systems. These proposed solutions bear no resemblance to bitcoin or any cryptocurrencies although and use this confusion is used as part of the blockchain meme to confuse the public.

There are at least five problems in this passage:

(1) Can the authors give us an example of an advocate who embraced both Libra and CBDCs who did not also work for Libra?

(2) Facebook’s Libra (Diem) project had closed its doors about five months before this book was published, so they should have at least put the second sentence it in past tense.

(3) Since the authors do not define or provide any model for what a CBDC is, it is clear in their 2nd sentence they are making it all up. Claiming that “at best” it is “digitizing existing accounting and payments systems” is wrong. They should consult an actual expert next edition.

(4) The last sentence is wrong because there are dozens of CBDCs proposals and implementations, some of which do share and use Ethereum-related infrastructure. The only people confused are the authors, and the Financial Times who for some reason quotes them.

(5) Lastly, there is some grammatical issues with the final sentence. Do they mean to use “although” or “use”?

On p. 190 they continue in their concluding paragraph:

Digital currencies are not synonymous with cryptocurrency, especially when a central issuer offers it. Digital currencies and payment rails are an essential part of public infrastructure that – especially in the United States – needs to transition from slow legacy batch systems that operate 3-4 times a week to real-time payment systems that other developed economies regularly use. These efforts are separate and entirely unrelated to cryptocurrency. Distributed ledger technology has nothing to offer central bank digital currencies as a central bank by definition, centralizes the architecture.

Every single sentence in this paragraph has an issue:

(1) Why is it “especially” when a central issuer offers it? The authors had the chance to explore centralized pegged-coins in this chapter but only focused on a project that never launched, Libra.

Are USDC and USDT not considered part of the “cryptocurrency” world because they are centrally issued? Maybe that is the case, but they did not bother to spell it out.

(2) FedNow was publicly announced August 5, 2019. Six weeks later there were congressional hearings about real-time payments on September 25-26 2019. That is nearly three years before the publication of this book. The authors did not fully describe how often “batch systems” operated in the U.S. during that time or why that aspect was important.

(3) Some of the efforts, such as FedNow, are indeed unrelated to CBDCs, but not every RTP and CBDC project around the world are mutually exclusive.51

(4) This is the first time the authors mentioned “distributed ledger technology” and they do not define it for the audience. And just two paragraphs above they mention the Boston Federal Reserve is exploring projects (Project Hamilton) and guess what the Boston Fed is using? A derivative of Bitcoin.

Overall everything in this subsection is wrong. Yet, strangely enough the authors (twice!) cite a solid paper from Kiff et al. That paper mentions “blockchain” 22 times and “smart contracts” 25 times. Did the authors even read it?

Lastly, the authors had a big miss, not predicting at least one of the problems facing centralized pegged-coin reliant on commercial banks as custodians: a credit event for the custody bank.

For example, two years ago I explained potential credit events with Signature Bank and Silvergate Bank (which Circle used as custodians to hold reserves backing USDC):

Where is Diehl et al. prediction? Nothing specific was mentioned in this chapter or book. They also missed the opportunity to discuss collateral-backed assets such as Dai and Rai.

If you are still reading this review it is worth taking a break because we still have more than fifty pages to go and the errors continue.

Chapter 19: Crypto Journalism

This chapter could have easily been filled with public antics from coin reporters who have gone out of their way to promote specific cryptocurrencies or even acted as sycophants to coin personalities, like SBF.

Instead readers are provided less than five pages of content, and only one that mentions disclosures.

On p. 192 they write:

The confusion about trade journalism as a reliable source is unfortunately common in the absence of authoritative mainstream reporting on cryptocurrency. Government bodies and financial institutions such as the International Monetary Fund, United States Securities and Exchange Commission, and FinCEN regularly cite cryptocurrency trade journalism as the basis for public policy.

If by “regularly cite” the authors mean, the IMF, SEC, and FinCEN will refer to a coin zine in the footnotes, then yes they do. Is that good or bad? It depends on the facts-and-circumstances.

Unfortunately the authors do not provide a single example so we have no idea what they think.

Continuing on the next page they write about the ICO bubble:

This process of credibility purchasing, exploitation of transitive trust, and stoking a “fear of missing out” was a core part of the engine that drove the ICO bubble and was a lucrative enterprise for those participating in it. Several unethical publications silently pulled their articles touting tokens that were later the subject of lawsuits or criminal investigations.

Which publications? Which tokens? What lawsuits and criminal investigations? We have no idea because there is no citation.

On p. 193 they write:

The articles pushed by these outlets vary from the mundane to the bizarre, but several trends are apparent headline trends across most outlets. The first narrative is an almost pending corporate adoption of bitcoin or blockchain technology.

Can we get an example? A reference?

In the same paragraph they write:

The content of the articles will cherry-pick quotes from seemingly mundane internal report on emerging trends in financial services to support whatever position the outlet is looking to promote. The contents of these reports rarely ever support any research and hesitation.

Can we get an example? A reference?

The only citation for the whole paragraph (which is even longer than what was quoted above) is to a very short Financial Times blog post about Terra.

At the bottom of p. 193 they discuss news about Venezuela and Zimbabwe, stating:

The narrative pushed by cryptocurrency outlets is that the citizens of these nations are fleeing their domestic currencies in favor of digital currencies as a flight to safety. While it is true that there are some users of cryptocurrencies in these nations, as there are in most internet-connected countries, there is absolutely no macro trend of citizens towards bitcoin as a means of exchange.

They cite a relevant article from Reuters regarding Venezuela. But it is worth highlighting that once again, in the last part of the final sentence, the authors cannot stop talking about bitcoin. It lives rent-free in their minds.

Yet the world of cryptocurrencies and blockchains is much larger than the orange memecoin.

On p. 194 they write:

During the height of the ICO bubble, investigative journalists looked into the price for journalists to promote a given ICO project at various cryptocurrency outlets. Shockingly the investigation found the prices of an article from a low of $240 to a high of $4500.

Hurray, they finally provided a relevant citation! This is what the chapter should have included, similar stories.

Throughout this chapter – and in particular this section – I kept wondering what were you guys doing in 2017-2018?

Did you warn the public about what you perceived as scammy ICOs? This would have been a good spot for the authors to provide some bonafides.

Chapter 20: Initial Coin Offerings

This chapter has one of their strongest sections and also has some of their worst prose and arguments. at 16 pages it could definitely serve as the foundation for a new edition.

On p. 197 they write:

During 2017-2019 there was a massive secondary bubble on top of the cryptocurrency bubble in which fledgling blockchain companies used the ethereum blockchain as part of crowd sale activities to sell custom tokens representing alleged ownership in new enterprises.

This is not 100% accurate. Not every ICO during that time frame only used Ethereum.

For instance, in July 2017, Binance conducted its ICO that raised $15 million, split between BTC and ETH. That same month Tezos raised around $232 million from approximately 66,000 BTC and 361,000 ETH. The authors do not provide any examples. Also, not every ICO claimed the tokens represented ownership in new enterprises. That is something the authors made up.

On p. 197 they write:

The simple fact remains that no company that raised funds under an ICO model has taken any profitable product to market.

That is probably true, but they do not provide a reference. An outlier for sure, but an example of one company that did was Binance, which operates the largest centralized exchange by spot volume. 52

On p. 197 they write:

The first ICO was in 2013 for a small project called Mastercoin. The project raised $2.3 million by selling a custom digital token for a specific exchange amount of bitcoin and ethereum per new token issued.

While Mastercoin (later rebranded as Omni) is widely considered to have conducted the “first” public ICO, the authors are incorrect on at least one detail: Ethereum did not even exist at this time.53

Nor did anyone participating in the Mastercoin ICO ever exchange ETH for the new token because Mastercoin lived on top of Bitcoin (it was similar to other “colored coin” projects at the time). I wrote a paper on this topic nearly eight years ago, feel free to use the works cited.

On p. 198 they write:

For ICO exit scams, the strategy is straightforward. You construct a fantastical prospectus that makes wild claims about a product or business imply or outright state that investment will increase in value over time and incur massive returns for early investors. Then you raise the money and then hop on a plane to a country without an extradition treaty and launder the money into the local currency. This is known as a exit scam or rug pull.

This was an enjoyable paragraph to read. To their credit they did cite a New York Times article that provides some examples. Yet a second edition should clarify that it is “an extradition treaty with the U.S.” (or a relevant jurisdiction) Also, probably need to use “an” instead of “a” in front of exit scam.

On p. 198 they write:

This is the simplest and most common form of ICO business model. The best example of this is the April 2018 Vietnamese scam for two companies named Ifan and Pincoin. The two firms are alleged to have misled approximately 32,000 investors and stolen upwards of $660 million.

I recall that sad story, even mentioned it in the private newsletter (mentioned earlier):

Source: Post Oak Labs newsletter

The authors say it is the most common form of ICO business model. Do the authors have a percentage or other figure to determine how common it is?

On p. 199 they discuss the Telegram ICO involving the The Open Network (TON) token. The authors use the date of 2020 but the references they cited actually refer to the year 2019. The authors should revise the language because the lawsuit was in October 2019.

On p. 199 they write:

The secondary economic question pertains to the fact that the overwhelming majority of these companies have produced nothing of value. The lack of any marketable blockchain artifacts raises some existential questions about the utility of this sector.

That may be the case but the authors are trying to have it both ways. On the one hand they demand evidence, on the other hand they a priori dismiss all blockchains and cryptocurrencies as utility-free. They need to be consistent.

On p. 200 they write:

The question remains where did all this money go? Not all of it was spent on Lamborghinis, parties, and cocaine (although a fair amount was).

There is no citation, so how do the authors know “a fair amount was”?

Continuing in the same paragraph:

While it is true that these companies have created jobs, however, this kind of job creations is the equivalent to paying employees to dig ditches and then fill it back up again. The parable of the broken window is an economic thought experiment regarding whether a child breaking a window is a net win for the economy simply due to the window having to be replaced. The activity of replacing the window has unseen costs that, when netted over all of the participants, are in aggregate negative over the opportunity costs of other productive activities. ICOs, simply put, are a society-level misallocation of capital that incurs a massive opportunity cost in the number of productive things and companies that could be built with said capital.

That is probably true – in fact I agree with the thrust of this passage – but they do not provide any example to strengthen their position. Frédéric Bastiat’s parable that they dutifully summarize can be explored in a second edition; the authors could explain what the ICO funds could have been spent on instead. Although this is tangential to the broader issues around consumer (and investor) protections.

On p. 200 they write:

For coins that are neither exit scams nor thinly-veiled pump and dump schemes, there is another class of projects with slow-burn failures. This class of ventures stems from the inability to deliver on unrealistic business defined by the whitepaper. These whitepapers typically involved appeals to vague buzzword and aspirations to build software built around “decentralization” memes and vague terms such as: Immutable, Decentralized, Trustless, Secure, Tamper-proof, Disintermediated, Open/Transparent, Neutral, Direct transfer of value.

I agree with the authors because what they are basically describing is chainwashing. But the problem is they are throwing rocks at glass houses because Adjacent did something similar back in 2016-2018. Just look through the direct quotes from Diehl and his colleagues during that time frame.

For what it is worth, I think it would have been consistent for them to criticize using these phrases all while explaining they have first hand experience in the industry (which Diehl has removed from his online biography).

On p. 200 they write:

Several jurisdictions became ICO-friendly to encourage innovation and job growth, to collect taxes, and to expand the possibilities of having homegrown domestic startup success stories. The most popular choices for jurisdictions were the Swiss canton of Zug and the island of Malta. The Swiss banking culture of client confidentiality encouraged many ICO companies to incorporate in the Zug region and then use the Swiss or Lichtenstein banking system to convert their bitcoin and ethereum into Francs and enter the traditional financial system. These funds could then be distributed to British offshore trusts, often set up in Gibraltar, to hide the funds from taxation and lawsuits.

The authors provide a reference to a note by Julianna Debler. While it discusses jurisdictional issues, it does not mention anything about Switzerland, Malta, or Lichtenstein.

How do we know these were the most popular jurisdictions? How do we know the funds were setup in Gibraltar? The authors may know something but did not provide a citation for it.

On p. 202 they write:

The average Series A for an American startup is around $13 million. However, these ICO funds raised capital 10-100 times that of a typical Series A round.

There is definitely a lot of blame to go around, but there is no reason to make up anything when publicly known facts seem incriminating.

For instance, what source do the authors derive the average Series A figure? When I lived in the Bay area the average Series A was typically between $2m – $5 million. According to Carta, in Q1 2023 the median cash raised for a Series A was $6.4 million.

But let us assume that the authors are correct, that the figure is closer to $13 million. They are also saying that “these ICO funds” raised $130m – $1.3 billion. Which funds were they referring to? Only a couple dozen ICOs raised more than $100m. A few outliers, like EOS, raised more than $1 billion.

On p. 202 they write:

There was an unusual pattern of ICO-backed tech ventures founded entirely by lawyers and social media influencers with no technical leadership. From a technical perspective, many of these slow-burn companies attempted to build the software proposed in their initial whitepaper only to find that the underlying technology stack they initially proposed was simply too slow, immature, or impossible to support their product pitched. Many companies overpromised the capacity of so-called smart contracts to build arbitrarily complex financial products and were quickly hit by the hard limitations shortly after investigating the technology. In the absence of experienced technical leadership, many of these companies attempted to remedy the immaturity of the software themselves and hired repeated iterations of teams unsuccessfully to build what they had initially promised.

Anecdotally I have heard similar stories but the authors should provide examples or a reference.

On p. 203 they write about Crazy Coins. This is one of the most interesting sections in the book. However it is worth pointing out that very few of them were actual ICOs.

On p. 207 they discuss celebrity endorsements, writing:

On the back of the speculative bubble of coin offerings, many entrepreneurs recruited a variety of people to promote these investments. These included many celebrities such as rappers and Hollywood actors who used their influence and social media presence to tout unregistered securities.

The authors do not mention if they are licensed lawyers or consulted lawyers yet many chapters are littered with accusations such as “tout unregistered securities.”

That may true but the accusation has to be proven in a court. So a future edition should add hedging words like “alleged” or “possible.” Or they could quote a securities attorney.

On p. 208 they discuss court cases, starting with the SEC lawsuit with Telegram. While the authors seem to do a good job summarizing the case, they miss one minor detail: The Open Network eventually launched. Telegram users can transfer Toncoin (the token) to other users on the app itself.

On p. 210 they write:

This model appeals to entrepreneurs as it increase the addressable investor pool to include international and unaccredited individuals who may not otherwise be able to participate.

This may or may not be true. Either way, the authors never explain what an accredited versus unaccredited individual is or what jurisdiction they are referring to (likely the U.S.).

On p. 210 they write:

Companies that engage in this sale often create a Theranos-style long firm whose premise is based on increasingly large token sales on top of a company that is either empty or fraudulent. For these companies, statement is simple: the token is the product.

There are a couple of grammatical issues. What is a “Theranos-style long firm”? What does “statement is simple” mean?

The authors reference an interesting and relevant paper from Paul Momtaz. However the Momtaz paper does not mention Theranos at all.

At the top of p. 211 they write:

Regulars are given many additional political tools to enforce rulings, however, the primary mechanism of action is to bring suits against the worst violations after the fact. Under-resourced regulators will simply often go after the top 20% of worst cases that will result in clear legal precedence and prevent future violations, but on the whole, the system lacks the resources to pursue every case.

There are a couple of issues:

(1) They misspell “regulators” in the first sentence (“Regulars” -> “Regulators”)

(2) Where do they refer the “top 20%” of worst cases? Where does that figure come from?

On p. 211 they write about tokens as illegal securities, writing:

The economic crises of the 1920s and 1930s led to a new variety of laws to curb the excesses of wild speculation that had created the crises.

Which crises were the authors referring to in the 1920s? The Great Depression? Was the Great Depression caused by speculative excesses or were there other contributors?

The authors should probably refine their statement to say something like, “In the U.S., the fallout from speculative excesses and mania that came to a head in late 1929 paved way for the passage of laws such as the Securities Act of 1933.”

On p. 212 they write about the Howey test:

A product is considered a security under US law when it shares the following three characteristics.

Yet later on p. 234 they mention Howey test has four characteristics. They should probably talk to a licensed lawyer to reconcile the wording. For instance, the authors should chat with Todd Phillips, who recently wrote a relevant op-ed in their favorite periodical, the Financial Times.

On p. 212 they say “During the 2016-2018 ICO bubble…” yet in the ICO section on p. 203 they mention “the 2017-2020 bubble.” Are these dates referring to different bubbles?

On p. 213 they write:

The other method around the securities laws is the use of dual-purpose tokens, which can be redeemed for services within a network and traded speculatively. In many of these dual-use token cases, the smoking gun is the presence of prominent venture capital investors where the expressed purpose of their investment vehicle is to return on the investment on their fund. If a messaging app offered a token that granted the alleged “utility” of being able to purchase in-app stickers, it is implausible that a fund of this size’s intent is to buy hundreds of millions of dollars of stickers for its own use. Instead, they intend to use their capital and information asymmetry to gain an advantage in trading the tokens for a return after the presale. The alleged utility is simply a very thin legal cover to hide their real intent.

A couple of issues with this statement:

(1) Which jurisdiction are the authors referring to? The U.S.? Which specific securities laws are they referring to?

(2) That could all be true – and I a sympathetic to their general argument during the ICO bubble years – but the authors do not provide any examples of a specific fund that did this. They basically sound like self-deputized prosecutors.

Overall this chapter has a number of areas the authors can build a strong foundation from, specifically the areas of “crazy coins.”

But even the title of that subsection makes you wonder: how do the authors determine what are crazy and non-crazy coins? They definitely should include direct quotes from actual licensed attorneys because some of their arguments probably have merit but right now it comes across as opinions of news clippings.

Chapter 21: Ransomware

This is a four page chapter that abruptly ends. It could have been much stronger if it included the history of “data kidnapping” in the 1990s. With that said, the authors do provide several specific examples and even a timeline, so that is a good start.

On p. 215 they write:

Most bitcoin use outside of speculation is not in payments but in financial black market activities and malware.

Source? Citation?

Surely just a little googling can help back-up the argument. For instance, according to Chainalysis, illicit use of cryptocurrencies hit a record $20.1 billion during 2022. Yet earlier this month an expert with CipherTrace says: Chainalysis data contributed to ‘wrongful arrest’ of alleged Bitcoin Fog founder. That seems like something readers might like to learn about.

On p. 217 they write:

In late 2019 there was an attack on the University of California San Francisco research department performing COVID-19 vaccine development, which locked servers by epidemiology and biostatistics departments.

The authors do not provide a reference to that UCSF story and a quick googling shows the date is incorrect. The hacking event – and subsequent ransomware demand – was in June 2020.

On p. 217 they write:

With cryptocurrency enabling ransomers, it allows these criminals to proliferate behind the scenes with very little chance of getting caught.

I sympathize and mostly agree with this statement. However it is missing a very important word – liquid cryptocurrency.

Why? Illiquid cryptocurrencies can be difficult and expensive to quickly move in and out of.

For instance, if Diehl issued his own token – Diehlcoin – its mere existence does not a priori enable ransomers. Rather, a deep and liquid cryptocurrency is necessary to expedite the process at scale. That is one of the reason that J.P. Koning recommended focusing on the payments leg of ransomware.

On p. 218 they provide eight dates that are not ordered chronologically, a new edition should order them by-date or at least explain that the ordering is done by ransomware amount.

Lastly, the very final sentence includes “a $5.2B/year industry” — the authors should spell out “billion” instead of abbreviating it.

Chapter 22: Financial Populism

This six page chapter should have been longer or at least spent longer discussing the fall-out of the 2007-2009 financial crisis.

It only plays lip services to the frustrations and concerns highlighted by protestors within the Occupy Wall Street movement.

For instance on p. 220 they write:

However, the genuine grievances percolating about the American zeitgeist were not bracketed purely to leftists groups; the events of the global financial crisis were indiscriminate and universal in the damage they caused the public, regardless of political affiliation. Movements on the right, such as the Tea Party, also adopted financial populist language as a reaction against the perceived injustice of the Obama administration’s bailout package and recovery plans. It was a rare moment in America where both the left and the right were, for equally legitimate reasons, furious at the fact that the public had been swindled by reckless Wall Street speculation – much of which was entirely based on crimes that would be later uncovered by post-crisis financial journalism.

Any specifics about the bailout packages and recovery plans? Wasn’t TARP legislation passed in the final months of the previous (Bush) administration?

Either way, the authors moved on without mentioning anything about the existence of systemically important financial institutions (SIFIs) during that time period which is a big omission; nor do they mention important legislation like Dodd-Frank.

Instead, they say these folks were naïve simpletons, writing on p. 221:

A valid criticism of the Occupy movement was that, in hindsight, the campaign had no clear goals or vision of what success or positive change would entail. Occupy was primarily a youth movement made up of individuals who overwhelmingly did not understand the complexity of the global financial system, regulation, or the principal causes of the financial crisis but were personally impacted by all these factors. The campaign was a reactionary movement against a not-well-understood injustice that had been exacted against them but which almost none of them could articulate the actual problem or proposed solution. The exposition of the movement’s ideas led to many misconceptions and debatably amounted to little tangible change in regulation or policy.

Perhaps this is all true but up until this point, apart from two pages in chapter 3, the authors do not spend any time discussing the GFC; nor the tangible changes in regulation and policy (such as Dodd-Frank).

Later in the chapter they mentioned TARP but do not mention how – in the U.S. – are still left with a highly concentrated financial system that privatizes profits and socializes losses.

Perhaps the youthful participants in the Occupy movement were ignorant, but the patronizing tone of this paragraph and the book seems like projection.

A reader could substitute “Occupy” with “anti-coiners” and arrive at the same conclusion as the authors did about the veracity of anti-coiners inability to articulate the actual problems facing the financial system. For example, in this book the authors show they do not understand how PayPal actually operates (e.g., as a shadow bank).

On p. 221 they discuss WallStreetBets and Bitcoin

The political imagination of Satoshi – and many crypto apostles who followed his vision – was that the financial system could not be reformed. Nothing less than the wholesale destruction of corrupt financial institutions would achieve their goals.

That may or may not be true, is there a citation or source for that?

The sole reference is to a paper from Carola Binder. The paper does not mention anything about cryptocurrencies, including bitcoin. Is this another strawman by the authors?

On p. 222 they write:

The American public’s rage toward Wall Street and the elected officials are, in many ways, highly justified. In response to the financial crisis, the American government created the Trouble Asset Relief Program (TARP) in the form of a $7000 billion government bailout to purchase toxic assets from financial institutions to stabilize the economy. While, in hindsight, the package may have been necessary, it only reaffirmed the notion that the financial sector plays by a different set of rules than the public; rules that encourage risk-taking because public taxpayer money is always available whenever the situation becomes too dire. Economists use the term moral hazard to describe conditions where a party will take risks because the cost incurred will not be felt by the party taking the risk. The clearest example of these excesses was when in 2009, a year after the bank rescue program, Goldman Sachs paid out $16.7 billion in bonuses to bank employees, seemingly as compensation for their extreme risk-taking leading up to the crisis. These bonuses paid out, seemingly on the back of the taxpayer, enraged the public. Despite all the public anger, the Obama administration did not prosecute any of the high-level executives involved in the events leading up to 2008. Instead the courts prosecuted a single executive, Kareem Serageldin, who was sentenced to 30 months in prison for conspiracy to falsify books and records at Credit Suisse. In what many perceive to be an affront to justice, the rest of the sector was graciously given a bailout and a slap on the write despite the public outcry for the Obama administration to collect banker scalps.

While the authors pay some lipservice to injustice that carries on to today, their 270 word exposition contains no mention of market structure, specifically how single points of failure (SPOF), single points of trust (SPOT), and systemically important financial infrastructures are still hanging over our heads.

Will blockchains or cryptocurrencies “solve” SIFIs? Maybe, maybe not. But the authors do not even attempt to discuss a scenario of decentralized financial market infrastructures (dFMI). Yup, I co-authored a paper on that topic too.

A couple of other quibbles about that passage:

(1) They do not explain why TARP was necessary. At the time, others argued for alternatives and even no bailouts at all. A second edition should explain the pro-TARP position.

(2) Courts are venues where litigation occurs and as such do not ‘prosecute,’ it is prosecutors who prosecute entities. Worth revising the wording the sentence about Kareem Serageldin.

On p. 223 they discuss the Reddit forum WallStreetBets, writing:

Despite the narrative of a populist uprising, the so-called Gamestop Revolution had little effect on the broader market. Instead, the vast majority of retail investors who chose to participate in the Gamestop bubble ended up losing money, as is characteristic of other historical bubbles. In the aftermath of the bubble popping, the Wall Street Journal report that many of the brokers and market makers made outsized profits off the increased volume in trades; the Journal wrote that “Citadel Securities executed 7.4 billion shares of trades for retail investors. That was more than the average daily volume of the entire U.S. stock market in 2019”. It also reported that Wall Street investment bank Morgan Stanley “doubled its net profit in the first quarter of 2021 to $41. billion” At the end of the day, the real winners of the GameStop bubble were the same entrenched institutions as before, and the public learned the hard lesson that day trading is not an effective means of protest against the financial establishment.

Several issues with this:

(1) This is the first – and only – time that the authors acknowledge “entrenched institutions.” Up until this point we have highlighted how the authors implicitly carry water for incumbents and legacy institutions. A second edition should build beyond the single reference they provide, to a paper from Jonchul Kim.

(2) A second edition could also discuss the role Robinhood played in this faux populism. And specifically, the constraints in the financial plumbing.

For instance, Robinhood had to raise $1 billion and throttle trades at one point due to clearing and settlement bottlenecks with the DTCC.54

(3) The authors should be consistent with how they write “Gamestop” or “GameStop” because they use both.

On p. 224 they write:

Financial populism is a reaction to this fundamental economic shift that can be framed in terms of six key components of the ideology.

The authors only list five components, where is the sixth?

Chapter 23: Financial nihilism

What expectations do you have for five pages in a chapter called financial nihilism?

On p. 227 they write:

Crypto is a symptom of the problems of our era, of a post-truth world awash in crackpottery, and a breakdown of trust in our institutions. For the first time in a generation, Americans feel the economic crunch like never before. Now well into their thirties, the millennial generation has been hammered by both the 2008 financial crisis and the coronavirus pandemic. Study after study confirms that Americans are more atomized, lonely, depressed, and desperate. At a certain level, the psychological state of market participants also begins to alter the markets and the fabric of the financial landscape itself.

Which studies? Any example? And what is threshold for “a certain level”?

On p. 228 they write about alienation:

Nihilism is an anti-philosophy, an intellectual dead-end from which no other observations can be derived. The financial form of nihilism takes these ideas and applies them to the concept of value and markets.

Hey, I think I know where their story might be headed…

Source: Twitter

Thanks for the credit guys! Don’t forget to cite Colin Platt too.

On p. 229 they write about the subjective theory of value:

A radical reading of the subjective theory of value asserts that any objective measure of value cannot exist, and the subjective preferences of the buyer entirely determine that market value and the seller, revealed through the autonomous operation of the free market. Dogecoin, diamonds, and dollars all have the same intrinsic value of zero because everything has zero intrinsic value. Markets simply trade in memes, some more popular than others, but none having any objective status or corresponding to any truth. Any investment scheme is thus assumed to be a grift a priori. After all, it is an attempt to get others to believe in some collective delusion which is assumed to be a Ponzi structure because everything is a Ponzi. The entire economy is thus nothing more than a Keynesian beauty contest for collective delusions. The role of the individual in late capitalism is to be nothing more than a maggot eating the corpse of civilizations while the world boils itself to death in an orgy of greed and corruption.

Oh?

In re-reading the passage above, while the authors were purposefully exaggerating the bleak worldview of the “nihilist” it is clear that the two camps share at least one common cudgel: the grift of a priorism.

We have documented around two dozen examples – so far – of the authors eschewing empiricism for an a priori approach.

Their argument immediately falls apart because prosecutors (which the authors have deputized themselves as) must use facts-and-circumstances, evidence, to prosecute a case. Not oration.

On p. 229 they mention there “in a world of zero interest rates” but the world of ZIRP – at least in the U.S. – ended several months before this book was published. The Fed began hiking rates in March 2022.

On p. 230 they write about how everything is a Ponzi:

Instead of a 401k, a diversified portfolio of mutual funds, and a mortgage, for a nihilist it is an entirely natural alternative to constructing a portfolio of CumRocket, Shibu Inu, SafeMoon, and a hundred other blatant scams in the hope that one of the scams works out.

Let us be pedantic: while some readers may know what a 401k is, not everyone might, so a future edition should probably explain what a 401k is or what a diversified portfolio of mutual funds are.

The authors should probably also explain why an investor pays management fees that mutual funds charges (versus an index fund that might not). Also, the authors might want to explain what type of mortgage they are thinking of too (they are not all the same in every country).

Also, since they do not provide any evidence for why CumRocket, Shibu Inu, or Safemoon are scams, then we can dismiss their claim without any evidence.

In the concluding paragraph of this chapter they write:

The world has a structure to it, and through the capacities of reason and science, we can understand both the world and the human condition, and through reason, we can improve our condition to build a better future. While democracy is not perfect, it is perfectible. Even if none of this were true, it is still better to labor under a delusion of misplaced hope and optimism than to wallow in aimless despair. Financial nihilism is a worldview that, although understandable, can be outright rejected.

Like most concluding paragraphs in the book, this is just rhetoric and polemics. The chapter does not actually cite anything about despair, is there a study on the level of despair of degen coin nihilists?

Chapter 24: Regulation

We have mentioned this before but it bears repeating: an editor would have helped consolidate similar topics together. This nine page chapter has some new ideas and concepts but it also regurgitates a number of topics that have already been semi-addressed elsewhere. It is also filled with more rants which are tiring to hear over and over again.

On p. 233 they write:

We live in a new golden age of fraud. Never since the 1920s has financial fraud and grifting been so ingrained in public as today. Yet, the cryptocurrency bubble is entirely built on a single foundation: securities fraud. The investment narrative of cryptoassets derives from an uncomfortable truth; selling unregulated financial assets to unsophisticated investors is a great way to raise large amounts of money quickly and with little overhead and oversight. In the 1920s, people raised money from the public on the back of promises of “easy money” from non-existent oil wells, distant gold mines in foreign countries, and snake oil cure-alls. And yet nothing has changed. Today, we have promises of investments to build financial perpetual motion machines created on the back of promises of decentralized networks, a new digital economy, and blockchain snake oil cures for whatever problem one sees in the world.

The authors cite a relevant paper from Boreiko and Ferrarini and a book from Michèle Finck. Both primarily focus on blockchain-related regulations in Europe.

But as they have in previous chapters: the authors also keep interchangeably using “securities fraud” with the sale of “unregulated financial assets.”

I am not a lawyer, are the authors? Who is being defrauded in their mind? Are they sure they do not mean “financial assets that should be regulated” or “financial assets that have been regulated in different ways depending on the jurisdiction”?

A second edition should clarify what exactly they mean when they use these words and more importantly what jurisdiction(s) they had in mind.

On p. 233 they write:

The Securities Framework put in place by our grandparents following the Market Crash of 1929 is based on universal truths about the nature of capitalism.

Look we all probably agree with the thrust of this particular page but it comes across heavy-handed in places. And more importantly, the argument presents “The Securities Framework” as if it was handed down by Moses and cannot be changed.

Apart from having semi-endorsed the STABLE Act and e-Cash Act, I do not currently have a strong view about any of the proposed legislation on the docket in the U.S. at the state or federal level. But that is not why you came to read this book review either.

On p. 234 they mention “the initial coin offering bubble of 2018” which is yet another date format. Previously they have said 2016-2018 and 2017-2020. A second edition should reconcile and harmonize these.

This full paragraph is enjoyable:

The initial coin offering bubble of 2018 gave us the most unambiguous evidence of how crypto creates a criminogenic environment for fraud. By allowing potentially anonymous entrepreneurs to raise crypto-denominated capital, from all manner of international investors, with no due diligence, reporting obligations, registration requirements, or fiduciary obligations to their investors, we saw exactly what one might expect: a giant bubble of outright scams. Some studies put the number of outright ICO scams at 80%. These companies had no pretense of any economic activity, and the founders simply wanted to abscond with investor money. The rest of the 20% merely fall under the category of illegal securities offerings, companies that sold digital shares as a proxy for equity in a common venture to American investors.

I actually agree with some of what they wrote, but it is how they wrote it – hyperbolic! – that is problematic. With the amount of alleged fraud and scams that took place in that era, there is no reason to exaggerate or get sloppy or lazy about references.

Where do the get the 80% and 20%? There are no citations.

Did they make it up? A quick googling found a 2018 report from Satis Group which claims that: Over 70% of ICO funding (by $ volume) to-date went to higher quality projects, although over 80% of projects (by # share) were identified as scams.

Is this what the authors had in mind? Do the authors agree with Satis’s methodology? If so, add it to the bibliography in the next edition.

How do we know the remaining 20% are “illegal securities offerings”? The authors do not explain why there are only two categories. What about ICOs that did not solicit Americans?

The remaining portion of this subsection is hard to take seriously since, as mentioned previously, they do not have a consistent view on how many prongs the Howey test is.

On p. 235 they write about shadow equity and securities fraud, specifically around venture capital firms. They do not provide any citations yet state that: “The venture investing model is an integral part of the United States tech economy and an engine for enormous prosperity and growth.”

Maybe it is, what is the reference?

Continuing on the same page:

However, in the post-2018 era, the outsized venture returns seen in the previous era have largely fallen by the wayside. The unicorns-companies valued at over $1 billion – that were once darlings of Silicon Valley, Peleton, WeWork, Uber, and Lyft have not performed like the giants of the dot-com era when IPOing; the unicorn stampede has become a bloodbath in the public markets.

A few issues with this:

(1) They probably should add a colon after “Silicon Valley”

(2) They misspelled Peloton (not Peleton)

(3) While we all probably understand the gist of what the authors are trying to say – that recently listed unicorns have underperformed since they IPO’ed – the comparison with “dot-com era giants” is not the best one.

In fact, in Chapter 3 they specifically highlighted the “The Dot-Com Bubble”. What are we supposed to do with this conflicting information?

For example, the authors do not mention specific “dot-com era giants” but we can probably assume they would include Amazon since it was mentioned in Chapter 3. Its first five years after listing were pretty dicey.

(AMZN) Source: Yahoo Finance

A future edition could simply say something like, some high-profile unicorns have underperformed since being publicly listed.

Continuing in the same paragraph they write:

Venture capitalists chasing the double-digit yields of the past have turned into increasingly more bizarre, risky, and unsustainable business models as part of their portfolio building. For venture capitalists dipping their toes into crypto investing, this has increasingly meant not investing in equity in their portfolio companies but instead investing in crypto tokens as a proxy for equity, a controversial mechanism known as shadow equity.

What is shadow equity? The authors do not provide a formal definition. What does Google say?

So the authors create a new term – shadow equity – do not provide a definition for the readers and it turns out there is already another working definition that is not the same thing as what the authors were describing.

A second edition should either drop the term “shadow equity” or find another term industry participants use to describe whatever it is the authors had in mind.

Continuing on p. 236 they write:

However, with shadow equity companies are not effectively issuing shares represented by cryptoassets or smart contracts, which are securities yet receive none of the investor protections of regular equity. Instead of a traditional equity raise, venture capital firms approach founders of crypto companies and do backroom deals that exchange capital for a percentage of the tokens that the company will issue in a sale known as a pre-mine. For instance, if a company issues 30 million shadow equity “share” tokens, it might allocate 20% or more of these tokens to its investors before selling them directly to the public.

There are several issues with this, including:

(1) Despite how common this allegedly is, the authors provide no specific examples or citations.

(2) It technically is only a “pre-mine” if there is actual mining taking place (such as a proof-of-work coin). There are other industry terms for non-proof-of-work coins but why should we do all the homework for the authors?

(3) Anecdotally I have heard of different types of retention and compensation models, but the one they describe for “shadow equity share tokens” is new. Where did they hear that?

On p. 237 they use the word “tieing” but the correct spelling is “tying”

On p. 237 they write:

Since the rise of the “web3” marketing campaign, many high-profile venture capital firms, although not all, have engaged in mass securities fraud to juice the returns on their portfolio.

Did the authors provide a single example? Nope. Perhaps they are correct but that which is presented without evidence can be dismissed without evidence.

Continuing in the same paragraph:

Investors’ returns on shadow equity are directly offering these investments to the public far faster than any other traditional form of venture investment. A typical web3 company can have a pre-mine sale, raise $50 million, offer the token to the public in a giant marketing push, and watch the price temporarily soar 10-20x in value in a massive pump while insiders take their profits, and before it all collapses down to peenies on the share; and all this before any pretense of a product is event built.

Did the authors provide a single example? Nope. Perhaps they are correct but that which is presented without evidence can be dismissed without evidence.

On p. 238 they write about industry lobbying efforts. But they do not mention a single lobbying organization which is a real disappointment because lobbying organizations like Coin Center white wash the negative externalities of proof-of-work mining.

For instance, they write:

All the while, the cryptocurrency industry has been lobbying lawmakers left and right, attempting to pass beneficial laws which all them to circumvent securities laws and create loopholes for them to continue the gravy train perpetuated by open and ubiquitous fraud. The revolving door between government agencies and crypto companies has been prolific in the last few years. Currently, the government risks falling into an irreparable state of regulatory capture where agencies are run by the entities they allegedly regulate.

I agree with the general thrust of this but you know what the authors are missing? Specific examples and evidence.

For instance, five years ago Lee Reiners wrote the first long-form article diving into the “revolving door.” A second edition must include that. In addition, Nathaniel Popper was the first mainstream reporter who covered how specific venture firms were actively lobbying specific regulatory agencies in the U.S., asking for “carve outs.”

It is worth pointing out to readers that a number of anti-coiners have shown open disdain with Popper despite the fact that he was covering this space long before the anti-coiners decided to care about it. The fact that Popper’s coverage is not cited reduces the credibility of these authors who have not done diligence.

For instance, where were the authors when Popper was reporting on the misdeeds of Centra?

On p. 239 the authors present a framework for discussion (with regulators) and propose five questions. These are good questions.

On p. 240 they present a “path forward” which includes:

Cryptoassets are clearly securities contracts. They meet both the legal and practical qualifications for being regulated, just like any other investment contract. To investors, they present with much the same presentation of opportunity: to generate a return based on the efforts of others, but with far more extreme risk. The existing securities framework would vastly mitigate these risks and protect the public from harms that have been well-understood by economists and lawyers for 100 years now.

All cryptoassets are “clearly securities”? What supporting evidence to the authors provide to back up this claim? Nothing. That which is presented without evidence can be dismissed without evidence.

Continuing on p. 240 they write:

The amount of pump and dumps and market manipulation present in crypto markets is unprecedented and is primarily created and done by exchange operators themselves. Massive amounts of non-public asymmetric information, economic cartels, and manipulation are not conducive to either capital formation or financial stability.

How unprecedented are the pump and dumps? How do they know these are primarily created by exchange operators?

What supporting evidence to the authors provide to back up this claim? Nothing.

That which is presented without evidence can be dismissed without evidence.

Also, this is the first and only time the authors complain about cartels. They missed the opportunity to discuss them in Chapter 3 regarding the financial industry during and after the 2007-2009 crisis.

On p. 241 they propose to “ban surrogate money schemes derived from sovereign currencies.” This is not a bad idea per se, Rohan Grey has kind of discussed something similar. But this would impact PayPal, is that something the authors are aware of?

Continuing, they write:

As found in many stablecoin projects, surrogate money schemes attempt to create dollar-like products that mimic public money. However, the products are not backed by the full faith and credit of the United States Government, and in many cases not even back by any hard assets. Stablecoins are subject to extreme risk of runs, much like we saw in bank runs in the Great Depression, an event not seen in the United States in 90 years.

It is too bad the authors did not take the opportunity to flesh out their arguments – in full – in the chapter 18. Such as, what is the definition of a “stablecoin”?

In this chapter they still do not provide specific examples of stablecoins that they perceive to be bad actors.

Furthermore, what do the authors mean by “bank runs”? Does this mean customers of banks standing outside the physical branch while the bank goes under?

Source: FDIC

As mentioned in the review of Chapter 18, the authors only discuss Libra (Diem). They do not mention specific banks, which is a big miss because others – including myself – specifically predicted the commercial banks that could collapse.

They need to do better with providing evidence, they had ample space in 247 pages to do so.

Continuing they write about money market mutual funds (MMMF):

The creation of stablecoins in almost precisely the same system, but instead backed by even riskier assets like Chinese commercial paper and other cryptoassets, which take the run risk of MMF and expand it exponentially.

The authors do not provide any evidence or references regarding Chinese commercial paper.

They could strengthen their argument if they – for example – explained how the New York Attorney General sued and settled with Tether Ltd (USDT). And during this investigation the NYAG discovered that Tether Ltd had at one point held securities issued by a couple of Chinese banks including ICBDC and CCB. Why not include these helpful details?

Also, why is it riskier to own these Chinese assets and what makes the run risk exponential? Perhaps both are true, but that which is presented without evidence can be dismissed without evidence.

Continuing in the same paragraph:

On top of this, the proliferation of private money simply weakens the dollar’s strength both domestically and abroad. Stablecoins are the financial product for which the upside is entirely illusory, and the downsides are catastrophic. The proliferation or integration of stablecoins is not in the interest of the United States from both a financial stability and foreign policy perspective.

This is a weird argument. In some ways, it is very similar to pro-pegged stablecoin legislators make:

Source: Twitter

Also, if the authors are actually against the “proliferation of private money” then they should be shaking their fists at the entities responsible for the creation of the vast majority of “private money” in the U.S., commercial banks.

Their next recommendation is to “firewall cryptoassets away from the banking sector and the broader market”

Writing on p. 241:

The Glass-Steagal Act, put in place after the Great Depression, set “firewalls” between different divisions of the banks.

They misspelled Steagal (should be Steagall). While I agree with parts of their proposal they could have mentioned that Glass-Steagall was eventually repealed in 1999. Is that good or bad? Seems like a good future discussion to have in a book.

Their final recommendation is a “complete ban.” Writing on p. 242:

Alternatively, the United States could consider a path similar to what China recently enacted or to the historical American Executive Order 6102, which forbade ownership of gold. Despite the rhetorical claims to “not throw the baby out with the bathwater,” there is, after 13 years of crypto, very little evidence that there is any baby at all.

The authors do cite a relevant article from the WEF regarding the 2021 bans in China. Why they waited until the very end of the book to cite this is unclear. Why not reference it in earlier chapters regarding China? What parts of the bans do the authors agree with? All of them?

Also, it is clear that throughout the book, the authors did not put much effort into finding evidence to even support their own claims, let alone conduct market research that provides evidence that contradicts their a priori cudgel.

It is worth pointing out that the copy/paste Twitter account – Web3 Is Going Great – conducts similar behavior as the authors: they both cherry-pick news that is favorable to their narratives. It is disingenuous and dishonest.

Continuing in the same paragraph:

Introducing completely non-economic digital speculative “playthings” introduces nothing to an economy other than slightly more exotic gambling games. In fact, there is a strong argument that such activities may come at an enormous opportunity cost, in the capital and talent that get diverted to ever-more extravagant ways to financialize digital nothingness. We can create an entire industry speculating on the volatility of nothingness and turn every fictional thing into a tradable token, but should we?

That is a good question! What evidence did the authors provide or refer to to reinforce their strong argument? Nothing.

I actually agree with one of their points here (regarding opportunity costs) but without evidence it is just another random opinion. A future edition could also cite the musings of John Bogle, the founder of Vanguard and creator of the index fund. He often characterized the excessive speculation that benefited financial intermediaries as the “croupier’s take.”

The final paragraph of the chapter reads:

The only overall outcome of this program is the equivalent of digging digital ditches and filling them up again. Perhaps our society has better things to do than digging deeper and deeper ditches and filling them up again. And quite possibly, the Americans should simply ban crypto and play intellectual catchup with what seems like the rather sensible policy the Chinese have concluded on for the same universal common-sense financial and public harm mitigation reasons.

What would a ban entail? That no Americans in America can have a digital wallet on their phone? That no Americans in America can install software that runs a blockchain validator? What is the plan?

Also, the authors do not actually explain what China banned. For instance, private individuals can still own cryptocurrencies in China. Do the authors want to replicate that too?

All-in-all this chapter is a disappointment because it should have come earlier in the book, it should have been more comprehensive, it should have had more citations and references, and most importantly: it should have been vetted by experts in their fields including at least one licensed lawyer.

Chapter 25: Conclusion

The final four pages are basically a long rant, so let us dive in.

On p. 243 they write:

Crypto is a gripping story full of sound and fury, hope and fear, hype and noise, greed and idealism, yet despite all that, it is a tale signifying nothing in the end. Crypto is not just an experiment in anarcho-capitalism that did not work; it is an experiment that can never work and will never work. Crypto was promised as the technology of the future, yet it is a technology that can never escape its negative externalities or its entanglement with the terrible ideas of the past. Crypto is not the future of finance: it is the past of finance synthesized with the age-old cry of the populist strongman, To Make Money Again.

There are a few issues with this:

(1) The authors erect a strawman but empirically we know not all “crypto” projects are attempting to ‘make money again.’ Nor do all blockchains use proof-of-work. In fact, in looking at the current list of Layer 1s on CoinGecko, the majority are based on proof-of-stake. What are the negative environmental externalities of proof-of-stake?

(2) Yet again, the authors use an a priori argument to predict the future: “an experiment that can never work and will never work.” How can they know the future with such certainty? This is soothsaying.

Continuing on p. 243 they write:

While our existing financial system is undeniably profoundly flawed, not optimally inclusive, and sometimes highly rigged in favor of the already wealthy; crypto offers no solution to its problems other than to create an even worse system subject to unquantifiable software risk, profound conflicts of interest, and an incentives structure that would exasperate wealthy inequality to levels not seen since the Dark Ages. Put simply, Wall Street is bad, but crypto is far worse.

When I tried to explain to friends that this book unnecessarily carries water for incumbents, this is the reoccurring meme that came to mind.

There is no reason the authors have to defend incumbents or the a cartel that regularly is fined for the very activities that the authors abhor. Guess who invented all of these criminogenic concepts in the first place?

Rather, it is possible to critique both the coin world and the traditional financial world. You do not have to join one camp or the other.

In fact, real researchers should attempt to be neutral, or at the very least, provide some kind of nuance. There is no nuance in this book. To their credit, they did cite a Bitcoin-specific article from 2013 in referring to the Dark Ages. Too bad for them, the coin world in June 2022 was more than just the orange memecoin.

On p. 244 they write:

At all levels of sophistication and from all walks of life, every type of investor needs to be given truthful, fair, and full information about their investments and protected against fraud and unnecessary risk by our public institutions. Crypto’s very design is entirely antithetical to building or improving any of our existing markets and only serves to add more opaqueness, systemic risk, and fraud.

Oh, now they authors finally care about systemic risk. It only took 244 pages.

To their credit, they do cite a few external sources. The first is Hanley’s paper on Bitcoin (and only Bitcoin). The second reference is to a three-person interview that meanders around, why did the authors add it? The third is a reference to a blog post from Ed Zitron’s whose hyperbolic rant sounds nearly identical to the authors. Opinions are not evidence, they are opinions. Maybe there is some evidence but… what can be presented without evidence can be dismissed without evidence.

On p. 244 they continue:

All scientists and engineers are duty-bound to our profession and our communities that the public good is the central concern during all professional computing work. As a technologist, cryptoassets present our industry with an immense challenge and fundamental questions about the nature of responsible innovation.

Did Diehl – or one of the other authors – just break the fourth wall? Do the authors have a monopoly on who gets to represent “the technologist”? I have worked for tech-related companies for years, are my opinions weighted any differently than theirs?

They do cite two references, one is the same presentation from David Rosenthal and the other is a hyperbolic presentation from Nicholas Weaver. Are these challenges insurmountable? According to the authors and Weaver, that would be an a priori no.

On p. 245 they write:

Despite thirteen years of development, there is widespread debate over the proposed upside of cryptoassets from technical and financial considerations. While the aspirations of technologies may be genuine, the reality of the technology and its applications are vastly overstated and not in line with what is possible. Blockchain-based technologies have severe limitations and design flaws that preclude almost all applications that deal with customer data and regulated financial transactions. Real-worlds applications of blockchain technology within financial services are sparse and ambiguous as to whether they are an improvement on existing non-blockchain solutions. Most senior software engineers now strongly reject the entire premise of a blockchain-based financial system because the idea rests on both economic and technical absurdities.

Let’s walk backwards for a moment. Recall from Chapter 14 that we are all taught in writing class not to introduce new concepts or ideas in the conclusion of a story. The authors not only do it again, but they do not provide any citation.

For example, did the authors conduct a survey to determine that “most senior software engineers now strongly reject.”

Guess what? We all know what the proper response is to this.

The authors also showed their direct contributions as at least one of the co-authors of the anti-Web3 letter that was published two weeks before this book. How do we know?

The letter has a passage that sounds identical to the remark above:

After more than thirteen years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions.

Coincidence. Not at all.

At the time, I pointed out that the first web browser (appropriately called the “WorldWideWeb“) was launched in 1990. It was not until 2004 that Google revealed Ajax-based Gmail followed by Google Maps.

If the authors are trying to make the claim that anything (everything?) useful should have been invented in 13 years then they should hold other tech initiatives to the same standard. Besides, most blockchains themselves are much younger than 13 years too.

For instance, Ethereum’s mainnet launched 8 years ago and has undergone extensive changes over the past several years.

Lastly, what are “existing non-blockchain solutions”? This is the type of argument that Bitcoin maximalists such as Chris DeRose frequently used: just use a database. Okay, which one? Are you a database expert now too? Can other experts have a difference of opinion or is your view the final word?

Continuing on p. 245 they write:

The catastrophes and externalities related to crypto are neither isolated nor are they growing pains of a nascent technology; instead, these are the violent throws of a technology that is not built for its purpose and is forever unsuitable as a foundation for large-scale economic activity.

There is something wrong with the grammar in the middle of this rant: “these are the violent throws of a technology that is not built for its purpose”. What does that mean? On the margin of the book I wrote, “Did the authors meant to say ‘not fit for purpose’?” but even that does not make sense there.

Either way, by claiming “is forever unsuitable” the authors are once again trying to predict the future a prori.

Continuing on p. 245 they write:

Technologies that serve the public must always have mechanisms for fraud mitigation and allow a human-in-the-loop to reverse transactions. Blockchain technology, the foundation of all cryptoassets, cannot, and will not, have transaction reversal or data privacy mechanisms because they are antithetical to its bae design. The software behind crypto is architecturally unsound, and the economics are incoherent.

This is factually untrue. An RTGS such as Fedwire has irreversible transactions. There are no “human-in-the-loop” on purpose. In order to negate one transaction a subsequent transaction must be sent. This is true for cases such as bankruptcy too.

Do not take my word for it, here is what the Federal Reserve actually says:

We see this in other systemically important financial infrastructure too, such as CLS. CLS was setup after the collapse of a German bank giving rise to what we now know as Settlement risk or Herstatt risk.

I have patiently tried explaining these ideas – around SIFIs – to various anticoiners and Bitcoin maximalists and they frequently just pretend that “irreversibility” is a characteristic of blockchains and nothing in traditional finance. 55

Lastly, when the authors say that cryptoassets cannot and will not have “data privacy mechanisms” is there any existing confidentiality or privacy-related effort that they are okay with? They dunked on Tornado Cash earlier in the book, and they singled out both Monero and Zcash as well.

Are the authors okay with developers attempting to create new confidentiality or privacy-related technology or is it just not allowed in the universe the authors live in?

Continuing they write:

The theoretical upsides of every crypto project are entirely illusory. It is a solution in search of a problem. Its very foundations are predicated on logical contradictions and architectural flaws that more technology cannot fix and will never be resolved.

The authors are once again predicting the future with a lot of certainty: Will never be resolved. This is an a priori argument and once again, can be rejected because it does not have any evidence. The only thing they cite is another op-ed by Ed Zitron. A scientist should sit down and explain to the authors – and many of the people they cite – and explain the difference between a priori arguments and a posteriori arguments.

Continuing they write:

The impact of crypto’s externalities is massive and becomes more more pronounced every day it is allowed to continue to exist. Crypto is a project that will always create more net suffering by its very design because its design is antithetical to both the rule of law and the foundations of liberal democracy. Technologies working on cryptoassets and web3 are not building a brighter and more egalitarian future; they are only creating a path back to serfdom, where the landed elite are now tech platforms that control the means of communication, the money supply, and the levers of the state itself.

It took 246 pages but now the authors are finally critics of “tech platforms that control the means of communication.”

Are the authors critical of Big Tech for this type of centralized ownership and control or because “crypto” might be involved in some way? Who knows.

What we do know is that the authors believe that crypto “will always create more net suffering by its very design”.

Lacking any citations this can be classified as an opinion.

The final paragraph of the chapter, states:

A tech-led plutocracy is not a future we want to build, and despite the inevitability rhetoric of its supporters, crypto does not have to be part of our future. Crypto has no physical existence; it is a meme, an idea-and an incoherent one at that-which is no more eternal or permanent than the notion of the divine right of kings to rule once was. Crypto is an idea that is as senseless and ephemeral as every other collective delusion throughout history that has since passed into the intellectual dustbin of history, and this time is not different.

Can we talk about “inevitability rhetoric” for just a moment? The authors use this exact rhetoric over and over in each chapter. It is tiring. And it is not an adequate substitute for an evidence.

Obviously coin promoters should also be held to the same standard and if you read my other book reviews, I point out the same sorts of issues.

That is their conclusion, were we expecting something less polemical and more substantive?

Chapter 26: Acknowledgements

This is not an actual chapter but it now helps sync up the out-of-sync bibliography. It is worth looking at really quickly:

Many thanks to all those who helped with editing, citations, and research. Adam Wespeiser, Brian Goetz, Ravi Mohan, Neil Turkewitz, James King, Alan Graham, Geoffrey Huntley, Rufus Pollock, Paul Hattori, Grady Booch, and Dave Troy. And to the many other crypto critics who laid the intellectual foundation myself and others to follow.

Did Diehl – or one of his co-authors – break the fourth wall again? Who is “myself”? The same person who was referring to themselves in the Conclusion as “a technologist”?

It is not a huge coincidence that many of the people the authors acknowledge also happen to be co-signers of the anti-web3 letter that was published two weeks prior to the books publication.

Overlapping names include: Adam Wespeiser, Alan Graham, Geoffrey Huntley, Rufus Pollock, Grady Booch, and Dave Troy. Two of the co-authors of the book – Darren Tseng and Stephen Diehl – also sign the letter.

Nearly all of the works cited overlap as well. Guess who probably had a heavy hand in drafting that totally-organic-anti-web3 letter?

Book review final remarks

This is probably the worst book I have reviewedBlockchain Revolution and both of Michael Casey’s books are pretty close to the bottom of the barrel however Popping the Crypto Bubble is basically a long winded blog post filled with evidence-free assertions.  The authors fail at providing a modicum of supporting references beyond endless rants.

What makes this particular book extra cringy is how much playtime the Financial Times has given it.56 Not only do some of its reporters seem to have a direct line to Stephen Diehl, they even did a softball interview with him without having read the book.

Where did it go wrong?

The best illustration: Chapter 18 is entitled “Stablecoins.”  It is six pages long.  Five pages discuss Libra – a project that was never launched – and the final page briefly covers CBDCs without diving into specific CBDC models.  One of the authors – Diehl – spends a great deal of energy on social media regarding “stablecoins” but could not spend a minute discussing the history of pegged stablecoins or what stablecoins exist today.  The authors could not even bother quoting arguments that strengthened their views – such as lawsuits from the CFTC and NYAG.  While they said the word “Tether,” they did not mention USDT or USDC at all. Why the omission? 

What is another example of weaknesses?  In Chapter 24 they have a subsection on “coin lobbying.”  But they do not mention any specific lobbying organizations or shills in congress.  How hard is it to provide supporting details?

Tim, you are just angry they did not cite you!

Undefinied acronyms and undeserved victory laps

The authors do not define NFTs or explain their history.  They repeatedly use a metonym – Sand Hill road – yet the casual reader may not understand it refers to Silicon Valley.

The authors could have but did not interview anyone inside or outside the industry. They could have done some original first-hand reporting. Instead we are served with a compilation of a stories from third parties. This is the same laziness that the copy/paste Twitter account – Web3 Is Going Great – suffers from; a lack of authentic research.

Anti-coiners should hold themselves to the same standard they frequently criticize the coin industry with, and that includes providing evidence and citations. For all of their claims around “fraud” and “scams,” the authors only made generalized forecasts and did not make any specific predictions around say, FTX or Terra. They missed out on describing the implosion of centralized lenders altogether. 

After all the pump and rah-rah books, the world needs a solid detox. The market needs a book about blockchains and cryptocurrencies with a critical, yet nuanced, eye. This is not that book.  

Endnotes

  1. As described in The Tribes of maximalism, the etymology of “no-coiner” comes from three vocal Bitcoin maximalists, Michael Goldstein, Elaine Ou, and Pierre Rochard who used it as a smear. []
  2. For instance, Chapter 9 covers “Ethical Problems” but in the Bibliography “Ethical Problems” is Chapter 10. The root problem is the authors skip Chapter 1 altogether in the Bibliography: in the book, Chapter 1 is a two page introduction and Chapter 2 is a ten page History of Crypto. The bibliography mislabels Chapter 1 as Chapter 2 and it has a knock-on effect for the remainder of the bibliography. []
  3. While at R3 I was introduced to Diehl via Simon Taylor, one of their advisors. []
  4. At the time of its publication, one of my popular (older) posts was: Archy and Anarchic Chains. I attended and participated in dozens of formal meetings with regulated financial institutions between 2015-2019, the word “anarchy” may have been mentioned in jest a couple of times. []
  5. PayPal is mentioned 67 times in Dan Awrey’s law review paper: “Bad Money.” []
  6. This dovetails into the motivations behind why Bitcoin was created, with some arguing it was built following the challenges facing the online gambling industry which had difficulties maintaining persistent banking access; Caribbean-based ones were frequently debanked. []
  7. There have been a wide-range and wide-variety of tokenization efforts unrelated to the euphoria around digital art collectibles. Coincidentally I wrote a paper on this topic in 2015: Watermarked tokens and pseudonymity on public blockchains. []
  8. In 2017, while at R3 I helped co-edit a relevant paper with experts from Blockseer and the Zero Electric Coin company (creators of Zcash): Survey of Confidentiality and Privacy Preserving Technologies for Blockchains (pdf). []
  9. I wrote about Bitcoin mining in China in May 2014. []
  10. Decades ago, the Supreme Court exempted Major League Baseball from antitrust laws. []
  11. This is a topic I wrote about at length in a newsletter several years ago; it discussed the sub-industry of collectible trading conventions and even price guides (such as Beckett). []
  12. Contra anti-coiner insistence: it is not a scalable business model for a one-person studio, expecting an artist – that wants to use NFTs as a distribution and royalty collection mechanism – to start suing perceived violators en masse. []
  13. While writing this review, WeWork warned it had “substantial doubt” that it could continue as a business. []
  14. After a decade, Uber finally did finally post a profitable quarter, but that was a year after the book was published. []
  15. I have previously argued that proof-of-work-based networks actually can be negative sum since the mining activity introduces negative environmental externalities. []
  16. One reviewer of this review commented: I don’t agree that JP is calling crypto an early bird game. It doesn’t have to generate returns for the earlier entrants. What is wrong with viewing it as a superficial commodity like gold or diamonds? []
  17. This is unlikely to occur due in part to the implicit control that Bitcoin miners and their maximalist enablers have on the BTC ticker symbol. Previously, several prominent maximalists such as Samson Mow and Adam Back have used their sway via Blockstream, to push miners in specific directions. []
  18. Perhaps the hooks will be underutilized but several of the vendors for core banking software – including Fiserv and Jack Henry – have production-ready hooks with blockchain-related integrations for clients. []
  19. Early efforts towards creating “clearing” or “settling” networks between exchanges eventually led to now defunct SEN and Signet (Silvergate Exchange Network and Signature Network). This relatively centralized infrastructure allowed participants (such as exchanges) to settle trades around the clock irrespective of weekends or holidays. And they could do so without trades having to be transferred on-chain, forgoing the fees and time delays. Note: according to Fortune, Signet was a white-label version of TassatPay, a private, blockchain-based solution currently operational at five other banks. []
  20. I was a formal advisor to Blockseer which provided similar on-chain analytics services before its acquisition by DMG Blockchain. Both Elliptic and Chainalysis typically post quarterly and annual reports that includes this type of information for public consumption. []
  21. Luke-Jr is a prominent Bitcoin Core developer who was a central propagandist for smaller blocks during the “block size civil war” primarily between 2015-2017. One of the hurdles he personally faced was that his internet connection in Florida was relatively slow and he used it as a barometer for how home validators should be able to upload and download a block. In the past he has voiced disdain for developers attempting to use OP_Return and recently threatened to spam the network to ban Ordinals. []
  22. Also, there is no reason to carry water for any of these chains but if you are going to critique them at least use consistent verbiage. []
  23. Visa was an investor in Chain.com back in September 2015 when the startup pivoted from Bitcoin API services to enterprise blockchain infrastructure. []
  24. A quick googling revealed a couple of papers published before the book was made public: DQ: Two approaches to measure the degree of decentralization of blockchain by Lee et al., and The Importance of Decentralization by Muzzy and Anderson. []
  25. Several of the large data and analytics providers have service contracts with trading entities that can flag events, e.g., when specific addresses become active. A recent example is when Arkham, an analytics firm, mistakenly reported that bitcoins connected to Mt. Gox and the U.S. government were on the move, the errant news temporarily resulted in a large selloff. []
  26. I have pointed this out to maximalists and anti-coiners over the years and the response is deafening. For example, nearly two years ago I did an interview with Aviv Milner who is podcaster. For some reason he would twist any criticism of the traditional financial industry – specifically concentration risk – as… not a valid criticism. Anti-coiners such as the authors of this book and several podcast series seem uninterested in holding traditional financial organizations to the same standard as the coin world they attempt to investigate. It is okay to find warts in both of them! []
  27. I have written about them several times, primarily in the 2014-2016 era. []
  28. The germination of ISO 20022 arose from some of those early blockchain-related conversations as well. Worth pointing out that in this case, it was specifically unrelated to cryptocurrencies; although a number of cryptocurrency efforts currently market themselves as “ISO 20022 compliant.” []
  29. The banking lobby in Europe is opposed to interest-bearing stablecoins in part because in theory it could dent their deposit base, just as narrow banks could. []
  30. In fact, I liked the Bergstra and Weijland paper so much that in 2014 I used the title for a short book I wrote on the same topic. []
  31. Put it another way, how many bitcoins does it cost to create a bitcoin? For miners to be profitable, the aspiration is less than 1 bitcoin. []
  32. Credit to Kevin Zhou who first pointed this out in 2014 while at Buttercoin. Yes, the same Kevin Zhou who accurately predicted the demise of Terra. []
  33. While Carter tries to place himself front-and-center of this specific topic, it was Andreas Antonopoulos who first prominently used the holiday lighting example. []
  34. It was not a coincidence that Dilley would later join Blockstream as their first chief strategy officer. []
  35. In fact, Coinbase would not list any other asset besides Bitcoin until 2016 because the executive team and early investors were prominent Bitcoin bulls. Listing Ethereum Classic (ETC) was a “newsworthy” event in 2018. []
  36. Michael Goldstein, Elaine Ou, and Pierre Rochard – are prominent Bitcoin maximalists and were co-creators of the term “no-coiner” and “pre-coiner” in late 2017-early 2018. The term “no-coiner” was intended to be an insult, a slur. []
  37. I have some bona fides in this as I authored the most widely cited paper on the topic back in 2015: Consensus-as-a-service: a brief report on the emergence of permissioned, distributed ledger systems []
  38. I have mentioned these specific examples to both Bitcoin maximalists and anti-coiners alike, and again, the goal posts shift. For instance, Jorge Stolfi, a computer science professor and Aviv Milner, the podcaster mentioned above, both ignored the existence of such projects or dismissed them out of hand. I even tried to help introduce Stolfi to a director at the DTCC so he could ask specific questions, which he did not. []
  39. Eight years ago I corresponded with a reporter at Fusion regarding the possibility of litecoin (LTC) being used for illicit activity (regarding chain hopping). []
  40. There is a clear insular clique that only engages with one another, much like certain coin tribes do (such as IOTA). []
  41. Early touchscreen-based personal data assistants (PDAs) included Palm Pilot, Apple Newton, and Blackberry from RIM. []
  42. Maybe as RWAs are deployed to Ethereum less attention will be paid to an ossified chain like Bitcoin, lowering Bitcoin’s marketcap below 30%. Who knows, maybe the opposite occurs. Being a cheerleader on specific price points based on ideology seems foolish. []
  43. This question initially stumped Libra / Diem managers. Anecdotally, one of the managers I spoke to early on in that project assumed that the custody bank would decide which fork to recognize. []
  44. A simple googling resulted in numerous papers including: Smart Contracts and the Cost of Inflexibility by Sklaroff, Towards user-centered and legally relevant smart-contract development: A systematic literature review by Dixit et al., and Smart Contracts, Blockchain, and the Next Frontier of Transactional Law by McKinney et al. Were those authors wrong? Sounds like the job for Diehl et al. to read and determine. []
  45. If you scroll back to the top of this book review and click on Diehl’s presentation and talks in 2017 and 2018, his thinking does not seem to incorporate or recognize what has gone on. []
  46. For instance, a variety of enterprises including regulated financial institutions have built and deployed smart contracts for a bevy of experiments, some that are still in pilot mode. Maybe these enterprises should be laughed out of the room but this is an empirical, evidence-based activity, the conclusions are not predetermined beforehand. []
  47. There is a lot of confusion over the origins of “Hyperledger,” here is a brief backstory. []
  48. This was a weakness in Hilary Allen’s own writings, specifically the DeFi Shadow Banking paper they cite in Chapter 12. Allen’s paper incorrectly states that lending protocols will accept any collateral, it was one of many technical inaccuracies in that paper. []
  49. Coincidentally, in the process of writing this review Lamina1 – a new layer-1 blockchain advised by Neal Stephenson – launched a beta of the metaverse-focused network. []
  50. The cited Gerarad’s book – Libra Shrugged – as reference number 2 in the bibliography for that chapter. []
  51. As part of a literature review the authors could look at the Bank of England’s new RTGS. Section 6 of the roadmap specifically mentions DLT and Section 3 of their Consultation paper discusses CBDCs. []
  52. At the time of this writing the management team is under investigation by the U.S. Department of Justice. []
  53. While not usually categorized as “ICOs,” there were some Bitcoin-related projects that did crowdsale / crowdfunding raises in 2012-2013 coordinated on the BitcoinTalk forum. []
  54. Coincidentally, Nathaniel Popper, a former reporter with The New York Times left the newpaper to write a book on the topic of financial populism. He had a good command of how cryptocurrencies and blockchains worked, yet anti-coiners attacked him for the cardinal sin of recommending nuance. []
  55. The authors also cite Hilary Allen who is not a credible authority on this particular topic. Rosen uses identical techniques and opinion-filled arguments in her writings, and frequently cites Diehl. Demand evidence from them. []
  56. It is not fair to blame the entire team at the Financial Times, some of their reporters did a stellar job chronicling the FTX collapse. []

Presentation: 8 areas for PMF and IMF with blockchains*

This past week I gave a new presentation at the 2nd annual Soranomics event (last year I presented on a related topic: pegged coins aka “stablecoins”). It includes a number of illustrations to discuss product market fit and infrastructure market fit.

Below is a copy of the deck as well as the A/V. Note: there are citations and references in the speaker notes. Note: I am to publish a long-form version based on this content.

Mini book review: “The Billionaire’s Folly”

I’ve previously reviewed at least seven blockchain-specific books in the past number of years. No one has paid me to review them, although I have received a couple copies for free. Unfortunately more than half of the books have been pretty bad… both technically wrong and often very polemical.

Fortunately, a page turner appeared in my inbox about a month ago: “The Billionaire’s Folly” by Faisal Khan. I’ve already posted a couple of short comments on the bird app and an usual for me – do not have a lot more to add. Mostly because it lacked many errors. Sure, it had a couple of typos here and there and a couple of debatable points but overall it was well-written and informative.

It also didn’t try to stray far away from what it aimed to do: discuss Khan’s perspective working at ConsenSys, an Ethereum-focused company, during what turned out to be the heady days of the ICO era. So in some ways, it is closer to Nathaniel Popper’s Digital Gold (which was equally well-written) than most of the other b-word books.

I didn’t mention this in the thread above but a number of anecdotes that Khan shares in the book were either relayed to myself (often through co-workers) or by actually witnessing it first hand. So it is interesting to see some of them independently confirmed.

One that did not (because Khan had yet to join the company) but definitely could have fit right in, involved an event held in the spring of 2016 near Seattle. About 60ish employees of this Fortune 100 tech company hosted a day-long powwow about “blockchains” and only three external companies were allowed to send representatives:

  • A well-known, large consulting company
  • ConsenSys, who sent several executives
  • R3 (my then-employer) sent myself

After presentations were given, the floor was opened for questions and a senior architect in the back questioned the urgency and immediacy that one of the promoters had claimed. And during the ensuing war-of-words, a partner at the consulting firm literally stood on the table at this closed-room event, crooning to everyone that “blockchain was the biggest thing in his career and that it would dramatically impact this tech company.” One of Khan’s future colleagues from the table over made eye contact with me and we just shook our heads. Although in retrospect, he was probably shaking his head for very different reasons than I was. I’m ngmi, right?

Either way, Khan has oodles of stories packed into a book that isn’t polemical. Check it out.

MEV and OFAC

[Note: this is a non-exhaustive post on a trending topic. For a more in-depth view, be sure to read OFAC Sanctions & Ethereum PoS – Some Technical Nuances from BitMEX Research and The Case for Social Slashing by Eric Wall]

Last week I was interviewed in a Twitter Spaces hosted by Taariq Lewis at Paloma. The other guest was Ameen Soleimani, co-founder of Reflexer Labs, which created Rai (an unpegged, stabilized asset on Ethereum).

The primary topic of the conversation started with “stablecoins” in relationship to OFAC. OFAC is a governmental organization that we have discussed in some previous posts.

What is OFAC?

The Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United​ States.

Why is OFAC is in the news and why have we written about it before?1

OFAC has previously sanctioned cryptocurrency-related assets and addresses before, most notably, starting with proceeds of ransomware operated by several Iranian nationals.

Source: U.S. Treasury

OFAC maintains and updates a list of SDNs, or Specially Designated Nationals and Blocked Persons. Nearly four years ago, they added several Bitcoin addresses, not just human beings.2

Over the past four years, other cryptocurrency addresses have been added to the list. The Block recently put together an easy-to-read guide chronicling these actions.

So what is the big deal this time? After all, we have written about this potential scenario several times in the past including in mid-2015, dubbing one gated flavor “permissioned-on-permissionless” — it is a weird hydra that combines the worst of both worlds (e.g. no legal recourse).

Two weeks ago, OFAC went beyond sanctioning specific addresses and sanctioned a smart contract called Tornado Cash. What is Tornado Cash?

Recall that by default, all activity on public chains (and private chains) is unshielded. While there are several zero-knowledge-based proposals in the works, on-chain privacy only exists through mixing or tumbling coins together. In contrast, centralized applications (and intermediaries) such as Venmo, users can often shield their activity from 3rd parties.

Tornado Cash is a free, open-source protocol that was implemented first on Ethereum. The implementation that was sanctioned, could in theory, be deployed to virtually every EVM-compatible chain, public or private.

Yes, code was sanctioned which is arguably beyond the scope of what OFAC was intended to monitor and police.

Source: Twitter

Administrators of centrally issued pegged coins went different directions. The operators of USDC quickly blacklisted the ~$750,000 in USDC held by addresses linked to the 45 address OFAC had sanctioned.3 In contrast, Tether LTD announced it would only do so if explicitly requested by U.S. authorities.

But Gerard’s take is bad because the sanctions go beyond hitting SDNs (humans) to instead contracts and code, creating a chilling effect downstream by creating sanctions exposure for innocent people.4

For example, within 24 hours: the public repository for Tornado Cash was removed by Microsoft (owners of Github) and several developers who had contributed to the Tornado Cash, had their github accounts shut down. Infrastructure providers such as Alchemy and Infura blocked access to Tornado Cash. The Tornado Cash Discord server also was shut down.5

While the protocol still exists on Ethereum, activity on it has dwindled and some miners have stopped including TC-related transactions.

Source: Twitter

At least one other example of the unintended consequence of sanctioning code is the direct impact on researchers at both for-profit and non-profit organizations. For instance, if Matthew, a cryptographer, conjures up some code to help users retain privacy while transacting on-chain, yet does not implement or deploy the code — and someone else does — is Matthew now a target for sanctioning? This actually isn’t a hypothetical because Matthew Green, a tenured cryptographer at Johns Hopkins just did that yesterday.6

Are the people who develop the libraries that Matthew used also a viable target? Anti-coiner responses, such as Gerard’s 1,500 word post, do not delve into these real downstream effects.

What is another reason Gerard’s take is bad?

Because Bitcoin miners, and other cryptocurrency infrastructure operators, have included transactions from sanctioned addresses into blocks for about four years. While it may be a matter of “national security,” it is not consistent. For instance, in spring 2021, Marathon Digital – a U.S. based mining operator – announced that it would provide “OFAC-compliant” bitcoin mining. A month later it reversed this policy amid angst from Bitcoiners. Thus the question that Gerard and others who danced on Tornado Cash’s grave must ask: what about consistency?7

And Tim, what are your bonafides on this matter?

Source: Twitter

Above is a (mostly) one-way interaction between a coin lobbyist from Coin Center in 2015. What was Peter complaining about then and what does it have to do with OFAC’s recent actions?

The paper in question is “Watermarked tokens and pseudonymity on public blockchains.” Rather than re-litigating it, let’s pull out two small nuggets:

(1) A compendium: Integrating, Mining and Attacking: Analyzing the Colored Coin “Game” by Ernie Teo.8

This was a strawman cited throughout the paper that describes what later evolved into miner extractable value (MEV). MEV is a friendly acronym that describes what a number of lobbyists – and their think tank supporters – used to claim never would happen: proof-of-work miners (and other participants adjacent a miner) using discretion to (re)order transactions in a block. For more on MEV, highly recommend listening to episode 455 from Epicenter.

Source: Flashbots

According to the Flashbots project, about $673 million in profits has been extracted by MEV over the past two-and-a-half years.

Okay, so at least in mid-2022 no one is arguing that MEV is non-existent nor are proof-of-work miners necessarily neutral parties (see Ethermine and Marathon Digital above).9.

So what was the other nugget?

(2) The story about Symbiont using Bitcoin (which they would later reverse):

Source: Bloomberg

Scrolling back through the 2015 archives is a blast from the past. “Enterprise blockchain” startups such as Chain, Digital Asset, and Symbiont first attempted to tokenize real-world assets (RWA) and embed them into the Bitcoin blockchain. Yet early on in each of their approaches, they were told by regulators that this probably would not fly due to sanctions. Don’t shoot the messenger!

What does that mean in the 2015-era? Recall that at the time, (incumbent) regulated financial institutions (typically banks) were already hesitant at doing something blockchain-related because of the negative connection with Mt. Gox and Silk Road. Adding sanctions screening to the list was a doozy.

What did sanctions actually have to do with tokenizing RWAs and Bitcoin mining?

At the time, the scenario was pretty straightforward: if tokenized interest rates swaps (IRS) or tokenized syndicated loans were mined by a pool based in a sanctioned country, such as North Korea or Iran, knowingly paying a transaction fee to that pool would likely be falling afoul of some sanction. So rather than having to deal with that headache (among others, such as, what happens to stolen tokenized assets on a public chain), regulated financial institutions punted on that and headed down into the sterilized world of permissioned chains, where every counterparty was known and screened ahead of time.

Obviously that does not mean sanctions violations do not occur — in aggregate the largest money laundering and violation of anti-money laundering laws still occur through banks — but the justification at the time was that block producers for permissioned chains would not be operating out of a sanctioned country. Yet as I mentioned on the Twitter Spaces interview: this approach kills composability. Why? Because all contracts would have to be whitelisted which is one of the reasons why the bulk of “enterprise blockchain” projects pivoted or shut down. But again, a topic for another day.

Concluding remarks

This post could continue on, discussing hypothetical scenarios in which U.S. based intermediaries involved in staking – such as centralized exchanges – are required by OFAC (or other regulatory / enforcement bodies) to censor sanctioned transactions. But there are already a lot of good twitter threads on that. Especially from Gabriel Shapiro.

Instead I think the most concise argument opposed to sanctioning contracts and code is from an attorney, Nelson Rosario:

Source: Twitter

We could have ended this post by discussing the 2013 guidance from FinCEN regarding administrators and how miners were not included. And how FinCEN / OFAC have had inconsistent enforcement toward North Korean – and other “bad” state actors – when it comes to mining. For instance, hardware manufacturers such as Bitmain sell equipment (first and second hand) to parties that commercially interact with miners in sanctioned countries.10 Or U.S. based miners and pools process Bitcoin transactions that involve proceeds of malware.11

But that would detract from Rosario’s excellent point about code. Code in public repositories. Code implemented by independent 3rd parties. The sanctioned Tornado Cash contract should highlight the need for privacy-by-default, not as a bolt-on afterwards.

And who better to describe this mantra than the coiner of Fedcoin, J.P. Koning:

Source: Twitter

You do not have to like blockchains or be an industry lobbyist at all to see the core issues at hand — on privacy — are reminiscent to the legal fights over PGP nearly three decades ago. To galvanize hoi polloi, worth listening to the reflections from Phil Zimmermann, who spearheaded the fight (and defense) of code during that time.

End notes

  1. We would be remiss if we did not highlight that Angela Walch was the first academic to argue that “miners are intermediaries” in a vetted long form paper. You do not have to agree with her conclusions to recognize that she blazed a trail during a time period in which lobbyists tried to spin any and all examples of transaction discretion by miners. []
  2. Note: this post is partially based on a presentation I gave over two years ago: “Regtech and Blockchains” for MIT Horizon. []
  3. In the U.S., sanctions are usually enforced by a centralized payment system or some entity that provides a service. []
  4. One common way transactional “tracing” occurs today is through contracting 3rd party vendors such as Chainalysis, Elliptic, and TRM Labs. We have discussed analytics providers in the past but worth highlighting how in the instance of Tornado Cash, it is unclear how many “hops” away funds that touched Tornado Cash are perceived as clean versus dirty. And the methodology varies from vendor to vendor (Maya Zehavi rightly points out the abuse of user metadata that “Web2” companies like Facebook were involved in and how compliance around Tornado Cash resurfaces some of the same thorny issues.). This then ties in with nemo dat, a principal we have covered many times. E.g., in the real world, physical cash is exempted from encumbrances because commerce would grind to a halt if holders had to trace the chain of custody each time they did a cash-based transaction. []
  5. A dusting attack also took place in which 0.1 ETH from Tornado Cash was sent to publicly identifiable Ethereum addresses, the owners of whom were unable to use the frontend of popular DeFi dapps. []
  6. Not a coincidence that the EFF is assisting Matthew Green in his effort, just as they formed to defend Internet civil liberties during the ‘cypher wars‘ in the early ’90s. []
  7. One argument law enforcement might make is that Tornado Cash – via the DAO and fees around the protocol – is providing a service for sanctions evaders. A counterargument could be that the Tornado Cash frontend used the Chainalysis API to block sanctioned wallets and the TORN governance token did not capture those fees for holders. []
  8. According to a guest in episode 372 of Unchained (at around the 51m mark), “PMCGoohan” independently described MEV in 2014. []
  9. Earlier examples of discretionary transaction selection include: (1) Slush mining pool manually helping Tone Vays win a bet against Roger Ver; (2) Luke-Jr, a developer and mining pool operator, threatening to censor Satoshi Dice transactions from Eligius pool; (3) during the ICO boom of 2017, certain Ethereum mining pool operators such as F2Pool would accept pre-payment in order to guarantee investors a spot in a block for Status, Brave, and other offerings []
  10. A mid-2017 article hypothesized a scenario that an advisor to the company explicitly told me was occurring. []
  11. Why now, why Tornado Cash, what about other TC deployed on chains, miners, dapps? For instance, Tornado Cash that was cloned and deployed on BSC and Arbitrum was not sanctioned. As a former regulator explained: On the other hand, uneven enforcement is an inevitability in part because organizations like FinCEN have ~30 people and only half a dozen or so are lawyers. The equivalent in the MAS is about 2 people, thus principals in Terra and Anchor still quietly reside in Singapore. The only entity with the manpower, probably, were the PRC and they gave up after less than a year. []

Book review: The Cryptopians

I have found a blockchain-related book that did not have me completely shaking my fist in the air. For background, I have reviewed six other blockchain-focused books, most of which were pretty bad and/or filled with inaccuracies (the exception thus far was Digital Gold).

In contrast, The Cryptopians by Laura Shin was a breezy read and one that – from a technical perspective – I feel comfortable recommending to both geeky and non-geeky audiences trying to understand some of the people that created the Ethereum ecosystem (as well as a few other blockchains).

For instance, I enjoyed the steady dripping of GRE words like pastiche and bucolic which were carefully placed throughout each chapter alongside detailed (physical) descriptions of venues and individuals. I look forward to seeing it turned into a mini-series (Luka Dončić will obviously play Vitalik).

In terms of “inside baseball,” while I have bumped into and interacted with many of the people mentioned, I don’t know enough to comment on several figures discussed so the review below is largely about other portions of the book.

With that said, there were a few areas that I had quibbles with. For instance, I probably would’ve highlighted how much aggregate fraud took place during the 2017-2018 ICO boom (e.g., why Chinese governmental authorities kicked out exchanges, etc.). But that likely would have distracted the main story around how Ethereum evolved as infrastructure.

And before I’m labeled a rose-tinted glasses fanboy, worth pointing out that when I first interacted with Shin years ago, we didn’t agree on a number of things. Rather than dwell on those past differences, I think it is a credit to her reporting that she provided nuances in the story (such as the early days of Hyperledger project and Enterprise Ethereum Alliance) that pundits who are new to this space are unaware of or put no effort in understanding. Calling everything a scam is the laziest form of concern trolling and fortunately readers have a list of citations to peruse instead of relying on innuendo from flash-in-the-pan Twitter personalities.

Note: all transcription errors are my own. See my other book reviews on this topic. Spoiler Alert: there are a bunch of spoilers below!

Preface

Before we begin, worth pointing out that the book covers a roughly four year timespan (January 2014-January 2018) and was published in February 2022. The preface included a helpful backdrop of what was occurring in the financial services area during this time frame. One paragraph stuck out, stating on p.3:

Soon financial institutions as powerful as JPMorgan Chase, Nasdaq, Visa, HSBC, State Street, UBS, Santander, and many others worldwide began exploring the technology. In late 2015, “Blockchain, not bitcoin” became the mantra on Wall Street, and from January 2014 into February 2017, more than fifty financial services firms invested in the space.1

To be pedantic, the very first person I am aware of that said “Blockchain, not bitcoin” is a VC named Adam Draper, who opportunistically pivoted the messaging from his portfolio companies in late 2015:

Source: CoinDesk

I attempted to chronicle some of these wordsmith shenanigans in October 2015.

Is it important in the scheme of things?

Maybe not. But I think it is worth re-highlighting this fairweather etymology. For instance, contemporaneously some anti-coiners actively attempt to memoryhole the slur that is “no-coiner” to play identity politics; e.g., People who purposefully do not own snow skis are not labeled as “no-skier” or someone who doesn’t own an airplane, a “no-planer” or someone who doesn’t own a computer a “no-computerer.” One of the reasons some anti-coiners do not call themselves anti-coiners is because they likely do not understand the etymology of “no-coiner” and how it is a grammatic corpse.

But that’s a different story, although germane for 2022.

Chapter 1

Chapter 1 provides readers with a short biography about Vitalik Buterin, including his early childhood (I was unaware of his prowess with Excel!).

I made a pedantic scribble on p. 12:

Shutting down Bitcoin would require tracking down and switching off the devices of every single person running the software — and that would require the coordinated action of every government in the world. But even shutting off all existing computer on the network wouldn’t stop anyone else from spinning up the Bitcoin software.

This is accurate at a high level. Pedantically however, in mid-2022 a well-resourced attacker (such cooperating governments) has a bit simpler task: (1) shut down large mining farms which ultimately slows down block production (e.g., the difficulty overhang would likely require a hard fork); (2) shut down or compromise just three ISPs or BRN/FIBRE — a protocol that propagates blocks directly between mining pools; (3) shut down or severely curtail liquidity providers (e.g., require large CEXs such as Coinbase to delist Bitcoin).

Again, we could argue (and Bitcoiners love to argue!) about the likelihood of either occurring but in my view a better illustration of geopolitical resiliency would be proof-of-stake (P-o-S) networks such as Avalanche, Polkadot, or Cosmos which do not rely on easily-identifiable points of failure (e.g., large mining farms) and are therefore mostly immune to scenario 1 (although clearly dependence on centralized cloud providers for any of these can be a weakness).

With that said, going down this rabbit trail clearly would have been confusing to the average reader so it is understandable why this hypothetical wargamming was not included.

Pages 15-17 provided some interesting background on how Bitcoin Magazine came into being (although maybe a missed opportunity to describe how it ultimately turned into a mother-son Bitcoin maximalist operation!).

On page 16, the author identified some good foresight:

Back home in Toronto after his globe-trotting, Vitalik was coding up a client using the language Python for Ethereum, while Gavin and Jeffrey worked on the C++ and Go clients, respectively. (Vitalik wanted Ethereum to work on different software clients so that a bug in one wouldn’t take the whole blockchain down; the entities on the network could run another one while the buggy one was fixed.)

This is an important paragraph and I am glad that Shin mentioned this so early on.

Why is implementation pluralism a good thing? Because as she described, it provides resiliency in the event something catastrophic or existential occurs (such as a bug that knocked 13% of Ethereum validators offline two years ago). Most blockchains, even a few years after launch, still are dependent on a single codebase maintained by a single team. Apart from resiliency (e.g,. a different implementation surviving a bug that knocks other implementations offline), this could lead to some perverse scenarios such as with Bitcoin wherein de facto gatekeepers ossifying around the BIP process (e.g., a priori anti-bigger blocks).

Today, there are at least four different “Eth 2” client implementations that are undergoing stress tests for the upcoming “merge.” Up through the spring, Prysm has been the most popular implementation and is actively attempting to reduce its marketshare by acknowledging that a network is more resilient with more active implementations.

Chapter 2

On a personal level Chapter 2 is interesting because during the time frame it takes place (January 20, 2014 to June 3, 2014) I was also writing a short book and had a chance to interview a few of the people mentioned. I witnessed odd behavior at least once: I had a Skype call with a couple members of the original Ethereum team. During the call, one person pointed a video camera (with its bright light) right back at me and video tapped it. I don’t recall the names but according to Shin, at least one person in that group was actively recording things which kind of seems off (or maybe I’m not sentimental enough!). I also thought Charles Hoskinson (who I separately interviewed) used phrases and words intimating as if he was a middle aged mathematics guru. And only learned he wasn’t through the book.2

Shin does a good job throughout the book articulating what the inner monologue was, what key people were thinking at the time. On p. 31 she writes about Gavin Wood who was brought on as the first developer and learns that the organization isn’t fully formed. Stating, “Why are they discussing this? If Ethereum hasn’t been founded yet, then damnit, I want to be a founder!”

This is followed-up with supporting details two pages later, “Later, Gavin would feel shafted as a lower-tier founder when he says he eventually found out that Charles had gotten into the Skype group only a day before he had.”

Another interesting detail on p. 36, “From Christmas to mid-February, for their respective Ethereum clients, Gavin and Jeff wrote more than seventy thousand lines of code.3 (Eventually, Vitalik’s Python client would mostly be used for research.)

On p. 40 the author pointed out how Charles had told at least one person in the team (Mihai) that he was Satoshi.

But as Shin notes,

The real Satoshi could easily prove his/her/their identity by moving a coin in the first block of the Bitcoin blockchain. There was no need for all of Charles’s hocus-pocus. Ultimately, most of the Zug group decided Charles was not Satoshi.

Pedantically the first sentence is both true and false. The real Satoshi could prove their identity by moving coins in the first block mined on January 9th, but not by moving coins in the actual Genesis block (from January 3rd). Why not? Because the Genesis block was hardcoded into the chain, the coins cannot be spent. Shin’s statement is a good barometer for filtering out wanna-be Satoshi’s, such as Craig Wright.

I’m also glad that Shin referenced Gavin Wood’s original essay on “Web 3” which was published in April 2014. You don’t have to agree with it, but unlike many of the VCs who promote “Web 3” or the anti-coiners who permahate on it, Wood provides some specific characteristics defining it. Is that too much to ask letter campaigns today?

Chapter 2 also goes into some details about the “holons” which I always thought was kind of bananas. Stating, “The Romanian Mihai, the Bitcoin Magazine founder who had lived in anarchist squats, enjoyed drinking, and was sociable, spontaneous, and creative, wanted Ethereum to comprise a series of live-work holons.”

The book goes into some depth about the drama these live-work locations, eventually they were dropped from official sponsorship and funding.

Page 48 mentions people, such as Vitalik, possible being “on the spectrum of Autism” and I seem to recall finger pointing at various events of who is and isn’t “on the spectrum.” Hopefully these antics will retire, there’s no room for the rudeness in polite society.

Chapter 2 closes with some nice imagery:

Vitalik walked out onto the front deck, the larger of the two on the top floor. It was drizzling outside. Beneath his feet were perfectly straight, cherry-stained wooden slats, and off to the side, a black barbecue grill, four black planters with bushes, and a yellow flower pinwheel.

Shin does a good job placing these details throughout the book, helping the reader imagine the scene.

Chapter 3

This is also an interesting chapter in terms of how certain events moved by quickly. For instance, with the crowdsale, on p. 71:

Stiftung Ethereum was finally established on July 9. By Friday July 18, the Ethereum crew had Pryor Cashman’s draft opinion letter. On Monday, July 21, they received it signed. On Tuesday, July 22, at midnight Central European Summer Time, they launched the crowdsale.

On p. 73 it is kind of funny to see some Bitcoin maximalists enter the chat:

Meanwhile, many Bitcoiners claimed “alt-coins” like Ethereum were unnecessary. For instance, a March blog post titled “The coming Demise of the Altcoins (and What You Can Do to Hasten It)” sad, “When people say, ‘But Ethereum can do smart contracts!’ this is actually false… Ethereum will therefore soon be forgotten like the rest once it inevitably fails to deliver on its promise.”

Coincidentally a few months ago I highlighted that same article and how the author ended up kicked out of the little institute he co-created, later joining the Bitcoin SV circus. Without endorsing Ethereum itself, it is empirically clear that it has not been forgotten and has delivered more than most publicly funded blockchain projects. This still doesn’t sit well with vocal maximalists (and anti-coiners).

On p. 84 the author mentions cold storage devices that stored the Ethereum Foundation’s bitcoin and specifically mentioned Michael Perklin.4 The one related anecdote I have about him: I spoke at Devcon 2 which took place from September 17-19 in 2016 in Shanghai. This is about a month after Bitfinex was hacked for around 119,000 bitcoin.

Just a total coincidence but when I got on the maglev, Perklin and I ended up sitting next to one another. Recognizing him, I started peppering him with questions about Bitfinex, who he was helping provide a security audit (he was mentioned in an official blog post on it). If I recall, my argument was that in traditional financial markets, an exchange operator that had suffered a similarly huge loss would have been closed down by regulators, least of all not been allowed to socialize losses and issue a couple of IOUs. Long story short, we disagreed on some fundamental issues and went our separate ways.

Chapter 3 concludes with the formal launch of Ethereum mainnet and the hiring of Ming Chan.

Chapter 4 & 5

Chapters 4 & 5 had lots of interesting anecdotes and drama I was unaware of. Geeky readers may be asking, “what’s with the big deal gossip?” In my view, I find it impressive that anything was built and delivered with the type of work dynamics described, e.g., it’s hard to imagine operating in an environment with a senior leader having loud outbursts throughout every conversation.

Chapter 4 ends with the termination of Gavin from the foundation and Chapter 5 concludes with The DAO being drained. A number of ICOs were mentioned, such as Lisk and DigixDAO. Where are they today? Lisk still exists, maintaining an SDK for developers. Digix suspended its operations five months ago, and is reviewing its license requirements in Singapore. A companion book could probably have been written to discuss (and scrutinize!) the types of ICOs and tokens that were created between the collapse of The DAO and early 2018, more on this later.

Chapter 6 & 7

Chapter 6 was quite the page turner. Even though I was actively providing analysis at that time, it’s always interesting to read a cohesive blow-by-blow, with comments from the key developers and stake holders (the timeline at the end is great!). The fact that Phil Potter had such a dismissive view about Ethereum (calling it a “shit coin” a couple of times, including p. 182), isn’t a huge surprise considering his previous antics of “cat and mouse” bank accounts.5

For instance, I had no idea the role Andrey Ternovskiy, the creator of Chatroulette, had in increasing the drama-per-second following The DAO hack, leading up to the hard fork (he pretended to be the original DAO hacker and tried to social engineer some outcomes).

An interesting technical point from an excellent Chapter 7 (especially the sleepless nights for the Robin Hood Group), on p. 166:

The hard fork was indeed less complicated, especially compared to a similar process on Bitcoin. Because Bitcoin was “a peer-to-peer electronic cash system,” as Satoshi Nakamoto described it in the Bitcoin white paper, it had a chain of custody that could be followed all the way from the creation of a bitcoin to the one (or fraction of one) that someone owned. It made possible the digital equivalent of being able to trace a dollar bill from the time it gets minted to the time it gets used to tip a cab driver, who then uses it to buy flowers from a florist, who then pays bus fare with it. In order to unwind something like the DAO on Bitcoin, to undo the cabbie’s tip, one would also have to rescind the bus ticket and return the flowers.

Bitcoin uses the UTXO model and Ethereum uses an accounts model, in principal, the forking process could work the same way if planned ahead of time. For example, while the flow of funds (payments) between users and merchants were not reversed when Ethereum split into ETH and Ethereum Classic, but with forks like Bitcoin Cash, if a blob of UTXO had ever been used, it really cannot be precisely excised and grafted onto the new fork without having to fully unwind the butterfly effect (see the 2013 accidental hardfork of Bitcoin for the winners-and-losers).

The brief discussion of Bitcoin maximalism on p. 181 as well as the quote from Aaron van Wirdum (a vocal Bitcoin maximalist at Bitcoin Magazine) reminded me of a tweet I posted just after the hardfork:

Source: Twitter

What’s the context of this dumpster fire? Recall that beginning in summer 2015, the Bitcoin “community” was undergoing a (negatively) transformative event: the Bitcoin civil war. At the heart was whether or not to hard fork and increase the block size. Several proposals, such as Bitcoin XT had been drafted up and a vocal wing, primarily composed of Blockstream-affiliated developers and organizations were opposed to any hard fork, let alone one that increased the block size (hence the “block size debate“).

This same group of antagonists regularly claimed that hard forks were unsafe and would lead to disaster, disarray, and the collapse of the entire ecosystem. Seriously, that’s how overdramatic some of these “small blocker” developers came across. Look up reddit and listserve discussions at the time, it was crazy talk.

Suffice to say, you don’t have to have an opinion over whether or not a hard fork should or should not have taken place on Ethereum to simultaneously observe that it did not lead to the collapse of the entire ecosystem. Hence, the egg-on-face, dumpster fire gif above. A number of other major L1s have successfully coordinated hard forks, multiple forks in fact, without leading to total pandemonium.

On p. 188-190, the author discusses the origins behind what is now called Ethereum Classic (ETC) as a separately traded coin. One personal anecdote: I distinctly recall the head of trading at a large U.S.-based exchange reaching out to me during this time period (July 2016) asking if I knew of any Ethereum holders who might be interested in selling their ETC. Worth pointing out, this was before it was listed on Poloniex. So the story of the various parties working in the background to get ETC off the ground probably could be expanded if a second edition is ever written (not that it needs a second edition!).

On p. 189, the author found a maximalist:

On the day of the fork, Bitcoin Magazine, Vitalik’s old publication, wrote an article about “the launch of a spin-off project: Ethereum Classic.” While the author, Aaron van Wirdum, noted that Ethereum Classic, “seems to be a bit of a joke, intended to make a point,” he wrote, the project has been gaining some traction, with a small-but-growing user-base on Reddit and Slack […]”

Fast forward nearly six years by several metrics such as TVL and active full-time developers, Ethereum Classic never really grew beyond its core group of devotees: Bitcoin maximalists who LARPed as Ethereans.6

Just as Litecoin and Dogecoin have not faded away (despite a lack of usage or developer interest), traders will probably continue to trade ETC until PoW coins are delisted for ESG reasons.

Source: Slide 77 from Electric Capital

On this note, on p. 192 the author writes:

They could see that, in the community at large, Bitcoiners in particular felt that Ethereum’s hard fork would illustrate one of Bitcoin’s core features: its immutability.

Two quibbles with this:

(1) some of the largest Bitcoin holders are not maximalists but like Bitcoin for other reasons (e.g., can be used as collateral on other chains);

(2) from a technical perspective, no public chain is “immutable” in the sense that it cannot be forked, if anything immutability describes the one-way hash function. Bitcoin’s development has fully ossified over the past five-ish years, with those interested in building actual dapps having left for greener pastures. Arguably the only thing “immutable” with Bitcoin today is who acts as the gatekeepers to the BIP process: the same self-appointed guards that prevented bigger blocks back in 2015-2016.

Chapters 8 & 9

On p. 198-199 the author mentions some pro-ETC tweets from Barry Silbert (founder of DCG):

Bought my first non-bitcoin digital currency… Ethereum Classic (ETC)

At $0.5.0, risk/return felt right. And I’m philosophically on board

Vitalik was stunned. He had met with Barry at the DCG offices in March, and at that time Barry had offered to help him and be his advisor. Now he was finding out that despite the friendly overture, Barry had never bought ether and now instead had bought ether classic.

Somewhat ironically five years ago, a group of Bitcoin maximalists actually chided Barry Silbert for his tweets (turning it into a full on Medium post). Around the same time, Reuters did a story about whether or not someone in his position would be falling afoul of SEC regulations for the type of tweets he was publishing. Putting personalities aside for the moment, it is worth pointing out that ETC has since had multiple deep reorgs and as shown in the presentation from Electric Capital above, does not really have developer mindshare.

These two chapters also provided some interesting background to both Poloniex (now co-owned by a syndicate led by Justin Sun) and Bitcoin Suisse (who had a change in management last year).

For instance, on pgs. 217-218

The WHG was trying to return people’s money, but instead they’d gotten the majority of it frozen at an exchange. When they asked Polo why it had blocked the trade, Griff and Jordi say the rep asked how Polo was to know the difference between a white hat and a black hat hacker. According to Griff, the rep then said that Polo was going to hold the money because it wasn’t the WHG’s money. Bity and the White Hat Group told Poloniex that it wasn’t theirs either. (Eventually, the WHG would realize that although Kraken was happy to let the Bity account trade, the exchange had blocked its withdrawals.)

Around the same time, someone working in the Bity office, who was then helping the WHG, recalls hearing a rumor from what they believed to be a credible source that the FBI had opened an investigation into the WHG’s activity, which scared the shit out of some group members. For the next two days, they spent a lot of time staring up at a big screen, incessantly refreshing the Poloniex account page to see if the money had been unfrozen. During this stretch of time, they slept very little — going to bed at 8 a.m. the night they realized the funds were frozen — and when people passed out, they did so on the sofas around the office. Weed and bottles of whiskey were strewn about, though the White Hat Group didn’t partake.

Another example of a prominent Bitcoin maximalist attempting to derail Ethereum, on p. 221

A few days after Alexis of Bity published a blog post on the status of the ETC refund, which explained why the WHG had first wanted to convert everything to ETH, a Bitcoin maximalist who went by the online handle WhalePanda published a blog titled “Ethereum: Chain of liars & thieves,” in which he delineated the trades that the White Hat Group tried to do on the various exchanges and concluded, “TLDR; We market dumped the illegally obtained ETC to crash/kill ETC but failed and now we want the locked funds back, sorry.”

His real name is Stefan Jespers and despite the fact that he has publicly invested in Ethereum-related tokens, his social media personality is toxic to this day.

Moving along, although I participated at the tail end of Devcon 2, I was completely unaware of all of the drama that was going on in the background.7

For instance, on p. 238

In the end, Bob didn’t even hear the final answer from Gav himself. Brian Behlendorf of Hyperledger had a call with Parity: Gav’s firm had decided not to go through with it. Bob felt Gav was acting out of spite. Bob also wondered if Gavin wanted to kill a potential competitor to Parity. Gav said Parity’s lawyer, who handled the company’s licensing strategy, had decided against it. Parity had partly gotten its VC funding by pitching an enterprise Ethereum implementation, so if the C++ codebase was permissively licensed, it might compete with Parity’s future product.

This was interesting because in retrospect, this future scenario didn’t really happen. While Parity did participate in several “enterprise” pilots and projects, this codebase was ultimately deprecated and turned into OpenEthereum (and later dropped altogether by Gnosis). Also, Pantheon (from ConsenSys) was donated to the Hyperledger project and re-emerged as “Besu.”

On pgs. 245-246 we learn about a possible motivation behind the denial of service attacks that took place during Devcon2

The DoS attacks were finally over. Though the period was stressful, Vitalik found fighting–and winning– this cyberwar fun in a way. Throughout, the attacker’s motivation was unclear. There wasn’t an obvious financial gain, although he or she could have shorted ETH. (The price did slide from about $13 to below $10 over the two months of the attacks.) In fact, he or she had spent one thousand ETH (roughly $12,000) on the attacks, plus the time to research and execute them. Many mused that perhaps the only people with such an incentive would be Bitcoin maximalists. Regardless, Ethereum became stronger and more capable of handling a high load of transactions–a beneficial maturation given what lay ahead.

When discussing the salaries of Ethereum Foundation employees and candidates, on p. 250:

But even her good qualities had downsides. For instance, even after the foundation found itself in a financially comfortable spot, she lowballed potential employees. When Google employees were applying and stated their salary requirements, she would say things like “Nobody gets paid that much” or that she and Vitalik didn’t–as if developers’ salaries should be benchmarked against her own. (Entry-level Google engineers would typically have incomes higher than Ming’s at the time, plus get valuable stock, and senior-level engineers’ compensation could be $1 million including stock.) At least one former Googler at the foundation was paid half his previous earnings; plus he was made a contractor, so he had no leave or benefits; another applicant from Google simply didn’t join the EF.

I don’t think these are good arguments for a couple of reasons:

(1) The Ethereum Foundation, like most coin foundations, is non-profit. We can argue about what the role of non-profits should or not be in society or what the salaries of their staff should or not be, but there is an implicit assumption that Foundations in general typically cannot offer the same types of compensation that many for-profit organizations can. For instance, the executive director role for both Hyperledger Project and the Enterprise Ethereum Alliance is around $400,000 a year. Since there is no equity or coin rewards for that role, is that high or low? Maybe it is low relative to the value that these organizations are perceived to create for the ecosystems they operate in.

(2) Having worked in the Bay area for five years (where my wife as a hardware engineer), with the current mini bear market in tech equities, arguably the salaries of Big Tech (software) employees were inflated. Plus in the case of Google, virtually all of their revenue comes from adtech which effectively monetizes personally identifiable information (PII) which is morally dubious at best. I don’t know what the “fair market value” of a senior engineer at Google should or should not be able to command after this mini bear market concludes, but the author should have used an apples-to-apples comparison: the salary of an experienced, senior engineer at other Foundations, and not with for-profit adtech companies in the Bay area.

Chapters 10 & 11

As mentioned at the beginning I don’t think the book was critical enough of ICOs in general, and specifically the way some organizers effectively fleeced retail by not disclosing much, if anything. Or how in many cases, a token was not needed.

One example of trying to force a token where one is probably unneeded on p. 256:

Many projects were, like the DAO, fund-raising by creating a token designated for use on that specific network. He said these tokens weren’t just being used to line initial coin offering (ICO) issuers’ pockets with ETH; they were actually being used in the dapps themselves. The people who offered services to the network could be pad in that token, which could then be exchanged for other money. Setting these projects apart was the fact that each was not a traditional app with a company at the center pushing out updates and making business deals; these were “decentralized software protocols” (emphasis added). Historically, such protocols had not been profitable. For instance, the people working on simple mail transfer protocol (smtp) for email did not make money. Outlook, Hotmail, and Gmail, the applications using smtp, had. However, now tokens made it possible for protocol builders to reward themselves since tokens could be created with the network, and they could keep some, like retaining equity in a start-up, and allocate some for continued work on the protocol.

A few quibbles about this passage:

(1) What the author (and the VC) is describing is: public goods, problem of free-riders, etc. Basically there is some useful internet infrastructure (smtp) that could be built but… : who builds it, who pays for the labor, who owns the IP, and so forth. The “Web 2” world now dominated by an oligopoly often referred to as Big Tech that sometimes builds out socially useful technology in exchange for monetizing personally identifiable information (e.g., rent-seeking). That is a morally bad exchange that has been normalized. We don’t have time to go into the years of abuse and exploitation (e.g., Cambridge Analytica scandal) that has occurred but this was one of the original motivations for proponents of “Web 3” in 2014. In practice, over the past eight years many VCs attempt to reinsert themselves and/or their portfolio companies (intermediaries like CEXs) in place of these tech incumbents. That’s not really mentioned in the book but probably should in a future edition.

(2) A sundry of ICO issuers did in fact attempt to line their pockets at the expense of retail. While some useful dapps and infrastructure have arisen out of the chaos of the 2016-2018 ICO mania, continually pointing to these is textbook survivorship bias. We don’t have time to go into how crowdfunding should or should not look like, but clearly there were a lot of victims who had no recourse and that’s not typically mentioned by coin promoters (such as the coin VCs of that era). The author doesn’t say it, but others have defended this time frame as “the ends justify the means” and I don’t think that is a good argument either. Nor is having to donate to unaccountable public goods (e.g., Wikipedia) the only other viable alternative.

(3) Unlike anti-coiners, I don’t think it is fair to throw the baby out with the bath water when it comes to creating new methods of funding public goods. Not everything was a scam or a fraud. Even securities regulators are okay with certain forms of crowdfunding from retail. Simultaneously I’ve been consistent over the years that a “tcpipcoin,” if it had been created almost 50 years ago, would have likely led to distractions for the stakeholders of that era, much like today.

For instance, below is a passage from a paper I wrote in April 2015 (pgs 18-19)

Moving along, on p. 257 the author put together a concise (and interesting!) history of ERC-20:

Suddenly everyone was on the hunt for the next big protocol tokens. And creating new ones on Ethereum was so easy. The previous fall, Fabian Vogelstellar of the Robin Hood Group had solicited comments on an idea that Vitalik had long discussed: standardizing a smart contract for creating new tokens. Fabian made it issue number twenty on a board designated for discussing protocol improvements called Ethereum Request for Comments. After 362 comments, they settled on a standard called ERC-20 tokens, which became a class of tokens that, because they were in a standardized smart contact, could be added easily be exchanges, wallets, and so forth.

In the discussion of crowdfunding, on p. 260 the author mentioned a now mostly dead project, Augur:

Right when they launched, the presale for Augur, a decentralized prediction market in which people could make predictions and bet on the outcome, was happening. When Taylor went to put money in, she was stymied, again, by challenging technical instructions. She asked Kosala to make a one-click button for her. He did, and they added an “Augur Crowdsale” tab to the site. Late in the sale, which ended October 1, 2015, teh Augur newsletter gave a shout-out to MyEtherWallet for the button. Taylor and Kosala exchanged chats peppered with “omg omg”–thrilled to have been noticed by others in the community.

Apart from the handful of people who bought it at < $2 immediately post-launch, the insiders of Augur did okay.8 Why? Today at around $8, Augur (REP) trades at roughly the same level as it did five summers ago. While money may not be the motivating factor for all crowdsale participants, ETH grew and sustained several multiples higher over the same time period (e.g., opportunity cost of capital). Apart from betting on the outcome of U.S. presidential elections, the platform – like Open Bazaar – remains a ghost town. To its credit, unlike other ICO survivors from that era, the Augur team converted 90% its ETH holdings for real money to build and deploy a working prediction market that is updated from time to time.

On p. 269 we learn how Poloniex operated a lot like Binance did pre-2021:

By the time of that victory, the exchange was facing a new problem. Due to US sanctions, it needed to block Iranians from using Poloniex. However, it could not, because the exchange did not have a robust know-your-customer (KYC) program to verify customers’ identities. (The one instituted in 2015 was, according to an early employee, “super basic” and “really, really easy to work around.”) It was a three-tiered KYC system that granted users greater trading access in exchange for higher levels of verification, and part of the reason for it was that Jules and Mike wanted to minimize friction for users to sign up and deposit funds. These discussions dragged on from the end of 2016 into the first half of 2017, when Jules and Mike finally relented.

Even cynical readers familiar with the cyber coin world were probably shaking their heads at this passage: how can operators of a U.S.-based CEX enrich themselves for years intentionally slow-walking compliance with the BSA?

It reminded me of when news leaked around Circle’s acquisition of Poloniex several years ago:

Source: Twitter

Speaking of the SEC, to-date they have prosecuted and/or settled with around 60 token issuers since the start of 2017 (collectively Canadian provinces and individual U.S. states have pursued about as many). The book spends a bit of time on The DAO report, published in July 2017, but doesn’t really highlight retail-focused solicitations, such as Kik (e.g., Kik was mentioned on p. 271 but nothing about their very public fight with the SEC). A second edition could include some retrospection around these retail-focused raises; e.g., why did different governmental bureaus in China ban ICOs around the same time frame?9

On pgs. 282-283 Poloniex is described as a panopticon:

In 2017, Poloniex’s volume grew fifty to seventy-five times what it had been in December 2016. With more customers, more volume, and now more processes, the company became buried. About twenty people were managing almost five million accounts, and the owners had not invested in the company at all. Instead of hiring a third-party know-your-customer vendor, as many companies would, to make sure each submitted ID matched the selfie taken and that the address given wasn’t for, say, a strip mall in Nevada, Polo employees had to process IDs one by one. Support was still bare-bones: according to a manager at the time, five people handled more than one hundred thousand support tickets. In the first half of the year, Johnny managed to “poach” a few troll box moderators to be new support agents, brining the total to eight. According to Johnny, Jules made workers put their phones in cubbies upon entering the office, forbade them from listening to music, and though this might also be for security reasons, blocked their computers from the internet so they could only do one thing on those machines: work. They had to wear headphones so that they wouldn’t accidentally overhear any conversations, they were recorded via cameras inside the office, and they were instructed to communicate with each other only on chat. (Later Jules would acknowledge to employees that they were surveilling all staff chats, including direct messages.)

On p. 288 the author mentioned some of the exuberance during the “Consensus” event in 2017:

The next day, EOS, which billed itself as a faster (but more centralized) competitor to Ethereum, kicked off its nearly year long ICO. The month before, it had advertised its sale on a massive billboard in Times Square, during the consensus conference, which had twenty-seven hundred attendees. The advertisement was ironic given that the EOS ICO blocked US IP address. That week, the ETH price again traded with highs in the $330s and lows in the $200s.

I attended this event and recall visiting the “official” afterparty wherein one of Block.One (the commercial backer of EOS) pointed out that the EOS billboard was just aesthetics and wasn’t encouraging anyone to participate in the ICO. One update for a future edition of the book: in September 2019 Block.One, settled with the SEC for a small sum of $24 million. Not-so fun fact: one of the defense attorney’s who worked on that case also (successfully) defended several other 2017-era ICOs that had purposefully focused on retail investors. This is part of the history that anti-coiners, who are new to town, should probably focus their wrath on instead of trafficking conspiracy theories.

On p. 294 we hear a prominent ICO promoter mentioned in passing:

Meanwhile, on the rocky, lizard- and fern-filled island of Ibiza the Parity team and friends were at a lovely terra-cotta-tiled, exotic-plant-adorned home rented by Brock Pierce, the former Mighty Ducks actor turned crypto VC, wrapping up a weeklong retreat that, for at least some attendees, was at times an alcohol-and drug-fueled blur. The previous Sunday, in the VIP room of the club Amnesia, the group had made merry.

There are a number of similar party-the-night-away excerpts throughout the book. One wonders how anything was shipped during this time frame! Speaking of Pierce, in early February 2018, The New York Times published a critical story of Pierce (and his crew) arriving in Puerto Rico to take advantage of the lenient tax treatment of capital gains (and income) without contributing much in return. Later that same month, clearly without any motivation to clear his name, he publicly pledged to donate $1 billion. To-date, there has been no follow-up, despite folks asking what he has done beyond drumming up easy PR. This is a pattern with some of the prominent coin promoters (post ICO mania) who promise big donations, yet little materializes beyond the press release.

Another example of why a future chapter dedicated to ICO then-and-now reflection is found on p. 298,

For instance, on May 26, the day after Token Summit, there was an ICO for something called Veritaseum that hadn’t open-sourced its code, hadn’t published a white paper, and, based on its jumbled marketing, appeared to be a centralized company that could have easily accepted US dollars for payment — not a decentralized network. It did not even take the basic step of having a secure website, despite the hacks rampaging throughout crypto. It raised $11 million. Early on, VERI tokens ranked tenth among crypto assets by market cap. On July 22, the market cap based on circulating supply was $458 million. But accounting for the fact that Veritaseum had only released 2 percent of its tokens, its market cap by the total float was $22.9 billion. By that measure, the one-month-old company was almost twice as valuable as Nasdaq. Its market cap was more than that of Ethereum’s, which on that day closed $21.5 billion. And who controlled 98% of VERI? The founder.

Two things that stuck out:

(1) In November 2019, Reggie Middleton (the founder of Veritaseum) settled with the SEC for about $9.5 million (most of which was disgorgement), this could be added in a future edition.

(2) Intermediaries such as Nasdaq have an oligopoly on the services (and infrastructure) they provide. If anything, the entire “blockchain” set of experiments (including those initiatives Nasdaq has rolled out into production) should highlight the large amount of market share that systemically important financial institutions and utilities are able to capture and hold and gorge upon. Dismissing all alternatives out-of-hand, as most anti-coin commentators frequently do, raises the question: who are anti-coiners actually trying to help? Financial incumbents who get bailed out by governments? Retail who get fleeced with PFOF? If their goal is to somehow “help” the average Joe, then clearly defending the status quo isn’t very helpful either since it largely rewards incumbents who despite having a regulatory moat, in times of need also get bailed out because they are “too big to fail.”

For all of the discussions around The DAO, Slock.it, and securities regulations, there was one interesting info nugget on p. 301:

While the document was incriminating and put the crypto industry on notice, it wasn’t entirely accurate (The SEC, which declined to comment on this matter, had not interviewed Slock.it and reached out only to at least one American curator. An October 2020 FOIA request turned up no documents on any discussion around who deployed the DAO) Slock.it hadn’t set up the DAO-hub forums (though it had set up the Slack), it hadn’t deployed the DAO smart contract (unknown DAO community members had created eight of them and Taylor’s then fiancé Kevin had tossed the coin that had chosen which DAO to use), and the Robin Hood and White Hat groups, which included some Slock.it employees on their own time, helped resolve the attack. Regardless, the SEC had meant the document to be foundational, to show how the SEC was looking at the space. Lawyer surmised the agency had chosen a “21a report”–giving others notice that going forward the commission would likely follow up with enforcement actions for similar behaviors–because the DAO no longer existed and people had not lost money.

What other regulators may have reached out to Slock.it and curators? Was there a line-in-the-sand somewhere?

On p. 307 we learned about one Ethereum co-founder’s involvement in several ICOs:

At this time, during the ICO craze, Anthony had made a name for himself–not necessarily in a good way. He was slapping his name on ICOs as an advisor in exchange for tokens: Civic, Blockmason, Etherparty, Enjin Coin, Worldwide Asset eXchange, Skrumble Network, Cindicator, Polymath, AION, PayPie, Storm, Unikrn, WAX, Po.et, and Veriblock. Although Civic, Polymath, WAX, and Unikrn were somewhat well-known, the others were no-name projects. He’d also invested in two Chinese projects, Vechain and Qtum.

Not sure why the Chinese angle was worth highlighting; also not an endorsement but both Vechain and Qtum are around and still putting out “announceables.” It is worth mentioning that there are a number of high profile coin VCs who have removed or whitewashed their shilly ICO past, to somehow become… thought-leaders. In the U.S. it is more than two hands can count. Despite the collective “coinesia,” retail-focused promoters-turned-investors probably deserved to be named in a future edition.

On p. 319, more interesting information about Poloniex was described:

That fall, Poloniex’s dominance began to slip. If in June it had sometimes seen trading volume of $5 billion per week, early that fall the peaks were more like $4 billion. Still, even with the dip, the exchange was making a killing. One reason for the drop was that competitors were investing in upgrades, but Polo was doing the bare minimum. Seeing competitor Kraken boast about a slew of new features, Polo employees asked, “Why are we not doing this? Why are we just letting them take our business?” One example: Kraken launched an efficient, self-service feature for two-factor authentication allowing users themselves to disable it. Even though customer service said launching a similar feature would cut a third of all open support tickets, Jules and Mike wouldn’t let Tristan work on it. (As far as most people could tell, Tristan controlled nearly every aspect of Poloniex’s code–a grasp of its intricacies wasn’t spread out among a team of people, as would be expected of an exchange transacting in billions of dollars’ worth of crypto every week.) By this point, according to someone familiar with the matter, the exchange had almost half a million open support tickets. Johnny managed to poach more trollbox moderators to act as customer service agents, reaching twelve total by year’s end. He would feel really good the few times in the fall of 2017 that they got the number of open support tickets down to one hundred thousand. Jules and Mike did let them hire a few freelancers, who Johnny, the head of customer support, trained to help out with the backlog of KYC verification. They were good, so he suggested hiring them all immediately. He recall Jules and Mike said, essentially, No, we’re not going to hire anyone. Work with what you’ve got.

It’s interesting to hear this side of the story because throughout this time period, on social media and in chat groups, people would complain about Poloniex’s customer service. Now we know why.

Dentacoin was name dropped on p. 325. It is routinely lampooned for as you can guess, what it is named after.

Chapter 12 & 13

On pgs. 335-336 readers are presented with a thought experiment:

But most of all, things had been different during the DAO drama. Back then, Ethereum had done so many forks before, the community thought forking was without consequences. At that time, not forking was the threat. However, after the DAO, they knew that a hard fork could create yet another Ethereum. And that became the threat. Another factor was that, unlike with the DAO, there was no time pressure. The funds were frozen, and absent any decisions, they would be frozen forever. With the DAO the time for a rescue was limited, and that had prompted people to act. Additionally, with so many new tokens having been built on Ethereum, a contentious hard fork created the risk of producing all kinds of duplicate assets on another chain–Gnosis Very Classic, BAT Very Classic, Status Very Classic, and so forth.

I chuckled at the “Very Classic” names. But truth be told, both Ethereum and Ethereum Classic have had hard forks since the time frame this passage took place (late 2017). So technically speaking, those alt tokens could exist, although to my knowledge no major exchange supported the now-deprecated forks and alts.

On p. 343 we see mentions of Julian Assange and efforts like Pineapple Fund. Assange is frequently lionized by some Bitcoin promoters but he willingly only dumped secrets that damaged one specific U.S. political party and went out of his way not to publish anything that damaged Putin’s government. Ecuador’s government (which allowed Assange to live in its embassy for several years) found direct ties between Assange and the Russian government. In 2017, then-Trump advisor Dana Rohrabacher visited Assange in London and offered a pardon in exchange for Assange publicly stating “the Russians were not involved in the email leak that damaged Hillary Clinton’s presidential campaign in 2016 against Trump.”

Obviously this would have been a distraction in the book but in my mind it is hard to mention this very controversial character without providing context on why he was likely a willing Russian asset.

Epilogue

The epilogue tries to tie many of the threads into complete knots. Some worked, like the Poloniex conclusion on p. 358:

Circle’s acquistion of Poloniex closed on February 22, 2018. Fortune reported the deal was for $400 million, but according to a source familiar with the matter, the actual amount eventually paid out was between $200 million and $300 million. The sale was almost perfectly time to when not only the flood of trading volume began to wane at Polo but also the crypto bubble itself began to burst and volumes globally were lower than at their peak in mid-December. Polo had been shopping itself since the spring of 2017, such as to Barry Silbert’s Digital Currency Group and Blockchain.com. Circle had been hoping to close the deal in November, but Jules, Mike, and Tristan, citing the crushing amount of work (which the staff and another person who worked with them attributed to their “greedy” refusal to hire additional employees), managed to drag it out while the exchange was still bringing in obscene amounts of revenue–and yet to close before the employees’ shares vested. Some early staff calculated they’d been strong-armed out of $5 million to $10 million apiece.

Wow, that sucks. I have some close friends that had a similar story about a different NYC-based technology company during the same time frame.

Other knots didn’t quite close, like the lawsuits between ConsenSys management and its former employees discussed on p. 364-365. One recently settled and at least one of the lawsuits is ongoing and continues to garner headlines and involves a fight over IP rights for infrastructure such as Metamask.

Concluding remarks

From a technical standpoint the book was pretty good, just a few small quibbles. As mentioned at the beginning, while I heard rumors, I don’t know enough about a bunch of the inner circle to comment on a number of the personalities that were the focus of the book.10

There are several other books describing the ins and outs of how Ethereum was created that I hope to read through this summer, and time willing write-up a review. In the meantime, if you are looking for a page turner that doesn’t require a PhD in cryptography to understand, I think The Cryptopians is worth adding to your reading list.

Also, if you’re interested in hearing a credible candidate for who The DAO hacker may have been, Shin published a related thread with links a few months ago.

Endnotes

  1. [Note: there was a footnote from a relevant 2017 CB Insights article. []
  2. The only two interactions I am aware of on Twitter are: (1) when Brian Hoffman, creator of OB1 & Open Bazaar and Charles Hoskinson said I bashed Hoffman’s platform (For the record I repeatedly, publicly said it is unclear why Open Bazaar would succeed when it was relying on users spending bitcoin which historically they had not. Today OB1 no longer exists and Open Bazaar lives on in name only via IPFS); (2) Charles throwing barbs at Vitalik with respect to the then fork between Ethereum and Ethereum Classic. []
  3. These stats are based on their github repo contributions. []
  4. See More questions than answers []
  5. As mentioned in a blog post five years ago:

    This is not the first time Bitfinex has been “debanked” before. Phil Potter, the CFO of Bitfinex, recently gave an interview and explained that whenever they have lost accounts in the past, they would do a number of things to get re-banked. In his words: “We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you… shift to a new corporate entity, lots of cat and mouse tricks that everyone in Bitcoin industry has to avail themselves of.” []

  6. Two of the most prominent Bitcoin maximalists quickly became Ethereum Classic supporters – Nick Szabo and Eileen Ou (note: that in 2015 Ou was sued and settled with the SEC). As noted by Shin, Greg Maxwell heckled Vitalik with a couple of emails during this time as well. []
  7. Technically speaking, I spoke on Day 5 of the International Blockchain Week (agenda), on September 23 entitled: “Opportunities and Challenges for Financial Services in the Cloud: Trade-offs in digitizing and automating finance.” Interestingly, GDPR has not been strictly enforced and public blockchains seem to have gotten a “free pass.” However the lack of data sharing, data portability agreements harmed many “private” blockchain-focused consortia. []
  8. One of the founders, Jeremy Gardner, gave a public presentation in January 2015 highlighting how Augur could be used for “assassination markets.” I challenged him, in front of the audience, why anyone in that room would find that useful. He tried to brush it off and has publicly called me a “derp.” []
  9. Because of rampant fraud, several local and national regulators inspected then banned several dozen trading platforms from offering ICOs on the mainland. []
  10. Over the course of reading the book I compiled a number of personal anecdotes that while relevant, probably should be part of a separate blog post altogether. []

Web3 needs critics and criticism

[Note: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

"I made it up "Source?" Doctor Manhattan Jaw Neck Sleeve Gesture Human anatomy Art Waist Chest Trunk Thigh Nerve Knee Electric blue Symmetry Painting
[A public position lacking specific citations]

As we have discussed before, “Web3” is a nebulous term that has been used to market a slew of products and services, often via “chainwashing.”

What is “Web3?”

This past week 25 guys and one gal signed and published a 741-word letter to senior U.S. legislators calling for “Support of Responsible Fintech Policy.” And while many “Web3” promoters do deserve a good chastising, this letter has many technical shortcomings and is a disappointment to those who have been in the trenches for years… before being a “critic” was considered en vogue. Worst, it doesn’t define what “Web3” or even a “blockchain” is or is not.

But let’s start with a comment that I thought was pretty good, the intro:

“Today, we write to you urging you to take a critical, skeptical approach toward industry claims that crypto-assets (sometimes called cryptocurrencies, crypto tokens, or web3) are an innovative technology that is unreservedly good. We urge you to resist pressure from digital asset industry financiers, lobbyists, and boosters to create a regulatory safe haven for these risky, flawed, and unproven digital financial instruments and to instead take an approach that protects the public interest and ensures technology is deployed in genuine service to the needs of ordinary citizens.”

I – along with a number of other independent researchers such as Angela Walch (who they referenced) – have publicly made similar requests in the past. For instance, the original conclusion in my 2018 WSJ op-ed expanded upon the lack of transparency and surveillance sharing for why the SEC has not approved a bitcoin-denominated ETF by stating, “…the retail public wants seductive narratives and fantastical returns. The supply of fraud will therefore grow to meet that demand.”

To reuse a cliché analogy, throughout most of 2021 you could probably throw a baseball at a collection of dapps and hit one that at the very least, played fast and loose with marketing high APR yields.

This was followed with a quizzical take:

“Not all innovation is unqualifiedly good; not everything that we can build should be built. The history of technology is full of dead ends, false starts, and wrong turns. Append-only digital ledgers are not a new innovation. They have been known and used since 1980 for rather limited functions.”

The first sentence probably has a lot of supporters, including myself, as it relates to non-proliferation of weapons of mass destruction. The somber and horrific legacies of the atomic and hydrogen bombs are certainly an example of something that should not have been built.

But the shade thrown at “append-only digital ledgers” is pretty farcical. Why do these authors get to determine what is or is not useful in the spring of 2022?

For instance, if we look at the core moving pieces of the Bitcoin blockchain, all of the main elements (“prerequisites“) had been around for years. And it was by assembling them together that we have arguably the first blockchain.1 The authors are taking a page from the lazy Maximalist playbook, one that does not withstand empirical scrutiny.

In looking at the “tech stack” of Big Tech, Google maintains a project called “Certificate Transparency” (implemented as “Trillian“).2 Certificate Transparency is not a blockchain, but it is a Merkle tree of things which are interconnected and signed and in production today.

From the Trillian team:

The ideas underpinning Certificate Transparency, Revocation Transparency and related efforts are not specific to certificates, but can in fact be used to make almost anything transparent. These technologies are strongly related to the much-hyped blockchain. The reality, of course, is that there isn’t a “the” blockchain, and that decentralisation is not always the answer. We are not making “the” blockchain, and we do not claim to support decentralisation.

As mentioned in a previous post, the problem with the a priori position that anti-coiners (and many maximalists) have is that over time they continually get backed up into a corner. Why? Because over the past decade we continue to see – empirically – how blockchains and blockchain-like elements are incorporated by a spectrum of organizations from Big Tech and Big Finance all the way down to small startups.

As Matthew Green (a cryptographer) explains in a thread on this topic, the granular fine points around “blockchain technology” is mostly bad:

Unfortunately the authors – while seemingly well intentioned – do not clearly state what parts of a blockchain they dislike, what parts of “distributed ledger technology” that they explicitly think is bad.

Furthermore, the idea of a neutrally owned, shared ledger is not a new concept. Several initiatives in the financial industry — such as a Joint Back Office (JBO) — pre-date the euphoria around blockchains but languished in concept mode.3 What is the lure for maintaining a shared ledger between (competing) organizations? Resiliency and reduction of reconciliation often come up as two of the main reasons but the list is long and deserves its own post. Suffice to say, claiming that “append-only digital ledgers” are a plaything of the ’80s is not even wrong.

Another broad sweeping set of statements that lack precision:

As software engineers and technologists with deep expertise in our fields, we dispute the claims made in recent years about the novelty and potential of blockchain technology. Blockchain technology cannot, and will not, have transaction reversal mechanisms because they are antithetical to its base design.

As Green and Byrne (among other responders) have pointed out, there is a missing nuance by the authors in that there are different types of blockchains. For instance, depending on the implementation some permissioned blockchains allow – in theory – certain participants to freeze transactions.4

Likewise on public chains, administrators of USDC, USDT, and other collateral-backed pegged coins, regularly blacklist and freeze transactions. In fact, any chain with smart contract functionality can provide some form of reversibility (or at the very least, freezing of state). We also see this empirically during and after exploits, with developer teams freezing tokens.

This is a strange miss because one of the signatories is Stephen Diehl, who as far back as July 2017 (when I spoke to him in an official meeting) was/is the CTO and director at Adjoint, which is a British private blockchain firm that has previously announced payment-related partnerships.

This statement starts out good:

Similarly, most public blockchain-based financial products are a disaster for financial privacy; the exceptions are a handful of emerging privacy-focused blockchain finance alternatives, and these are a gift to money-launderers. Financial technologies that serve the public must always have mechanisms for fraud mitigation and allow a human-in-the-loop to reverse transactions; blockchain permits neither.

Green (and suzuha) points out that the authors are trying to have their cake and eat it too:

Source: Twitter

For example, as far back as 2015, banks involved in R3 presented use-cases that required – by law – protection of PII. At the time, any company or organization wanting to engage with regulated financial institutions quickly learned how PII was an unmovable touchstone (see this related presentation). And so from those functional requirements arose different solutions ranging from hardware-based solutions (like SGX) to software-based solutions (like ZK-Snarks). The public chain world was often where these ideas either first originated or at the very least, first tested.5

Over the years I have regularly pointed out how privacy and confidentiality-features could be used for a sundry of illicit activities. But just because it could be used by those types of actors, does not mean it regularly is.

On that point, in 2016 I helped edit a paper on this very topic. It was co-authored by Danny Yang (founder of Blockseer), Zooko Wilcox-O’Hearn, and Jack Gavigan. Wilcox-O’Hearn and Gavigan are executives at the Electric Coin Company, a for-profit company leading the development of Zcash. Worth pointing out that one of the signatories on the letter above amplified false information about myself two months ago, claiming I was not an advisor at Blockseer. Not only is this false, but I still own the equity in DMG Blockchain (which acquired Blockseer four years ago). This calls into question the credibility of the individuals amplifying information they did not fact check. What other false information are they claiming about blockchains?

Scare quotes is not the only thing that harms this section:

By its very design, blockchain technology, specifically so-called “public blockchains”, are poorly suited for just about every purpose currently touted as a present or potential source of public benefit. From its inception, this technology has been a solution in search of a problem and has now latched onto concepts such as financial inclusion and data transparency to justify its existence, despite far better solutions already in use.

The paragraph preceding this one also mentions “public blockchains” but doesn’t use quotes around it. And neither defines or provides nuance to explain the differences between “permissioned” (or private) blockchains compared with “public” (or anarchic) blockchains.

Either way, the authors make a good argument about how pulling on the heart strings of financial inclusion is mostly bupkis and I agree, and others have pointed that this rings hollow too.6 To strengthen this, the authors should have provided a citation or at least an example of “far better solutions already in use.” For example, Raúl Carrillo (who is not one of the listed authors) has pointed to Postal Banking as a possible avenue for (re)banking not just marginalized persons. Blockchains aren’t need for that or arguably for other retail activity.7

The next part of the paragraph is painfully arbitrary:

After more than thirteen years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions.

First of all, the first web browser (appropriately called the “WorldWideWeb“) was launched in 1990. It wasn’t until 2004 that Google revealed Ajax-based Gmail followed by Google Maps. If the authors are trying to make the claim that anything (everything?) useful should have been invented in 13 years then they should hold other tech initiatives to the same standard.

The lack of nuance in this letter is striking because not every blockchain is based on the purposefully limited architecture of Bitcoin. Between 2009-2015, a typical on-chain user could only access Bitcoin or a Bitcoin-based fork or clone (like Litecoin). Ethereum and other chains with a virtual machine, did not launch until the summer of 2015.8 That is part of the reason why regulated financial institutions (Big Banks) and large technology companies (Big Tech) began deploying resources in this sector in 2015: first with consortia and later setting up their own internal teams of subject matter experts. What a user could do with a blockchain changed over time thus a priori declaring “almost all applications” dead is incredulous.

And again, the authors provide no examples of what “existing non-blockchain solutions” they are referring to. For example, every single major vendor that provides core banking software for banks — such as FIS, Fiserve, and Jack Henry — have integrated tools that enable the software to interact with or hook into a blockchain. Every major Big Cloud vendor provides both tools for blockchain node operators as well as dedicated “Web3” development teams to compete with Alchemy and Infura. Several CSDs and CCPs have invested in a blockchain-focused company (like Digital Asset or Axoni) and have announced blockchain-based pilots. Pretending that this digitization and tokenization trend is not occurring beyond niche NFT art collections is intellectually dishonest.

I agree with most of this statement but it needs nuance:

Finally, blockchain technologies facilitate few, if any, real-economy uses. On the other hand, the underlying crypto-assets have been the vehicle for unsound and highly volatile speculative investment schemes that are being actively promoted to retail investors who may be unable to understand their nature and risk. Other significant externalities include threats to national security through money laundering and ransomware attacks, financial stability risks from high price volatility, speculation and susceptibility to run risk, massive climate emissions from the proof-of-work technology utilized by some of the most widely traded crypto-assets, and investor risk from large scale scams and other criminal financial activity.

The nuance these authors need to include is defining what “blockchain technology” is and is not. Trillian is not a blockchain but shares several common elements. Thus throwing the baby with the bath water flies in the face of the empirical reality.9 As far as criticisms around the negative externalities created by proof-of-work-based blockchains: I 100% agree. I have written on this topic roughly every 18 months. What would strengthen their statement is to provide actual statistics and data regarding each of their points (the data exists from companies like Chainalysis or previously, Blockseer).

Their polemical statement meanders on a bit more but this statement is worth assessing:

The catastrophes and externalities related to blockchain technologies and crypto-asset investments are neither isolated nor are they growing pains of a nascent technology. They are the inevitable outcomes of a technology that is not built for purpose and will remain forever unsuitable as a foundation for large-scale economic activity.

The second sentence falls under Hitchens razor: that which is presented without evidence can be dismissed without evidence. In fact, we do know why Bitcoin was built, Satoshi explained it at length on mailing lists and in the white paper. And Bitcoin was just the first “blockchain,” other chains have arisen later that fulfill other requirements. Onyx from JP Morgan is now being used for trading intraday repos. Maybe Onyx is just a flash in the pan, but it serves as a narrative violation — and there are more than a dozen other examples that the authors are likely unaware of, just read Ledger Insights each week.10

Lastly, in the Financial Times, one of the authors was quoted saying:

“The computational power is equivalent to what you could do in a centralised way with a $100 computer,” said de Icaza. “We’re essentially wasting millions of dollars’ worth of equipment because we’ve decided that we don’t trust the banking system.”

This is true with respect to proof-of-work-based blockchains but not at all relevant to alternate Sybil resistant models like proof-of-stake (P-o-S). Conflating the two is not accurate. Also, de Icaza and others needlessly defend the status quo, both with comments like this as well as the letter itself. Fortunately for retail, “the banking system” is not completely static and changes over time (it is also not a single monolithic entity). Also, not a single author listed works for a financial institution yet opines on it; there are plenty of blockchain “skeptics” within the financial industry why not find one?

Which brings us to the next section.

(Un)intentionally defending the status quo

The only reason to publicly identify themselves is to give weight or credibility to the matters discussed in the letter. Even though this letter was directed at U.S. congressmen and women, more than half of the signees are neither US residents or citizens. Even though more than a handful work at public tech companies or large organizations that rely on donations, let us give them the benefit of the doubt that they were not explicitly defending the status quo.

Yet without offering specifics beyond vague “non-blockchain solutions,” the authors are implicitly defending both systemically important financial institutions (SIFIs) and systemically important cloud providers. Both are bad for society and we should not defend their existence.

It is worth pointing out apart from two or three, most of these authors were not actively critical during the very public 2017-2018 ICO boom.11 What has motivated them to self-deputize and attempt to police what can and cannot be done with a blockchain in 2022 and ignore those who have been pathfinders in prior years? Perhaps there is a good reason, busy solving other worldly problems. I am certainly a fan of more introspection by disinterested parties!

I have written about it before but if the aim is to (1) influence policy makers and work with (2) regulators, there are at least two ways to achieve their goals:

  1. Set up a not-for-profit lobbying organization modeled after Coin Center… the Anti-Coin Center. Hire former regulators and policy makers and re-use the lobbyist blueprint to engage with decision makers. A couple of years ago I wrote out a general overview to a couple L1 creators, it’s not complicated. You don’t even need a blockchain. But it does require some capital to hire for various roles, so it is not completely lean (e.g., would probably need to hire an actual blockchain engineer instead of relying on IT administrators). Oh and someone who posts frivolous memes all day is a must.
  2. About four months ago, I asked one of the authors to submit their concerns directly with various agencies, such as the SEC and CFTC. This can be done formally through a whistle blower process (I’ve done it!). An ad hoc Hail Mary… is to informally do so through letter writing campaigns coordinated on social media. And as they haven’t stated otherwise, instead of submitting paperwork, some of these authors spend all day engagement farming on social media. If the outcome is “to get regulators to do something” this seems suboptimal because U.S. regulators typically need a paper trail to get the bureaucracy moving.

The blockchain world needs critics and criticism but it also needs criticism that is technically valid. And this letter is not only imprecise but sounds like something incumbent technology firms would write to defend their turf (which probably isn’t how it originated).

Bonafides

Over the past 18 months, the most recent coin bull market brought in a slew of new commentators a few of whom have attempted to co-opt the term “critic.” Clearly no one owns this term, there is no monopoly on it. Heck, I’ve even been labeled a “crypto” or “bitcoin” critic on more than one occasion. Yet we are seeing a cottage industry of professional “skeptics” who have a priori made up their mind irrespective of the evidence presented.

In addition to writing the most widely cited paper on “permissioned” blockchains, I wrote the first long form discussion on potential systemic important cryptocurrency networks in 2018 and think it is a bit absurd that some anti-coin commentary claims that cyber coins currently threaten the entire financial system. Feel free to disagree, but the onus is on the party making the positive claim. The counterfactual occurred the past five months: more than half of the aggregate coin marketcap evaporated. As collateral-backed pegged coins unwound, they did not lead to massive treasury liquidations crushing the traditional financial market.12

This is not defending the way centralized, commercial-bank backed pegged coins arose or currently operate.13 Rather it is a statement of fact: today the cyber coin world is not “too big to fail” and hopefully it never will be. Contagion can be real and should be simulated and stress tested!14 There are plenty of good criticisms to be lobbed at the “Web3” world, none of which requires making up fanciful conspiracies or playing fast and loose with technical verbiage.

If we are going to (rightly) criticize startups, investors, and other interested parties for mis-marketing “Web3” we should provide specific reasons as well as definitions. And while we are at it, let us bring a fine comb and scrutinize other hyped tech verticals that dramatically impact the well being of individuals such as: A.I. and workplace discrimination, privacy rights over data (including identity).15

Crusades can be big tent and incorporate more than just a small echo chamber of folks who (rightly) point out that a lot of cryptocurrency buzz is likely a financial grift with little real utility. Yet it is not a coincidence that perhaps the best critics are actual practioners, engineers, and architects who saw the limitations or drawbacks in certain blockchain designs and decided to build a different way. If there is a second version of this letter, it is highly recommended that input from outsiders be solicited. Including the world’s richest man, Colin Platt!

Or maybe we’ll just have to settle for a Kimberley process for Web3 claims, for both promoters and pundits alike.

End notes

  1. Depending on how it is defined, a candidate for the “original blockchain” was the Haber and Stornetta timestamping system published in 1990 (and thrice cited in the Bitcoin whitepaper). Therefore archaic blockchains had a useful niche before Bitcoin but were not capable of moving assets without a third party. Note: as they failed to provide a definition of a “blockchain” in their letter, the authors overly broad usage of “not useful” could encompass e-signature providers such as DocuSign and HelloSign. []
  2. One of the authors, Kelsey Hightower, works at Google, and a couple others work for large tech companies partly reliant on adtech revenue [e.g., monetizing personal information and data.] []
  3. SIFI intermediaries such as Swift, Euroclear, and CLS have done deep dives and pilots into “DLT.” A quick literature review pulls up the following relevant papers that the anti-coin authors may be unaware of: Distributed ledger technology in payment, clearing and settlement from the Bank for International Settlements; Distributed ledger technology for securities clearing and settlement: benefits, risks, and regulatory implications from Randy Priem; Distributed ledger technologies in securities post-trading from the European Central Bank; Distributed ledger technology in payments, clearing, and settlement from the Federal Reserve Board; The Tokenisation of Assets and Potential Implications for Financial Markets from the OCED; Digital Securities Management Bringing Private Markets Infrastructure Into the 21st Century from the DTCC. []
  4. At one point Accenture proposed an “edit” feature that does not appear to have been adopted by any chain. Stellar has implemented a feature that allows developers to “burn an asset.” []
  5. The experiments in the “dangerous” public chain space are funding and battle testing some of the new privacy and tech stacks that ‘Big Banks’ were not incentivized to build. Two examples in the U.S.: the FTX clearing proposal might be a better “exchange stack” than existing traditional finance operations and the Silvergate banking API (SEN) quickly confirms transactions based on on-chain data. Both services might not have been built even in the private blockchain world; at least they have not thus far. []
  6. To be fair, a number of financial incumbents and non-blockchain-related fintechs market their products and services as “financial inclusion.” They all attend many of the same events and sit on the same panels too. []
  7. See also the proposed E-Cash Act co-authored by Rohan Grey. []
  8. Technically Mastercoin, Counterparty, and several colored coin projects launched before Ethereum did, but they did not include a virtual machine that can run arbitrary code. []
  9. For balance, traditional financial markets also facilitate the transfer of illicit funds (money laundering) and ill-gotten gains from scams and fraud. The authors would have a stronger argument if they provided actual stats, e.g., what percentage of on-chain transactions involved illicit activities. []
  10. For instance, this coming October, a tokenized pound (‘synthetic CBDC’) on a blockchain platform operated by Fnality International will go-live in the U.K. Uptake may be slow in part because of issues around composability and because initial participants are banks that need to change the way they make payments. AntChain from Alibaba is a production chain used to settle e-commerce payments (connecting their banks to their merchants). Another example would be “perpetuals” which were conceived by Robert Shiller in 1992 and first implemented in 2016 by Bitmex, and now widespread on many major CEXs and a few DEXs. []
  11. At least two of the authors have previously cited my article on this crazy time period: Eight Things Cryptocurrency Enthusiasts Probably Won’t Tell You. []
  12. Yesterday the Japanese parliament passed a bill aimed at clarifying the legal status of “stablecoins.” Similar laws and/or guidance are expected to be brought up in other countries. []
  13. See Parasitic Stablecoins. []
  14. The Federal Reserve Board annually conducts stress tests of the U.S. financial system. Similar tests occur in other countries. Researchers at the IMF recently released a paper describing the underlying framework of GST. []
  15. U.S. legislators at the national level have failed at providing a comprehensive digital rights and privacy framework, as well as A.I. auditing guidance. These issues are arguably just as important and impactful as cryptocurrency-related topics. []

Not all algorithmic stabilization mechanisms are the same

We (the ‘royal we’) have previously discussed various flavors of pegged coins, “stablecoins,” as well as CBDC proposals. This short, non-comprehensive post will look into the rise and rapid fall of the Luna and UST, two cryptocurrencies native to the Terra blockchain.1

What are the separate categories that the “stablecoin” idea can be bucketed into?

Figure 1 Source: Robert Sams based on the model by Klages-Mundt et al.

Above is a helpful taxonomy created by Klages-Mundt et al. and adapted by Robert Sams.2 One of the commonalities among all of these efforts above is that they are intended to administer an elastic money supply (as opposed to fixed, deterministic, or inelastic supplies used in many cryptocurrencies such as bitcoin).

Most analysis on this topic lacks the important nuances separating custodial and non-custodial “stablecoins” as well as those that depend on exogenous collateral versus endogenous collateral.

We are not going to dive into each one of the projects above. Furthermore, the usage of a name or logo is not an endorsement of a particular company or project.

So what happened to Luna and the UST this past week?

To answer that we need to quickly explain what the Terra blockchain is and how and why there are more than one layer 1 token such as Luna, UST, KRT (Korean Won) and SDT (an SDR token). 3

Brief history

Launched just over two years ago – in April 2019 – the Terra blockchain incorporated elements of the “Seigniorage Shares” idea with a couple of twists. Whereas several other projects attempted to collateralize (back stop) a single stabilized asset through a mint/burn mechanism, Terra enabled arbitrageurs to burn Luna (the volatile, staking token) and mint one of several different pegged coins, the most prominent of which is UST. UST was marketed as being stable relative to the USD. That is to say, through an automated on-chain program, a trader could burn $1 worth of Luna (at Luna’s prevailing market price) and receive 1 unit of UST (irrespective of the prevailing market price of UST), and vice versa: a trader could exchange 1 unit of UST and receive $1 worth of Luna.4 In theory.

You might be asking yourself, what guarantees that traders will be able to redeem $1 of either at any point in time? Terraform Labs (TFL) is the main developer behind the the Terra blockchain. One of the ways TFL attempted to architect guaranteed redemption and simultaneously mitigate a “death spiral” (an existential crisis that multiple “algo stablecoins” have crashed into), was by capping the daily minting of UST.5 The exact amount has changed over time but the goal was to help throttle the unbounded risk of an oversupply of UST (or some other pegged coin).

Why is this important?

Because as mentioned above: UST (and the other pegged coins that can be minted) were explicitly uncollateralized — although there has been an implicit acknowledgement that the aggregate UST (and other minted currencies) needs to remain below the marketcap of Luna which is the key conduit for redemptions. An imbalance, or “flippening,” could (and did) result in a crisis of confidence and collapse.

Figure 2 Source: Coinmarketcap

The chart (above) shows the aggregate market caps of both UST and Luna over the past 12 months. At their height last month, they together represented almost $60 billion in (paper) value. Today that has dropped to just over $1 billion.6

Why did things go wrong?

Before we answer that, let us look at when “the flippening” occurred.

The chart (above) shows the aggregate UST marketcap relative to Luna’s marketcap over the course of a single day. At around 1am SGT on May 10th, UST’s marketcap overtook Luna for good.

What is another way to visualize this?

The chart (above) shows the same aggregates but over the course of the past 6 weeks.

What does this mean? Due to the “macro” bear market in cryptocurrencies (the aggregate coin market is more than 50% off its all-time high from last year), Luna’s market cap saw a rapid decline that quickly became a vicious cycle due to the Why.

While there are a bunch of mostly cliché conspiracy theories as to which traders took advantage of the knowledge and conditions to short Luna (and UST), the conditions that led to UST’s rapid ascent (relative to Luna) seen in Figure 2, are pretty pedestrian.

What was the key reason for this ascent starting in November? The popular Anchor dapp on the Terra blockchain. What is Anchor?

Launched in March 2021, Anchor is an all-in-one asset management dapp that allowed traders to deposit their Luna as collateral and borrow UST against it. Often traders would go to an exchange and convert the UST into Luna, depositing the Luna into Anchor and lever up several more times. Its ease of use led to rapid growth, with total-value-locked (TVL) growing from zero to $6 billion within six months. The loan-to-value (LTV) ratio shifted over time but was northward of 70% when UST overtook Luna this past week.

Why did TVL grow so fast on Anchor?

The main reason was the dapp subsidized both lenders and borrowers through the emission of a governance token called ANC. For over 6 months, Anchor marketed itself as being able to provide 19.5% APY on all UST deposits via a blended combination of Luna staking emission and reoccurring ANC airdrops.7 Both sophisticated and unsophisticated investors, believing that $1 UST was redeemable at par with $1 USD, deposited large quantities of $UST (which others could then borrow as well). Anecdotally we have heard of startups at incubators and seasoned fintechs in emerging markets offering retail users access to this high yield product. The yield was unsustainable and developers knew it so various interest groups (including several high profile investors) proposed ways to reduce the ANC yield each month depending on economic indicators.

But by the time the downward adjustment was implemented it was too late. This relatively high yield had turned UST into a “hodl asset,” a “store of value” — something that the uncollateralized system was not properly designed to absorb.8

Prior to the collapse of Luna and UST, the development teams behind Terra and Anchor recognized this shortcoming and this past February announced the Luna Foundation Guard (LFG) and organization that would accumulate exogenous collateral to defend the $1 USD peg.

Recall that at the very top in Figure 1, Terra was categorized as using endogenous collateral, that is capital native to the protocol itself (e.g., Luna, UST). As part of the initial LFG announcement, the organization aspired to accumulate large quantities of exogenous coins starting with bitcoin and later others (such as AVAX, and even both USDC and USDT). At its height, LFG’s reserves tallied over $3.5 billion and as of this writing it has shrunk to around $80 million (sans some squirrelly BTC).

Anchor aweigh

Even without Anchor the fundamental problem is that the underlying collateral is volatile, so what is over-collateralized can become under-collateralized very quickly (whether it is endogenous or exogenous).9

Those who argue that the solution for decentralized stablecoins is to be “fully backed” are still kind of missing the point. If these protocols are all using the same 3-5 major coins as collateral, you can get the same ‘death spiral’ scenario materializing if the stablecoin supply grows large vis-à-vis the collateral marketcap. After all, even LFG’s liquidation of $1.6 billion BTC moved the largest coin cap.

So who is the buyer-of-last resort? If it is actually decentralized, it can only be the parties who can liquidate or redeem the collateral. CDP systems like Maker have the incentives for this behavior, but suffer from the coin supply side being driven by lending and no mechanism to equilibrate that supply to the demand side (the mechanism is the stability fee and savings rate, but that is set by governance, not the market)

The root problem for UST and Luna, (as Kevin Zhou, Matt Levine, and others have mentioned), was that neither had any source of value independent of the other. If the market decided to sell both, there was nothing to give you confidence that they would recover. UST was built on Luna and for the past 6 months Luna was built on essentially Anchor yield savings. Even a large “stabilization fund” – with a transparent and automated mechanism for how it would be deployed – would not prevent the Luna/UST market cap from growing to dwarf the LFG backstop, thus a sequence like this past week was always a risk.

We could spend pages describing alternate plans and paths the development teams, users, traders, and other interest groups could have taken to stymie the collapse. Instead we wanted to highlight one final chart that we found interesting.

Divergence

The chart (above) shows the intraday prices each day over the course of a week between Luna (in dark pink) and bLuna (in blue).

What is bLuna? bLuna is a liquid staking mechanism managed by Lido in a partnership with Anchor.10 Liquid staking is actually an interesting concept. Most readers are probably vaguely familiar with staking on a proof-of-stake network: users deposit their coins to an address on-chain and receive some form of remuneration (emission) for helping to secure the network (and process transactions, if they are a validator).

But the coins used in staking are effectively frozen and cannot be easily used elsewhere as collateral. Enter liquid staking. As the name suggests, liquid staking is a concept that has been implemented in two different ways: at the dapp layer (via Lido, Marinade, and a few others) or at the native L1 layer (Osmosis in the Cosmos ecosystem is about to be the first to do so).

Liquid staking is neat because it allows all of the locked up (“frozen”) capital to be used as collateral for lending. An imperfect example: Bob purchases $200,000 of Apple stock. He wants to buy a new home and instead of selling the stock he finds a bank willing to use his Apple stock as collateral for the down payment on the house. Similarly, liquid staking is not rehypothecation as no new asset is created.11

The reason a lot of brain cycles have been spent on creating liquid staking dapps (like Lido) is that the vast majority (>95%) of all staked assets on proof-of-stake networks is illiquid. If they can become liquid that would enable more capital to be used for endogenous lending — instead of having to rely on exogenous capital like wrapped assets (WETH, WBTC) or real world assets (USDC, USDT).

In theory, when an asset transforms from a staked asset into a liquid staked asset, the market prices of the two should be very similar. In some cases, such as stETH (ether deposited in Lido on Ethereum) or mSOL (sol deposited in Marinade on Solana), the liquid asset accrues the emission reward therefore becoming slightly more valuable over time (in proportion to the emission rate).

In the case above, bLuna and Luna were tightly coupled but clearly broke down between May 9th-11th due to the massive selling pressure and unstaking that took place (more than 95% of all Luna has been unstaked down considerably over the past month). This brings us to the final section.

Proposed category

Surprise! I have a couple ideas on how to evolve the “algo stabilization” world, including adding a (possible) new category to the four incumbents above: a demurrage-based settlement asset.

But first, let’s take a step back and ask the question what amount of UST could Luna have absorbed?

Even the most hardened maximalist or anti-coiner would concede that a single solitary 1 UST could probably be absorbed by Luna’s market cap.

So where is the limit? Where do the wheels fall off? When do things become unwieldy?

It was not the UST borrow side that was a priori the fundamental culprit. Amplifying the problem was goosing the UST demand side with 19.5% “risk free” returns on Anchor. For instance, if the arbitrage mechanism only allowed the creation of UST (or other pegged assets) based on a small single digit percentage of Luna’s marketcap, it is likely this collapse might not have happened in such a dramatic fashion.

Yet as mentioned above, this approach alone still would not have staved off simultaneous sell-offs of both UST and Luna and/or hyperlunaflation.

Future developers looking to enter this arena could construct an asset with a stabilized unit-of-account that maintains a diminutive aggregate relative to the staked asset being burned. E.g., depending on the use case, an aggregate the size of $100,000 could conceivably power a small on-chain economy much like in traditional markets rely on a high velocity of money to grease the economy (where money is circulates among participants like a hot potato).12

That is to say, a high velocity stabilized unit-of-account, one that is used as a medium-of-exchange and not as a store-of-value or hodl asset, probably has a lot more longevity so as long as its creation (or borrowing) is not heavily subsidized. Sprinkle in some demurrage – or negative interest rates – to further disincentivize hodling and focus on a handful of uses (n.b. “hodling” is not using).1314

Final remarks

It is pretty easy to dance on the grave of another dead / dying cryptocurrency, there have been a few dozen marathon’s worth of victory laps on social media this past week. Despite autopsies and red flags, it is likely that some folks will attempt to emulate the heavily subsidized borrowing model too.

Apart from designing a purposefully limited high velocity, stabilized unit-of-account, what can non-developers do?

Arguably, the most accurate commentator on this topic is a friend, Kevin Zhou (founder of Galois Capital), who publicly predicted what would occur months ago. But unlike the maximalists and anti-coiners who stridently label everything a scam and a fraud, Zhou actually modeled out several scenarios in detail. Give him a follow.

Future analysis could look into the on-chain contagion such as dapps that were impacted including Mirror protocol (did the yield at Anchor cannibalize the other use cases by acting as a liquidity gravity well?). As of this writing it is unclear what direction a “LunaV2” will take but worth pointing out that key stake holders in the ecosystem agreed to shut down the network twice and switched to PoA.

Endnotes

  1. There are oodles of news articles exploring how the “death spiral” took place, this is not really one of them. []
  2. In 2015 Sams created the USC consortium (which has evolved into Fnality) as well as proposed the original “Seiniorage Shares” concept in 2014. []
  3. Note: according to the Terra Token Cash Flow chart, Terra was actually generating more in KRW fees (primarily via Chai) than it was earning in UST fees. The KRT ecosystem had more velocity: KRT turning over ~500 per month versus UST at a mere 1.5 times with the caveat that the KRT ecosystem is very small. []
  4. The actual arbitrage opportunity would be if UST is trading for $1.10, a trader could exchange $1 of Luna for 1 UST, therein arbing a profit while increase UST supply and bring price down. Conversely, if UST is $.90, a trader could exchange 1 UST for $1 of Luna. []
  5. There are some similarities with the collapse of Titan / Iron bank last year, although part of that involved a discrepancy with the oracle feed. []
  6. A simple way to observe the troubling trend early on was the UST / Luna marketcap ratio (based on circulating supply). Below are specific numbers that appeared in a chatroom I was in:

    April 17 7:30pm EST — 63%
    April 30 11:30am EST — 66%
    May 7 5:00pm EST — 78%
    May 7 6:30pm EST — 81%
    May 8 9:00am EST — 90%
    May 9 1pm EST — 95%
    May 9 3pm EST — 113%
    May 9 11pm EST –125%
    May 10 7:30am EST –149%
    May 10 3:45pm EST– 166%
    May 10 5:30pm EST — 207%
    May 10 6pm EST — 211%
    May 11 5:30am EST — 291%

    In April, the ratio flirted with and fell below the 2/3rd mark. But due to the persistent bear market coupled by sell side pressure of both UST and Luna, by the morning of May 10th, ‘hyper hyperinflation’ was well underway with a massive expansion of Luna’s total supply. []

  7. As mentioned in the bLuna section: users can mint a bAsset called bLuna by depositing Luna into Anchor. Staked funds are effectively pooled together by a white list of validators (users collectively share emission rewards as well as slashing events). These staked funds are used as collateral for borrowers who are subsidized through what is now a money-market. Thus there are three different tokens active in the dapp and the “19.5%” headline figure largely consists of a recurring airdrop of the ANC governance token.  E.g., if Bob deposited bLuna as collateral, he is paid out in ANC (and UST fees) in lieu of his regular staking rewards (or at least pre-crisis that was the case).  And borrowers were subsidized in the form of ANC as well.  Those who deposited UST (not Luna) received 19.5% APY up until this month (where it dropped to 18%).  This came from ANC rewards as well as a reserve fund that TFL topped up on occasion. []
  8. Some analysts think that Anchor was not that big of a deal yet at a minimum it was important as a supply sink. It is not as important in terms of how the system got insolvent; that’s more because of the underlying mint / redeem mechanism. Or as Kevin Zhou concisely explained on Odd Lots: “And they [TFL] would also use that to keep basically topping up the Anchor protocol on their yield reserve. Because they were paying more interest to depositors than they were collecting from borrowers. And, you know, I think in the end stages of Luna in its final days, you could see that the, you know, the deposit amount was way, way higher than the borrowed amount. So, you know, they, they were bleeding.” […] “I think the system was way in the past, it was already insolvent, you know, it’s just that nobody realized because they had created such a strong supply sink in Anchor for this UST, you know, if that disappeared overnight, or even gradually, the entire system was insolvent.” []
  9. Several commentators have attempted to downplay Anchor as little more than a user acquisition strategy, stating “There was nothing wrong with Anchor, they just paid more yield than what was sustainable as a growth strategy. Tons of businesses operate at a loss as a customer acquisition growth strategy.” But we can clearly see, what works for tech platform business development does not apply generally. You probably cannot integrate a heavily subsidized GTM strategy into the incentive mechanisms of your dapp or L1 without contorting the financial system you are building. As one reviewer noted: “sustainable mechanism design needs to make pessimistic assumptions (where assumptions must be made) with respect to the behavior of actors. That means minimizing mercenary behavior (e.g., “I’ll come for the subsidy and immediately depart when the freebie is removed.”). []
  10. Lido is the largest and most popular liquid staking dapp for Ethereum, Terra, and several other blockchains. []
  11. A Luna holder can pledge their Luna as collateral and receive bLuna which pay out rewards in Terra-related tokens such as UST and ANC. []
  12. In this strawman example: a stabilized unit-of-account would not need expand much so as long as its usage is high velocity. “Velocity” is an economics term used to describe how quickly the average unit of money (e.g., dollars) turns over in a given year. If this stabilized unit-of-account is only used to top up loans or fulfill margin requirements, its aggregate size would be different than a synthetic store-of-value (which is what UST attempted to be). Thus $100,000 may be sufficient to help fulfill specific sets of on-chain uses (such as those around derivatives or prediction markets). []
  13. As a friend recently pointed out: “an ‘algo stablecoin’ like Luna / UST is a form of collateralized stablecoin just different from external collateral. In this case, TFL and others were making their own collateral and hoping it retains value. They seemed to believe the amount of Luna backing UST was relatively high enough it could absorb redemptions without going into a spiral because, say, people valued those Luna tokens independently from redemption sufficiently high enough due to its governance rights over the entire blockchain that had other important commercial applications. A small coin that had limited systemic impact could be used as some sort of collateral basis and potentially survive indefinitely.” []
  14. Ultimately all public chains need base layer transactional demand to survive post-block reward. “Hypothetically, an algorithmic stablecoin could survive in the long-run, if it were to have ongoing transaction-related demand (similar to a fiat currency)” from Global Markets Daily: The Economics of Algorithmic Stablecoins, by Rosenberg & Pandl at Goldman Sachs on May 16, 2022. []

40 cointroversies to look into over the summer

2009 "Chuck E. Cheese" Game Token **FREE SHIPPING** | eBay
A real coin in a sea of many faux coins

[Note: I neither own nor have any trading position on any cryptocurrency. I was not compensated by any party to write this. The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

Summer has nearly arrived in the northern hemisphere and several friends have reached out to ask several unanswered questions and rumors.

Note that many of the questions below are about commercial and trade secrets where there is no obligation to make the information public.

For instance, we could openly ask how much Cargill (the largest private corporation in the US) spends to manufacture its wares but they are under no obligation to provide that to anyone beyond their managers, shareholders, and regulators.

Similarly, most of the companies (and individuals) below are under no obligation to provide answers. However since we think it is in the public interest to know who benefits from certain decision-making (such as who first knew about #NoBugFix last year), we are publishing them here with the aim of answering them over time.

This is a non-exhaustive list and arranged in no particular order:

(1) We were promised a public audit, so who hacked Bitfinex in August 2016? Was it an inside job? Compromised BitGo account? Who was moving the ‘stolen’ coins last month? Will the current NY AG lawsuit versus Bitfinex/Tether reveal these details?1

(2) Ripple’s co-founders gave (granted?) ~80 billion XRP to Ripple Inc. back in January 2013 when it was still called OpenCoin. How much XRP was/is given to early investors like a16z and/or future partners?

(3) When R3 sued and settled with Ripple in 2018, rumors circulated that R3 won the equivalent of ~$500m in XRP and were limited to selling just as Jed McCaleb is constrained by.2 How much was the settlement for and how much XRP has been sold? How much do XRP sales account for R3 and other organizations revenue? For instance, Ripple has sold at least $1.1 billion in XRP to finance its operations through mid-2019. What are the ramifications if XRP is deemed a security?

(4) Three years ago several Bitcoin Core developers were allegedly involved with an astroturfing campaign (such as Antbleed) via coordination in a “Dragon’s Den” Slack room. Was this real and if so, who are these people? Are they still active?

(5) A couple years ago, Jackson Palmer and Angela Walch separately asked who were the people that had merge access in the Bitcoin Core repo. They were rebuffed and told this is a necessary secret to maintain. Is this a secret? If so, why the lack of transparency and who made this decision? How common is this secrecy in other coin projects?

(6) As Bitfinex is an investor in Blockstream, what’s the formal relationship between the two organizations today, specifically with respect to Tether?3 Do either organizations operate OTC trading desks? If so, where and how are those licensed or legally structured?

(7) It is alleged in a lawsuit that EOS organizers recycled its year-long ICO proceeds back into its own sale thereby inflating its raise and generating hype. How much actual coin money from retail investors was sent into this generally solicited ICO?

(6) In April 2017 Bitfinex (briefly) sued Wells Fargo regarding the cutting off of correspondence banking… and a week later withdrew the suit. What were the names of the Taiwanese banks that were supposedly at the center of this (non) compliance controversy? Did these banks eventually reopen accounts on behalf of Bitfinex or Tether?

(7) Based on an interview with George Fogg, a 2015 FT article pointed out that Bitcoin (and likely other coins) has a lien problem: that due to rampant thefts and DNM activity there were probably more claims on specific bitcoins than there were bitcoins.4 What percentage of bitcoin (or other coins) are encumbered today?

(8) A rumor since 2014 is that a US-based coin exchange signed a deferred adjudication agreement with the federal government due to money laundering issues. If true, will it be revealed if/when an IPO is filed?

(9) Since SAFTs are largely considered cadavers in the US, what (if anything) will happen to its creators and early promoters? Enriched and sauntering off into the sunset? Or disbarred and disgorged?

(10) Will deposit-taking coin intermediaries ever be required to comply with federal laws as banks do in the US? Will they simply end up lobbying and moving shell entities into the state of Wyoming for an SPDI?

(11) FinCEN carved out a loophole for proof-of-work miners in 2013. Yet in practice, mining pool operators can and do select or censor transactions.5 Will they be held liable as an MTO or PSP as more value is moved through their machines and regulators catch-on?

(12) It is alleged that Craig Wright has plagiarized and used ghost writers for publishing papers. Who are they and how much were they paid?

(13) Last year, a former senior executive at a US-based coin exchange is alleged to have undue influence on listing coins based on his bags. What, if any, are the internal controls erected to prevent this type of behavior in coin exchanges? Several coin creators and issuers have joined and/or created coin exchanges in the past.6 Have any of them used their position to profit off of the asymmetric knowledge on listing their coins (or others)? If so, how to prevent this in the future?

(14) Lightning Network was frequently marketed as being ‘just around the corner’ yet it appears to have stagnated in activity over the past 18 months. Who(m) is responsible for this continued delay? Will it reach its marketed potential in the next year or too much of a Rube Goldberg machine? When will LN hubs need to become compliant with the Travel Rule?

(15) Who acquired the @Bitcoin user on Twitter last year? Did the acquisition or transfer violate the Terms of Service?

(16) Regarding the revolving door: how many former regulators now work at coin intermediaries? And vice-versa: how many former coin employees work with regulators? With the push for additional stablecoins and potential CBDCs, will there be transparent interactions between regulators (and politicians) and vendors? If a single vendor oversees a proprietary codebase, how will this not result in a Hold-Up problem?

(17) At least one Chinese exchange, pre-2017, went out of its way to support scams like MMM. How many exchanges knowingly profited from allowing MMM or BitConnect-like actors to operate? Are regulated stablecoin issues such as Paxos aware of this?

(18) bitFlyer was accused of knowingly laundering money for the Yakuza. How many other exchanges have done so as well? In a given year, what percentage of exchange revenue comes from laundering the proceeds of organized crime?

(19) A conspiracy theory (joke?) is that whenever a coin exchange operator in South Korea gets a tax bill, they hack themselves in order to reduce the tax liability. Is this true and if so, how much has been pilfered?

(20) Jackson Palmer, Gwern Branwen, and others have poked into the original source code of Bitcoin and found the seeds of a marketplace and poker lobby.7 Was the original goal to also include a coin exchange or DNM?

(21) Why is Coinlab still dragging its feet during the never ending Mt. Gox bankruptcy proceedings? 8

(22) Was that really Gerald Cotten’s body or is he just mostly dead? Did Cotten act alone as the narrative leads us to believe or did Michael “identity theft” Patryn have a roll in the missing funds? As it was during their honeymoon, is Jennifer Robertson aware of anything odd about the circumstances surrounding Cotten’s death?

(23) Late last year, one of the allegations against Virgil Griffith included somehow helping move a computer system to act as a mining rig across the border to North Korea. We have heard rumors of used, second-hand mining hardware making its way across the same border in the past. Hardware manufacturers have said it is difficult to police because even if they KYC the original buyer, they have no control of where used hardware is sold over time. How much hashrate for Bitcoin or Ethereum and other PoW coins are generated out of North Korea?

(24) Common conversations at events imply that virtually every coin exchange has been hacked yet most simply eat the losses without publicly disclosing it. How many major hacks of coin exchanges in the US have still not been disclosed?9

(25) Several podcasters have openly bragged about not paying taxes on their coin dealings. For instance, the co-creator of a coin launched in 2014 from an organization based in California, now avoids California due to not having paid the state’s capital gains tax. How many others are virtue (vice) signaling? Or are they still counting on lax enforcement?

(26) Ethereum Classic (ETC) is technically the original Ethereum chain. During the debates over the ETH-ETC hard fork in late July 2016, a small handful of investors including Barry Silbert were vocally claiming on social media to support ETC.10 Several subsequent separate investigations into Silbert’s social media activity raised questions around anti-touting provisions of securities laws. If ETH or ETC was a security in 2016 due to a coordinated hard fork that was not sufficiently decentralized, who could be held liable for actively promoting a coin to unsophisticated investors? For instance, earlier this year actor Steven Seagal was penalized for not disclosing his paid endorsement of Bitcoiin2Gen (B2G). Does touting matter if a coin is or is not a security?

(27) The scandal and fallout around Joi Ito (and MIT) knowingly accepting funds from sex offender Jeff Epstein is still on-going. Last year we learned that Epstein was not just interested in Bitcoin, but he reached out to invest and fund Bitcoin-related companies and efforts (perhaps even DCI). For instance, Elizabeth Stark (from Lightning Labs) pointed out that she turned down an investment offer. Did Epstein put money into entities such as Digital Garage, which Ito co-founded?11 What about Digital Garage’s portfolio companies?

(28) The IOTA mainnet was stopped for days then weeks, and the non-anonymous founders fought in public about past grievances including funds that were supposed to build hardware devices… that were unaccounted for. The IOTA network, like EOS and Cardano, are arguably still centralized due to the smattering of nodes operated by a handful of entities. At what point are these types of networks deemed centralized money transmission operators (MTO) with the need to register with FinCEN and other similar regulators?12

(29) Where is Binance’s headquarters? Their executives often claim to not have offices – even when they are visited by the police… yet these same Binance executives appear in photo-ops on islands and jurisdictions found on the FATF blacklist. Where are they domiciled from a legal perspective? Do they pay taxes somewhere?

(30) In 2017, OKCoin and Huobi were penalized for not disclosing to their customers that they were re-investing deposits in other financial products. It is rumored that other coin exchanges have used their customer deposits and cash reserves to manipulate various coin prices which ultimately wreck retail investors, all because they can see trader’s positions and know exactly what amount of manipulation will close positions. How common is this?

(31) What happened to all of the funds donated to the dubiously self-serving ‘DefendCrypto’ effort? Recall that Kik conducted an ICO because it was running out of fundraising options… and then later sued by the SEC. Were all of the ‘community donations’ simply handed over to their lobbying organization (Blockchain Association) to spend carte blanche?

(32) Why do some coin exchanges employ outspoken tribalists or maximalists? What does this mean for how the exchange treats trades and orders for non-tribal-approved coins?

(33) How much do coin lobbying organizations charge to get fines or sanctions reduced? At least one DC-based organization removed the name of a prominent coin exchange (despite accepting their funds) after a lawsuit from NY AG was announced. Do these types of advocacy / lobbying organizations return the funds from illicit actors? When will the coin holdings of staff at coin lobbying organizations be required to be disclosed?13

(34) Over the past five years, numerous corporates and enterprises have publicly announced partnerships with more than a dozen different coin issuers. Most of these are vanity projects that end after 3-6 months. However, prior to the public announcement, it is alleged that insiders acquire coins with the expectation of a jump in prices.14 How common is this and how to remove this temptation from future decision-makers?

(35) CryptoDeleted was silenced by embarrassed social media personalities as it screen grabbed their boisterous coin shilling. How many other times has this specific type of suspension occurred on Twitter and other platforms with respect to documenting coin shills?

(36) Without providing any proof at the time, several prominent coin promoters claimed to have – or will have – donated large quantities of money to charitable organizations. In the case of Brock Pierce, more than two years ago his plans to donate $1 billion was uncritically reported on. Binance and other coin intermediaries that are in continuous legal limbo, also frequently claim to donate to causes in developing countries or for COVID-19. How much has actually been donated? Do operators believe such donations make up for listing P&D coins that fleeced retail investors?

(37) During the height of the fraudulent ICO boom days of 2017, dozens of coin funds were purportedly spun up to capitalize off the quick pump-and-dump on retail investors that was taken place globally.15 At the time, one article listed 15 such funds, most of whom appear to have fallen to the way side, and at least one (Polychain) that was sued by multiple different LPs for lack of transparency. How many of these funds got early access discounts and quietly dumped coins as soon as the coin got listed? How many actually paid taxes on the rumored ill-gotten gains?

(38) Soldering ASIC mining chips into always-on devices has repeatedly proven to be a bad deal for the consumer due to the fixed unit of labor within each device. Yet nearly every year starting with the 21.co toaster and Bitfury light bulb, a new manufacturer jumps into the fray to release yet another one of these environmental hazards. As an aggregate, how many of these all-in-one Earth sizzling devices have been shipped to consumers?

(39) Whatever happened to Halong mining? Their Dragonmint rig was repeatedly hyped by prominent maximalists back in late 2017 and early 2018. They shipped some units but they’ve been silent for a couple of years. Just one-and-done?

(40) With the release of the latest Raspberry Pi 4 and increasingly cheap SSDs, will node operators begin to (again) support larger block sizes? Aside from politics and ideology, what are the show-stopping technical reasons for not doing so? Too much to sync for a mobile device?

Bonus! Is ransomware fully dependent on the liquidity of cryptocurrencies? If so, will regulators and law enforcement eventually close down coin exchanges in order to snuff out this evergrowing parasite?

Again, this list is non-exhaustive and fairly US-centric. It also doesn’t even scratch the surface of C-level executives and apparatchiks who repeatedly use their social media platforms to push “buy the dip” memes onto unsophisticated investors.

For the future: what are some other types of questions that would serve the public interest in knowing the answer to? Recommended reading: Eight Things Cryptocurrency Enthusiasts Probably Won’t Tell You

Acknowledgements: many thanks to AC, GW, JS, CP, VB, AW, RS, AC, and CK for their feedback and suggestions.

Endnotes:

  1. Tether Inc. has repeatedly misled the public about the 1:1 backing of its coin. As it has not regularly released an independent audit, some researchers such as Nicholas Weaver, hypothesize that there could be an imbalance that inflates bitcoins price level. []
  2. Note: other partners, co-founders, and early employees are supposedly constrained by similar limits, not just McCaleb. []
  3. Did Blockstream really own a Gulfstream IV? If so, why did a small software company need one? Why did they remove their team page a couple years ago? []
  4. As we have mentioned elsewhere, a fundamental problem for all current cryptocurrencies is that they are not exempt from nemo dat and have no real fungibility because they purposefully were not designed to integrate with the legal system. []
  5. Some mining pools have a service that enables certain customers to pay higher fees to expedite transactions. []
  6. For instance, Charlie Lee (the creator of Litecoin), worked at Coinbase and claims to have had no influence on Coinbase’s decision to list Litecoin. Bobby Lee, his older brother, ran a coin exchange in China called BTCC. Back in 2014, BTCC introduced a marketing campaign for listing Litecoin (“Brothers Reunited“) which Charlie was purportedly involved in. []
  7. Update 6/9/2020: According to a reader who compiled the code: “Original Bitcoin source code included the poker lobby and an eBay-like marketplace with a review system and essentially a sub-currency called “atoms” which were kind of like seller reputation / review kudos tokens.” []
  8. As an aside, is there any additional connotation to Mt. Gox and the term Mutum Sigillium (which means a sealed deposit)? []
  9. As an aside, one US exchange allegedly confiscated and sold CLAM coins that were airdropped on its user base, without their knowledge. []
  10. Other ‘coinfluencers’ involved in the ETC split include Charles Hoskinson. []
  11. Note: Epstein interacted with several prominent voices in the coin universe, including Brock Pierce and Reid Hoffman. []
  12. Related: what about DeFi infrastructure, how many developers will be forced to adhere to rules and compliance requirements? Clearly most are not in-line with the PFMIs! Also, what was given (negotiated) with the dForce hacker? []
  13. A couple sources claim that multiple personnel at three different DC-based lobbying groups including Coin Center have large undisclosed coin holdings (such as ZEC) which are believed to be a direct conflict-of-interest with how these organizations market themselves as “neutral.” []
  14. For instance, a Fortune 100 company has investigated a former project lead who purchased a large quantity of a coin without disclosing it to the management team; it is believed this person may have even chosen to do this project with the coin issuer in the first place just for the ‘cheap’ coins because from a technical perspective, there was little merit in pursuing this architecture. []
  15. One interesting story during this time frame was in September 2017, when several Chinese government agencies launched a large crackdown of ICOs and shut down many coin exchanges. Law enforcement perused WeChat chat histories to identify P&D ring leaders. A prominent coin investor based in Shanghai was supposedly tipped off and booked a seat on a private airplane from Shanghai for Los Angeles. Upon landing this person then flew to Georgia where they had a home and remained for several months. During this time this individual, in an agreement with Chinese governmental bodies, disgorged a large part of their ill-gotten coin earnings and later returned to China. []

Book review: The Truth Machine

A friend of mine sent me a copy of The Truth Machine which was published in February 2018.  Its co-authors are Michael Casey and Paul Vigna, who also previously co-wrote The Age of Cryptocurrency a few years ago.

I had a chance to read it and like my other reviews, underlined a number of passages that could be enhanced, modified, or even removed in future editions.

Overall: I do not recommend the first edition. For comparison, here are several other reviews.

This book seemed overly political with an Occupy Wall Street tone that doesn’t mesh well with what at times is a highly technical topic.

I think a fundamental challenge for anyone trying to write book-length content on this topic is that as of 2018, there really aren’t many measurable ‘success’ stories – aside from speculation and illicit activities – so you end up having to fill a couple hundred pages based on hypotheticals that you (as an author) probably don’t have the best optics in.

Also, I am a villain in the book. Can’t wait?  Scroll down to Chapter 6 and also view these specific tweets for what that means.

Note: all transcription errors are my own. See my other book reviews on this topic.

Preface

on p. x they write:

The second impact is the book you are reading. In The Age of Cryptocurrency, we focused primarily on a single application of Bitcoin’s core technology, on its potential to upend currency and payments.

Would encourage readers to peruse my previous review of their previous book. I don’t think they made the case, empirically, that Bitcoin will upend either currency or payments. Bitcoin itself will likely exist in some form or fashion, but “upending” seems like a stretch at this time.

On p. xi they write in a footnote:

We mostly avoid the construct of “blockchain” as a non-countable noun.

This is good. And they were consistent throughout the book too.

Introduction

They spent several pages discussing ways to use a blockchain for humanitarian purposes (and later have a whole chapter on it), however, it is unclear why a blockchain alone is the solution when there are likely other additional ways to help refugees.

For instance, on p. 3 they write:

Just as the blockchain-distributed ledger is used to assure bitcoin users that others aren’t “double-spending” their currency holdings – in other words, to prevent what would otherwise be rampant digital counterfeiting – the Azraq blockchain pilot ensures that people aren’t double-spending their food entitlements.

But why can’t these food entitlements be digitized and use something like SNAP cards? Sure you can technically use a blockchain to track this kind of thing, but you could also use existing on-premise or cloud solutions too, right?  Can centralized or non-blockchain solutions fundamentally not provide an adequate solution?

On p. 4 they write:

Under this new pilot, all that’s needed to institute a payment with a food merchant is a scan of a refugee’s iris. In effect, the eye becomes a kind of digital wallet, obviating the need for cash, vouchers, debit cards, or smartphones, which reduces the danger of theft (You may have some privacy concerns related to that iris scan – we’ll get to that below.) For the WFP, making these transfers digital results in millions of dollars in saved fees as they cut out middlemen such as money transmitter and the bankers that formerly processed the overall payments system.

Get used to the “bankers” comments because this book is filled with a dozen of them. Intermediaries such as MSBs and banks do take cuts, however they don’t really dive into the fee structure. This is important because lots of “cryptocurrency”-focused startups have tried to use cryptocurrencies to supposedly disrupt remittances and most basically failed because there are a lot of unseen costs that aren’t taken into account for.

Another unseen cost that this book really didn’t dive into was: the fee to miners that users must pay to get included into a block.  They mention it in passing but typically hand-waved it saying something like Lightning would lower those costs.  That’s not really a good line of reasoning at this stage in development, but we’ll look at it again later.

On p. 6 they write:

That’s an especially appealing idea for many underdeveloped countries as it would enable their economies to function more like those of developed countries – low-income homeowners could get mortgages, for example; street vendors could get insurance. It could give billions of people their first opening into the economic opportunities that the rest of us take for granted.

That sounds amazing, who wouldn’t want that?  Unfortunately this is a pretty superficial bit of speculation.  For example, how do street vendors get insurance just because of the invention of a blockchain?  That is never answered in the book.

On p. 7 they write:

The problem is that these fee-charging institutions, which act as gatekeepers, dictating who can and cannot engage in commercial interactions, add cost and friction to our economic activities.

Sure, this is true and there are efforts to reduce and remove this intermediation. The book also ignores that every cryptocurrency right now also charges some kind of fee to miners and/or stakers. And with nearly all coins, in order to obtain it, a user typically must buy it through a trusted third party (an exchange) who will also charge a markup fee… often simultaneously requiring you to go through some kind of KYC / AML process (or at least connect to a bank that does).

Thus if fee-charging gatekeepers are considered a problem in the traditional world, perhaps this can be modified in the next edition because these type of gatekeepers exist throughout the coin world too.

On p. 8 they list a bunch of use-cases, some of which they go into additional detail later in the book. But even then the details are pretty vague and superficial, recommend updating this in the next edition with more concrete examples.

On p. 9 they write:

Silicon Valley’s anti-establishment coders hadn’t reckoned with the challenge of trust and how society traditionally turns to centralized institutions to deal with that.

There may have been a time in which the majority of coders in the Bay area were “anti-establishment” but from the nearly 5 years of living out here, I don’t think that is necessarily the case across the board. Recommend providing a citation for that in the future.

On p. 10 they write:

R3 CEV, a New York-based technology developer, for one, raised $107 million from more than a hundred of the world’s biggest financial institutions and tech companies to develop a proprietary distributed ledger technology. Inspired by blockchains but eschewing that lable, R3’s Corda platform is built to comply with banks’ business and regulatory models while streamlining trillions of dollars in daily interbank securities transfers.

This whole paragraph should be updated (later in Chapter 6 as well):

  • The Series A funding included over 40 investors, not 100+.
  • The ‘community’ version of Corda is open sourced and available on github, so anyone can download, use, and modify it. There is also a Corda Enterprise version that requires a license and is proprietary.
  • While initially eschewing the term “blockchain,” Corda is now actively marketed as a “blockchain” and even uses the handle @cordablockchain on Twitter, on podcast advertisements, and in public presentations.1
  • I am unaware of any current publicly announced project that involves streamlining trillions of dollars in daily interbank securities transfers. Citation?

On p. 10 they briefly mention the Hyperledger Project.  Recommend tweaking it because of its own evolution over the years.

For example, here is my early contribution: what is the difference between Hyperledger and Hyperledger.

On p. 11 they write:

While it’s quite possible that many ICOs will fall afoul of securities regulations and that a bursting of this bubble will burn innocent investors, there’s something refreshingly democratic about this boom. Hordes of retail investors are entering into early stage investment rounds typically reserved for venture capitalists and other professional.

This paragraph aged horribly since the book was published in February.

All of the signs were there: we knew even last year that many, if not all, ICOs involved overpromising features and not disclosing much of anything to investors. As a result, virtually every week and month in 2018 we have learned just how much fraud and outright scams took place under the guise and pretext of the “democratization of fund raising.”

For instance, one study published this summer found that about 80% of the ICOs in 2017 were “identified scams.” Another study from EY found that about 1/3 of all ICOs in 2017 have lost “substantially all value” and most trade below their listing price.

Future versions of this book should remove this paragraph and also look into where all of that money went, especially since there wasn’t – arguably – a single cryptocurrency application with a real user base that arose from that funding method (yet).

On p. 11 they write:

Not to be outdone, Bitcoin, the grandaddy of the cryptocurrency world, has continued to reveal strengths — and this has been reflected in its price.

This is an asinine metric. How exactly does price reflect strength? They never really explain that yet repeat roughly the same type of explanation in other places in this book.

Interestingly, both bitcoin’s price and on-chain transaction volume have dramatically fallen since this book was first published. Does that mean that Bitcoin weakened somehow?

On p. 12 they write:

Such results give credence to crypto-asset analysts Chris Burniske and Jack Tatar’s description of bitcoin as “the most exciting alternative investment of the 21st century.”

Firstly, the Burniske and Tatar book was poorly written and wrong in many places: see my review

Secondly, bitcoin is a volatile investment that is arguably driven by a Keynesian beauty contest, not for the reasons that either book describes (e.g., not because of remittance activity).

On p. 12 they write:

The blockchain achieves this with a special algorithm embedded into a common piece of software run by all the computers in the network.

To be clear: neither PoW nor PoS are consensus protocols which is implied elsewhere on page 12.

On p. 12 they write:

Once new ledger entries are introduced, special cryptographic protections make it virtually impossible to go back and change them.

This is not really true. For coins like Bitcoin, it is proof-of-work that makes it resource intensive to do a block reorganization. Given enough hashrate, participants can and do fork the network. We have seen it occur many times this year alone. There is no cryptography in Bitcoin or Ethereum that prevents this reorg from happening because PoW is separate from block validation.2

On p. 13 they write:

Essentially, it should let people share more. And with the positive, multiplier effects that this kind of open sharing has on networks of economic activity, more engagement should in turn create more business opportunities.

These statement should be backed up with supporting evidence in the next edition because as it stands right now, this sounds more like a long-term goal or vision statement than something that currently exists today in the cryptocurrency world.

On p. 13 they mention “disintermediation” but throughout the book, many of the cryptocurrency-related companies they explore are new intermediaries. This is not a consistent narrative.

On p. 14 they write:

If I can trust another person’s claims – about their educational credentials, for example, or their assets, or their professional reputation – because they’ve been objectively verified by a decentralized system, then I can go into direct business with them.

This is a non sequitur. Garbage in, garbage out (GIGO) — in fact, the authors make that point later on in the book in Chapter 7.

On p. 15 they write:

Blockchains are a social technology, a new blueprint for how to govern communities, whether we’re talking about frightened refugees in a desolate Jordanian output or an interbank market in which the world’s biggest financial institutions exchange trillions of dollars daily.

This is vague and lacks nuance because there is no consensus on what a blockchain is today. Many different organizations and companies define it differently (see the Corda example above).

Either way, what does it mean to call a blockchain “social technology”? Databases are also being used by refugee camp organizers and financial infrastructure providers… are databases “social technology” too?

Chapter 1

On p. 17 they write:

Its blockchain promised a new way around processes that had become at best controlled by middlemen who insisted on taking their cut of every transaction, and at worst the cause of some man-made economic disasters.

This is true and problematic and unfortunately Bitcoin itself doesn’t solve that because it also has middlemen that take a cut of every transaction in the form of a fee to miners. Future editions should add more nuance such as the “moral hazard” of bailing out SIFIs and TBTF and separate that from payment processors… which technically speaking is what most cryptocurrencies strive to be (a network to pay unidentified participants).

On p. 18 they write:

Problems arise when communities view them with absolute faith, especially when the ledger is under control of self-interested actors who can manipulate them. This is what happened in 2008 when insufficient scrutiny of Lehman Brother’s and other’s actions left society exposed and contributed to the financial crisis.

This seems to be a bit revisionist history. This seems to conflate two separate things: the type of assets that Lehman owned and stated on its books… and the integrity of the ledgers themselves. Are the authors claiming that Lehman Brother’s ledgers were being maliciously modified and manipulated? If so, what citation do they have?

Also a couple pages ago, the authors wrote that blockchains were social technology… but we know that from Deadcoins.com that they can die and anything relying on them can be impacted.

Either way, in this chapter the authors don’t really explain how something Bitcoin itself would have prevented Lehman’s collapse. See also my new article on this topic.

On p. 19 they write:

A decentralized network of computers, one that no single entity controlled, would thus supplant the banks and other centralized ledger-keepers that Nakamoto identified as “trusted third parties.”

Fun fact: the word “ledger” does not appear in the Bitcoin white paper or other initial emails or posts by Nakamoto.

Secondly, perhaps an industry wide or commonly used blockchain of some kind does eventually displace and remove the role some banks have in maintaining certain ledgers, but their statement, as it is currently worded, seems a lot like of speculation (projection?).

We know this because throughout the book it is pretty clear they do not like banks, and that is fine, but future editions need to back up these types of opinions with evidence that banks are no longer maintaining a specific ledger because of a blockchain.

On p. 20 they write:

With Bitcoin’s network of independent computers verifying everything collectively, transactions could now be instituted peer to peer, that is, from person to person. That’s a big change from our convoluted credit and debit card payment systems, for example, which routes transactions through a long sequence of intermediaries – at least two banks, one or two payment processors, a card network manager (such as Visa or Mastercard), and a variety of other institutions, depending on where the transaction take place.

If we look back too 2009, this is factually correct of Bitcoin at a high level.3 The nuance that is missing is that today in 2018, the majority of bitcoin transactions route through a third party, some kind of intermediary like a deposit-taking exchange or custodial wallet.4 There are still folks who prefer to use Bitcoin as a P2P network, but according to Chainalysis, last year more than 80% of transactions went through a third party.5

On p. 20 they write:

Whereas you might think that money is being instantly transferred when you swipe your card at a clothing store, in reality the whole process takes several days for the funds to make all those hops and finally settle in the storeowner’s account, a delay that create risks and costs. With Bitcoin, the idea is that your transaction should take only ten to sixty minutes to fully clear (not withstanding some current capacity bottlenecks that Bitcoin developers are working tor resolve). You don’t have to rely on all those separate, trusted third parties to process it on your behalf.

This is mostly incorrect and there is also a false comparison.

In the first sentence they gloss over how credit card payment systems confirm and approve transactions in a matter of seconds.6 Instead they focus on settlement finality: when the actual cash is delivered to the merchant… which can take up to 30+ days depending on the system and jurisdiction.

The second half they glowingly say how much faster bitcoin is… but all they do is describe the “seen” activity with a cryptocurrency: the “six block” confirmations everyone is advised to wait before transferring coins again. This part does not mention that there is no settlement finality in Bitcoin, at most you get probabilistic finality (because there is always chance there may be a fork / reorg).

In addition, with cryptocurrencies like Bitcoin you are only transferring the coins. The cash leg on either side of the transaction still must transfer through the same intermediated system they describe above. We will discuss this further below when discussing remittances.

On p. 20 they write:

It does so in a way that makes it virtually impossible for anyone to change the historical record once it has been accepted.

For proof-of-work chains this is untrue in theory and empirically. In the next edition this should be modified to “resource intensive” or “economically expensive.”

On p. 20 they write:

The result is something remarkable: a record-keeping method that brings us to a commonly accepted version of the truth that’s more reliable than any truth we’ve ever seen. We’re calling the blockchain a Truth Machine, and its applications go far beyond just money.

It is not a “truth machine” because garbage in, garbage out.

In addition, while they do discuss some historical stone tablets, they don’t really provide a metric for how quantitatively more (or less) precise a blockchain is versus other methods of recording and witnessing information. Might be worth adding a comparison table in the next edition.

On p. 21 they write:

A lion of Wall Street, the firm was revealed to be little more than a debt-ravaged shell kept alive only by shady accounting – in other words, the bank was manipulating its ledgers. Sometimes, that manipulation involved moving debt off the books come reporting season. Other times, it involved assigning arbitrarily high values to “hard-to-value” assets – when the great selloff came, the shocking reality hit home: the assets had no value.

The crash of 2008 revealed most of what we know about Wall Street’s confidence game at that time. It entailed a vast manipulation of ledgers.

This was going well until that last sentence. Blockchains do not solve the garbage in, garbage out problem. If the CFO or accountant or book keeper or internal counsel puts numbers into blocks that do not accurately reflect or represent what the “real value” actually is, blockchains do not fix that. Bitcoin does not fix that.

Inappropriate oversight, rubber stamp valuations, inaccurate risk models… these are off-chain issues that afflicted Lehman and other banks. Note: they continue making this connection on pages 24, 28, and elsewhere but again, they do not detail how a blockchain of some kind would have explicitly prevented the collapse of Lehman other other investment banks.

See also: Systemically important cryptocurrency networks

On p. 22 they write:

The real problem was never really about liquidity, or a breakdown of the market. It was a failure of trust. When that trust was broken, the impact on society – including on our political culture – was devastating.

How about all of the above? Pinning it on just one thing seems a little dismissive of the multitude of other interconnecting problems / culprits.

On p. 22 they write:

By various measures, the U.S. economy has recovered – at the time of writing, unemployment was near record lows and the Dow Jones Industrial Average was at record highs. But those gains are not evenly distributed; wage growth at the top is six times what it is for those in the middle, and even more compared to those at the bottom.

If the goal of the authors is to rectify wealth inequalities then there are probably better comparisons than using cryptocurrencies.

Why? Because – while it is hard to full quantify, it appears that on cursory examination most (if not all) cryptocurrencies including Bitcoin have Gini coefficients that trends towards 1 (perfectly unequal).

On p. 23 they write about disinformation in the US and elsewhere.  And discuss how trust is a “vital social resource” and then mention hyperinflation in Venezuela. These are all worthy topics to discuss, but it is not really clear how any of these real or perceived problems are somehow solved because of a blockchain, especially when Venezuela is used as the example. The next edition should make this more clear.

On p. 29 they write:

On October 31, 2008, whil the world was drowning in the financial crisis, a little-noticed “white paper” was released by somebody using the pen name “Satoshi Nakamoto,” and describing something called “Bitcoin,” an electronic version of cash that didn’t need state backing. At the heart of Nakamoto’s electronic cash was a public ledger that could be viewed by anybody but was virtually impossible to alter.

One pedantic note: it wasn’t broadly marketed beyond a niche mailing list on purpose… a future edition might want to change ” a little-noticed” because it doesn’t seem like the goal by Nakamoto was to get Techcrunch or Slashdot to cover it (even though eventually they both did).

Also, it is not virtually impossible to alter.7 As shown by links above, proof-of-work networks can and do get forked which may include a block reorganization. There is nothing that technically prevents this from happening.

See also: Interview with Ray Dillinger

On p. 31 they write:

Szabo, Grigg, and others pioneered an approach with the potential to create a record of history that cannot be changed – a record that someone like Madoff, or Lehman’s bankers, could not have meddled with.

I still think that the authors are being a little too liberal with what a blockchain can do. What Madoff did and Lehman did were different from one another too.

Either way, a blockchain would not have prevented data – representing fraudulent claims – from being inserted into blocks. Theoretically a blockchain may have allowed auditors to detect tampering of blocks, but if the information in the blocks are “garbage” then it is kind of besides the point.

On p. 32 they write:

Consider that Bitcoin is now the most powerful computing network in the world, one whose combined “hashing” rate as of August 2017 enabled all its computers to collectively pore through 7 million trillion different number guesses per second.

[…]

Let the record show that period of time is 36,264 trillion trillion times longer than the current best-estimate age of the universe. Bitcoin’s cryptography is pretty secure.

This should be scrapped for several reasons.

The authors conflate the cryptography used by digital signatures with generating proofs-of-work.8 There are not the same thing. Digital signatures are considered “immutable” for the reasons they describe in the second part, not because of the hashes that are generated in the first.9

Another problem is that the activity in the first part — the hash generation process — is not an apples-to-apples comparison with other general computing efforts. Bitcoin mining is a narrowly specific activity and consequently ASICs have been built and deployed to generate these hashes. The single-use machines used to generate these hashes cannot even verify transactions or construct blocks. In contrast, CPUs and GPUs can process a much wider selection of general purpose applications… including serialize transactions and produce blocks.

For example: it would be like comparing a Falcon 9 rocket launch vehicle with a Toyota Prius. Sure they are nominally both “modes of transportation” but built for entirely different purposes and uses.

An additional point is that again, proof-of-work chains can and have been forked over the years. Bitcoin is not special or unique or impervious to forks either (here’s a history of the times Bitcoin has forked). And there are other ways to create forks, beyond the singular Maginot Line attack that the authors describe on this page.10

On p. 33 they write:

Whether the solution requires these extreme privacy measures or not, the broad model of a new ledger system that we laid out above – distributed, cryptographically secure, public yet private – may be just what’s needed to restore people’s confidence in society’s record-keeping systems. And to encourage people to re-engage in economic exchange and risk-taking.

This comes across as speculation and projecting. We will see later that the authors have a dim view of anything that is not a public blockchain. Why is this specific layout the best?

Either way, future versions should include a citation for how people’s confidence level increase because of the use of some kind of blockchain. At this time, I am unaware of any such survey.

On p. 34 they quote Tomicah Tilleman from the Global Blockchain Business Council, a lobbying organization:

Blockchain has the potential to push back against that erosion and it has the potential to create a new dynamic in which everyone can come to agree on a core set of facts but also ensure the privacy of facts that should not be in the public domain.

This seems like a non sequitur. How does a blockchain itself push back on anything directly? Just replace the word “blockchain” with “database” and see if it makes sense.

Furthermore, as we have empirically observed, there are fractures and special interest groups within each of these little coin ecosystems. Each has their own desired roadmap and in some cases, they cannot agree with one another about facts such as the impact larger block sizes may have on node operators.

On p. 35 they write:

If it can foster consensus in the way it has been shown to with Bitcon, it’s best understood as a Truth Machine.

This is a non sequitur. Just because Nakamoto consensus exists does not mean it that blockchains are machines of truth. They can replicate falsehoods if the blocks are filled with the incorrect information.

Chapter 2

On p. 38 they write:

Consider how Facebook’s secret algorithm choose the news to suit your ideological bent, creating echo chambers of like-minded angry or delighted readers who are ripe to consume and share dubious information that confirms their pre-existing political biases.

There are some really valid points in this first part of the chapter. As it relates to cryptocurrencies, a second edition should also include the astroturfing and censoring of alternative views that take place on cryptocurency-related subreddits which in turn prevent people from learning about alternative implementations.

We saw this front-and-center in 2015 with the block size debate in which moderators of /r/bitcoin (specifically, theymos and BashCo) banned any discussion from one camp, those that wanted to discuss ways of increasing the block size via a hardfork (e.g., Bitcoin XT, Bitcoin Classic).

This wasn’t the first or last time that cryptocurrency-related topics on social media have resulted in the creation of echo chambers.

On p. 43 they write:

The potential power of this concept starts with the example of Bitcoin. Even though that particular blockchain may not provide the ultimate solution in this use case, it’s worth recalling that without any of the classic, centrally deployed cybersecurity tools such as firewalls, and with a tempting “bounty” of more than $160 billion in market cap value at the time we went to print, Bitcoin’s core ledger has thus far proven to be unhackable.

There is a lot to unpack here but I think a future edition should explain in more detail how Bitcoin is a type of cybersecurity tool. Do they mean that because the information is replicated to thousands of nodes around the world, it is more resilient or redundant?

Either way, saying that “Bitcoin’s core ledger” is “unhackable” is a trope that should be removed from the next edition as well.

Why? Because when speaking about BTC or BCH or any variant of Bitcoin, there is only one “ledger” per chain… the word ‘core’ is superfluous. And as described above, the word “unhackable” should be changed to “resource intensive to fork” or something along those lines. “Unhackable” is anarchronistic because what the authors are probably trying to describe is malicious network partitions… and not something from a ’90s film like The Net.

Continuing on p. 43 they write:

Based on the ledger’s own standards for integrity, Bitcoin’s nine-year experience of survival provides pretty solid proof of the resiliency of its core mechanism for providing decentralized trust between users. It suggest that one of the most important non-currency applications of Bitcoin’s blockchain could be security itself.

This last sentence makes no sense and they do not expand on it in the book. What is the security they are talking about? And how is that particularly helpful to “non-currency applications of Bitcoin’s blockchain”? Do they mean piggy-backing like colored coins try to do?

On p. 44 they write:

The public ledger contains no identifying information about the system’s users. Even more important, no one owns or controls that ledger.

Well technically speaking, miners via mining pools control the chain. They can and do upgrade / downgrade / sidegrade the software. And they can (and do) fork and reorg a chain. Is that defined as “control”? Unclear but we’ll probably see some court cases if real large loses take place due to forks.

On p. 44 they write:

As such there is no central vector of attack.

In theory, yes. In practice though, many chains are highly centralized: both in terms of block creation and in terms of development. Thus in theory it is possible to compromise and successfully “attack” a blockchain under the right circumstances. Could be worth rephrasing this in the next edition.

On p. 44 they write:

As we’ll discuss further in the book, there are varying degrees of security in different blockchain designs, including those known as “private” or “permissioned” blockchains, which rely on central authorities to approve participants. In contrast, Bitcoin is based on a decentralized model that eschews approvals and instead banks on the participants caring enough about their money in the system to protect it.

This is a bit of a strawman because there are different types of “permissioned” blockchains designed for different purposes… they’re not all alike. In general, the main commonality is that the validators are known via a legal identity. How these networks are setup or run does not necessarily need to rely on a centralized authority, that would be a single point of trust (and failure). But we’ll discuss this later below.

On p. 44 they write:

On stage at the time, Adam Ludwin, the CEO of blockchain / distributed ledger services company Chain Inc., took advantage of the results to call out Wall Street firms for failing to see how this technology offers a different paradigm. Ludwin, whose clients include household names like Visa and Nasdaq, said he could understand why people saw a continued market for cybersecurity services, since his audience was full of people paid to worry about data breaches constantly. But their answers suggested they didn’t understand that the blockchain offered a solution. Unlike other system-design software, for which cybersecurity is an add-on, this technology “incorporates security by design,” he said.

It is unclear from the comments above exactly how a blockchain solves problems in the world of cybersecurity. Maybe it does. If so, then it should be explored in more detail than what is provided in this area of the book.

As an aside, I’m not sure how credible Ludwin’s comments on this matter are because of the multiple pivots that his companies have done over the past five years.11

On p. 45 they write:

A more radical solution is to embrace open, “permissionless” blockchains like Bitcoin and Ethereum, where there’s no central authority keeping track of who’s using the network.

This is very much a prescriptive pitch and not a descriptive analysis. Recommend changing some of the language in the next edition. Also, they should define what “open” means because there basically every mining pool doxxes themselves.

Furthermore, some exchanges that attempt to enforce their terms-of-service around KYC / AML / CTF do try to keep track of who is doing what on the network via tools from Chainalysis, Blockseer, Elliptic and others. Violating the ToS may result in account closures. Thus, ironically, the largest “permissioned” platforms are actually those on the edges of all cryptocurrencies.

See: What is Permissioned-on-Permissionless

On p. 45 they write:

It’s not about building a firewall up around a centralized pool of valuable data controlled by a trusted third party; rather the focus is on pushing control over information out to the edges of the network, to the people themselves, and on limiting the amount of identifying information that’s communicated publicly. Importantly, it’s also about making it prohibitively expensive for someone to try to steal valuable information.

This sounds all well and good, definitely noble goals. However in the cryptocurrency world, many exchanges and custodial wallets have been compromised and the victims have had very little recourse. Despite the fact that everyone is continually told not to store their private keys (coins) with an intermediary, Chainalysis found that in 2017 more than 80% of all transactions involved a third-party service.

On p. 45 they write:

Bitcoin’s core ledger has never been successfully attacked.

They should define what they mean by “attacked” because it has forked a number of times in its history. And a huge civil war took place resulting in multiple groups waging off-chain social media campaigns to promote their positions, resulting in one discrete group divorcing and another discrete group trying to prevent them from divorcing. Since there is only de facto and not de jure governance, who attacked who? Who were the victims?

On p. 45 they write:

Now, it will undoubtedly be a major challenge to get the institutions that until now have been entrusted with securing our data systems to let go and defer security to some decentralized network in which there is no identifiable authority to sue if something goes wrong. But doing so might just be the most important step they can take to improve data security. It will require them to think about security not as a function of superior encryption and other external protections, but in terms of economics, of making attacks so expensive that they’re not worth the effort.

This seems a bit repetitive with the previous couple of page, recommend slimming this down in the next edition. Also, there are several class action lawsuits underway (e.g., Ripple, Tezos) which do in fact attempt to identify specific individuals and corporations as being “authorities.” The Nano lawsuit also attempted to sue “core developers.”

On p. 46 they write:

A hacker could go after each device, try to steal the private key that’s used to initiate transactions on the decentralized network, and, if they’re lucky, get away with a few thousand dollars in bitcoin. But it’s far less lucrative and far more time-consuming than going after the rich target of a central server.

The ironic part of this is that generally speaking, the private keys controlling millions of bitcoins are being housed in trusted third parties / intermediaries right now. In some cases these are stored on a centralized server. In other cases, the cold wallet managed by hosting providers such as Xapo (which is rumored to secure $10 billion of bitcoin) does geographically split the keys apart into bunkers. Yet at some point those handling the mutli-sig do come together in order to move the coins to a hot wallet.12

On p. 47 they write:

It seems clear to us that the digital economy would benefit greatly from embracing the distributed trust architecture allowed by blockchains – whether it’s simply the data backups that a distributed system offers, or the more radical of an open system that’s protected by a high cost-to-payout ratio.

What does this mean? Are they saying to add proof-of-work to all types of distributed systems? It is only useful in the Bitcoin context in order to make it expensive to Sybil attack the network… because participants were originally unknown. Does that same problem exist in other environments that they are thinking of? More clarity should be added in the next edition.

On p. 48 they write:

The idea, one that’s also being pursued in different forms by startups such as Gem of Los Angeles and Blockchain Health of San Francisco, is that the patient has control over who sees their records.

This is one of the difficulties in writing a long-form book on this general topic right now: projects and companies frequently pivot.

For instance, a couple months after the book was published, Gem announced its “Universal Token Wallet,” a product which currently dominates its front page and social media accounts of the company. There have been no health care-related announcements from the company in over a year.

Similarly, Blockchain Health no longer exists. Its CEO left and joined Chia as a co-founder and the COO has joined the Neighborly team.

On p. 50 they write:

It was a jury-rigged solution that meant that the banking system, the centralized ledger-keeping solution with which society had solved the double-spend problem for five hundred years, would be awkwardly bolted onto the ostensibly decentralized Internet as its core trust infrastructure.

I think there are some legitimate complaints to made towards how online commerce evolved and currently exists but this seems a tad petty. As backwards as financial institutions are (rightly and wrongly) portrayed, it’s not like their decision makers sat around in the early ’90s trying to figure out how to make integrating the Web an awkward process.

On p. 50 they write:

Under this model, the banks charged merchants an interchange fee of around 3 percent to cover their anti-fraud costs, adding a hidden tax to the digital economy we all pay in the form of higher prices.

Again, like their statement above: there are some very legitimate gripes to be had regarding the existing oligopolistic payment systems, but this specific gripe is kind of petty.

Fraud exists and as a result someone has to pay for it. In the cryptocurrency world, there is no recourse because it is caveat emptor. In the world of courts and legal recourse, fees are levied to cover customer service including fraud and insurance. It may be possible to build a payment system in which there is legal recourse and simultaneously no oligopolistic rent seeking but this is not explored in the book. Also, for some reason the fee to miners is not brought up in this section, yet it is a real fee users must pay… yet they do not receive customer service as part of it.

Lastly, the Federal Reserve (and other central banks) monitor historical interchange fees. Not all users are charged the ~3% as mentioned in the book.

For instance (see below): Average Debit Card Interchange Fee by Payment Card Network

Source: Statista

On pages 52 and 53 they write uncritically about Marc Andresseen and VCs who have invested in Bitcoin and cryptocurrencies.

a16z, the venture firm co-founded by Andresseen, arguably has a few areas that may be conflicts-of-interest with the various coin-related projects it has invested in and/or promoted the past several years (e.g., investing in coins which are listed on an exchange they also are an investor and board member of such as 0x). Those ties are not scrutinized in a chapter that attempts to create a black and white narrative: that the legacy players are centralized rent-seekers and the VCs are not. When we know empirically that some VCs, including a16z, have invested in what they believe will become monopolies of some kind.

On page 54 and 55 they write about “Code is not law,” a topic that I have likewise publicly presented on.

Specifically they state:

One risk is that regulators, confused by all these outside-the-box concepts, will overreact to some bad news – potentially triggered by large-scale investors losses if and when the ICO bubble bursts and exposes a host of scams. The fear is that a new set of draconian catchall measures would suck the life out of innovation in this space or drive it offshore or underground. To be sure, institutions like the Washington-based Coin Center and the Digital Chamber of Commerce are doing their best to keep officials aware of the importance of keeping their respective jurisdictions competitive in what is now a global race to lead the world in financial technology.

This is word for word what coin lobbyists have been pitching to policy makers around the world for years. Both Coin Center and Digital Chamber of Commerce lobby on behalf of their sponsors and donors to prevent certain oversight on the cryptocurrency market.13 An entire book could probably be written about how specific people within coin lobbying organizations have attempted to white wash and spin the narrative around illicit usage, using carefully worded talking points. And they have been effective because these authors do not question the motivations and agenda these special interest groups have.

Either way, Bitcoin and many other cryptocurrencies were born in the “underground” and even “offshore.” It is unclear what the authors are trying to excuse because if anything, regulators and law enforcement have arguably been very light handed in the US and most regions abroad.

If anything, once a foreign registered ICO or coin is created, often the parent company and/or foundation opens an office to recruit developers in San Francisco, New York, and other US cities. I know this because all the multiple “blockchain” events I have attended overseas the past two years in which organizers explain their strategy. The next edition of this book could explore this phenomenon.

On p. 57 they write:

By The DAO founders’ own terms, the attacker had done nothing wrong, in other words. He or she had simply exploited one of its features.

Excellent point that should be explored in further detail in the next edition. For instance, in Bitcoin there have been multiple CVEs which if exploited (at least one was) could have resulted in changes in the money supply. Is that a feature or a bug?

And the most recent one, found in pre-0.16.3, was partially downplayed and hidden to prevent others from knowing the extent of potential damage that could have been done.

On p. 59 they write:

The dependence on a trusted middleman, some cryptocurrency purists would argue, overly compromises a blockchain’s security function, rending it unreliable. For that reason, some of them say, a blockchain is inappropriate for many non-currency applications. We, however, view it as a trade-off and believe there’s still plenty of value in recording ownership rights and transfers to digitally represented real-world assets in blockchains.

I think this whole section should be reworded to describe:

  1. what types of blockchains they had in mind?
  2. how the legal hooks into certain blockchains behave versus anarchic chains?
  3. being more precise with the term purist… do they mean maximalists or do they mean someone who points out that most proposed use-cases are chainwashing?

On pages 59 and 60 they write:

Permissioned blockchains – those which require some authorized entity to approve the computers that validate the blockchain – by definition more prone to gatekeeping controls, and therefore to the emergence monopoly or oligopoly powers, than the persmissionless ideal that Bitcoin represents. (We say “ideal” because, as we’ll discuss in the next chapter, there are also concerns that aspects of Bitcoin’s software program have encouraged an unwelcome concentration of ownership – flaws that developers are working to overcome.)

It would be beneficial in the next edition to at least walk through two different “permissioned blockchains” so the reader can get an idea of how validators become validators in these chains. By not including them, each platform is painted in the same light.

And because they are still comparing it with Bitcoin (which was designed for a completely different type of use-case than ‘permissioned chains’ are), keep in mind that the way mining (block making) is done in 2018 is very different than when it was first proposed in the 2008 paper. Back then, mining included a machine that did two things: validated blocks and also generate proofs-of-work. Today, those two functions are completely separate and because of the relatively fierce competition at generating hashes, there are real exit and entry costs to the market.

In many cases, this means that both the mining pool operators and hash generators end up connecting their real world government-issued identities with their on-chain activity (e.g., block validation). It may be a stretch to say that there is an outright monopoly in mining today, but there is a definite trend towards oligopoly in manufacturing, block producing, and hash generation the past several years. This is not explored beyond a superficial level in the book.

On p. 60 they write:

Until law changes, banks would face insurmountable legal and regulatory opposition, for example, to using a system like Bitcoin that relies on an algorithm randomly assigning responsibility at different stages of the bookkeeping process to different, unidentifiable computers around the world.

This is another asinine comment because they don’t explicitly say which laws they would like changed. The authors make it sound like the PFMIs are holding the world back when the opposite is completely true. These principals and best practices arose over time because of the systemic impact important financial market infrastructures could have on society as a whole.

Proof-of-work chains, the ones that are continually promoted in this book, have no ability to prevent forks, by design. Anarchic chains like Bitcoin and Ethereum can only provide probabilistic finality. Yet commercial best practices and courts around the world demands definitive settlement finality. Why should commerce be captured by pseudonymous, unaccountable validators maintained in jurisdictions in which legal recourse is difficult if not impossible?

On p. 60 they continue:

But that doesn’t mean that other companies don’t have a clear interest in reviewing how these permissioned networks are set up. Would a distributed ledger system that’s controlled by a consortium of the world’s biggest banking institutions be incentivized to act in the interest of the general public it serves? One can imagine the dangers of a “too-big-to-fail blockchain” massive institutions could once again hold us hostage to bailouts because of failures in the combined accounting system.

This has been one of Michael Casey’s talking points for the past three years. I was even on a panel with him in January 2016 in which he called R3 a “cartelchain,” months before Corda even existed. His justified disdain towards traditional financial institutions — and those involved with technology being developed in the “permissioned” world — pops up throughout this book. I do think there are some valid critiques of consortia and permissioned chains and even Corda, but those aren’t presented in this edition of the book.

He does make two valid observations here as well: regulated commerce should have oversight. That is one of the reasons why many of the organizations developing “permissioned blockchains” have plans to or already have created separate legal entities to be regulated as some type of FMI.

The other point is that we should attempt to move away from recreating TBTF and SIFI scenarios. Unfortunately in some cases, “permissioned chains” are being pitched as re-enabler of that very scenario. In contrast, dFMI is a model that attempts to move away from these highly intermediated infrastructures. See also my new article on SICNs.

On p. 60 they write:

Either way, it’s incumbent upon us to ensure that the control over the blockchains of the future is sufficiently representative of broad-based interests and needs so that they don’t just become vehicles for collusion and oligpolistic power by the old guard of finance.

The ironic part of this statement is — while well-intended — because of economies of scale there is an oligopoly or even monopoly in most PoW-mined coins. It is unclear how or why that would change in the future. In addition, with the entrance of Bakkt, ErisX, Fidelity and other large traditional financial organizations (e.g., the old guard) into the cryptocurrency world, it is hard to see how “permissionless ecosystems” can prevent them from participating.

On p. 61 they write:

As we stated in The Age of Cryptocurrency, Bitcoin was merely the first crack at using a distributed computing and decentralized ledger-keeping system to resolve the age-old problem of trust and achieve this open, low-cost architecture for intermediary-free global transactions.

But as the authors have stated elsewhere: proof-of-work chains are inherently costly. If they were cheap to maintain then they would be cheap to fork and reorg. You cannot simultaneously have a cheap (“efficient”) and secure PoW network… that’s a contradiction.

See:

Chapter 3

On pages 64 and 65 they provide a definition of a blockchain. I think this could be more helpful more earlier on in the book for newer audiences.

A few other citations readers may be interested in:

On p. 66 they write:

That way, no authorizing entity could block, retract, or decide what gest entered into the ledger, making it censorship resistant.

Could be worth referencing Eligius, a pool run by Luke-Jr. that would not allow Satoshi Dice transactions because its owners religious views.14

On p. 67 they write:

These computers are known as “miners,” because in seeking to win the ten-minute payout, they engage in a kind of computational treasure hunt for digital gold.

I understand the need to make simple analogies but the digital gold one isn’t quite right because gold does not have an inflexible supply whereas bitcoin does. I’ve pointed this out in other book reviews and it bears repeating because of how the narrative of e-cash to HODLing has changed over the last few years.1516

Readers may be interested of a few real life examples of perfectly inelastic supplies.

On p. 67 they write:

Proof of work is expensive, because it chews up both electricity and processing power. That means that if a miner wants to seize majority control of the consensus system by adding more computing power, they would have to spend a lot of money doing so.

This is correct. Yet six pages earlier they say it is a “low-cost” infrastructure. Needs to be a little more consistent in this book. Either PoW is resource intensive or it is not, it cannot be both.

On p. 68 they write:

Over time, bitcoin mining has evolved into an industrial undertaking, with gigantic mining “farms” now dominating the network. Might those big players collude and undermine the ledger by combining resources? Perhaps, but there are also overwhelming disincentives for doing so. Among other considerations, a successful attack would significantly undermine the value of all the bitcoins the attacking miner owns. Either way, no one has managed to attack Bitcoin’s ledger in nine years. That unbroken record continues to reinforce belief in Bitcoin’s cost-and-incentive security system.

It’s worth pointing out that there are ways to fork Bitcoin beyond the singular Maginot Line attack. As mentioned above, Bitcoin and many other coins have forked; see this history. Hundreds of coins have died due to lack of interest by miners and developers.

It could also be argued that between 2015-2017, Bitcoin underwent a social, off-chain attack by multiple different groups attempting to exert their own influence and ideology onto the ecosystem. The end result was a permanent fracture, a divorce which the principal participants still lob social media bombs at one another. There isn’t enough room to discuss it here, but the astroturfing actions by specific people and companies in order to influence others is worth looking into as well. And it worked.

On p. 71 they write:

The caveat, of course, is that if bad actors do control more than 50 percent of the computing power they can produce the longest chain and so incorporate fraudulent transactions, which other miners will unwittingly treat as legitimate. Still, as we’ve explained, achieving that level of computing power is prohibitively expensive. It’s this combination of math and money that keeps Bitcoin secure.

I probably would change some of the wording because with proof-of-work chains (and basically any cryptocurrency), there are no terms of service or end user license agreement or SLA. At most there is only de facto governance and certainly not de jure.

What does that mean? It means that we really can’t say who the “bad actors” are since there is no service agreement. Barring an administrator, who is the legitimate authority in the anarchic world of cryptocurrencies? The original pitch was: if miners want to choose to build on another tree or fork, it’s their decision to do so… they don’t need anyone’s permission to validate blocks and attempt to update the chain as they want to. The next edition should explicitly say who or what is an attacker or what a fraudulent transaction is… these are points I’ve raised in other posts and book reviews.

Also, the authors mention that computational resources involved in PoW are “prohibitively expensive” here. So again, to be consistent they likely should remove “low-cost” in other places.

On p. 71 and 72 they write:

In solving the double-spend problem, Bitcoin did something else important: it magically created the concept of a “digital asset.” Previously, anything digital was too easily replicated to be regarded as a distinct piece of property, which is why digital products such as music and movies are typically sold with licensing and access rights rather than ownership. By making it impossible to replicate something of value – in this case bitcoins – Bitcoin broke this conventional wisdom. It created digital scarcity.

No it did not. This whole passage is wrong. As we have seen with forks and clones, there really is no such thing as this DRM-for-money narrative. This should be removed in the next edition.

Scarcity effectively means rivalrous, yet anyone can copy and clone any of these anarchic chains. PoW might make it relatively expensive to do a block reorg on one specific chain, but it does not really prevent someone from doing what they want with an identically cloned chain.

For instance, here is a list of 44 Bitcoin forked tokens that arose between August 2017 and May 2018. In light of the Bitcoin and Bitcoin Cash divorce, lobbying exchanges to recognize ticker symbols is also worth looking into in a future edition.

On p. 73 they write:

Many startups that were trying to build a business on top of Bitcoin, such as wallet providers and exchanges, were frustrated by an inability to process their customers’ transactions in a timely manner. “I’ve become a trusted third party,” complained Wences Casares, CEO of bitcoin wallet and custodial service Xapo. Casares was referring to the fact that too many of his firms’ transactions with its customers had to be processed “off-chain” on faith that Xapo would later settle the transaction on the Bitcoin blockchain.

This is one of the most honest statements in the book. The entire cryptocurrency ecosystem is now dominated by intermediaries.

Interestingly, Xapo moved its main office from Palo Alto to Switzerland days after Ripple was fined by FinCEN for violating the BSA. Was this just a coincidence?

On p. 73 they wrote:

Making blocks bigger would require more memory, which would make it even more expensive to operate a miner, critics pointed out. That could drive other prospective miners away, and leave Bitcoin mining even more concentrated among a few centralized players, raising the existential threat of collusion to undermine the ledger.

This wasn’t really the argument being made by the “small blockers.” Rather, it was disk space (not memory) that was — at the time — perceived as a limitation for retail (home) users in the long run. Yet it has been a moot point for both Bitcoin and Bitcoin Cash as the price per gigabyte for a hard drive continues to decline over time… and because in the past year, on-chain transactions on both chains have fallen from their peak in December 2017.

In practice, the “miners” that that authors refer to are the roughly 15 to 20 or so mining pools that in a given day, create the blocks that others build on. Nearly all of them maintain these nodes at a cloud provider. So there is already a lot of trust that takes place (e.g., AWS and Alibaba are trusted third parties). Because of economies of scale, spinning up a node (computer) in AWS is relatively inexpensive.

It really isn’t discussed much in the book, but the main argument throughout the 2nd half of 2017 was about UASF — a populist message which basically said miners (mining pools) didn’t really matter. Followers of this philosophy emphasized the need to run a node at home. For instance, if a UASF supporter based in rural Florida is attempting to run a node from his home, there could be a stark difference between the uptime and bandwidth capacity he has at home versus what AWS provides.

On p. 74 they write:

Without a tally of who’s who and who owns what, there was no way to gauge what the majority of the Bitcoin community, composed of users, businesses, investors, developers, and miners, wanted. And so, it all devolved into shouting matches on social media.

I wrote about this phenomenon in Appendix A in a paper published in November 2015. And what eventually happened was a series of off-chain Sybil attacks by several different tribes, but especially by promoters of UASF who spun up hundreds — thousands of nodes — and acted as if those mattered.

Future editions should also include a discussion on what took place at the Hong Kong roundtable, New York agreement, and other multilateral governance-related talks prior to the Bitcoin Cash fork.

On p. 74 they write:

A hard-fork-based software change thus poses a do-or-die decision for users on whether to upgrade or not. That’s bad enough for, say, word processing software, but for a currency it’s downright problematic. A bitcoin based on the old version could not be transferred to someone running software that support the new version. Two Bitcoins. Two versions of the truth.

The authors actually accidentally proved my earlier point: that public chains, specifically, proof-of-work chains, cannot prevent duplication or forks. Proof-of-work only makes it resource intensive to do double-spend on one specific chain.

This is one of the reasons why regulated financial organizations likely will continue to not issue long lifecycle instruments directly onto an anarchic chain like Bitcoin: because by design, PoW chains are forkable.

Also, future editions may want to modify this language because there are some counterarguments from folks like Vitalik Buterin that state: because hard forks are opt-in and thus lead to cleaner long-term outcomes (e.g., less technical debt).

On p. 75 they write a lot about Lightning Network, stating:

So, there are no miners’ fees to pay and no limit on how many transaction can be done at any time. The smart contracts prevent users from defrauding each other while the Bitcoin blockchain is used solely as a settlement layer, recording new balance transactions whenever a channel is opened or closed. It persists as the ultimate source of proof, a guarantee that all the “off-chain” Lightning transactions are legitimate.

What is not discussed in this edition is that:

  1. Lightning has been massively hyped with still relatively subdued traction
  2. Lightning is a separate network – it is not Bitcoin – and thus must be protected and secured through other non-mining means
  3. Lightning arguably distorts the potential transition to a fee-based Bitcoin network in much the same way that intermediaries like Coinbase do. That is to say, users are paying intermediaries the fees instead of miners thus prolonging the time that miners rely on block rewards (as a subsidy) instead of user fees.

Also, it bears mentioning that Bitcoin cannot in its current form act as a legal “settlement layer” as it cannot provide definitive settlement finality as outlined in the PFMIs (principle #8).

On p. 75 they write:

The SegWit/Lightning combination was in their minds the responsible way to make changes. They had a duty, they believed, to avoid big, disruptive codebase alterations and instead wanted to encourage innovators to develop applications that would augment the powers of the limited foundational code. It’s a classic, security-minded approach to protocol development: keep the core system at the bottom layer of the system simple, robust, and hard to change – some of the words “deliberately dumb” – and thus force innovation “up the stack” to the “application layer.” When it works you get the best of both worlds: security and innovation.

The authors should revise this because this is just repeating the talking points of specific Core developers, especially the last line.

Empirically it is possible to create a secure and “innovative” platform… and do so with multiple implementations of a specification. We see that in other cryptocurrencies and blockchain-related development efforts including Ethereum. The Bitcoin Core participants do not have a monopoly on what is or is not “security minded” and several of them are vocally opposed to supporting multiple implementations, in part, because of the politics around who controls the BIP process.

In fact, it could be argued that by insisting on the SegWit/Lightning approach, they caused a disruption because in point of fact, the amount of code that needed to be changed to increase the block size is arguably less than what was needed to build, verify, and release SegWit.

It’s not worth wading deep into these waters in this review, but the next edition of this book should be more even handed towards this schism.

On p. 76 they write:

But a group of miners with real clout was having none of it. Led by a Chinese company that both mined bitcoin and produced some of the most widely used mining equipment, this group was adamantly opposed to SegWit and Lightning. It’s not entirely clear what upset Jihan Wu, CEO of Bitmain, but after lining up with early Bitcoin investor and prominent libertarian Roger Ver, he launched a series of lobbying efforts to promote bigger blocks. One theory was that Bitmain worried that an “off-chain” Lightning solution would siphon away transaction fees that should be rightly going to miners; another was that because such payment channel transactions weren’t traceable as on-chain transactions, Chinese miners were worried that their government might shut them down. Bitmain’s reputation suffered a blow when revelations emerged that its popular Ant-miner mining rigs were being shipped to third-party miners with a “backdoor” that allowed the manufacturer-cum-miner to shut its opponents’ equipment down. Conspiracy theories abounded: Bitmain was planning to subvert SegWit. The company denied this and vowed to disable the feature. But trust was destroyed.

There is a lot of revisionism here.

But to start with, in the process of writing this review I reached out and contacted both Roger Ver and separately an advisor at Bitmain. Both told me that neither of the authors of this book had reached out to them for any comment. Why would the authors freely quote Bitcoin Core / SegWit developers to get their side of this debate but not reach out to speak with two prominent individuals from the other side to get their specific views? The next edition should either include these views and/or heavily revise this section of the book.

There are a few other problems with this passage.

Multiple different groups were actively lobbying and petitioning various influential figures (such as exchange operators) during this time period, not just Jihan and Roger. For instance, as mentioned above, the Hong Kong roundtable and New York agreement were two such examples. Conversely, SegWit and UASF was heavily promoted and lobbied by executives and affiliates at Blockstream and a handful of other organizations.

Regarding this “backdoor,” let’s rewind the clock and look at the overt / covert tempest in a teapot.

Last April Bitmain was alleged by Greg Maxwell (and the Antbleed campaign) of having maybe kinda sorta engaged in something called covert mining via Asicboost. Jimmy Song and others looked into it and said that there was no evidence covert was happening. At the time, some of the vocal self-identified “small block” supporters backing UASF, used this as evidence that Bitmain was a malicious Byzantine actor that must be purged from Bitcoinland. At the time, Greg proposed changing the PoW function in Bitcoin in order to prevent covert Asicboost from working.

In its defense, Bitmain stated that while Asicboost had been integrated into the mining equipment, it was never activated… partly because of the uncertain international IP / patent claims surrounding Asicboost. Recently, they announced a firmware upgrade that miners could activate overt Asicboost… a few days after another organization did (called “braiins”).

So why revisit this?

Two months ago Sia released code which specifically blocked mining equipment from Bitmain and Innosilicon. How and why this action is perceived as being fair or non-political is very confusing… they are definitely picking favorites (their own hardware). Certainly can’t claim to be sufficiently decentralized, right?

Yet in this section of the book, they don’t really touch on how key participants within the tribes and factions, represented at the time. Peruse both lists and look at all of the individuals at the roundtable that claim to represent “Bitcoin Core” in the governance process versus (the non-existent) reps from other implementations.

Even though the divorce is considered over, the tribes still fling mud at one another.

For example, one of the signatories of the HK roundtable, Adam Back, is still heckling Bitmain for supposedly not being involved in the BIP process. Wasn’t participation supposed to be “voluntary” and “permissionless”? Adam is also now fine with “overt” Asicboost today but wasn’t okay with it 18 months ago. What changed? Why was it supposedly bad for Bitmain to potentially use it back then but now it’s kosher because “braiins” (Slush) is doing it? That seems like favoritism.

Either way, the book passage above needs to be rewritten to include views from other camps and also to remove the still unproven conspiracy theories.

On p. 76 they write:

Meanwhile, original bitcoin went on a tear, rallying by more than 50 percent to a new high above $4,400 over a two-week period. The comparative performance of the pair suggested that small-block BTC and the SegWit reformers had won.

The next edition should change the wording because this comes across one-sided.

While an imperfect comparison, a more likely explanation is that of a Keynesian beauty contest. Most unsophisticated retail investors had heard of Bitcoin and hadn’t heard of Bitcoin Cash. Bitcoin (BTC) has brand recognition while Bitcoin Cash and the dozens of other Bitcoin-named forks and clones, did not.

Based on anecdotes, most coin speculators do not seem to care about the technical specifications of the coins they buy and typically keep the coins stored on an intermediary (such as an exchange) with the view that they can sell the coins later to someone else (e.g., “a greater fool“).

On p. 77 they write:

Bitcoin had gone through a ridiculous circus, one that many outsiders naturally assumed would hurt its reputation and undermine its support. Who wants such an ungovernable currency? Yet here was the original bitcoin surging to new heights and registering a staggering 650 percent gain in less than twelve months.

The problem with cherry picking price action dates is that, as seen in the passage above, it may not age well.17

For example, during the write-up of this review, the price of bitcoin declined from where it was a year ago (from over $10,000 then down to around $4,000). What does that mean? We can all guess what happened during this most recent bubble, but to act like non-tech savvy retail buyers bought bitcoin (BTC) because of SegWit is a non sequitur. No one but the tribalists in the civil war really cared.

On p. 77 they write:

Why? Well, for one, Bitcoin had proven itself resilient. Despite its civil war, its blockchain ledger remained intact. And, while it’s hard to see how the acrimony and bitterness was an advantage, the fact that it had proven so difficult to alter the code, to introduce a change to its monetary system, was seen by many as an important test of Bitcoin’s immutability.

There are a few issues here.

What do the authors mean by the “blockchain ledger remained intact”? I don’t think it was ever a question over whether or not copies of the Bitcoin blockchain (and/or forks thereof) would somehow be deleted. Might want to reword this in the future.

Segwit2x / Bitcoin Cash proponents were not trying to introduce a change to Bitcoin’s monetary system. The supply schedule of bitcoins would have stayed the same. The main issue was: a permanent block size increase from 1 MB to at least 2 MB. That proposal, if enacted, would not have changed the money supply.

What do the authors mean by “Bitcoin’s immutability”? The digital signatures are not being reversed or changed and that is what provides transactions the characteristic of “immutability.”

It is likely that the authors believe that a “hard fork” means that Bitcoin is not immutable. That seems to conflate “immutability” of a digital signature with finality (meaning irreversibility). By design, no proof-of-work coin can guarantee finality or irreversibility.

Also, Bitcoin had more than a dozen forks prior to the block size civil war.

On p. 77 and 78 they write:

Solid censorship resistance was, after all, a defining selling point for Bitcoin, the reason why some see the digital currency becoming a world reserve asset to replace the outdated, mutable, fiat-currency systems that still run the world. In fact, it could be argued that this failure to compromise and move forward, seen by outsiders as Bitcoin’s biggest flaw, might actually be its biggest feature. Like the simple, unchanging codebase of TCP/IP, the gridlocked politics of the Bitcoin protocol were imposing secure rigidity on the system and forcing innovation up the stack.

This is not what “censorship resistance” means in the context of Bitcoin. Censorship resistance is narrow and specific to what operators of miners could do. Specifically, the game theory behind Nakamoto Consensus is that it would be costly (resource intensive) for a malicious (Byzantine) actor to try and attempt to permanently censor transactions due to the amount of hashrate (proof-of-work) a Byzantine actor would need to control (e.g., more than 50%).

In contrast, what the authors described in this book was off-chain censorship, such as lobbying by various special interest groups at events, flamewars on Twitter, removing alternative views and voices on reddit, and via several other forms.

The “world reserve asset” is a loaded phrase that should be clarified in the next edition because the passage above comes across a bit like an Occupy Wall Street speech. It needs more of an explanation beyond the colorful one sentence it was given. Furthermore, as I predicted last year, cryptocurrencies continue to rely on the unit-of-account of “fiat systems” and shows no signs of letting up in this new era of “stablecoins.”

The authors definitely need to remove the part that says “unchanging codebase of TCP/IP” because this is not true. TCP/IP is a suite of protocol standards and its constituent implementations continue to evolve over time. There is no single monolithic codebase that lies unchanged since 1974 which is basically the takeaway from the passage above.18

In fact, several governing bodies such as IFTF and IAB continue to issue RFCs in order to help improve the quality-of-service of what we call the internet. It is also worth pointing out that their analogy is flawed for other reasons discussed in: Intranets and the Internet. In addition, the next version of HTTP won’t be using TCP.

As far as whether innovation will move “up the stack” remains to be seen but this seems to be an argument that the ends justify the means. If that is the case, that appears to open up a can of worms beyond the space for this review.

On p. 78 there is a typo: “BTH” instead of “BCH”

On p. 78 they write:

That’s what BTC, the original Bitcoin, promises with its depth of talent at Core and elsewhere. BTH can’t access such rich inventiveness because the community of money-focused bitcoin miners can’t attract the same kinds of passionate developers.

Strongly recommend removing this passage because it comes across as a one-sided marketing message rather than a balanced or neutral explanation using metrics. For instance, how active are the various code repositories for Bitcoin Core, Unlimited, and others? The next edition should attempt to measure how to measure “depth.”

For example, Bitmain has invested $50 million into a new fund focused on Bitcoin Cash called “Permissionless Ventures.” 2-3 years from now, what are the outcomes of that portfolio?

On p. 78 they write about permissioned blockchains:

Under these arrangements, some authority, such as a consortium of banks, choose which entities get to participate in the validation process. It is, in many respects, a step backward from Nakamoto’s achievement, since it makes the users of that permissioned system dependent once again, on the say-so of some trusted third party.

This is a common refrain throughout the book: that the true innovation was Bitcoin.

But it’s an apples-to-oranges comparison. Both worlds can and will co-exist because they were designed for different operating environments. Bitcoin cannot provide the same finality guarantees that “permissioned chains” attempt to do… because it was designed to be forkable. That’s not necessarily a flaw because Satoshi wasn’t trying to create a solution to a problem banks had. It’s okay to be different.

On p. 79 they write:

Most importantly, permissioned blockchains are more scalable than Bitcoin’s, at least for now, since their governance doesn’t depend upon the agreement of thousands of unidentified actors around the world; their members can simply agree to increase computing power whenever processing needs rise.

This doesn’t make sense at all. “Permissioned chains” in the broadest sense, do not use proof-of-work. As a result, there is no computational arms race. Not once have I been in a governance-related meeting involving banks in which they thought the solution to a governance-related issue was increasing or decreasing computational power. It is a non sequitur and should be removed in the next edition.

Also, there are plenty of governance issues involving “permissioned chains” — but those are typically tangential to the technical challenges and limitations around scaling a blockchain.

On p. 79 they write:

To us, permissionless systems pose the greatest opportunity. While there may well be great value in developing permissioned blockchains as an interim step toward a more open system, we believe permissionlessness and open access are ideals that we should strive for – notwithstanding the challenges exposed by Bitcoin’s “civil war.”

The authors repeat this statement in a couple other areas in the book and it doesn’t really make sense. Why? Because it is possible for both operating environments to co-exist. It doesn’t have to be us versus them. This is a false dichotomy.

Also, if any of these “permissioned chains” are actually put into production, it could be the case that end users could have “open access” to the platform, with the exception of participating in the validation of blocks. That’s pretty much how most coin users experience a cryptocurrency network today (e.g., via permissioned endpoints on Coinbase).19

On p. 80 they write:

The problem was that Bitcoin’s single-purpose currency design wasn’t ideally suited for these non-currency applications.

A side note maybe worth mentioning in a footnote is that Satoshi did attempt to build a marketplace early on but gave up.

On p. 81 they mention Nick Szabo with respect to smart contracts. Could be worth exploring the work of Martín Abadi which predates Szabo (the idea of distributed programs that perform authorizations predates Szabo’s “smart contracts”).  Mark S Miller has also done work in this area.

On p. 82 they write about Ethereum:

“Android for decentralized apps.” It would be an open platform much like Google’s smartphone operating system, on which people could design any new application they wanted and run it, not on a single company-owned server but in a decentralized manner across Ethereum’s ownerless network of computers.

This is probably not the best analogy because there is a difference between Google Android and Android Open Source Project. One of them includes proprietary tech. Also, Google can and does add and remove applications from the Play store on a regular basis based on its terms and conditions.

Lastly, someone does in fact own each of the computers that constitute the Ethereum blockchain… mining farms are owned by someone, mining pools are owned by someone, validating nodes are owned by someone. And so forth.

On p. 82 they write about Vitalik Buterin:

Now he was building a universally accessible, decentralized global supercomputer.

The next edition should drop the “supercomputer” verbiage because the Ethereum chain is only as powerful as the least powerful mining pool node… which in practice is typically a common computer located in a cloud provider such as AWS. This isn’t something like Summit over at Oak Ridge.

On p. 82 they write:

Now, with more than six hundred decentralized applications, or Dapps, running on Ethereum, he is looking vindicated. In just the first eleven months of 2017, the system’s internal currency, ether, rose from just over $8 to more than $400. By then the entire market cap for ether stood at $39 billion, a quarter that of Bitcoin’s. The success has made the wunderkind Buterin an instant multi-millionaire and turned him into a cultlike figure for the holders of ether and related tokens who’ve become rich.

The next version of the book should explicitly spell out what are the metrics for success. If it is solely price of a coin going up, what happens when the price of the coins goes down like it has in the past year?

For instance, ether (ETH), peaked in mid-January at around $1,400 and has been hovering near $100 the past several weeks. Does that mean Vitalik is no longer vindicated? Also, what is he vindicated from?

Lastly, it would be worth exploring in the next edition what Dapps are currently being used on a regular basis. As of this writing, the most popular Dapps are gambling apps (like proof-of-weak-hands / FOMO3D) and a few “decentralized exchanges” (DEX).

On p. 82 they write:

Ethereum co-founder Joseph Lubin only added to the complexity when he setup ConsenSys, a Brooklyn-based think tank-like business development unit tasked with developing new use cases and applications of the technology.

ConsenSys markets itself as a “venture studio” — a bit like YCombinator which incubates projects and provides some seed financing to get it off the ground. These projects are typically referred to as “spokes” (like a hub-and-spoke model).  As of this writing there are over 1,100 employees spread across several dozen spokes.  There is more to it than that and it would be interesting to see it explored in the next edition.

On p. 83 they write:

For example, the Parity Wallet, which was designed by Ethereum co-founder and lead architect Gavin Wood as a way to seamlessly engage, via a browser, with Ethereum smart contracts, lost $30 million in a hack.

Actually, Parity had a couple issues in 2017 and it is likely that the book may have been sent to publication around the same time the bigger problem occurred on November 13, 2017. The second one involved a Parity-developed multisig wallet… and $150 million in ether that is now locked away and cannot be accessed (barring a hardfork). Most developers — including those at Parity — characterize this instance as a “bug” that was accidentally exploited by a developer.

On p. 84 they write:

These kinds of dynamics, with large amounts of money at stake, can foster concerns that founders’ interests are misaligned with other users. Ethereum’s answer was the not-for-profit Ethereum Foundation, which was tasked with managing the pool of ether and other assets from the pre-mine and pre-sale- a model since used by many of the ICO token sales.

It would be interesting to explore how this foundation was created and how it evolved and who manages it today. For instance, at one point in 2014 there were conversations around creating a commercial, for-profit entity led in part by Charles Hoskinson who later left and founded Cardano.

On p. 85 they write about The DAO:

After a few modest coding changes failed, they settled on a drastic fix: Ethereum’s core developers “hard-forked” the Ethereum blockchain, implementing a backward-incompatible software update that invalidated all of the attacker’s transactions from a certain date forward. It was a radical move. To many in the cryptocurrency community, it threw into question Ethereum’s all-important claim to immutability. If a group of developers can force a change in the ledger to override the actions of a user, however unsavory those actions are, how can you trust that ledger won’t be tampered with or manipulated again in the interest of one group over another? Does that not destroy the whole value proposition?

This passage should probably be revised because of the usage of the word immutable.

Also, it could be argued that Bitcoin Core and other “core” groups act as gate keepers to the BIP process (or its equivalent) could lobby on behalf of special interest groups to push specific code changes and/or favor certain outcomes on behalf of specific stakeholders.

In either case, it is the miners that ultimately install and use the code. While some developers (like Bitcoin Core) are highly influential, without miners installing and running software, the rules on the network cannot be changed.

See Sufficiently Decentralized Howeycoins.

On p. 85 they write:

Well, in many respects, the Ethereum team operated as policymakers do during real-world crises. They made hard decisions that hurt some but were ultimately taken in the interests of the greater good — determined, hopefully, through as democratic a process as possible. The organizers went to great lengths to explain and gain support for the hard fork.

The next edition should strive to be more specific here: what exactly made the decision making around the hard fork democratic. Who participated, who didn’t participate. And so forth.

Continuing on p. 85:

And, much like the Segwit2x and other Bitcoin reform pro-miners didn’t accept it. For all intents and purposes, the fix was democratic – arguably, much more so than non-participatory democratic models through which crisis policymaking is enacted by national governments. And since Ethereum is more of a community of software engineers than of cryptocurrency investors, it was less contentious than Bitcoin’s struggle over hard-fork proposals.

This makes very little sense as it is written because the authors don’t define or specify what exactly made any of the decision making democratic. Who was enfranchised? Who got to vote and make decision? Also, how do the authors know that Ethereum is “more of a community of software engineers than of cryptocurrency investors.” Is there any hard numbers to back that assertion up?

And lastly how do we measure the level of contentiousness? Is there an objective measure out there?

On p. 85 they write about Ethereum Classic:

This created much confusion and some interesting arbitrage opportunities – as well as some lessons for bitcoin traders when their own currency split two years later – but it can also be viewed as the actions of a dissenting group non-violently exercising their right to secede. More than a year later, Ethereum Classic is still around, though it trades at a small fraction of Ethereum’s value, which means The DAO attacker’s funds – whose movements on the public Ethereum blockchain have been closely watched – are of lower value than if they’d been preserved in ETH.

I don’t think we can really say for sure how much the The DAO fund (and child DAO fundss) would be worth since that is an alternative timeline.

Also, there are some vocal maximalists that have created various Ethereum-branded tribes which are okay with The DAO attacker having access to those funds. Will be interesting to see if there are any sociological studies to reference in a new edition.

On p. 86 they write:

These hacks, and the scrambles to fix them, seem nuts, right? But let’s put them in perspective. First, is this monetary chaos anything less unsettling than the financial crisis of 2008? Or the audacity of the subsequent Wall Street trading scandals?

This is a whataboutism. Also, strangely the authors are saying the bar for judgement is as low as the financial engineering and socialized loses of the GFC. Isn’t the narrative that cryptocurrencies are supposed to be held to a higher standard because the coin creators seek to architect a world that doesn’t have arbitrary decision making?

On p. 87 and 88 they write:

When the FBI auctioned the 144,000 bitcoins (worth $1.4 billion as of late November 2017) that it seized from Ross Ulbricht, the convicted mastermind of the Silk Road illicit goods marketplace, those coins fetched a significantly higher price than others in the market. The notion was that hey had now been “whitewashed” by the U.S. government. In comparison, other bitcoins with a potentially shady past should be worth less because of the risk of future seizure. That’s hardly fair: imagine if the dollar notes in your wallet were hit with a 10 percent tax because the merchant knew that five years ago, unbeknownst to you, they had been handled by a drug dealer. To avoid these distortions and create a cryptocurrency that works more like fungible cash, Wilcox’s Zcash uses sophisticated “zero-knowledge proofs” to allow miners to prove that holders of the currency aren’t’ double-spending without being able to trace the addresses.

What the authors likely mean by “whitewashed” is probably “cleansed.” In the US there have been discussions on how this could take place via the existing Uniform Commercial Code (see Section 3.3). To date, there hasn’t been a specific update to the UCC regarding this issue (yet) but it has been discussed in multiple places such as Bitcoin’s lien problem.

As far as the “fairness” claim goes, it could be worth revising the passage to include a discussion around nemo dat quod non habet and bona fide purchasers. Legal tender is explicitly exempt because of the very scenario the authors describe. But cryptocurrencies aren’t legal tender, so that exemption doesn’t exist (yet).

Lastly, only “shielded” transactions in Zcash provide the functionality described in the passage above… not all transactions on Zcash utilize and opt-in to this mode.

On p. 89 they describe EOS. Worth updating this section because to-date, they have not achieved the 50,000 transactions per second on mainnet that is stated in the book. There has also been a bit of churn in the organizations as Ian Grigg (named in the book) is no longer at the organization, nor are employees 2 through 5.

On p. 90 they write about proof-of-stake:

One criticism of the model has been that without the electricity consumption costs of proof of work, attackers in a proof-of-stake system would simply mine multiple blocks to boost their chances of inserting a fraudulent one into the ledger.

This “nothing at stake” scenario is a valid criticism of some early attempts at building a proof-of-stake mechanism but isn’t valid for some other proposals (such as, theoretically, “Slasher“).

Chapter 4

On p. 91 they write:

It was clear that investors bought into Brave’s promise of a token that could fundamentally change the broken online advertising industry.

How do we know this was clear to investors? Anecdotally it appears that at least some investors participated as speculators, with the view that the token price would increase. A future edition should probably change the wording unless there is a reference that breaks down the motivation of the investors.

What about Civil?

On p. 96 they write about StorJ

Other models include that of the decentralized computer storage platform Storj, which allows hard-drive-starved users to access other’s excess space in exchange for storj tokens.

Could be worth pointing out that Storj had two public ICOs and it is still unclear if that will result in legal or regulatory issues. Putting that aside, currently Storj has just under 3,000 users. This stat is worth looking at again in future versions, especially in light of less-than-favorable reviews.

On p. 98 they talk about BAT:

The point is that it’s all on the community – the society of BATs users – not on external investors, to bear the risk of that happening

[…]

Once the 1 billion tokens had sold out in twenty-four seconds, it was revelead that only 130 accounts got them and that the biggest twenty holdings covered more than two-thirds of the total. Those distortions left many investors angry.

There is currently a debate around whether these types of ICOs in 2017 (and earlier) were investment contracts (e.g., securities). In the US, this has led to more than a hundred subpoenas with some quiet (and not so quiet) enforcement action.

The language used in this chapter (and elsewhere in the book) suggests that the participants involved in the ICO were investing with the expectation of profit in a common enterprise managed by the Brave team. Worth revisiting in a future edition.

On p. 102 they write about ERC20 tokens:

But because of the ERC-20 solution, they didn’t need to develop their own blockchain with all the independent computing power that would require. Instead, Ethereum’s existing computing network would do the validation for them.

This piggybacking may be initially helpful to token issuers but:

  1. it is a form of centralization which could have legal and regulatory consequences with respect to being viewed as not sufficiently decentralized
  2. in the long run this could create a top-heavy issue as miners are not being compensated in proportion to the amount of value they are trying to secure (see Section 2.1)

On p. 102 they write:

This low-cost solution to the double-spending challenge launched a factory of ICOs as issuers found an easy way to tap a global investing community. No painful negotiations with venture capitalists over dilution and control of the board. No wining and dining of Wall Street investment banks to get them to put their clients on the order book. No wait for SEC approval. Just straight to the general public: here are more tokens; they’re cool, buy them. It was a simple, low-cost formula and it lowered the barrier to entry for some brilliant innovators to bring potentially world-changing ideas to market. Unfortunately, it was also a magnet for scammers.

Could be worth updating this section to include more details on the scams and fraud that took place throughout 2017. Many of the tokens that raised capital from outside investors during this time not only have not delivered a working product, but in most cases, the token underperformed both ether and bitcoin.

Also bears mentioning that beginning in late 2017 through the time of this writing, there was a clear divergence between public sale ICOs and private sale of tokens… the latter of which basically involves a private placement to accredited investors, including the same type of funds that the passage above eschewed.

On p. 104 they write about Gnosis:

With the other 95 percent controlled by the founders, those prices meant that the implied valuation of the entire enterprise stood at $300 million – a figure that soon rose above $1 billion as the Gnosis token promptly quadrupled in price in the secondary market. By Silicon Valley standards, it meant we had the first ICO “unicorn.”

Actually, Ethereum did an ICO back in 2014 — and as the price of ether (measured in USD) increased, it is likely that ETH could be seen as the first ICO “unicorn.” But that’s not really an apples-to-apples comparison though because ETH (or Gnosis) holders do not have say, voting rights, which equity holders of a traditional company would.  Plus, “marketcap” is a poorly defined metric in the coin world (see Section 6).

On p. 104 and 105 they write:

One day, Paul received a call from a businessman who’d read one of his stories in The Wall Street Journal and wanted more information about how to get started and where to get legal advice. The man said he’d tried to reach the lawyer Marco Santori, a partner at the law firm Cooley who’d been quoted in the story, but couldn’t get through. Santori later told us that he was getting so many calls about ICOs, he simply couldn’t answer them all.

In January 2018, the SEC Chairman gave a public speech in which he singled out the “gatekeepers” (legal professionals) regarding the advice they gave clients. Could be worth revisiting who the main ICO-focused lawyers and lawfirms were during this time period and where they are now and if there were any enforcement actions undertaken.

On p. 105 they write:

“Most of these will fail,” said Olaf Carlson-Wee, the CEO of Polychain Capital, citing poorly conceived ideas and a lack of coding development. “Most of these are bad ideas from the beginning.” That said, Polychain is an investment firm that Carlson-Wee founded expressly to invest in these new projects. In fact, most of the people investing seemed to be taking a very VC-like approach to it. They understood that most of the projects would fail. They just hoped to have a few chips down on the one winner.

Carlson-Wee’s comments seem accurate insofar as the inability of many projects to execute and deliver based on the narratives each pitched investors. However, it could be worth digging into Polychain itself, which among other drama, may have “flipped” tokens due to a lack of lock-up periods.20 21

On p. 108 and 109 they compare Blue Apron and block.one (EOS). Even though it’s not an apples-to-apples comparison could be worth revisiting this in the future because of the churn and drama with both organizations.

Pages 110 and 111 aged quickly as most of the ICO rating websites and newsletters have fallen to the wayside due to payola scandals and inability to trust the motivations behind the ratings.

Similarly, the authors describe accredited investors and SAFTs. There is a typo here as the authors likely mean that an individual needs to have an income of $200,000 not $200 million. The SAFT model has fallen out of favor for several reasons that could be explored in a future version.22

On p. 112 they write about ASICs:

But developers of Vertcoin have shown that it’s also possible to create a permanent commitment to ASIC-resistance by introducing something from the real, non-digital world of social organizations: a pact. If the platform’s governing principles include a re-existing commitment from all users of the coin to accept a fork – a change to the code – that would add new, ASIC-resistant elements as soon as someone develops such a chip, the coin’s community can protect the distributed, democratic structure of a GPU-led mining network.

Putting aside the fanciful ASIC-resistance utopia that is peddled by some coin issuers, the passage above raises a couple flags.

Who gets to decide what the governing principles are? Do these principles get to change overtime? If the answer is yes to either, who are those decision makers and how are they chosen? So far, there has not really been any “democratic” way of participating in that decision making process for any cryptocurrency. How can that change in the future?

Why is a GPU-led mining network considered more democratic? In practice, most of these farms are located in basically the same type of structure and geography as ASIC-based equipment… in some cases they are swapped out over time. In light of the Sia coin fork… which clearly shows favoritism at play, a future edition of the book could include a chart or spectrum explaining how the mining of one coin more or less democratic versus another.

On p. 113 there is more discussion of ICOs and token sales as it relates to “open protocols” but in practice it has largely been reinventing the same intermediated system we have to do, but with fewer check and balances or even recourse for retail investors.

On p. 114 they speculate that:

This speaks to our broader notion that tokens, by incentivizing the preservation of public goods, might help humanity solve the Tragedy of the Commons, a centuries-in-the-making shift in economic reality.

That’s a big claim that requires evidence to back it. Let’s revisit next time.

On p. 115 they write:

Much like Wall Street bond traders, these will “make markets” to bring financial liquidity to every countervailing pair of tokens – buying some here and selling other there – so that if anyone wants to trade 100 BATs for a third of a Jackson Pollock, they can be assured of a reasonable market price.

But how does a blockchain actually do this? They mention Lykke as an startup that could help match tokens at a fair price… but to-date there is nothing listed on Lykke that really stands out as different than what you could fine at other cryptocurrency exchanges. Perhaps a future version of the book could walk the reader step-by-step through how a blockchain can enable this type of “fairness” whereas previous technology could not.

On p. 116 they discuss several projects they label as “interoperability” initiatives including Interledger, Cosmos, sidechains, and Lightning. It may be helpful for the reader to see a definition for what “interoperability” means because each of these projects — and its supporters — may be using the term in a different way. Perhaps a comparison chart showing the similarities and differences?

On p. 117 they write:

In an age where U.S. presidents peddle “alternative facts” and pundits talk openly about our “post-truth society,” using the truth machine to put a value on honesty sounds appealing.

On the face of it, that end goal seems like more than a stretch because it’s unclear how a blockchain (today) controls off-chain behavior. The example they go on to use is Augur. But Augur is a futures market and there are many of those already in existence. How would Augur or a futures market “with a blockchain” prevent politicians from lying? Walking through this process could be helpful to the reader.

On p. 118 they mention Erick Miller’s investment fund called CoinCircle… and a couple of “special value tokens” called Ocean Health Coin and Climate Coin.

Maybe worth following up in the next edition because neither has launched and each of the pitches sounds very handwavy, lacking in substance. Also, one of the ICOs CoinCircle advised – Unikrn – is part of a class action lawsuit.

Most of p. 119 and 120 come across as more political discourse, which is fine… but unclear how a blockchain in some form or fashion could directly impact the various issues raised. Perhaps the next edition could include a chart with a roadmap in how they see various projects achieving different milestones?

Chapter 5

If the reader is unfamiliar with IoT then the first 1/3 of chapter five is pretty helpful and informative.

Then there are some speedbumps.

On p. 130 they write about authenticating and verifying transactions involving self-driving cars:

The question, though, is: would this transaction be easily processed if it were based on a private blockchain? What are the chances, in a country of more than 230 million cars, that both vehicles would belong to the same closed network run by a group of permissioned validating computers? If they weren’t part of the same network, the payment couldn’t go through as the respective software would not be interoperable.

This is a red herring. Both “permissioned” and “permissionless” blockchains have similar (though not identical) scaling challenges. And interoperability is a separate issue which has been a known hurdle for years.

In fact, recently the Hyperledger Fabric team announced that it now supports the EVM. This comes a couple weeks after Hyperledger joined EEA as a member and vice-versa. Maybe none of these immediate efforts and experiments amount to many tangible outputs in the short-run but it does show that several ecosystems are attempting to be less tribal and more collaborative.

Also, the issue of payments is also separate from a blockchain-related infrastructure. Payments is a broad term and can include, for instance, a proposed central bank digital currency (e.g., “cash on ledger”)… or it can involve plugging into existing external payment systems (like Visa or ACH). It would be helpful if the next edition was more specific.

Continuing on p. 130 they write:

Other car manufacturers might not want to use a permissioned verification system for which, say GM, or Ford, is the gatekeeper. And if they instead formed a consortium of carmakers to run the system, would their collective control over this all-important data network create a barrier to entry for newer, startup carmakers? Would it effectively become a competition-killing oligopoly?

These are possible scenarios and good questions but this is kind of an unfair characterization of consortia. Let’s flip it around: why shouldn’t carmakers be allowed to build their own blockchains or collaborate with others who do? Do they need someones permission to do so? Depending on local regulations, maybe they do need permission or oversight in a specific jurisdiction. That could be worth exploring in another version.

On this topic they conclude that:

A truly decentralized, permissionless system could be a way around this “walled-garden” problem of siloed technology. A decentralized, permissionless system means any device can participate in the network yet still give everyone confidence in the integrity of the data, of the devices, and of the value being transacted. A permissionless system would create a much more fluid, expansive Internet of Things that’s not beholden to the say-so and fees of powerful gatekeepers.

That sounds well and good and a bit repetitive from earlier passages which said something similar. The passage aboves seems to be redefining what make something “permissioned” and “permissionless.” What does it mean for every device participate on a ‘decentralized, permissionless system’? Does that mean that each device is capable of building and/or creating a new block? If so, how do they choose which chain to build on?

And why is it so hard to imagine a world in which open-sourced platforms are also permissioned (e.g., validation is run by known, identifiable participants)… and these platforms are interoperable. Could be worth exploring because that scenario may be just as likely as the ones presented in this chapter.

Lastly, how does a “permissionless system” create a more fluid IoT world? These claims should be explored in more detail next time.

On p. 131 and 132 they write about IOTA, a specific project that markets itself as a purpose-built blockchain for IoT devices. But that project is beset by all kinds of drama that is beyond the scope of this review. Suffice to say that the February software build of IOTA cannot be run on most resource constrained IoT devices.

On p. 138 they mention in passing:

Exergy is a vital concept for measuring energy efficiency and containing wasteful practices; it doesn’t just measure the amount of energy generated but also the amount of useful work produced per each given amount of energy produced.

Fun fact: back in May 2014 I wrote an in-depth paper on Bitcoin mining that utilized the concept of “exergy.”

On pages 139-145 they talk about a number of vendors, use-cases, and platforms typically centered around the supply chain management world. Would be interesting to see which of these gained traction.

On p. 147 they write:

Blockchain-proven digital tokens point to what blockchain consultant and entrepreneurs Pindar Wong calls the “packetization of risk.” This radical idea introduces a negotiable structure to different phases of the chain. Intermediate goods that would otherwise be encumbered by a pre-established chain of unsettled commitments can instead be put out to bid to see if other buyers want to take on the rights and obligations associated with them.

It would be useful in this explanation to have a diagram or two to explain what Pindar proposes because it is a bit hard to follow.

On p. 147 they write:

This is why many people believe that the concept of a “circular economy” – where there is as much recycling as possible of the energy sources and materials in production – will hinge on the transparency and information flows that blockchain systems allow.

Does this mean that other “non-blockchain” systems do not allow transparency and information flows?

On p. 147 they write:

The principal challenge remains scaling. Open-to-all, permissionless blockcahins such as Bitcoin’s and Ethereum’s simply aren’t ready for the prime time of global trade. If all of the world’s supply chains were to pass their transactions through a permissionless blockchain, there would need to be a gargantuan increase in scalability, either off-chain or on-chain. Solutions may come from innovations such as the Lightning Network, discussed in chapter three, but they are far from ready at this stage.

Can we propose a moratorium on additional usages of “Lightning” in the next edition unless there is significant adoption and usage of it? Also, it is unclear why the worlds supply chains should for some reason be connected onto an anarchic chain: what is the benefit of putting this information onto a chain whose operators are unaccountable if a fork occurs?

On p. 148 they write:

Instead, companies are looking at permissioned blockchains, which we’ll discuss in more detail in chapter six. That makes sense because many big manufacturers think of their supply chains as static concepts, with defined members who have been certified to supply this or that component to a finished product. But in the rapidly changing world of the Fourth Industrial Revolution, this might not be the most competitive option. Emerging technologies such as additive manufacturing, where production can be called up anywhere and delivered by anyone with access to the right software files and a sufficiently configured 3D printer, are pointing to a much more fluid, dynamic supply-chain world, where suppliers come and go more easily. In that environment, a permissionless system would seem necessary. Once scaling challenges are resolved, and with robust encryption and reliable monitoring systems for proving the quality of suppliers work, permissionless blockchain-based supply chains could end up being a big leveler of the playing field for global manufacturing.

There are way too many assumptions in this paragraph to not have somewhere written that there are many assumptions.

Is a blockchain really needed in this environment? If so, a future edition should explain how a 3D printer would be more useful connected to a blockchain than some other network. Also, this seems to be a misuse of the term “permissionless” — why does the network need to be anarchic? How would the supply chain benefit from validators who are unknown?

On p. 148 they write:

It will be difficult to marry that old-world body of law, and the human-led institutions that manage it, with the digital, dematerailized, automated, and de-nationalized nature of blockchains and smart contracts.

How are blockchains “de-nationalized”? As of this writing there are probably a couple dozen publicly announced state-sponsored blockchain platforms of some kind (including various cryptocurrency-related initiatives). This phrase should probably be removed.

On p. 150 they write about the Belt and Road Blockchain Consortium:

Hence the opportunity for blockchain technologies to function as an international governance system. Hong Kong’s role will be important: the territory’s British legal traditions and reputation for respecting property rights have made it a respected safehouse for managing intellectual property and other contractual obligations within international trade. If the blockchain is to be inserted into global trade flows, the region’s bridging function may offer the fastest and most impactful route. For Hong Kong residents who want the territory to retain its British legal traditions, that role could be a vital protection against Beijing undermining them.

From publicly available information it is unclear if the Belt and Road Blockchain Consortium has seen much traction. In contrast, the Ping An-led HKMA trade finance group has turned on its “blockchain” platform.

Chapter 6

On p. 151 they wrote about a public event held on August 5, 2015:

As far as bankers were concerned, Bitcoin had no role to play in the existing financial system. Banking institutions thrive on a system of opacity in which our inability to trust each other leaves us dependent on their intermediation of our transactions. Bankers might give lip service to reforming the inner workings of their system, but the thought of turning it over to something as uncontrollable as Bitcoin was beyond heresy. It wasn’t even conceivable.

This is a bit of a red herring. I’ve been in dozens of meetings with banks and financial institutions over the past four years and in general there is consensus that Bitcoin – the network – is not fit for purpose as financial market infrastructure to handle regulated financial instruments. Why should banks process, say payments, on a network in which the validators are neither accountable if a problem occurs nor directly reachable in case users want to change or upgrade the software? Satoshi wasn’t trying to solve interbank-related issues between known participants so this description shouldn’t be seen as a slight against Bitcoin.

Now, bitcoin, the coin, may become more widespread in its usage and/or ownership at banks. In fact, as of this writing, nearly every large commercial bank owns at least a handful of cryptocurrencies in order to pay off ransomware issues. But the passage above seems to conflate the two.

See also: Systemically important cryptocurrency networks

On p. 151 they write:

At the same time, committed Bitcoin fans weren’t much interested in Wall Street, either. Bitcoin, after all, was designed as an alternative to the existing banking system. An improvement.

This is a bit revisionist. For instance, the original whitepaper uses the term “payment” twelve times. It doesn’t discuss banking or specific product lines at banks. Banks do a lot more than just handle payments too. Satoshi attempted to create an alternative payment system… the “be your own bank” narrative is something that other Bitcoin promoters later added.

On p. 152 they discuss the August 2015 event:

In essence, Symbiont was promising “blockchain without bitcoin” – it would maintain the fast, secure, and cheap distributed network model, and a truth machine at its center that validated transactions, but it was not leaderless, permissionless, and open to all. It was a blockchain that Wall Street could control.

This has some hyperbole in it (does “Wall Street” really control it?) but there is a kernel that the authors could expand on in the next version: vendor-dependence and implementation monopoly. In the example above, the authors could have pointed out that the same market structure still exists, so what benefit does a blockchain provide that couldn’t already be used? In addition to, what do the authors mean by “cheap distributed network model” when they have (rightly) mentioned that proof-of-work is resource intensive? As of this writing, Symbiont uses BFT-SMaRt and doesn’t use PoW.

Also, the authors seem to conflate “open to all” with blockchains that they prefer. Yet nearly all of the blockchains they seem to favor (like Bitcoin) involve relatively centralized gatekeeping (BIP process) and permissioned edges via exchanges.

Again, when I wrote the paper that created this distinction in 2015, the “permissionless’ness” is solely an attribute of mining not on sending or receiving coins.

On p. 153 they write:

But these permissioned systems are less open to experiments by computer engineers, and access rights to the data and software are subject to the whim of the official gatekeeper. That inherently constrains innovation. A private blockchain, some say, is an oxymoron. The whole point of this technology is to build a system that is open, accessible, and public. Many describe them with the generic phrase “distributed ledger technology” instead of “blockchain.”

This is why it would be important for the authors to explicitly mention what “blockchain” they are referring to. In many cases their point is valid: what is the point of using a blockchain if a single entity runs the network and/or monopolizes the implementation?

Yet their argument is diminished by insisting on using loaded phrases like “open” and “public.” What does it mean to be open or public here? For instance, in order to use Bitcoin today, you need to acquire it or mine it. There can be substantial entry and exit costs to mining so most individuals typically acquire bitcoins via a trusted, permissioned gateway (an exchange). How is that open?

Lastly, the euphemism of using the term “blockchain” instead of using the term “bitcoin” dates back to late 2015 with investors like Adam Draper explicitly stating that was his agenda. See: The great pivot?

On p. 156 they write:

Though Bitcoin fans frowned upon permissioned blockchains, Wall Street continued to build them. These tweaked versions of Bitcoin shared various elements of the cryptocurrency’s powerful cryptography and network rules. However, instead of its electricity-hungry “proof-of-work” consensus model, they drew upon older, pre-Bitcoin protocols that were more efficient but which couldn’t achieve the same level of security without putting a centralized entity in charge of identifying and authorizing participants.

There is a few issues with this:

  1. Which Bitcoin fans are the authors referring to, the maximalists?
  2. Proof-of-work is not an actual consensus model
  3. There are newer Byzantine fault tolerant protocols such as HoneybadgerBFT which are also being used by different platforms

Their last sentence uses a false dichotomy because there are different security assumptions based on the targeted operating environment that result in tradeoffs. To say that Bitcoin is more or less secure versus say, an instance of Fabric is a bit meaningless because the users have different expectations that the system is built around.

On p. 157 they write about R3:

The biggest winner in this hiring spree was the research and development company R3 CEV, which focused on the financial industry. It sought to build a distributed ledger that could, on the one hand, reap the benefits of real-time securities settlement and cross-industry harmonization but, on the other, would comply with a vast array of banking regulations and meet its members’ proprietary interest in keeping their books private.

This seems like a dated pitch from a couple use cases from mid-2015 because by the time I departed in September 2017, real-time securities settlement wasn’t the primary use (for Corda) being discussed externally.

Also, the “CEV” was formally removed from the name about two years ago. See: A brief history of R3 – the Distributed Ledger Group

By the spring of 2017, R3 CEV had grown its membership to more than one hundred. Each member firm paid annual dues of $250,000 in return for access to the insights being developed inside the R3 lab. Its founders also raised $107 million in venture funding in 2017, mostly from financial institutions.

I don’t think the full details are public but the description of the funding – and what was exchanged for it – is not quite correct. The original DLG members got equity stakes as part of their initial investment. Also, as far as the Series A that was announced in May 2017, all but one of the investors was a financial institution of some kind.

On p. 157 they write:

Some of that money went to hire people like Mike Hearn, a once prominent Bitcoin developer who dramatically turned his back on the cryptocurrency community with an “I quit” blog post complaining about the bitter in fighting. R3 also hired Ian Grigg – who later left to join EOS – another prominent onetime rebel from the cryptocurrency space.

To be clear on the timing: Mike Hearn began working at R3 in October 2015 (along with James Carlyle).23 Several months later he published a widely discussed post about Bitcoin itself. Based on his public talks since January 2016, he still seems to have some passing interest in cryptocurrencies; he did a reddit AMA on /r/btc this past spring.

Also, Ian Grigg has since left EOS and launched a new startup, Chamapesa.

On p. 157 they write about me:

Before their arrival, R3 had also signed on Tim Swanson as research director. Swanson was a distributed ledger/blockchain analyst who was briefly enthused by Bitcoin but who later became disillusioned with the cryptocurrency’s ideologues. He became a vocal, anti-Bitcoin gadfly who seemed to delight in mocking its travails.

This is also revisionist history.

Not to dive too much into the weeds here – and ignoring everything pre-2014 – a quick chronology that could be added if the authors are looking to be balanced is the following:

Over the course of under four months, after doing market research covering a few dozen projects, I published Great Chain of Numbers in March 2014… which was a brief report that quickly became outdated.

Some of the feedback I received – including from Bob, an expert at a data analytics startup – was that I was too charitable towards the claims of cryptocurrency promoters at payment processors and exchanges.24 That is to say, Bob thought that based on analytics, the actual usage of a payment processor was a lot lower than what the executives from that processor told me. In retrospect, Bob was absolutely correct.

A couple months later I ended up – by accident – doing an interview on Let’s Talk Bitcoin. The original guest did not show up and while we (the co-hosts) were waiting, I ended up getting into a small debate with another co-host about the adoption and usage of cryptocurrencies like Bitcoin. You can listen to it here and read the corresponding long-read that provides more citations and supporting links to back up the comments I made in the podcast.

From this moment forward (June 2014) – because I fact-checked the claims and did not blindly promote cryptocurrencies – I quickly became labeled as a pariah by several of the vocal cryptotwitter personalities. Or as the authors of this book unfairly label me: “anti-Bitcoin gadfly.” To call this order of events “disillusionment” is also unfair.

Lastly, a quick fix to the passage in the book: I technically became a formal advisor to R3 at the end of 2014 (after their second roundtable in Palo Alto)… and then later in August 2015 came on full-time as director of market research (although I subsequently wore several different hats).

On p. 158 they write:

Of a similar breed was Preston Byrne, the general counsel of Eris Ltd., later called Monax which designed private blockchains for banks and a variety of other companies. When Byrne’s Twitter feed wasn’t conveying his eclectic mix of political positions – pro-Trump, anti-Brexit, pro-Second Amendment, pro-encryption, anti-software utopianism – or constant references to marmots (the Eris brand’s mascot), it poured scorn on Bitcoin’s fanatic followers. For guys like Swanson and Byrne, Bitcoin’s dysfunctional governance was a godsend.

Again, chronologically I met Preston online in early 2014. He helped edit and contributed to Great Chain of Numbers. Note: he left Eris last year and recently joined a US law firm.

This is an unfair description: “For guys like Swanson and Byrne, Bitcoin’s dysfunctional governance was a godsend.”

This is unfair for several reasons:

  • We were hardly the first people to spend time writing about the governance problems and frictions involved in cryptocurrencies. For instance this includes: Ray Dillinger, Ben Laurie, and likely dozens of others. Nor were we the only ones discussing it in 2014 and 2015.
  • Preston and I have also – separately – written and discussed issues with other cryptocurrencies and blockchains during that time frame… not just Bitcoin.

Thus to single us out and simultaneously not mention others who had similar views, paints us as some type of cartoonish villains in this narrative. Plus, the authors could have reached out to us for comment. Either way, the next version should attempt to fix the word choices and chronology.

I reached out to Preston Byrne and he provided a response that he asked to have included in a footnote.25

On p. 159 they write more about R3:

On the one hand, regulators were comfortable with the familiar membership of R3’s consortium: they were more accustomed to working with bankers than with T-shirt-and-jeans-wearing crypto-investors. But on the other, the idea of a consortium of the world’s biggest banks having say-so over who and what gets included within the financial system’s single and only distributed ledger conjured up fears of excessive banking power and of the politically unpopular bailouts that happened after the crisis. Might Wall Street be building a “too-big-to-fail” blockchain?

This is some strange criticism because many of the developers of Corda (and other pieces of software) wore casual and business casual attire while working in the offices.

Corda is not the “single and only distributed ledger” being used by enterprises. Nearly all of the banks that invested in R3 also invested in other competing entities and organizations including Axoni and Digital Asset. Thus the statement in the middle should be updated to reflect that R3 does not have some kind of exclusivity over banking or enterprise relationships.

Michael Casey has said multiple times in public (even prior to the existence of Corda) that R3 was a “cartel coin” or “cartel chain” — including on at least one panel I was on with him in January 2016.  This is during a time in which R3 did not have or sell any type of product, it was strictly a services-focused company.  Maybe the organization evolves in the future – there may even be some valid criticism of a mono-implementation or a centrally run notary – but even as of this writing there is no Corda Enterprise network up and running.26

Lastly, all of these banks are members of many different types of consortia and multilateral bodies. Simply belonging to or participating in organizations such as IOSCO does not mean something nefarious is afoot.

On p. 160 they write:

The settlement time is also a factor in a financial crisis, and it contributed to the global panic of 2008.

This is a good point and it would be great to go into further details and examples in the next edition.

On p. 160 they write:

This systemic risk problem is what drew Blythe Masters, one of the key figures behind blockchain innovation on Wall Street, into digital ledger technology; she joined Digital Asset Holdings, a blockchain service provider for the financial system’s back-office processing tasks, as CEO in 2014.

Two small quibbles:

  1. Pretty sure the authors meant to say “distributed” not “digital”
  2. Blythe Masters joined as CEO in March 2015, not in 2014

On p. 162 they write:

It’s just that to address such breakdowns, this new wave of distributed ledger system designers have cherry-picked the features of Nakamoto’s invention that are least threatening to the players in the banking system, such as its cryptographic integrity, and left aside its more radical, and arguably more powerful, features, especially the decentralized, permissionless consensus system.

This is revisionist history. Satoshi bundled together existing ideas and libraries to create a blockchain. He or she did not invent cryptography from the ground up. For more details, readers are encouraged to read “Bitcoin is worse is better” from Gwern Branwen. IT systems at financial institutions were (and are) already using various bits of cryptography, encryption, permissioning, data lakes, and distributed storage methods.

Furthermore, because the participants in the financial system are known, there is no reason to use proof-of-work, which is used in Bitcoin because the participants (miners) are unknown.

Lastly, the authors touch on it and do have a valid point about market structure being changed (or unchanged) and should try to expand that in the next edition.

On p. 162 they write:

The DTCC, which settles and clears the vast majority of US stock and bond trades, handles 10,000 transactions per second; Bitcoin, at the time of this writing, could process just seven. And as strong as Bitcoin’s value – and incentive-based security model has proven to be, it’s not at all clear that a few hundred million dollars in bitcoin mining costs would deter rogue traders in New York or London when government bond markets offer billion dollar fraud opportunities.

Firstly, at the time of this writing, on-chain capacity for Bitcoin (even with Segwit activated) is still less than seven transaction per second.

Second, it is not clear how “rogue traders” in New York or London would be able to directly subvert the mining process of Bitcoin. Are the authors thinking about the potential security delta caused by watermarked tokens and colored coins?27

On p. 162 they write:

Either way, for the firms that R3 and Digital Asset serve – managers of the world’s retirement funds, corporate payrolls, government bond issuances, and so forth -these are not security risks they can afford. For now – at least until solutions as Lightning provide large-scale transaction abilities – Bitcoin isn’t anywhere near ready to service Wall Street’s back-office needs.

But Bitcoin is not fit for purpose for regulated financial institutions. Satoshi wasn’t trying to solve back-office problems that enterprises had, why are the authors intent on fitting a round peg in a square hole?

Also, Lightning isn’t being designed with institutions in mind either. Even if one or more of its implementations becomes widely adopted and used by Bitcoin users, it still doesn’t (currently) meet the functional and non-functional requirements that regulated institutions have. Why market it as if it does?

On p. 162 they write:

There are also legal concerns. R3’s Swanson has argued that the mere possibility of a 51 percent attack – that scenario in which a minder gains majority control of a cryptocurrency network’s computing power and fraudulently changes transactions – means that there can never be “settlement finality” in a cryptocurrency transaction. That of perpetual limbo is a scenario that Wall Street lawyers can’t live with, he said. We might retort that the bailouts and various other deals which banks reversed their losses during the crisis make a mockery of “finality,” and that Bitcoin’s track record of irreversibility is many magnitudes better than Wall Street’s. Nonetheless, Swanson’s catchy critique caught on among bankers. After all, he was preaching to the choir.

So there are a few issues with this statement.

I did not invent the concept of “settlement finality” nor did ‘Wall Street lawyers.’  The term dates back decades if not centuries and in its most recent incarnation is the product of international regulatory bodies such as BIS and IOSCO. Regulated financial institutions – starting with financial market infrastructures – are tasked with reducing risk by making sure the payment systems, for instance, are irreversible. Readers should peruse the PFMIs published in 2012.

The next issue is, they make it sound like I lobbied banks using some ‘gotcha’ loophole to scare banks from using Bitcoin. Nowhere in my presentations or speeches have I justified or handwaved away the (criminally?) negligent behavior of individuals at banks that may have benefited from bailouts. This is another unfair characterization that they have painted me as.

To that point, they need to be more specific about what banks got specific transactions reversed. Name and shame the organizations and explain how it would not be possible in a blockchain-based world. Comparing Bitcoin with ‘Wall Street’ doesn’t make much sense because Bitcoin just handles transfers of bitcoin, nothing else. ‘Wall Street’ encompasses many different product lines and processes many other types of transactions beyond payments.

All in all, painting me as a villain is weak criticism and they should remove it in their next edition.

On p. 163 they write about permissioned ledgers:

They’re not racing each other to win currency rewards, which also means they’re not constantly building a wasteful computing infrastructure a la Bitcoin.

They say that as if it is a good thing. Encourage readers to look through the energy costs of maintaining several different proof-of-work networks that handle almost no commerce.

On p. 163 they write:

That’s why we argue that individuals, businesses, and governments really need to support the various hard-core technical solutions that developers are pursuing to help permissionless ledgers like Bitcoin and Ethereum overcome their scaling, security, and political challenges.

This agenda has been pretty clear throughout the book, though it may be more transparent to the reader if it comes earlier in chapter 1 or 2.

From a historical perspective this argument doesn’t make much sense. If Karl Benz had said the same thing in the 19th century about getting engineers to build around his car and not others. Or the Wright Brothers had been ‘more successful’ at suing aerospace competitors. Why not let the market – and its participants – chose to work on platforms they find of interest?

On p. 165 they write about the MIT Digital Currency Inititative but do not disclose that they solicit financial support from organizations such as central banks, some of whom pay up to $1 million a year to collaborate on research projects. Ironically, the details of this program are not public.

On p. 167 they write:

A broad corporate consortium dedicated to a mostly open-source collaborative approach, Hyperledger is seeking to develop nothing less than a common blockchain / distributed ledger infrastructure for the global economy, one that’s targeted not only at finance and banking but also at the Internet of Things, supply chains, and manufacturing.

The next edition should update that passage. All of the projects incubated by the Hyperledger Project are open sourced, there is no “mostly.” And not all of these projects involve a blockchain, some involve identity-related efforts.28

On p. 169 and again on p. 172 the authors quote Joi Ito who compares TCP/IP with “walled gardens” such as AOL and Prodigy.

That is comparing apples-and-oranges. TCP/IP is a suite of protocols, not a business. AOL and Prodigy are businesses, not protocols. AOL used a proprietary protocol and you could use TCP/IP via a gateway. Today, there are thousands of ‘walled gardens’ called ISPs that allow packets to jump across boundaries via handshake agreements. There is no singular ‘Internet’ but instead there are thousands of intranets tied together using common standards.

Readers may be interested in: Intranets and the Internet

On p. 173 they write:

Permissionless systems like those of Bitcoin and Ethereum inherently facilitate more creativity and innovation, because it’s just understood that no authorizing company or group of companies can ever say this or that thing cannot be built.

How are they measuring this? Also, while each platform has its own terms of service, it cannot be said that you need explicit permission to build an application on top of a specific permissioned platform. The permissioning has to do with how validation is handled.

On p. 173 they write:

It’s the guarantee of open access that fosters enthusiasm and passion for “permissionlessness” networks That’s already evident in the caliber and rapid expansion in the number of developers working on public blockchain applications. Permissioned systems will have their place, if nothing else because they can be more easily programmed at this early stage of the technology’s life to handle heavier transaction loads. But the overarching objective for all of us should be to encourage the evolution of an open, interoperable permissionless network.

This is just word salad that lacks supporting evidence. For the next edition the authors should tabulate or provide a source for how many developers are working on public blockchain applications.

The passage above also continues to repeat a false dichotomy of “us versus them.” Why can’t both of these types of ‘platforms’ live in co-existence? Why does it have to be just one since neither platform can fulfill the requirements of the other?

It’s like saying only helicopters provide the freedom to navigate and that folks working on airplanes are only doing so because they are less restricted with distances. Specialization is a real.

On p. 173 they conclude with:

There’s a reason we want a world of open, public blockchains and distributed trust models that gives everybody a seat at the table. Let’s keep our eyes on that ball.

This whole chapter and this specific statement alone comes across as preachy and a bit paternalistic. If the message is ‘permissionlessness’ then we should be allowed to pursue our own goals and paths on this topic.

Also, there are real entry and exit costs to be a miner on these public chains so from an infrastructure point of view, it is not really accurate to say everybody gets a seat at the table.

Chapter 7

This is probably their strongest chapter. They do a good job story telling here. Though there were few areas that were not clear.

On p. 179 they write:

But as Bitcoin and the blockchain have shown, the peer-to-peer system of digital exchange, which avoids the cumbersome, expensive, and inherently exclusionary banking system, may offer a better way.

The authors have said 5-6 times already that proof-of-work networks like Bitcoin can be very costly and wasteful to maintain. It would be helpful to the reader for the authors to expand on what areas the banking system is expensive.

And if a bank or group of banks used a permissioned blockchain, would that reduce their expenses?

On p. 181 they write about time stamps:

The stamp, though, is incredibly powerful. And that, essentially, is the service that blockchains provide to people. This public, recognizable open ledger, which can be checked by any time by anybody, acts in much the same way as the notary stamp: it codified that certain action took place at a certain time, with certain particulars attached to it, and it does this in a way that the record of that transaction cannot be altered by private parties, whether they be individuals or governments.

In the next edition the authors should differentiate time stamps and all the functions a notary does. Time stamps may empower notaries but simply stamping something doesn’t necessarily make it notarized. We see this with electronic signatures from Hello Sign and Docusign.

Also, these blockchains have to be funded or subsidized in some manner otherwise they could join the graveyard of hundreds of dead coins.

On p. 181 they write about Factom and Stampery. It would be good to get an update on these types of companies because the founder of Stampery who they single out – Luis Ivan Cuende – has moved on to join and found Aragon.

On p. 183 they discuss data anchoring: taking a hash of data (hash of a document) and placing that into a blockchain so that it can be witnessed. This goes back to the proof-of-existence discussion earlier on. Its function has probably been overstated and is discussed in Anchor’s Aweigh.

On p. 184 they discuss Chromaway. This section should be updated because they have come out with their own private blockchain, Chromapolis funded via a SAFT.

On p. 185 they write:

The easier thing to do, then, for a reform-minded government, is to hire a startup that’s willing to go through the process of converting all of an existing registry, if one exists, into a digital format that can be recorded in a blockchain.

Why? Why does this information have to be put onto a blockchain? And why is a startup the right entity to do this?

On p. 186 they mention several companies such as Bitfury, BitLand, and Ubiquity. It would be good to update these in the next edition to see if any traction occurred.

On p. 187 they write:

They key reason for that is the “garbage-in/garbage-out” conundrum: when beginning records are unreliable, there’s a risk of creating an indisputable permanence to information that enshrines some abuse of a person’s property rights.

This GIGO conundrum doesn’t stop and isn’t limited to just the beginning of record keeping. It is an ongoing challenge, potentially in every country.

On p. 188-192 they describe several other use cases and projects but it is unclear why they can’t just use a database.

On p. 193 they write:

Part of the problem is that cryptocurrencies continue to sustain a reptutation among the general public for criminality. This was intensified by the massive “WannaCry” ransomware attacks of 2017 in which attackers broke into hospitals’ and other institutions’ databases, encrypted their vital files and then extorted payments in bitcoin to have the data decrypted. (In response to the calls to ban bitcoin that inevitably arose in the wake of this episode, we like to point that far more illegal activity and money laundering occurs in dollar notes, which are much harder to trace than bitcoin transactions. Still, when it comes to perception, that’s beside the point – none of these incidents help Bitcoin’s reputation.)

This is a whataboutism. Both actions can be unethical and criminal, there is no need to downplay one versus the other. And the reason why bitcoin and other cryptocurrencies are used by ransomware authors is because they are genuinely useful in their operating environment. Data kidnapping is a good use case for anarchic networks… and cryptocurrencies, by design, continue to enable this activity. The authors can attempt to downplay the criminal element, but it hasn’t gone away and in fact, has been aided by additional liquidity to coins that provide additional privacy and confidentiality (like Monero).

On p. 193 they write about volatility:

This is a massive barrier to Bitcoin achieving its great promise as a tool to achieve financial inclusion. A Jamaican immigrant in Miami might find the near-zero fees on a bitcoin transaction more appealing than the 9 percent it costs to use a Western Union agent to send money home to his mother.

This financial inclusion narrative is something that Bitcoin promoters created after Satoshi disappeared. The goal of Bitcoin — according to the whitepaper and announcement threads – wasn’t to be a new rail for remittance corridors. Maybe it becomes used that way, but the wording in the passage above as a “great promise” is misleading.

Also, the remittance costs above should be fact-checked at the very handy Save On Send site.

On p. 194 they write about BitPesa. Until we see real numbers in Companies House filings, it means their revenue is tiny. Yet the authors make it sound like they have “succeeded”:

The approach is paying dividends as evident in the recent success of BitPesa, which was established in 2013 and was profiled in The Age of Cryptocurrency. The company, which offers cross-border payments and foreign-exchange transactions in and out of Kenya, Nigeria, Tanzania, and Uganda, reported 25 percent month-on-month growth, taking its transaction volume midway through 2017, up from $1 million in 2016.

They also cited some remittance figures from South Korea to the Philippines which were never independently verified and are old.

On p. 194 they dive into Abra a company they described as a remittance company but earlier this year they pivoted into the investment app category as a Robinhood-wannabe, with a coin index.

On p. 196 they discuss the “Somalia dilemma” in which the entire country is effectively unable to access external financial systems and somehow a blockhain would solve their KYC woes. The authors then describe young companies such as Chainalysis and Elliptic which work with law enforcement to identify suspicious transactions. Yet they do not close the loop on the narrative as to how the companies would help the average person in Somalia.

On p. 198 they discuss a startup called WeTrust and mention that one of the authors – Michael – is an advisor. But don’t disclose if he received any compensation for being an advisor. WeTrust did an ICO last year. This is important because the SEC just announced it has fined and settled with Floyd Mayweather and DJ Khaled for violating anti-touting regulations.

Chapter 8

Chapter 8 dives into self-sovereign identity which is genuinely an interesting topic. It is probably the shortest chapter and perhaps in the next edition can be updated to reflect any adoption that took place.

On p. 209 they write about physical identification cards:

Already, in the age of powerful big data and network analytics – now enhanced with blockchain-based distributed trust systems to assure data integrity – our digital records are more reliable indicators of the behavior that defines who we are than are the error-prone attestations that go into easily forged passports and laminated cards.

How common and how easily forged are passports? Would be interesting to see that reference and specifically how a blockchain would actually stop that from happening.

On p. 212 they write about single-sign ons:

A group of banks including BBVA, CIBC, ING, Societe Generale, and UBS has already developed such a proof of concept in conjunction with blockchain research outfit R3 CEV.

Earlier they described R3 differently. Would be good to see more consistency and also an update on this project (did it go anywhere?).

On p. 213 they describe ConsenSys as a “think tank” but it is actually a ‘venture studio’ similar to an incubator (like 500 Startups). Later on p. 233 they describe ConsenSys as an “Ethereum-based lab”.

On p. 216 they write about Andreas Antonopoulos:

What we should be doing, instead of acting as judge and executioner and making assumptions “that past behavior will give me some insight into future behavior,” Antonpolous argues, is building systems that better manage default risk within lenders’ portfolios. Bitcoin, he sustains, has the tolls to do so. There’s a lot of power in this technology to protect against risk: smart contracts, multi-signature controls that ensure that neither of the two parties can run off with the funds without the other also signing a transaction, automated escrow arrangements, and more broadly, the superior transparency and granularity of information on the public ledger.

There are at least two issues with this:

Nowhere in this section do the authors – or Antonopolous – provide specific details for how someone could build a system that manages default risk on top of Bitcoin. It would be helpful if this was added in the next edition.
And recently, Antonopoulos claims to have been simply educating people about “blockchain technology” and not promoting financial products.

If you have followed his affinity marketing over the past 4-5 years he has clearly promoted Bitcoin usage as a type of ‘self-sovereign bank‘ — and you can’t use Bitcoin without bitcoins.29 He seems to be trying to have his cake and eat it too and as a result got called out by both Nouriel and Buttcoin.

On p. 219 they write:

If an attestation of identifying information is locked into an immutable blockchain environment, it can’t be revoked, not without both parties agreeing ot the reversal of the transaction. That’s how we get to self-sovereignty. It’s why, for example, the folks at Learning Machine are developing a product to prove people’s educational bona fides on Blockcerts, an MIT Media Lab-initiated open-source code for notarizing university transcripts that hashes those documents to the bitcoin blockchain. Note the deliberate choice of the most secure, permissionless blockchain, Bitcoin’s. A permissioned blockchain would fall short of the ideal because there, too, the central authority controlling the network could always override the private keys of the individual and could revoke their educational certificates. A permissionless blockchain is the only way to give real control/ownership of the document to the graduate, so that he/she can disclose this particularly important attribute at will to anyone who demands it.

This disdain for ‘permissioned blockchains’ is a red herring and another example of the “us versus them” language that is used throughout the book. If a blockchain has a central authority that can do what the authors describe, it would be rightly described as a single point of failure and trust. And this is why it is important to ask what ‘permissioned’ chain they had in mind, because they are not all the same.

They also need to explain how they measure ‘most secure’ because Bitcoin – as described throughout this review – has several areas of centralization include mining and those who control the BIP process.

On p. 219 they quote Chris Allen. Could be worth updating this because he left Blockstream last year.

Chapter 9

This chapter seemed light on details and a bit polemical.

For instance, on p. 223 they write:

Many of our politicians seem to have no ideas this is coming. In the United States, Donald Trump pushes a “Buy America First” campaign (complete with that slogan’s echoes of past fascism), backed by threats to raise tariffs, tear up trade deals, boot undocumented immigrants out of the country, and “do good deals for America.” None of this addresses the looming juggernaut of decentralized software systems. IoT systems and 3D printing, all connected via blockchains and smart-contract-triggered, on-demand service agreements, will render each presidential attempt to strong-arm a company into retaining a few hundred jobs in this or that factory town even more meaningless.

Putting the politics aside for a moment, this book does not provide a detailed blue print for how any of the technology listed will prevent a US president from strong-arming a company to do any specific task. How does a 3D printer connected to a blockchain prevent a president from executing on their agenda?

On p. 224 they write about universal basic income:

This idea, first floated by Thomas Paine in the eighteenth century, has enjoyed a resurgence on the left as people have contemplated how robotics, artificial intelligence, and other technologies would hit working-class jobs such as truck driving. But it may gain wider traction as decentralizing force based on blockchain models start destroying middle-class jobs.

This speculation seems like a non sequitur. Nowhere in the chapter do they detail how a “blockchain-based model” will destroy middle class jobs. What is an example?

On p. 227 they write:

In case you’re a little snobbish about such lowbrow art, we should also point out that a similar mind-set of collaborative creation now drives the world of science and innovation. Most prominently, this occurs within the world of open-source software development; Bitcoin and Ethereum are the most important examples of that.

If readers were unfamiliar with the long history of the free open source software movement, they might believe that. But this ignores the contributions of BSD, Linux, Apache, and many other projects that are regularly used each and every day by enterprises of all shapes and sizes.

Also, during the writing of this review, an open source library was compromised — potentially impacting the Copay wallet from Bitpay — and no one noticed (at first). Eric Diehl, a security expert at Sony, has a succinct post up on the topic:

In other words, this is an example of a software supply chain attack. One element in the supply chain (here a library) has been compromised. Such an attack is not a surprise. Nevertheless, it raises a question about the security of open source components.

Many years ago, the motto was “Open source is more secure than proprietary solutions.” The primary rationale was that many eyes reviewed the code and we all know that code review is key for secure software. In the early days of open source, this motto may have been mostly true, under some specific trust models ( see https://eric-diehl.com/is-open-source-more-secure/, Chapter 12 of Securing Digital Video…). Is it still true in our days?

How often do these types of compromises take place in open-source software?

On p. 232 they write:

Undaunted, an unofficial alliance of technologists, entrepreneurs, artists, musicians, lawyers, and disruption-wary music executives is now exploring a blockchain-led approach to the entire enterprise of human expression.

What does that even mean?

On p. 232 they write about taking a hash of their first book and inserting it into a block on the Bitcoin blockchain. They then quote Dan Ardle from the Digital Currency Council who says:

“This hash is unique to the book, and therefore could not have been generated before the book existed. By embedding this hash in a bitcoin transaction, the existence of the book on that transaction date is logged in the most secure and irrefutable recordkeeping system humanity has ever devised.”

These plattitudes are everywhere in the book and should be toned down in the next edition especially since Ardle – at least in the quote – doesn’t explain how he measures secure or irrefutable. Especially in light of hundreds of dead coins that were not sustainable.

On p. 233 they write:

The hope now is that blockchains could fulfill the same function that photographers carry out when they put a limited number of tags and signatures on reproduced photo prints: it turns an otherwise replicable piece of content into a unique asset, in this case a digital asset.

This seems to be solutionism because blockchains are not some new form of DRM.

Continuing on this topic, they write:

Copying a digital file of text, music, or vidoe has always been trivial. Now, with blockchain-based models, Koonce says, “we are seeing systems develop that can unequivocally ensure that a particular digital ‘edition’ of a creative work is the only one that can be legitimately transferred or sold.” Recall that the blockchain, as we explained in chapter three, made the concept of a digital asset possible for the first time.

This is empirically untrue. It is still trivially possible to download and clone a blockchain, nothing currently prevents that from happening. It’s why there are more than 2,000 cryptocurrencies at the time of this writing and why there are dozens of forks of Bitcoin: blockchains did not make the concept of a digital asset possible. Digital assets existed prior to the creation of Bitcoin and attempting to build a DRM system to prevent unauthorized copies does not necessarily require a blockchain to do.

On p. 238 they write:

Yet, given the amssive, multitudinous, and hetergeneous state of the world’s content, with hundreds of millions of would-be creators spread all over the world and no way to organize themselves as a common interest, there’s likely a need for a permissionless, decentralized system in which the data can’t be restricted and manipulated by a centralized institution such as a recording studio.

Maybe, but who maintains the decentralized system? They don’t run themselves and are often quite expensive (as even the authors have mentioned multiple times). How does a decentralized system fix this issue? And don’t some artists already coordinate via different interest groups like the RIAA and MPAA?

On p. 240 they discuss Mediachain’s acquisition by Spotify:

On the other hand, this could result in a private company taking a technology that could have been used publicly, broadly for the general good, and hiding it, along with its innovative ideas for tokens and other solutions, behind a for-profit wall. Let’s hope it’s not the latter.

This chapter would have been a bit more interesting if the authors weren’t as heavy handed and opinionated about how economic activities (like M&A) should or should not occur. To improve their argument, they could include links or citations for why this type of acquisition has historically harmed the general public.

Chapter 10

On p. 243 they write:

Bitcoin, with its new model of decentralized governance for the digital economy, did not spring out of nowhere, either. Some of the elements – cryptography, for instance – are thousands of years old. Others, like the idea of electronic money, are decades old. And, as should be evident in Bitcoin’s block-size debate, Bitcoin is still very much a work in progress.

This statement is strange because it is inconsistent with what they wrote on p. 162 regarding permissioned chains: “… cherry-picked the features of Nakamoto’s invention that are least threatening to the players in the banking system, such as its cryptographic integrity…”

In this section they are saying that the ideas are old, but in the passage above in chapter 6, they make it sound like it was all from Nakamoto. The authors should edit it to be one way or the other.

Also, Bitcoin’s governance now basically consists of off-chain shouting matches on social media. Massive influence and lobbying campaigns on reddit and Twitter is effectively how the UASF / no2x movement took control of the direction of the BIP process last year.

On p. 245 they write:

That can be found in the individual freedom principles that guide the best elements of Europe’s new General Data Protection Regulation, or GDPR.

All blockchains that involve cross-jurisdictional movement of data will likely face challenges regarding compliance with data privacy laws such as GDPR. Michele Finck published a relevant paper on this topic a year ago.

See also: Clouds and Chains

On p. 247 they write about if you need to use a blockchain:

Since a community must spend significant resources to prove transactions on a blockchain, that type of record-keeping system is most valuable when a high degree of mutual mistrust means that managing agreements comes at a prohibitively high price. (That price can be measured in various ways: in fees paid to middlemen, for instance, in the time it takes to reconcile and settle transactions, or in the fact that it’s impossible to conduct certain business processes, such as sharing information across a supply chain.) When a bank won’t issue a mortgage to a perfectly legitimate and creditworthy homeowner, except at some usurious rate, because it doesn’t trust the registry of deeds and liens, we can argue that the price of trust is too high and that a blockchain might be a good solution.

Not all blockchains utilize proof-of-work as an anti-Sybil attack mechanism, so it cannot be said that “a community must spend significant resources”.

In the next edition it would be interesting to see a cost / benefit analysis for when someone should use a blockchain as it relates the mortgage use case they describe above.

On p. 248 they talk about voting:

Every centralized system should be open for evaluation – even those of government and the political process. Already, startups such as Procivis are working on e-voting systems that would hand the business of vote-counting to a blockchain-based backend. And some adventurous governments are open to the idea. By piloting a shareholder voting program on top of Nasdaq’s Linq blockchain service, Estonia is leading the way. The idea is that the blockchain, by ensuring that no vote can be double-counted – just as no bitcoin can be double-spent – could for the first time enable reliable mobile voting via smartphones. Arguably it would both reduce discrimination against those who can’t make it to the ballot box on time and create a more transparent, accountable electoral system that can be independently audited and which engenders the public’s trust.

A month ago Alex Tapscott made a similar argument.

He managed to temporarily unite some of the warring blockchain tribes because he penned a NYT op-ed about how the future is online voting… powered by blockchains. Below is a short selection of some Twitter threads:

  • Arvind Narayanan, a CS professor at Princeton said this is a bad idea
  • Angela Walch, a law professor at St. Mary’s said this is a bad idea
  • Philip Daian, a grad student at Cornell said this is a bad idea.
  • Luis Saiz, a security researcher at BBVA said this is a bad idea
  • Joseph Hall, the Chief Technologist at the Center for Democracy & Technology said this a bad idea
  • Preston Byrne, a transatlantic attorney and father of marmotology said this is a bad idea
  • Matt Blaze, a CS professor at UPenn, said this is a bad idea

NBC News covered the reaction to Tapscott’s op-ed.  Suffice to say, the next edition should either remove this proposal or provide more citations and references detailing why this is a good idea.

Throughout this chapter projects like BitNation and the Economic Space Agency are used as examples of projects that are “doing something” — but none of these have gotten much traction likely because it’s doing-something-theater.

On p. 252 – 255 they uncritically mention various special interest groups that are attempting to influence decision makers via lobbying. It would be good to see some balance added to this section because many of the vocal promoters at lobbying organizations do not disclose their vested interests (e.g., coin positions).

On p. 255 they talk about “Crypto Valley” in Switzerland:

One reason they’ve done so is because Swiss law makes it easier to set up the foundations needed to launch coin offerings and issue digital tokens.

MME – the Swiss law firm that arguably popularized the approach described in this section – set up more than a dozen of these foundations (Stiftung) before stopping. And its creator, Luke Mueller, now says that:

“The Swiss foundation actually is a very old, inflexible, stupid model,” he said. “The foundation is not designed for operations.”

Could be worth updating this section to reflect what happened over the past year with lawsuits as well.

On p. 255 they write:

The next question is: what will it take for U.S. policymakers to worry that America’s financial and IT hubs are losing out to these foreign competitors in this vital new field.

This is FOMO. The authors should tabulate all of the companies that have left the US – or claim to leave – and look at how many jobs they actually set up overseas because of these laws. Based on many anecdotes it appears what happens in practice is that a company will register or hold an ICO overseas in say, Singapore or Panama, but then open up a development arm in San Francisco and New York. They effectively practice regulatory arbitrage whereby they bypass securities laws in one country (e.g., the US) and then turn around and remit the proceeds to the same country (the US).

On p. 263 they conclude the chapter with:

No state or corporation can put bricks around the Bitcoin blockchain or whitewash its record. They can’t shut down the truth machine, which is exactly why it’s a valuable place to record the voices of human experience, whether it’s our love poems or our cries for help. This, at its core, is why the blockchain matters.

Their description basically anthropromorphizes a data structure. It also comes across as polemical as well as favoritism towards one specific chain, Bitcoin. Furthermore, as discussed throughout this review, there are clear special interest groups – including VC-backed Bitcoin companies — that have successfully pushes Bitcoin and other cyrptocurrencies – into roadmaps that benefit their organizations.

Conclusion

Like their previous book (AoC), The Truth Machine touches on many topics but only superficially.  It makes a lot of broad sweeping claims but curious readers – even after looking at the references – are left wanting specifics: how to get from point A to point B.

There also seems to be an anti-private enterprise streak within the book wherein the authors condescendingly talk down efforts to build chains that are not anarchic. That becomes tiring because – as discussed on this blog many times – it is not a “us versus them” proposition.  Both types of blockchains can and do exist because they are built around different expectations, requirements, and operating environments.

In terms of one-sided narratives: they also did not reach out to several of the people they villify, such as both myself and Preston Byrne as well as coin proponents such as Roger Ver and Jihan Wu.  The next edition should rectify this by either dropping the passages cited above, or in which the authors reach out to get an on-the-record comment from.

Lastly, while some churn is expect, many of the phrases throughout the book did not age well because it relied on price bubbles and legal interpretations that went a different direction (e.g., SAFTs are no longer popular).  If you are still looking for other books to read on the topic, here are several other reviews.

Endnotes

  1. See A brief history of R3 — the Distributed Ledger Group []
  2. Developers of various coins will include “check points” which do make it virtually impossible to roll back to a specific state. Both Bitcoin and Bitcoin Cash have done this. []
  3. See Why the payment card system works the way it does – and why Bitcoin isn’t going to replace it any time soon by Richard Brown []
  4. See Learning from the past to build an improved future of fintech and Distributed Oversight: Custodians and Intermediaries []
  5. Unsurprisingly users want to be able to hold someone accountable for their lack of care and/or difficulty in safely and securely backing up their keys. []
  6. Ibid []
  7. Technically every orphaned block alters the blockchain, because you thought one thing and now you are asked to think another. []
  8. Readers may be interested in The Path of the Blockchain Lexicon by Angela Walch []
  9. Recall that generating hashes is a means to an end: to make Sybil attacks costly on a network with no “real” identities. []
  10. For instance, Selfish Mining []
  11. Albumatic -> Koala -> Chain.com the Bitcoin API company -> Chain.com the enterprise company, etc. []
  12. This is slightly reminiscent of Dr. Strangelove in which General Turgidson says, “I admit the human element seems to have failed us here.” []
  13. See The Revolving Door Comes to Cryptocurrency by Lee Reiners and Is Bitcoin Secretly Messing with the Midterms? from Politico []
  14. See also his role in attacks on CoiledCoin and BBQcoin []
  15. David Andolfatto, from the St. Louis Fed, also pointed this out back in May 2015, skip to the 28 min mark []
  16. See the “no” side of the debate: Can Bitcoin Become a Dominant Currency? []
  17. Ironically in his most recent op-ed published today, he asks people to “quit this ugly obsession with price.”  There are at least 3-4 instances of the co-authors using price as a metric for “strength” in this book. []
  18. See also this related thread from Don Bailey []
  19. Some exchanges, such as Gemini, want proof of mining activity. See also: What is Permissioned-on-Permissionless []
  20. See also the Polly Pocket Investor Day []
  21. Ryan Zurrer, second-in-command at Polychain, was recently fired from Polychain amid weak performance this year. []
  22. The whole public sale thing is problematic from a MSB perspective. The colorability of the position taken by Cooley in that section was questionable at the time and possibly indefensible now. []
  23. Mike wrote the first line of code for Corda over three years ago. []
  24. The initial conversation with Bob took place in San Francisco during Coin Summit. Bob later became a key person at Chainalysis. []
  25. According to Preston:

    Eris, now Monax, was the first company to look at the combination of cryptographic primitives that make up Bitcoin and attempt to use them to make business processes more efficient. In shorthand, the company invented “blockchains without coins” or “permissioned blockchains.”

    Bitcoin’s dysfunctional governance wasn’t a “godsend” for our business, as we weren’t competing with Bitcoin. Rather we were trying to dramatically expand the usecases for database software that had peer to peer networking and elliptic curve cryptography at its core, in recognition of the fact that business counterparties reconcile shared data extremely inefficiently and their information security could benefit from a little more cryptography.

    In exchange for our efforts, Bitcoiners of all shapes and sizes heaped scorn on the idea that any successor technology could utilize their technology’s components more efficiently. We responded with pictures of marmots to defuse some of the really quite vitriolic attacks on our company and because I like marmots; these little critters became the company’s mascot through that process.

    Subsequent developments vindicated my approach. Cryptographically-secure digital cash being trialled by Circle, Gemini, and Paxos utilizes permissioning, a concept that Circle’s Jeremy Allaire said was impossible in 2015 – “they’re not possible separately” – and I predict that as those USD coins seek to add throughput capacity and functionality they will migrate off of the Ethereum chain and onto their own public, permissioned chains which are direct conceptual descendants of Eris’ work.

    They will compete with Bitcoin in some respects, much as a AAA-rated bond or USD compete with Bitcoin now, but they will not compete with Bitcoin in others, as they will cater to different users who don’t use Bitcoin today and are unlikely to use it in the future.

    Ultimately, whether Eris’ original vision was right is a question of how many permissioned chains there are, operating as secure open financial services APIs as Circle and Gemini are using them now. I predict there will be rather a lot of those in production sooner rather than later. []

  26. Oddly the authors of the book do not name “Corda” in this book… they use the phrase: “R3’s distributed ledger” instead. []
  27. Readers may also be interested in reading the 2016 whitepaper from the DTCC []
  28. At the time of this writing there are: 5 incubated “Frameworks” and 6 incubated “Tools.” []
  29. Antonopolous recently gave a talk in Seattle where he promoted the usage of cryptocurrencies to exit the banking system.  Again, a user cannot use a cryptocurrency without absorbing the exposure and risks attached to the underlying coins of those anarchic networks. []

Events and activities through November

The past 6 months have seen an evolution of insanity to sanity.  Just kidding!

One observation I have seen is that a few of the most vocal coin promoters have finally sat down and spoken with policy makers.  Or rather, they finally started attending events in which policy makers, regulators, and decision makers at institutions speak at.

For those of us who have been attending and participating in regulatory-focused events for several years, the general messaging hasn’t changed that much: laws and regulations around financial market infrastructure and financial instruments exist for legitimately good reasons (e.g., systemic risks can be existential to society).

What has changed is that there are a few new faces from the coin world — most of which have previously pretended or perhaps did not even know that there is parallel world that can be engaged with.

It is still too early to see whether or not this governance education will be helpful in moderating their coin-focused excitement on social media but it seems to be the case that regulators and policy makers are still further ahead in their understanding of the coin world than vice versa.  Maybe next year coin issuers and promoters will finally dive into the PFMIs which have been around since 2012.

Below are some of the activities I was involved and participated in.

Panels and presentations

Interviews and quotes

Op-ed

Cited

How much electricity is consumed by Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Monero?

I recently created a thread that on Twitter regarding the lower-bound estimates for how much electricity the Bitcoin blockchain consumed using publicly available numbers.

The first part of this post is a slightly modified version of that thread.

The second part of this post, below part 1, includes additional information on Bitcoin Cash, Ethereum, Litecoin, and Monero using the same type of methodology.

Background

The original nested thread started by explaining why a proof-of-work (PoW) maximalist view tries to have it both ways.

You cannot simultaneously say that Bitcoin is – as measured by hashrate – the “most secure public chain” and in the same breath say the miners do not consume enormous quantities of energy to achieve that.  The fundamental problem with PoW maximalism is that it wants to have a free energy lunch.

All proof-of-work chains rely on resource consumption to defend their network from malicious attackers.  Consequently, a less resource intensive network automatically becomes a less secure network.1  I discussed this in detail a few years ago.

Part 1: Bitcoin

Someone recently asked for me to explain the math behind some of Bitcoin’s electricity consumption, below is simple model using publicly known numbers:

  • the current Bitcoin network hashrate is around 50 exahashes/sec
  • the most common mining hardware is still the S9 Antminer which churns out ~13 terahashes/sec

Thus the hashrate pointed at the Bitcoin network today is about 50,000,000 terashashes.

Dividing one from the other, this is the equivalent of 3,846,000 S9s… yes over 3 million S9s.

While there is other hardware including some newer, slightly more energy efficient gear online, the S9 is a good approximate.

Because the vast majority of these machines are left on 24/7, the math to estimate how much energy consumption is as follows:

  • in practice, the S9 draws about 1,500 watts
  • so 1,500 x 24 = 36kWh per machine per day

Note: here’s a good thread explaining this by actual miners.

In a single month, one S9 will use ~1,080 kWh.

Thus if you multiply that by 3,846,000 machines, you reach a number that is the equivalent of an entire country.

  • for a single day the math is: ~138.4 million kWh / day
  • annually that is: ~50.5 billion kWh / year

For perspective, ~50.5 billion kWh / year would place the Bitcoin network at around the 47th largest on the list of countries by electricity consumption, right between Algeria and Greece.

But, this estimate is probably a lower-bound because it doesn’t include the electricity consumed within the data centers to cool the systems, nor does it include the relatively older ASIC equipment that is still turned on because of local subsidies a farm might receive.

So what?

According to a recent Wired article:

In Iceland, the finance minister has warned that cryptocurrency mining – which uses more power than the nation’s entire residential demand – could severely damage its economy.

Recent analysis from a researcher at PwC places the Bitcoin network electricity consumption higher, at more than the level of Austria which is number 39th on that list above.  Similarly, a computer science professor from Princeton estimates that Bitcoin mining accounts for almost 1% of the world’s energy consumption.2

Or to look at it in a different perspective: the Bitcoin network is consuming the same level of electricity of a developed country – Austria – a country that generates ~$415 billion per year in economic activity.

Based on a recent analysis from Chainalysis, it found that Bitcoin – which is just one of many proof-of-work coins – handled about $70 million in payments processed for the month of June.  Yet its cost-per-transaction (~$50) is higher than at any point prior to November 2017.

You don’t have to be a hippy tree hugger (I’m not) to clearly see that a proof-of-work blockchains (such as Bitcoin and its derivatives) are currently consuming significantly more resources than they create. However this math is hand-waved away on a regular basis by coin lobbyists.

The figure also didn’t include the e-waste generated from millions of single-use ASIC mining machines that are useful for about ~12 months; or the labor costs, or building rents, or transportation, etc.  These ASIC-based machines are typically discarded and not recycled.

In addition to e-waste, many mining farms also end up with piles of discarded cardboard boxes and styrofoam (source)

Part 2: Bitcoin Cash

With Bitcoin Cash the math and examples are almost identical to the Bitcoin example above.  Why?  Because they both use the same SHA256 proof-of-work hash function and as a result, right now the same exact hardware can be used to mine both (although not simultaneously).3

So what do the numbers look like?

The BCH network hashrate has been hovering around 4 – 4.5 exahashes the past month. So let’s use 4.25 exahashes.

Note: this is about one order of magnitude less hashrate than Bitcoin so you can already guesstimate its electricity usage.  But let’s do it by hand anyways.

An S9 generates ~13 TH/s and 4.25 exahashes is 4.25 million terahashes.

After dividing: the equivalent of about 327,000 S9s are used.

Again, these machines are also left on 24/7 and consume about 36 kWh per machine per day.  So a single S9 will use ~1,080 kWh per month.

  • 327,000 S9s churning for one day: ~11.77 million kWh / day
  • Annually this is: ~4.30 billion kWh / year

To reuse the comparison above, what country’s total electricity consumption is Bitcoin Cash most similar to?

Around 124th, between Moldova and Cambodia.

How much economic activity does Moldova and Cambodia generate with that electricity consumption?  According to several sources, Cambodia has an annual GDP of ~ $22 billion and Moldova has an annual GDP of ~$8 billion.

For comparison, according to Chainalysis, this past May, Bitcoin Cash handled a mere $3.7 million in merchant payments, down from a high of $10.5 million in March a couple months before.

Also, the Bitcoin Cash energy consumption number is likely a lower-bound as well for the reasons discussed above; doesn’t account for the e-waste or the resources consumed to create the mining equipment in the first place.

This illustrates once again that despite the hype and interest in cryptocurrencies such as Bitcoin and Bitcoin Cash, there is still little real commercial “activity” beyond hoarding, speculation, and illicit darknet markets.  And in practice, hoarding is indistinguishable from losing a private key so that could be removed too.  Will mainstream adoption actually take place like its vocal advocates claim it will?

Discarded power supplies from Bitcoin mining equipment (source)

Part 3: Ethereum

So what about Ethereum?

Its network hashrate has been hovering very closely to 300 TH/s the past month

At the time of this writing, the Ethereum network is still largely dominated by large GPU farms. It is likely that ASICs were privately being used by a handful of small teams with the necessary engineering and manufacturing talent (and capital), but direct-to-consumer ASIC hardware for Ethereum didn’t really show up until this summer.

There are an estimated 10 million GPUs churning up hashes for the Ethereum network, to replace those with ASICs will likely take more than a year… assuming price stability occurs (and coin prices are volatile and anything but stable).

For illustrative purposes, what if the entire network were to magically switch over the most efficient hardware -the Innosilicon A10 – released next month?

Innosilicon currently advertises its top machine can generate 485 megahashes/sec and consumes ~ 850 W.

So what is that math?

The Ethereum network is ~300 TH/s which is around 300,000,000 megahashes /sec.

Quick division: that’s the equivalent of 618,557 A10 machines.

Again, each machine is advertised to consume ~850 W.

  • in a single day one A10 consumes: 20.4 kWh
  • in a month: ~612 kWh

So what would 618,557 A10 machines consume in a single day?
– about 12.6 million kWh / day

And annually:
– about 4.6 billion kWh / year

That works out to be between Afghanistan or Macau.  However…

Before you say “this is nearly identical to Bitcoin Cash” keep in mind that the Ethereum estimate above is the lowest of lower-bounds because it uses the most efficient mining gear that hasn’t even been released to the consumer.

In reality the total energy consumption for Ethereum is probably twice as high.

Why is Etherum electricity usage likely twice as high as the example above?

Because each of the ~10 million GPUs on the Ethereum network is significantly less efficient per hash than the A10 is. 4  Note: an example of a large Ethereum mine that uses GPUs is the Enigma facility.

For instance, an air-cooled Vega 64 can churn ~41 MH/s at around 135 W which as you see above, is much less efficient per hash than an A10.

If the Ethereum network was comprised by some of the most efficient GPUs (the Vega 64) then the numbers are much different.

Starting with: 300,000,000 MH/s divided by 41 MH/s.  There is the equivalent to 7.32 million Vega GPUs generating hashes for the network which is more in line with the ~10 million GPU estimate.

  • one Vega 64 running a day consumes ~3.24 kWh
  • one Vega 64 running a month: ~77.7 kWh

If 7.32 million Vega equivalent GPUs were used:

  • in a day: ~ 23.71 million kWh
  • in a year: ~8.65 billion kWh

That would place the Ethereum network at around 100th on the electricity consumption list, between Guatemala and Estonia.

In terms of economic activity: Guatemala’s GDP is around $75 billion and Estonia’s GDP is around $26 billion.

What is Ethereum’s economic activity?

Unlike Bitcoin and Bitcoin Cash, the stated goal of Ethereum was basically to be a ‘censorship-resistant’ world computer.  Although it can transmit funds (ETH), its design goals were different than building an e-cash payments platform which is what Bitcoin was originally built for.

So while merchants can and do accept ETH (and its derivatives) for payment, perhaps a more accurate measure of its activity is how many Dapp users there are.

There are a couple sites that estimate Daily Active Users:

  • State of the Dapps currently estimates that there are 8.93k users and 8.25K ETH moving through Dapps
  • DappRadar estimates a similar number, around 8.37k users and 8.57K ETH moving through Dapps

Based on the fact that the most popular Dapps are decentralized exchanges (DEXs) and MLM schemes, it is unlikely that the Ethereum network is generating economic activity equivalent to either Guatemala or Estonia.5

For more on the revenue Ethereum miners have earned and an estimate for how much CO2 has been produced, Dominic Williams has crunched some numbers.  See also this footnote.6

According to Malachi Salacido (above), their mining systems (in the background) are at a 2 MW facility, they are building a 10 MW facility now and have broken ground on a 20 MW facility. Also have 8 MW of facilities in 2 separate locations and developing projects for another 80 MW. (source)

Part 4: Litecoin

If you have been reading my blog over the past few years, you’ll probably have seen some of my Litecoin mining guides from 2013 and 2014.

If you haven’t, the math to model Litecoin’s electricity usage is very similar to both Bitcoin and Bitcoin Cash.  From a mining perspective, the biggest difference between Litecoin and the other two is that Litecoin uses a hash function called scrypt, which was intended to make Litecoin more “ASIC-resistant”.

Spoiler alert: that “resistance” didn’t last long.

Rather than diving into the history of that philosophical battle, as of today, the Litecoin network is composed primarily of ASIC mining gear from several different vendors.

One of the most popular pieces of equipment is the L3+ from Bitmain.  It’s basically the same thing as the L3 but with twice the hashrate and twice the power consumption.

So let’s do some numbers.

Over the past month, the Litecoin network hashrate has hovered around 300 TH/s, or 300 million MH/s.

Based on reviews, the L3+ consumes ~800 W and generates ~500 MH/s.

So some quick division, there are about 600,000 L3+ machines generating hashes for the Litecoin network today.

As an aggregate:

  • A single L3+ will consume 19.2 kWh per day
  • So 600,000 will consume 11.5 million kWh per day
  • An annually: 4.2 billion kWh per year

Coincidentally this is roughly the same amount as Bitcoin Cash does as well.

So it would be placed around 124th, between Moldova and Cambodia.

Again, this is likely a lower-bound as well because it assumes the L3+ is the most widely used ASIC for Litecoin but we know there are other, less efficient ones being used as well.

What about activity?

While there are a few vocal merchants and a small army of “true believers” on social media, anecdotally I don’t think I’ve spoken to someone in the past year who has used Litecoin for any good or service (besides converting from one coin to another).

We can see that — apart from the bubble at the end of last year — the daily transaction volume has remained roughly constant each day for the past 18 months.  Before you flame me with a troll account, consider that LitePay collapsed before it could launch, partly because Litecoin still lacks a strong merchant-adopting ecosystem.

In other words, despite some support by merchant payment processors, its current usage is likely as marginal as Bitcoin and Bitcoin Cash.

Genesis Mining facility with Zeus scrypt mining equipment (source)

Part 5: Monero

The math around Monero is most similar to Ethereum in that it is largely dominated by GPUs.

In fact, earlier this year, a large number of Monero developers convinced its boisterous userbase to fork the network to prevent ASICs from being used.  This resulted in four Monero forks and basically all of them are dominated by high-end GPUs.

For the purposes of this article, we are looking at the fork that has the highest hashrate, XMR.  Over the past month its hashrate has hovered around 475 MH/s.

Only 475 MH/s?  That may sound like a very diminutive hashrate, but it is all relative to what most CPU and GPU hashrate performance is measured in Monero and not other coins.

For example, MoneroBenchmarks lists hundreds of different system configurations with the corresponding hashrate.  Similarly there are other independent testing systems that provide public information on hashrates.

Let’s take that same Vega 64 used above from Ethereum.  For Monero, based on tweaking it generates around 2000 hashes/sec and consumes around 160 W.

So the math is as follows:

  • 475,000,000 hashes/sec is the current average hashrate
  • A single Vega 64 will generate about 2000 hashes/sec
  • The equivalent of 237,500 Vega 64s are being used
  • Each Vega 64 consumes about 3.84 kWh per day
  • So 237,500 Vega 64s consume 912,000 kWh per day
  • And in a year: 332 million kWh

The 332 million kWh / year figure is a lower-bound because like the Ethereum Vega 64 example above: it doesn’t include the whole mining system, all of these systems still need a CPU with its own RAM, hard drive, and so forth.

As a result, the real electricity consumption figure is much closer to Haiti than Seychelles, perhaps even higher.  Note: Haiti has a ~$8.4 billion economy and the GDP of Seychelles is ~$1.5 billion.

So what about Monero’s economic activity?  Many Monero advocates like to market it as a privacy-focused coin.  Some of its “core” developers publicly claimed it would be the best coin to use for interacting with darknet markets.  Whatever the case may be, compared to the four above, currently it is probably the least used for commercial activity as revealed by its relative flat transactional volume this past year.

A now-deleted image of a Monero mining farm in Toronto (source)

Conclusion

Above were examples of how much electricity is consumed by just five proof-of-work coins.  And there are hundreds of other PoW coins actively online using disproportionate amounts of electricity relative to what they process in payments or commerce.

This article did not dive into the additional resources (e.g., air conditioning) used to cool mining equipment.  Or the subsidies that are provided to various mining farms over the years.  It also doesn’t take into account the electricity used by thousands of validating nodes that each of the networks use to propagate blocks each day.

It also did not include the huge amount of semiconductors (e.g. DRAM, CPUs, GPUs, ASICs, network chips, motherboards, etc.) that millions of mining machines use and quickly depreciate within two years, almost all of which becomes e-waste.7 For ASIC-based systems, the only thing that is typically reused is the PSU, but these ultimately fail as well due to constant full-throttle usage.

In summation, as of this writing in late August 2018:

  • Bitcoin’s blockchain likely uses the same electricity footprint as Austria, but probably higher
  • Bitcoin Cash’s blockchain is at least somewhere between Moldova and Cambodia, but probably higher
  • Ethereum’s blockchain is at least somewhere between Guatemala and Estonia, but probably higher
  • Litecoin’s blockchain is at least somewhere between Moldova and Cambodia, but probably higher
  • One of Monero’s blockchains is at least somewhere between Haiti and Seychelles, but probably higher

Altogether, these five networks alone likely consume electricity and other resources at an equivalent scale as The Netherlands especially once you begin to account for the huge e-waste generated by the discarded single-use ASICs, the components of which each required electricity and other resources to manufacture.  Perhaps even higher when costs of land, labor, on-going maintenance, transportation and other inputs are accounted for.

The Netherlands has the 18th largest economy in the world, generating $825 billion per annum.

I know many coin supporters say that is not a fair comparison but it is.  The history of development and industrialization since the 18th century is a story about how humanity is increasingly more productive and efficient per unit of energy.

Proof-of-work coins are currently doing just the opposite.  Instead of being more productive (e.g., creating more outputs with the same level of inputs), as coin prices increase, this incentivizes miners to use more not less resources.  This is known as the Red Queen Effect.89

For years, proof-of-work advocates and lobbying organizations like Coin Center have been claiming that the energy consumption will go down and/or be replaced by renewable energy sources.

But this simply cannot happen by design: as the value of a PoW coin increases, miners will invest more capital in order to win those coins.  This continues to happen empirically and it is why over time, the aggregate electricity consumption for each PoW coin has increased over time, not decreased.  As a side-effect, cryptocurrency mining manufacturers are now doing IPOs.10

Reporters, if you plan to write future stories on this topic, always begin by looking at the network hashrate of the specific PoW coin you are looking at and dividing it by the most common piece of mining hardware.  These numbers are public and cannot be easily dismissed.  Also worth looking at the mining restrictions and bans in Quebec, Plattsburgh, Washington State, China, and elsewhere.

To front-run an example that coin promoter frequently use as a whataboutism: there are enormous wastes in the current traditional financial industry, removing those inefficiencies is a decades-long ordeal.  However, as of this writing, no major bank is building dozens of data centers and filling them with single-use ASIC machines which continuously generate random numbers like proof-of-work coins do.  That would be rightly labeled as a waste.

In point of fact, according to the Federal Reserve:

In the aggregate, U.S. PCS systems process approximately 600 million transactions per day, valued at over $12.6 trillion.

It shouldn’t take the energy footprint of a single country, big or small, to confirm and settle electronic payments of that same country.  The fact of the matter is that with all of its headline inefficiencies (and injustices), that the US financial system has — the aggregate service providers still manage to process more than three orders of magnitude more in transactional volume per day than all of the major PoW coins currently do.11 And that is just one country.

Frequent rejoinders will be something like “but Lightning!” however at the time of this writing, no Lightning implementation has seen any measurable traction besides spraying virtual graffiti on partisan-run websites.

Can the gap between the dearth of transactional volume and the exorbitantly high cost-per-transaction ratio be narrowed?  Does it all come down to uses?  Right now, the world is collectively subsidizing dozens of minuscule speculation-driven economies that in aggregate consumes electricity on par with the 18th largest real economy, but produces almost nothing tangible in exchange for it.

What if all mining magically, immediately shifted over to renewable energy?

Izabella Kaminska succinctly described how this still doesn’t solve the environmental impact issues:

Renewable is displacement. Renewable used by bitcoin network is still renewable not used by more necessary everyday infrastructure. Since traditional global energy consumption is still going up, that ensures demand for fossil continues to increase.

To Kaminska’s point, in April a once-shuttered coal power plant in Australia was announced to be reopened to provide electricity to a cryptocurrency miner.  And just today, a senator from Montana warned that the closure of a coal power plant “could harm the booming bitcoin mining business in the state.”

It is still possible to be interested in cryptocurrencies and simultaneously acknowledge the opportunity costs that a large subset of them, proof-of-work coins, are environmental black holes.12

If you’re interested in discussing this topic more, feel free to reach out.  If you’re looking to read detailed papers on the topic, also highly recommend the first two links listed below.

Recommended reading:

End notes

  1. If the market value of a coin decreases, then because hashrate follows price, in practice hashrate also declines.  See also a ‘Maginot Line’ attack []
  2. Another estimate is that Bitcoin’s energy usage creates as much CO2 as 1 million transatlantic flights. []
  3. There have been proposals from various developers over the years to change this hash function but at the time of this writing, both Bitcoin and Bitcoin Cash use the same one. []
  4. And because many of these mining systems likely use more-powerful-than-needed CPUs. []
  5. Note: Vitalik Buterin highlighted this discrepancy earlier this year with the NYT: The creator of Ethereum, Vitalik Buterin, is leading an experiment with a more energy-efficient way to create tokens, in part because of his concern about the impact that the network’s electricity use could have on global warming. “I would personally feel very unhappy if my main contribution to the world was adding Cyprus’s worth of electricity consumption to global warming,” Mr. Buterin said in an interview. []
  6. At 8.65 billion kWh * $0.07 / kWh comes to around $600 million spent on electricity per year.  Mining rewards as of this writing: 3 ETH * $267 / ETH * 6000 blocks / day equals to $4.8 million USD / day.  Or ~$1.7 billion per year.  This includes electricity and hardware.  Thanks to Vitalik for double-checking this for me. []
  7. Just looking at the hash-generating machines, according to Chen Min (a chip designer at Avalon Mining), as of early November 2017, 5% of all transistors in the entire semiconductor industry is now used for cryptocurrency mining and that Ethereum mining alone is driving up DRAM prices. []
  8. See Chapter 3 []
  9. As described in a Politico article this past spring: “To maintain their output, miners had to buy more servers, or upgrade to the more powerful servers, but the new calculating power simply boosted the solution difficulty even more quickly. In effect, your mine was becoming outdated as soon as you launched it, and the only hope of moving forward profitably was to adopt a kind of perpetual scale-up: Your existing mine had to be large enough to pay for your next, larger mine.” []
  10. Following the dramatic drop in coin prices since January, Nvidia missed its revenue forecast from cryptocurrency-related mining: Revenues from miners were $289 million in Q1, which was about 10% of Nvidia’s revenue. The forecast for Q2 was $100 million and the actual revenues ended up being $18 million. []
  11. On average, the Bitcoin network confirms about 300,000 transactions per day.  A lot of that is not commercial activity.  Let’s take the highest numbers from Chainalysis and assume that each major cryptocurrency is processing at least $10 million in merchant transactions a day.  They aren’t, but let’s assume that they are.  That is still several orders of magnitude less than what US PCS systems do each day. []
  12. The ideological wing within the cryptocurrency world has thus far managed to convince society that negative externalities are ‘worth the cost.’  This narrative should be challenged by both policy makers and citizens alike as everyone must unnecessarily bear the environmental and economic costs of proof-of-work blockchains.  See also the Bitcoin Energy Consumption Index from Digiconomist and also Bitcoin is not a good fit for renewable energy. Here’s why. []

Book Review: Cryptoassets

[Disclaimer: The views expressed below are solely my own and do not necessarily represent the views of my clients.  I currently own no cryptocurrencies.]

As a follow-on to my previous book reviews, an old colleague lent me a copy of Cryptoassets by Chris Burniske and Jack Tatar.

Overall they have several “meta” points that could have legs if they substantially modify the language and structure of multiple sections in the book.  As a whole it’s about on par with the equally inaccurate “Blockchain Revolution” by the Tapscotts.

As I have one in my previous book reviews, I’ll go through and provide specific quotes to backup the view that the authors should have waited for more data and relevant citations as some of their arguments lack definitive supporting evidence.

In short: hold off from buying this edition.

If you’re interested in understanding the basics of cryptocurrencies but without the same level of inaccuracies, check out the new The Basics of Bitcoins and Blockchains by Antony Lewis.  And if you’re interested in the colorful background of some of the first cryptocurrency investors and entrepreneurs, check out Digital Gold by Nathaniel Popper.

Another point worth mentioning at the beginning is that there are no upfront financial disclosures by the authors.  They do casually mention that they have bitcoin once or twice, but that’s about it.

I think this is problematic because it is not being transparent about potential conflicts of interest (e.g., promoting financial products you may own and hope to see financial gain from).

For instance, we learned that Chris Burniske carried around a lot of USD worth of cryptocurrencies on his phone from a NYT article last year:

But a particularly concentrated wave of attacks has hit those with the most obviously valuable online accounts: virtual currency fanatics like Mr. Burniske.

Within minutes of getting control of Mr. Burniske’s phone, his attackers had changed the password on his virtual currency wallet and drained the contents — some $150,000 at today’s values.

Some quick math for those at home.  The NYT article above was published on August 21, 2017 when 1 BTC was worth about $4,050 and 1 ETH was worth about $314.  So Burniske may have had around 37 BTC or 477 ETH or a combination of these two (and other coins).

That is not a trivial amount of money and arguably should have been disclosed in this book and other venues (such as op-eds and analyst reports).1 In the next edition, they should consider adding a disclosure statement.

A final comment is that several reviewers suggested I modify the review below to be (re)structured like a typical book review — comparing broad themes instead of a detailed dissection — after all who is going to read 38,000+ words?

That is a fair point.  Yet because many of the points they attempt to highlight are commonly repeated by promoters of cryptocurrencies, I felt that this review could be a useful resource for readers looking for different perspective to the same topics frequently discussed in media and at events.

Note: all transcription errors are my own.


Authors’ Note

On p. xi, the authors wrote:

When embarking on our literary journey, we recognized the difficulty in documenting arguably the world’s fastest moving markets. These markets can change as much in a day – up or down – as the stock market changes in a year.

It is only mentioned in passing once or twice, but we know that market manipulation is a real on-going phenomenon.  The next edition could include a subsection of cryptocurrencies and ICOs that the CFTC and SEC – among other regulators – have identified and prosecuted for manipulation.  More on that later below.

Foreword

On p. xiv, Brian Kelly wrote in the Foreword

The beauty of this book is that it takes the reader on a journey from bitcoin’s inception in the ashes of the Great Financial Crisis to its role as a diversifier in a traditional investment portfolio.

A small quibble: Satoshi actually began writing the code for Bitcoin sometime in mid-2007, before the GFC took place.  It may be a chronological coincidence that it came out when it did, especially since it was supposed to be a payment system, which is just one small function of a commercial bank.23

On p. xv Kelly writes:

As with any new model, there are questions about legality and sustainability, but the Silicon Valley ethos of “break things first, then ask for forgiveness” has found its way to Wall Street.

There are also two problems with this:

  1. Both the SEC and CFTC – among other federal agencies – were set up in the past because of the behavior that Kelly thinks is good: “break things first, then ask for forgiveness” is arguably a bad ethos to have for any fiduciary and prudential organizations.4
  2. Any organization can do that, that’s not hard.  Some have gotten away with it more than others.  For instance, Coinbase was relatively loose with its KYC / AML requirements in 2012-2014 and has managed to get away with it because it grew fast enough to become an entity that could lobby the government.

On p.xv Kelly writes

“Self-funded, decentralized organizations are a new species in the global economy that are changing everything we know about business.”

In point of fact, virtually all cryptocurrencies are not self-funded.  Even Satoshi had some kind of budget to build Bitcoin with.  And basically all ICOs are capital raises from external parties.  Blockchains don’t run and manage themselves, people do.

On p. xv Kelly writes:

“These so-called fat protocols are self-funding development platforms that create and gain value as applications are built on top.”

The fat protocol thesis has not really born out in reality, more on that in a later chapter below.  While lots of crytpocurrency “thought leaders” love to cite the original USV article, none of the platforms are actually self-funded yet.  They all require external capital to stay afloat because insiders cash out for real money.5 And because there is a coin typically shoehorned at the protocol layer, there is very little incentive for capable developers to actually create apps on top — hence the continual deluge of new protocols each month — few actors want to build apps when they can become rich building protocols that require coins. More on this later.6

Introduction

On p. xxii the authors write:

“… and Marc Andreessen developing the first widely used web browser, which ultimately became Netscape.”

A pedantic point: Marc Andreessen was leader of a team that built Mosaic, not to take away from that accomplishment, but he didn’t single handedly invent the web browser.  Maybe worth rewording in next edition.

On p. xxiii they write:

Interestingly, however, the Internet has become increasingly centralized over time, potentially endangering its original conception as a “highly survivable system.”

This is a valid point however it glosses over the fact that all blockchains use “the internet” and also — in practice — most public blockchains are actually highly centralized as well.  Perhaps that changes in time, but worth looking at “arewedecentralizedyet.”

On p. xxiii they write:

Blockchain technology can now be thought of as a general purpose technology, on par with that of the steam engine, electricity, and machine learning.

This is still debatable.  After all, there is no consensus on what “blockchains” are and furthermore, as we have seen in benchmark comparisons, blockchains (however defined) come in different configurations.  While there are a number of platforms that like to market themselves as “general purpose,” the fact of the matter is that there are trade-offs based on the user requirements: always ask who the end-users and the use-cases a blockchain was built around are.

On p. xxiv they cite Don and Alex Tapscott.  Arguably they aren’t credible people on this specific topic.  For example, their book was riddled with errors and they even inappropriately made-up advisors on their failed bid to launch and fund their NextBlock Global fund.

On p. xxiv the authors write:

Financial incumbents are aware blockchain technology puts on the horizon a world without cash – no need for loose bills, brick-and-mortar banks, or, potentially, centralized monetary policies.  Instead, value is handled virtually through a system that has no central authority figure and is governened in a centralized and democratic manner. Mathematics force order in the operations. Our life savings, and that of our heirs, could be entirely intangible, floating in a soup of secure 1s and 0s, the entire system accessed through computers and smartphones.

This conflates multiple things: digitization with automation.7  Retail banking has and will continue its march towards full digital banking.  You don’t necessarily need a blockchain to accomplish that — we see that with Zelle’s adoption already.8

Also, central banks are well aware that they could have some program adjust interest rates, but discretion is still perceived as superior due to unforeseen incidents and crisis. 9

On p. xxv they write:

The native assets historically have been called cryptocurrencies or altcoins but we prefer the term cryptoassets, which is the term we will use throughout the book.

The term seems to have become a commonly accepted term but to be pedantic: most owners and users do not actually utilize the “cryptography” part — because they house the coins in exchanges and other intermediaries they must trust (e.g., the user doesn’t actually control the coin with a private key).10

And as we continue to see, these coins are easily forkable.  You can’t fork physical assets but you can fork and clone digital / virtual ones.  That’s a separate topic though maybe worth mentioning in the next edition.

On p. xxv they write:

It’s early enough in the life of blockchain technology that no books yet have focused solely on public blockchains and their native cryptoassetss from the investing perspective. We are changing that because investors need to be aware of the opportunity and armed both to take advantage and protect themselves in the fray.

Might be worth rewording because in Amazon there are about 760 books that pop up when “investing in cryptocurrencies” is queried.  And many of those predate the publication of Cryptoassets.  For instance, Brian Kelly, who wrote the Forward, published a fluffy coin promotion book a few years ago.

On p. xv they write:

Inevitably, innovation of such magnitude, fueled by the mania of making money, can lead to overly optimistic investors. Investors who early on saw potential in Internet stock encountered the devastating dot-com bubble. Stock in Books-A-Million saw its price soar by over 1,000 percent in one week simply by announcing it had an updated website. Subsequently, the price crashed and the company has since delisted and gone private. Other Internet-based high flyers that ended up crashing include Pets.com, Worldcom, and WebVan. Today, none of those stocks exist.

So far, so good, right?

Whether specific cryptoassets will survive or go the way of Books-A-Million remains to be seen.  What’s clear, however, is that some will be big winners. Altogether, between the assets native to blockchains and the companies that stand to capitalize on this creative destruction, there needs to be a game plan that investors use to analyze and ultimately profit from this new investment theme of cryptoassets. The goal of this book is not to predict the future – it’s changing too fast for all but the lucky to be right- but rather to prepare investors for a variety of futures.

Even for 2017 when the book was publish, this statement is lagging a bit because there were already several “coin graveyard” sites around.  Late last month Bloomberg ran a story: more than 1,000 coins are dead according to Coinopsy.

It is also unclear, “that some will be big winners.”  Maybe modify this part in the next version.11

On p. xxvi they write:

“One of the keys to Graham’s book was always reminding the investor to focus on the inherent value of an investment without getting caught in the irrational behavior of the markets.”

There is a healthy debate as to whether cryptocurrencies and “cryptoassets” have any inherent value either.12  Arguably most coins traded on a secondary market depend on some level of ‘irrational’ behavior: many coin holders have short time horizons and want someone else to help push up the price so they can eventually cash out.13

Chapter 1

On p. 3 they write:

In 2008, Bitcoin rose like a phoenix from the ashes of near Wall Street collapse.

This a little bit of revisionist history.14

The Bitcoin whitepaper came out on October 31, 2008 and Satoshi later said that he/she had spent the previous 18 months coding it first before writing it up in a paper.  The authors even discuss this later on page 7.  Worth removing in next edition.

On p. 3 they write:

Meanwhile, Bitcoin provided a system of decentralized trust for value transfer, relying not on the ethics of humankind but on the cold calculation of computers and laying the foundation potentially to obviate the need for much of Wall Street.

This is not quite true.  At most, Bitcoin as it was conceived and as it is today — is a relatively expensive payment network that doesn’t provide definitive settlement finality.15 Banks as a whole, do more than just handle payments — they manage many other services and products.  So the comparison isn’t really apples-to-apples.

Note: banks again as a whole spend more on IT-related systems than nearly any other vertical — so there is already lots of “cold calculation” taking place within each of these financial institutions.16

Now, maybe blockchain-related ideas replace or enhance some of these institutions, but it is unlikely that Bitcoin itself as it exists today, will do any of that.

On p. 5 they write:

What people didn’t realize, including Wall Street executives, was how deep and interrelated the risks CMOs posed were. Part of the problem was that CMOs were complex financial instruments supported by outdated financial architecture that blended and analog systems.

That may have been part of a bigger problem.17

There were a dozen plus factors for how and why the GFC arose and evolved, but “outdated financial infrastructure” isn’t typically at the top of the list of culprits.  Would blockchain-like systems have prevented the entire crisis?  There are lots of op-eds that have made the claim, but the authors do not really provide much evidence to support the specific “blended” argument here.  Perhaps worth articulating in its own section next time.

Speaking of which, also on p. 5 they write:

Whether as an individual or an entity, what’s now clear is that Satoshi was designing a technology that if existent would have likely ameliorated the toxic opacity of CMOs. Due of the distributed transparency and immutable audit log of a blockchain, each loan issued and packaged into different CMOs could have been documented on a single blockchain.

This seems to conflate two separate things: Bitcoin as Satoshi originally designed it in 2008 (for payments) and later what many early adopters have since promoted it as: blockchain as FMI.18

Bitcoin was (purposefully) not designed to do anything with regulated financial instruments, it doesn’t meet the PFMI requirements.  He was trying to build e-cash that didn’t require KYC and was difficult to censor… not ways to audit CMOs.  If that was the goal, architecturally Bitcoin would likely look a lot different than it did (for instance, no PoW).

And lastly on p. 5 they write:

This would have allowed any purchaser to view a coherent record of CMO ownership and the status of each mortgage within.  Unfortunately, in 2008 multiple disparate systems – which were expensive and therefore poorly reconciled – held the system together by digital strings.

Interestingly, this is the general pitch for “enterprise” blockchains: that with all of the disparate siloed systems within regulated financial institutions, couldn’t reconciliation be removed if these same systems could share the same record and facts on that ledger?  Hence the creation of more than a dozen enterprise-focused “DLT” platforms now being trialed and piloted by a slew of businesses.

This is briefly discussed later but the next edition could expand on it as the platforms do not need a cryptocurrency involved.19

On p. 7 they write:

By the time he released the paper, he had already coded the entire system.  In his own words, “I had to write all the code before I could convince myself that I could solve every problem, then I wrote the paper.” Based on historical estimates, Satoshi likely started formalizing the Bitcoin concept sometime in late 2006 and started coding around May 2007.

Worth pointing out that Hal Finney and Ray Dillinger — and likely several others – helped audit the code and paper before any of it was publicly released.

On p. 8 they write:

Many years later people would realize that one of the most powerful use cases of blockchain technology was to inscribe immutable and transparent information that could never be wiped from the face of digital history and that was free for all to see.

There appears to be a little hyperbole here.

Immutability has become a nebulous word that basically means many different things to everyone.  In practice, the only thing that is “immutable” on any blockchain is the digital signature — it is a one-way hash.   All something like proof-of-work or proof-of-stake does are decide who gets to vote to append the chain.

Also, as mentioned above, there are well over 1,000 dead coins so it is actually relatively common for ‘digital history’ to effectively be wiped out.

On p. 8 they write:

A dollar invested then would be worth over $1 million by the start of 2017, underscoring the viral growth that the innovation was poised to enjoy.

Hindsight is always 20-20 and the wording above seems to be a little unclear with dates.  As often as the authors say “this is not a book endorsing investments,” other passages seem do just the opposite: by saying how smart you would’ve been if you had bought at a relative low, during certain (cherry picked) dates.

Also, what viral growth?  What are the daily active and monthly active user numbers they think are occurring on these chains?  In later chapters, they do cite some on-chain activity but this version lacks specific DAU / MAU that would strengthen their arguments.20 Worth revisiting in the next edition.

On p. 8 they write:

Diving deeper into Satoshi’s writings around the time, it becomes more apparent that he was fixated on providing an alternative financial system, if not a replacement entirely.

This isn’t quite right.  The very first thing Satoshi tried to build was a marketplace to play poker which was supposed to be integrated with the original wallet itself.

A lot of the talk about “alternative financial system” is arguably revisionist propaganda from folks like Andreas Antonopoulos who have tried to rewrite the history of Bitcoin to conform with their political ideology.

Readers should also check out MojoNation and what that team tried to accomplish.

On p. 9 they write;

While Wall Street as we knew it was experiencing an expensive death, Bitcoin’s birth cost the world nothing.

There are at least two issues that can be modified for the future:

  1.  Wall Street hasn’t died, maybe parts of the financial system are replaced or removed or enhanced, but for better and worse almost 10 years since the collapse of Lehman, the collective financial industry is still around.
  2.  Bitcoin cost somebody something, there were opportunity costs in its creation.  And as we now know: the ongoing environmental impact is enormous.  Yet promoters typically handwave it away as a “cost of doing anarchy.”  Thus worth rewording or removing in the next edition.

On p. 9 they also wrote:

It was born as an open-source technology and quickly abandoned like a motherless babe in the world. Perhaps, if the global financial system had been healthier, there would have been less of a community to support Bitcoin, which ultimately allowed it to grow into the robust and cantankerous toddler that it currently is.

This prose sounds like something from Occupy Wall Street and not something found in literature to describe a computer program.

For example, there are lots of nominally open source blockchains, hundreds or maybe even thousands.21 That’s not very unique (it is kind of expected since there is a financial incentive to clone them).

And again, Satoshi worked on it for at least a couple years.  It’s not like he/she dropped it off at an orphanage after immediate gestation.  This flowery wording acts like a distraction and should be removed in the next edition.

Chapter 2

On p. 12 they write:

Three reputable institutions would not waste their time, nor jeopardize their reputations, on a nefarious currency with no growth potential.

There is a bit of an unnecessary attitude with this statement.  The message also seems to go against the criticism earlier in the book towards banks.  For instance, the first chapter was critical of the risks that banks took leading up to the GFC.  You can’t have it both ways.  In the next edition, should either remove this or explain what level or risk is appropriate.

Also, what is the “growth potential” here?  Do the authors mean the value of a coin as measured in real money?  Or actual usage of the network?

Lastly, the statement above equates the asset value growth (USD value increases) with a bank’s interest. Bank’s do not typically speculate on the price, they usually only care about volumes which make revenues. A cryptocurrency could go to $0.01 for all they care; and if people want to use it then they could consider servicing it provided the bank sees an ability to make money.  For example, UK banks did not abandon the GBP even though it lost 20% of its value in 2016 following the Brexit referendum.

On p. 12 they write:

Certainly, some of the earliest adopters of Bitcoin were criminals. But the same goes for most revolutionary technologies, as new technologies are often useful tools for those looking to outwit the law.

This is a “whataboutism” and is actually wrong.  Satoshi specifically says he/she has designed Bitcoin to route around intermediaries (like governments) and their ability to censor.  It doesn’t take too much of a stretch to get who would be initially interested in that specific set of payment “rails” especially if there is no legal recourse.22

On p. 12 they also write:

We’ll get into the specific risks associated with cryptoassets, including BItcoin, in a later chapter, but it’s clear that the story of bitcoin as a currency has evolved beyond being solely a means of payment for illegal goods and services. Over 100 media articles have jumped at the opportunity to declare bitcoin dead, and each time they have been proven wrong.

The last sentence has nothing to do with the preceding sentence, this is a non sequitur.

Later in the book they do talk about other use cases but the one that they don’t talk about much is how — according to analytics — the majority of network traffic in 2017 was users moving cryptocurrencies from one exchange to another exchange.

For example, about a month ago, Jonathan Levin from Chainalysis did an interview and mentioned that:

So we can identify, it is quite hard to know how many people. I would say that 80% of transactions that occur on these cryptocurrency ledgers have a counterparty that is a 3rd party service. More than 80%.

Maybe mention in the second edition: the unintended ironic evolution of Bitcoin has had… where it was originally designed to route around intermediaries and instead has evolved into an expensive permissioned-on-permissionless network.23

On p. 13 they write:

It operates in a peer-to-peer manner, the same movement that has driven Uber, Airbnb, and LendingClub to be multibillion-dollar companies in their own realms. Bitcoin lets anyone be their own bank, putting control in the hands of a grassroots movement and empowering the globally unbanked.

Not quite.  For starters: Uber, Airbnb, and LendingClub all act as intermediaries to every transaction, that’s how they became multibillion-dollar companies.

Next, Bitcoin doesn’t really let anyone be their own bank because banks offer a lot more products and services beyond just payments.  At most, Bitcoin provides a way of moving bitcoins you control to someone else’s bitcoin address (wallet).  That’s it.24

And there is not much evidence that Bitcoin or any cryptocurrency for that matter, has empowered many beyond relatively wealthy people in developed or developing countries.  There have been a few feel-good stories about marginalized folks in developing countries, but those are typically (unfortunately) one-off theatrics displaying people living in squalor in order to promote a financial product (coins).  It would be good to see more evidence in the next edition.

For more on this topic, recommend listening to LTB episode 133 with Richard Boase.

On p. 13 they write:

Decentralizing a currency, without a top-down authority, requires coordinated global acceptance of a shared means of payment and store of value.

Readers should check out “arewedecentralizedyet” which illustrates that nearly all cryptourrencies in practice have some type of centralized, top-down hierarchy as of July 2018.

On p. 13 they write:

Bitcoin’s blockchain is a distributed, cryptographic, and immutal database that uses proof-of-work to keep the ecosystem in sync.

Worth modifying because the network is not inherently immutable — only digital signatures have “immutability.”25 Also, proof-of-work doesn’t keep any “ecosystem” in sync.  All proof-of-work does is determine who can append the chain.  The “ecosystem” thing is completely unrelated.

On p. 15 they write:

There is no subjectivity as to whether a transaction is confirmed in Bitcoin’s blockchain: it’s just math.

This isn’t quite true.26 Empirically, mining pools have censored transactions for various reasons.  For example, Luke-Jr (who used to run Eligius pool) thinks that SatoshiDice misuses the network; he is also not a fan of what OP_RETURN was being used for by Counterparty.

Also, humans control pools and also manage the code repositories… blockchains don’t fix and run themselves.  So it’s not as simple as: “it’s just math.”

On p. 15 they write an entire paragraph on “immutability”:

The combination of globally distributed computers that can cryptographically verify transactions and the building of Bitcoin’s blockchain leads to an immutable database, meaning the computers building Bitcoin’s blockchain can only do so in an append only fashion. Append only means that information can only be added to Bitcoin’s blockchain over time and cannot be deleted – an audit trail etched in digital granite. Once information is confirmed in Bitcoin’s blockchain, it’s permanent and cannot be erased. Immutability is a rare feature in a digital world where things can easily be erased, and it will likely become an increasingly valuable attribute for Bitcoin over time.

This seems to have a few issues:

  1. As mentioned several times before in this review, “immutability” is only a characteristic of digital signatures, which are just one piece of a blockchain.  Recommend Gwern’s article entitled “Bitcoin-is-worse-is-better” for more details.
  2. Empirically lots of blockchains have had unexpected and expected block reorgs and hard forks, there is nothing fundamental to prevent this from happening to Bitcoin.  See this recent article discussing a spate of attacks on various PoW coins: Blockchain’s Once-Feared 51% Attack Is Now Becoming Regular
  3. The paragraph above ignores the reality that well over 1,000 blockchains are basically dead and Bitcoin itself had a centralized intervention on more than one occasion, such as the accidental hardfork in 2013 and the Bitcoin block size debate from 2015-2018.

On p. 15 they introduce us to the concept of proof-of-work but don’t really explain its own origin as a means of combating spam email in the 1990s.

For instance, while several Bitcoin evangelists frequently (mistakenly) point to Hashcash as the original PoW progenitor, that claim actually legitimately goes to a 1993 paper entitled Pricing via Processing or Combatting Junk Mail by Cynthia Dwork and Moni Naor.  There are others as well, perhaps worth adding in the next edition.27

On p. 16 they write:

Competition for a financial rewad is also what keeps Bitcoin’s blockchain secure.  If any ill-motivated actors wanted to change Bitcoin’s blockchain, they would need to compete with all the other miners distributed globally who have in total invested hundreds of millions of dollars into the machinery necessary to perform PoW.

This is only true for a Maginot Line attack (e.g., attack via hashrate).28 There are  cheaper and more effective out of band attacks, like hacking BGP or DNS.  Or hacking into intermediaries such as exchanges and hosted wallets.  Sure the attacker doesn’t directly change the blocks, but they do set in motion a series of actions that inevitably result in thefts that end up in blocks further down the chain, when the transactions otherwise wouldn’t have taken place.

On p. 17 they write:

The hardware runs an operating system (OS); in the case of Bitcoin, the operating system is the open-source software that facilitates everything described earlier.  This software is developed by a volunteer group of developers, just as Linux, the operating system that underlies much of the cloud, is maintained by a volunteer group of developers.

This isn’t quite right in at least two areas:

  1. Linux is not financial market infrastructure software; Bitcoin originally attempted to be at the very least, a payments network.  There are reasons why building and maintaining FMI is regulated whereas building an operating system typically isn’t.  It has to do with risk and accountability when accidents happen.  That’s why PFMI exists.
  2. At least in the case of Bitcoin (and typically in most other cryptocurrencies), only one group of developers calls the shots via gating the BIP / EIP process.  If you don’t submit your proposals and get it approved through this process, it won’t become part of Bitcoin Core.  For more on this, see: Bitcoin Is Now Just A Ticker Symbol and Stopped Being Permissionless Years Ago

On p. 17 they discuss “private versus public blockchains”:

The difference between public and private blockchains is similar to that between the Internet and intranets.  The internet is a public resource.  Anyone can tap into it; there’s not gate keepers.

This is wrong.  All ISPs gate their customers via KYC.  Not just anyone can set up an account with an ISP, in fact, customers can and do get kicked off for violating Terms of Service.

“The Internet” is just an amalgamation of thousands of ISPs, each of whom have their own Terms of Service.  About a year ago I published an in-depth article about why this analogy is bad and should not be use: Intranets and the Internet.

On p. 18 they write:

Public systems are ones like BItcoin, where anyone with the right hardware and software can connect to the network and access the information therein.  There is no bouncer checking IDs at the door.

This is not quite right.  The “permissionless” characteristic has to do with block making: who has the right to vote on creating/adding a new block… not who has the ability to download a copy of the blockchain.  Theoretically there is no gatekeeper for block making in Bitcoin. Although, there are explicit KYC checks on the edges (primarily at exchanges).

In practice, the capital and knowledge requirements to actually create a new mining pool and aggregate hashpower that is sufficiently capable of generating the right hash and “winning” the scratch-off lottery is very high, such that on a given month just 20 or so block makers are actually involved.29

While there is no strict permissioning of these participants (some come and go over the years), it is arguably a de facto oligopoly based on capital expenditures and not some type of feel-good meritocracy described in this book.30

On p. 18 they write:

Private systems, on the other hand, employ a bouncer at the door. Only entities that have the proper permissions can become part of the network. These private systems came about after Bitcoin did, when enterprises and businesses realized they liked the utility of Bitcoin’s blockchain, but weren’t comfortable or legally allowed to be as open with he information propagated among public entities.

This is not nuanced enough.  What precisely is permissioned on a “permissioned” blockchain is: who gets to do the validation.

While there are likely dozens of “permissioned” blockchain vendors — each of which may have different characteristics — the common one is that the validators are KYC’ed participants.  That way they can be held accountable if there is a problem (like a fork).

For example, many enterprises and businesses tried to use Bitcoin, Ethereum, and other cryptocurrencies but because these blockchains were not built with their use cases in mind, unsurprisingly found that they were not a good fit.

This is not an insult: the “comfort” refrain is tiring because there have been a couple hundred proofs-of-concept on Bitcoin – and variants thereof – to look into whether those chains were fit-for-purpose… and they weren’t.  This passage should be reworded in the second edition.

On p. 18 they write:

Within financial services, these private blockchains are largely solutions by incumbents in a fight to remain incumbents.

Maybe that is the motivation of some stakeholders, but I don’t think I’ve ever been in a meeting in which the participants (banks) specifically said that.  It would be good to have a citation added in the next edition.  Otherwise, as Hitchens said: what can be presented without evidence can be dismissed without evidence.

On p. 18 they write:

While there is merit to many of these solutions, some claim the greatest revolution has been getting large and secretive entities to work together, sharing information and best practices, which will ultimately lower the cost of services to the end consumer. We believe that over time the implementation of private blockchains will erode the position held by centralized powerhouses because of the tendency toward open networks. In other words, it’s a foot in the door for further decentralization and the use of public blockchains.

This is a “proletariat” narrative that is frequently used in many cryptocurrency books.  While there is a certain truth to an angle – collaboration of regulated entities that normally compete with one another – many of the vendors and platforms that they are piloting are actually “open.”

Which brings up the euphemism that some vocal public blockchain promoters like to stake a claim in… the ill-defined “open.”  For instance, coin lobbyists such as Coin Center and coin promoters such as Andreas Antonopoulos regularly advertise that they are experts and advocates of “open” chains but their language is typically filled with strawmen.

For instance, enterprise-specific platforms such as Fabric, Corda, and Quorum are all open sourced, anyone can download and run the code without the permission of the vendors that contribute code or support to the platforms.

Thus, it could be argued that these platforms are “open” too… which they are.

But it is highly unlikely that ideological advocates would ever defend or promote these platforms, because of their disdain and aversion to platforms built by financial organizations. 31

Lastly, this “foot in the door” comment comes in all shapes and sizes; sometimes coin promoters use “Trojan horse” as well.  Either way it misses the point: enterprises will use technology that solves problems for them and will not use technology that doesn’t solve their problem.

In practice, most cryptocurrencies were not designed – on purpose – to solve problems that regulated institutions have… so it is not a surprise they do not use coin-based platforms as FMI.  It has nothing to do with the way the coin platforms are marketed and everything to do with the problems the coins solve.

On p. 19 they write:

Throughout this book, we will focus on public blockchains and their native assets, or what we will define as cryptoassets, because we believe this is where the greatest opportunity awaits the innovative investor.

The authors use the term “innovative investor” a dozen or more times in the book.  It’s not a particularly useful term.32

Either way, later in the book they don’t really discuss the opportunity cost of capital: what are the tradeoffs of an accredited investor who puts their money long term into a coin versus buys equity in a company.  Though, to be fair, part of the problem is that most of the companies that actually have equity to buy, do not publish usage or valuation numbers because they are still private… so it is hard to accurately gauge that specific trade-off.33

On p. 19 they write about Bitcoin maximalism (without calling it that):

We disagree with that exclusive worldview, as there are many other interesting consensus mechanisms being developed, such as proof-of-stake, proof-of-existence, proof-of-elapsed time, and so on.

Proof-of-existence is not a consensus mechanism.  PoE simply verifies the existence of a file at a specific time based on a hash from a specific blockchain.  It does not provide consensus.  This should be reworded in the next edition.

Furthermore, neither proof-of-stake or proof-of-elapsed-time are actual consensus mechanisms either… they are vote ordering mechanisms — a mechanism to prevent or control sybil attacks. 34  See this excellent thread from Emin Gun Sirer.

Chapter 3

On p. 22 they write:

Launched in February 2011, the Silk Road provided a rules-free decentralized marketplace for any product one could imagine, and it used bitcoin as the means of payment.

This isn’t quite true.  Certain guns and explosives were considered off-limits and as a result “The Armory” was spun off.

On p. 22 they write:

Clearly, this was one way that Bitcoin developed its dark reputation, though it’s important to know that this was not endorsed by Bitcoin and its development team.

Isn’t Bitcoin — like all cryptocurrences — supposed to be decentralized?  So how can there be a singular “it” to not endorse something?35

On p. 22 they write:

The drivers behind this bitcoin demand were more opaque than the Gawker spike, though many point to the bailout of Cyprus and the associated losses that citizens took on their bank account balances as the core driver.

This is mostly hearsay as several independent researchers have tried to identify the actual flows coming into and going out of Cyprus that are directly tied to cryptocurrencies and so far, have been unable to.36

On p. 23 they write about Google Search Trends:

We recommend orienting with this tool even beyond cryptoassets, as it’s a fascinating window into the global mesh of minds.

Incidentally, despite the authors preference to the term “cryptoassets” —  according to Google Search Trends, that term isn’t frequently used in search’s yet.

Source: Google

On p. 24 they write:

This diversity has led to tension among players as some  of these cryptoassets compete, but this is nothing like the tension that exists between Bitcoin and the second movement.

Another frequent name typically used to call “the second movement” was Bitcoin 2.0.

For example, back in 2014 and 2015 I interviewed a number of project organizers and attempted to categorize them into buckets, including things like “commodities” and “assets.”  See for instance my guest presentation in 2014 at Plug and Play: (video) (slides).

This label isn’t frequently used as much anymore, but that’s a different topic entirely.

On p. 25 they write an entire section entitled: Blockchain, Not Bitcoin

The authors stated:

Articles like one from the Bank of England in the third quarter of 2014 argued, “The key innovation of digital currencies is the ‘distributed ledger,’ which allows a payment system to operate in an entirely decentralized way, without intermediaries such as banks. In emphasizing the technology and not the native asset, the Bank of England left an open question whether the native asset was needed

[…]

The term blockchain, independent of Bitcoin, began to be used more widely in North America in the fall of 2015 when two prominent financial magazines catalyzed awareness of the concept.

Let’s pull apart the problems here.

First, the “blockchain not bitcoin” mantra was actually something that VCs such as Adam Draper pushed in the fall of 2015.

For instance, in an interview with Coindesk in October 2015 he said:

“We use the word blockchain now. I say bitcoin, and they think that’s the worst thing ever. It just feels like they put up a guard. Then, I switch to blockchain and they’re very attentive and they’re very interested.”

Draper seems ambivalent to the change, though he said he was initially against using it, mostly because he believes it’s superficial. After all, companies that use the blockchain as a payments rail, the argument goes, still need to interface with its digital currency, which is the mechanism for transactions on the bitcoin blockchain.

“When we talk about blockchain, I mean bitcoin,” Draper clarifies. “Bitcoin and the blockchain are so interspersed together, the incentive structure of blockchain is bitcoin.”

Draper believes it’s mostly a “vernacular change”, noting the ecosystem has been through several such transitions before. He rifles off the list of terms that have come and gone including cryptocurrency, digital currency and altcoin.

“It’s moved from bitcoin to blockchain, which makes sense, it’s the underlying tech of all these things,” he added. “I think in a lot of ways blockchain is FinTech, so it will become FinTech.”

If you’re looking for more specific examples of companies that began using “blockchain” as a euphemism for “bitcoin” be sure to check out my post: “The Great Pivot.”

The authors also fail to identify that there were lots of early stage vendors and entrepreneurs working in the background on educating policy makers and institutions on what the vocabulary was and how the various moving pieces worked throughout 2015.

Want evidence?

Check out my own paper covering this topic and a handful of vendors in April 2015: Consensus-as-a-service.  This paper has been cited dozens of times by a slew of academics, banks, regulators, and so forth.  And contra Draper: you don’t necessarily need a coin or token to incentivize participants to operate a blockchain.37

On p. 26 they write:

A private blockchain is typically used to expedite and make existing processes more efficient, thereby rewarding the entities that have crafted the software and maintain the computers. In other words, the value creation is in the cost savings, and the entities that own the computers enjoy these savings. The entities don’t need to get paid in a native asset as reward for their work, as is the case with public blockchains.

First, not all private blockchains are alike or commoditized.

Two, this statement is mostly true.  At least those were the initially pitches to financial institutions.  Remember the frequently cited Oliver Wyman / Santander paper from 2015?  It was about cost savings.  Since then, the story has evolved to also include revenue generation.

For more up-to-date info on the “enterprise” blockchain world, recommend reading:

On p. 26 they write:

On the other hand, for Bitcoin to incentivize a self-selecting group of global volunteers, known as miners, to deploy capital into the mining machines that validate and secure bitcoin transactions, there needs to be a native asset that can be paid out to the miners for their work. The native asset builds out support for the service from the bottom up in a truly decentralized manner.

This may have been true in January 2009 but is not true in July 2018.  There are no “volunteers” in Bitcoin mining as running farms and pools have become professionalized and scaled in industrial-sized facilities.

Also, that last sentence is also false: virtually every vertical of involvement is dominated by centralized entities (e.g., exchanges, hosted wallets, mining manufacturing, etc.).

On p. 27 they write:

Beyond questioning the need for native cryptoassets – which would naturally infuriate communities that very much value their cryptoassets – tensions also exist because public blockchain advocates believe the private blockchain movement bastardizes the ethos of blockchain technology. For example, instead of aiming to decentralize and democratize aspects of the existing financial services, Masters’s Digital Asset Holdings aims to assist existing financial services companies in adopting this new technology, thereby helping the incumbents fight back the rebels who seek to disrupt the status quo.

Ironically, virtually all major cryptocurrency exchanges now have institutional investors and/or partnerships with regulated financial institutions.38 Like it or not, but the cryptocurrency world is deep in bed with the very establishment that it likes to rail at on social media.

Also, Bitcoin again is at most a payments network and does not actually solve problems for existing financial service providers on their many other lines of business.

On p. 27 they write:

General purpose technologies are pervasive, eventually affecting all consumers and companies. They improve over time in line with the deflationary progression of technology, and most important, they are a platform upon which future innovations are built. Some of the more famous examples include steam, electricity, internal combustion engines, and information technology. We would add blockchain technology to this list. While such a claim may appear grand to some, that is the scale of the innovation before us.

If you’re not familiar with hyperbole and technology, I recommend watching and reading the PR for the Segway when it first came out.  Promoters and enthusiasts repeatedly claimed it would change the way cities are built.  Instead, it is used as a toy vehicle to shuffle tourists around at national parks and patrol suburban malls.

Maybe something related to “blockchains” is integrated into various types of infrastructure (such as trade finance), but the next edition should provide proof of some actual user adoption.

For example, the authors in the following paragraph say that “public blockchains beyond Bitcoin that are growing like gangbusters.”

Which ones?  In the approximately 9 months since this book was published, most “traction” has been issuing ICOs on these public blockchains.  Currently the top 3 Dapps at the time of this writings, run decentralized exchanges… which trade ICO tokens.  Now maybe that changes, that is totally within the realm of possibility.39  But let’s take the hype down a few notches until consistent measurable user growth is observed.

On p. 28 they write:

The realm of public blockchains and their native assets is most relevant to the innovative investor, as private blockchains have not yielded an entirely new asset class that is investable to the public.

The wording and attitude should be changed for the next edition.  This makes it sound as if the only real innovation that exists are network-based coins that a group of issuers continually create and that you, the reader, should buy.

By downplaying opportunities being tackled by enterprise vendors, the statement glosses over the operating environment enterprise clients reside in and how they must conduct unsexy due diligence and mundane requirements gathering because they have to follow laws and regulations otherwise their customers won’t use their specific platforms.

These same vendors could end up “tokenizing” existing financial instruments, it just takes a lot longer because there are real legal consequences if something breaks or forks.40

On p. 28 and 29 they ask “where is blockchain technology in the hype cycle.”

This section could be strengthened by revisiting and reflecting on the huge expectations that these coin projects have raised and were raising at the time the book was first being written.  How were expectations eventually managed?

Specifically, on p. 29 they write:

While it’s hard to predict where blockchain technology currently falls on Gartner’s Hype Cycle (these things are always easier in retrospect), we would posit that Bitcoin is emerging from the Trough of Disillusionment. At the same time, blockchain technology stripped of native assets (private blockchain) is descending from the Peak of Inflated Expectations, which it reached in the summer of 2016 just before The DAO hack occurred (which we will discuss in detail in Chapter 5).

The first part is probably wrong if measured by actual usage and interest (as shown by the Google Search image a few sections above).41

The second part of the paragraph is probably right, though the timing was probably a little later: likely in the last quarter of 2016 when the first set of pilots turned out to require substantially larger budgets.  That is to say, in order to be put platforms into production most small vendors with short runways realized they needed more capital and time to integrate solutions into legacy systems.  In some cases, that was too much work and a few vendors pivoted out of enterprise and created a coin or two instead.42

Chapter 4

On p. 31 they write:

Yes, the numbers have changed a lot since.  Crypto moves fast.

This isn’t a hill I want to die on, but historically “crypto” means cryptography.  Calling cryptocurrencies “crypto” is basically slang, but maybe that’s the way it evolves towards.

On p. 32 they write:

Historically, crypotassets have most commonly been referred to as cryptocurrencies, which we think confuses new users and constrains the conversation on the future of these assets. We would not classify the majority of cryptoassets as currencies, but rather most are either digital commodities (cryptocommodities), provisioning raw digital resources, or digital tokens (cryptotokens), provisioning finished digital goods and services.

They have a point but a literature review could have been helpful at showing this categorization is neither new nor novel.

For instance, the title of my last book was: The Anatomy of a Money-like Informational Commodity.  A bit long-winded?

Where did I come up with that odd title?

In 2014, an academic paper was published that attempted to categorize Bitcoin from an ontological perspective. Based on the thought process presented in that paper, the Dutch authors concluded that Bitcoin is a money-like informational commodity.  It isn’t money and isn’t a currency (e.g., isn’t actually used).434445

On p. 32 they write:

In an increasingly digital world, it only makes sense that we have digital commodities, such as computer power, storage capacity, and network bandwidth.

This book only superficially explains each of these and doesn’t drill down into why these “digital commodities” can’t be priced in good old fashioned money or why an internet coin is needed.  If this is a good use case, is it just a matter of time before Blizzard and Steam get on board?  Maybe worth looking at what entertainment companies do for the next edition.

On p. 33 they write about “why crypto” as shorthand for “cryptoassets” instead of “cryptography.”

For historical purposes, Matt Blaze, the most recent owner of crypto.com, provides a good explanation that could be included or cited next edition: Exhaustive Search Has Moved.

On p. 35 they write:

Except for Karma, the problem with all these attempts at digital money was that they weren’t purely decentralized — one way or another they relied on a centralized entity, and that presented the opportunity for corruption and weak points for attack.

This seems to be conflating two separate things: anonymity with electronic cash.  You can have one without the other and do.46

Also, the BIP process is arguably a weak point for attack.47

On p. 35 they write:

One of the most miraculous aspects of bitcoin is how it bootstrapped support in a decentralized manner.

The fundamental problem with this statement is that it is inaccurate.48 Large amounts of centralization continues to exist: mining, exchanges, BIP vetting, etc.

On p. 35 they write:

Together, the combination of current use cases and investors buying bitcoin based on the expectation for even greater future use cases creates market demand for bitcoin.

Is that a Freudian slip?

Speculators buy bitcoin because they think can sell bitcoins at a higher price because a new buyer will come in at a later date and acquire the coins from them.49

For example, last month Hyun Song Shin, the BIS’s economic adviser and head of research, said:

“If people pay to hold the tokens for financial gain, then arguably they should be treated as a security and come under the same rigorous documentation requirements and regulation as other securities offered to investors for a return.”

In the United States, recall that one condition for what a security is under the Howey framework is an expectation of profit.

Whether Bitcoin is a security or not is a topic for a different post.50

On p. 36 they write:

For the first four years of Bitcoin’s life, a coinbase transaction would issue 50 bitcoin to the lucky miner.

[…]

On November 28, 2012, the first halving of the block reward from 50 bitcoin to 25 bitcoin happened, and the second halving from 25 bitcoin to 12.5 bitcoin occurred on July 9, 2016.  The thrid will happen four years from that date, in July 2020. Thus far, this has made bitcoin’s supply schedule look somewhat linear, as shown in Figure 4.1.

Technically incorrect because of the inhomogeneous Poisson process and the relatively large amounts of hashrate that came online, the first “4 year epoch” was actually less than 4 years.

Whereas the genesis block was released in January 2009, the first halving should have occurred in January 2013, but instead it took place in November 2012.  Similarly, the second halving should have — if rigidly followed — taken place in November 2016, but actually occurred in July 2016 because even more hashrate had effectively accelerated block creation a bit faster than expected.

On p. 36 they write:

Based on our evolutionary past, a key driver for humans to recognize something as valuable is its scarcity. Satoshi knew that he couldn’t issue bitcoin at a rate of 2.6 million per year forever, because it would end up with no scarcity value.

This is a non sequitur.51

Maybe Satoshi did or did not think this way, but irrespective of his or her view, having a finite amount of something means there is some amount of scarcity… even if it is a relatively large amount.  Now this discussion obviously leads down the ideological road of maximalism which we don’t have time to go into today.52  Suffice to say that bitcoin is fundamentally not scarce due to its inability to prevent forks that could increase or decrease the money supply.

On p. 37 they write:

Long term, the thinking is that bitcoin will become so entrenched within the global economy that new bitcoin will not need to be issued to continue to gain support. At that point, miners will be compesnated for processing transaction and securing the network through fees on high transaction volumes.

This might happen but hasn’t yet.

For instance, Kerem Kaskaloglu (see p. 71) created a cartoon model to show what this should look like.

But the actual curves do not exist (yet).

Recommended reading: Analysing Costs & Benefits of Public Blockchains (with Data!) by Colin Platt.

Notice how reality doesn’t stack up to the idealized version (yet)?

On p. 39 they write about BitDNS, Namecoin, and NameID:

Namecoin acts as its own DNS service, and provides users with more control and privacy.

In the next edition they should mention how Namecoin ended up having one mining pool that consistently had over 51% of the network hashrate and as a result, projects like Onename moved over to Bitcoin and then eventually its own separate network altogether (Blockstack).

On p. 41 they write:

This is an important lesson, because all cryptocurrencies differ in their supply schedules, and thus the direct price of each cryptoasset should not be compared if trying to ascertain the appreciation potential of the asset.

One way to strengthen this section is to provide a consistent model or methodology to systemically value a coin that doesn’t necessarily involve future demand from new investors.  Maybe in the second edition they could provide a way to compare or at least say that no valuation model works yet, but here is a possible alternative?

On p. 42 they write:

A word to the wise for the innovative investor: with a new cryptocurrency, it’s always important to understand how it’s being distributed and to whom (we’ll discuss further in Chapter 12). If the core community feels the distribution is unfair, that may forever plague the growth of the cryptocurrency.

Two things:

  1. If a cryptocurrency or “cryptoasset” is supposed to be decentralized, how can it have a singular “core” community too?
  2. In practice, most retail buyers of coins don’t seem to care about centralization or even coin distribution.  Later in the book they mention Dash and its rapid coin creation done in the first month.  Few investors seem to care. 53

On p. 42 they write:

Ripple has since pivoted away from being a transaction mechanism for the common person and instead now “enables banks to send real-time international payments across network.” This focus plays to Ripple’s strengths, as it aims to be a speedy payment system that rethinks correspondent banking but still requires some trust, for which banks are well suited.

If readers have time, I recommend looking through the marketing material of OpenCoin, Ripple Labs, and Ripple from 2013-2018 because it has changed several times.54 Currently there are a couple of different products including xRapid and xCurrent which are aimed at different types of users and as a result, the passage above should be updated.

On p. 43 they write:

Markus used Litecoin’s code to derive Dogecoin, thereby making it one more degree of separation removed from Bitcoin.

This is incorrect.  Dogecoin was first based off of Luckycoin and Luckycoin was based on a fork of Litecoin.  The key difference involved the erratic, random block reward sizes.

On p. 45 they write about Auroracoin.

Auroracoin is a cautionary tale for both investors and developers. What began as a seemingly powerful and compelling use case for a cryptoasset suffered from its inability to provide value to the audience it sought to impact. Incelanders were given a cryptocurrency with little education and means to use it. Unsurprisingly, the value of the asset collapsed and most considered it dead. Nevertheless, cryptocurrencies rarely die entirely, and Auroracoin may have interesting times ahead if its developer team can figure out a way forward.

A few problems:

  1. Auroracoin is still basically dead
  2. Over 1,000 other coins have died, so “rarely” should be changed in the next edition
  3. Why does a decentralized cryptocurrency have a singular development team, isn’t that centralization?

On p. 46 they write:

Meanwhile, Zcash uses some of the most bleeding-edge cryptography in the world, but it is one of the youngest cryptoassets in the book and suitable only for the most experienced cryptoasset investors.

In the next edition it would be helpful to specifically detail what makes someone an experienced “cryptoasset” investor.

On p. 46 they write:

Adam Back is considered the inspiration for Satoshi’s proof-of-work algorithm and is president of Blockstream, one of the most important companies in the Bitcoin space.

While Hashcash was cited in the original Satoshi whitepaper, recall above, that the original idea can be directly linked to a 1993 paper entitled Pricing via Processing or Combatting Junk Mail by Cynthia Dwork and Moni Naor.  Also, it is debatable whether or not Blockstream is an important company, but that’s a different discussion altogether.

On p. 46 they write:

Bitcoin and the permissionless blockchain movement was founded on principles of egalitarian transparency, so premines are widely frowned upon.

What are the founding principles?  Where can we find them?   Maybe it exists, but at least provide a footnote.55

On p. 47 they write:

While many are suspicious of such privacy, it should be noted that it has tremendous benefits for fungibility.  Fungibility refers to the fact that any unit of currency is as valuable as another unit of equal denomination.

Cryptocurrencies such as Bitcoin are not fungible.  Be sure to listen to this interview with Jonathan Levin from May.  See also: Bitcoin’s lien problem and also nemo dat.

On p. 48 they write:

Monero’s supply schedule is a hybrid of Litecoin and Dogecoin. For monero, a new block is appended to its blockchain every 2 minutes, similar to Litecoin’s 2.5 minutes.

In the next edition I’d tighten the language a little because a new monero block is added roughly or approximately every 2 minutes, not exactly 2 minutes.

On p. 48 they write:

By the end of 2016, Monero had the fifth largest network value of any cryptocurrency and was the top performing digital currency in 2016, with a price increase over the year of 2,760 percent. This clearly demonstrates the level of interest in privacy protecting cryptocurrency. Some of that interest, no doubt, comes from less than savory sources.

That is a non sequitur.

Where are the surveys of actual Monero purchasers during this time frame and their opinions for why they bought it? 56

For instance, in looking at the two-year chart above, how much on-chain activity in 2016 was due to speculators interest in “privacy” versus coin flipping?  It is impossible to tell.  Even with analytics all you will be able to is link specific users with purchases.  Intent and motivation would require  surveys and subpoenas; worth adding if available in the next edition.

On p. 48 they write:

Another cryptocurrency targeting privacy and fungiblity is Dash.

Is Dash really fungible though?  That isn’t explored in this section.  Plus Dash has a CEO… how is that decentralized?

On p. 49 they write:

In fact, Duffield easily could have relaunched Dash, especially considering the network was only days old when the instamine began to be widely talked about, but he chose not to.  It would have been unusual to relaunch, given that other cyrptocurrencies have done so via the forking of original code. The creators of Monero, for example, specifically chose not to continue building off Bytecoin because the premine distribution had been perceived as unfair.

How is this not problematic: for a “decentralized” cryptocurrency to be controlled and run by one person who can unilaterally stop and restart a chain?

It actually is common, that’s the confusing part.  Why have regulators such as FinCEN and the SEC not provided specific guidance (or enforcement) on the fact that one or a handful of individuals actually are unlicensed / non-exempted administrators of financial networks?

On p. 49 they write:

The Bitcoin and blockchain community has always been excited by new developments in anonymity and privacy, but Zcash took that excitement to a new level, which upon issuance drove the price through the roof.

Putting aside the irrational exuberance for Zcash itself, why do the authors think so many folks are vocal about privacy and anonymity?

Could it be that a significant portion of the coins are held by thieves of exchanges and hosted wallets who want to launder them?  Here are a few recent examples:

On p. 49 they write:

Through his time at DigiCash and longstanding involvement in cryptography and cryptoassets, Zooko has become one of the most respected members in the community.

Let’s put aside Zooko and Zcash.  The phrase, “the community” frequently appears in this book and similar books.  It is an opaque, ill-defined (and cliquish) term that is frequently used by coin promoters to shun certain people that do not promote specific policies (and coins).57  It’s a term that should be clearly defined in the next edition.

On p. 50 they write:

While it is still early days for Zcash, we are of the belief that the ethics and technology chops of Zooko and his team are top-tier, implying that good things lie in wait for this budding cryptocurrency.

The statement above seems like an endorsement.  Did either of the authors own Zcash just as the book came out?  And what are the specific ethics they speak of?  And why do the authors call it a cryptocurrency instead of a “cryptoasset”?

Chapter 5

On p. 51 they write:

For example, the largest cryptocommodity, Ethereum, is a decentralized world computer upon which globally accessible and uncensored applications can be built.

How is it a commodity?  Maybe it is and while they use a lot of words in this chapter, they never really precisely why it is in a way that makes much sense.  Recommend modifying the first few pages of this chapter.

On p. 52 they write about “smart contracts” and mention Nick Szabo.

For a future edition I recommend diving deeper into the different uses and definitions of smart contracts.  Also could be worth following Tony Arcieri suggestion:

I really like “authorization programs” but people really seem married to the “smart contract” terminology. Never mind Martin Abadi’s work on authorization languages (e.g. Binder) predates Nick Szabo’s “smart contracts” by half a decade…

For instance, there has been a lot of work done via the Accord Project with Clause.io and others such as IBM and R3.  Also worth looking into Barclay’s and UCL’s effort with the Smart Contract Templates.  A second edition that aims to be up-to-date should look at these developments and how they have evolved from what Abadi and Szabo first proposed.

On p. 53 they mentioned that Counterparty “was launched in January 2014.”  Technically that is not true.  The fundraising (“proof-of-burn”) took place in January and it was the following month that it “launched.”

On p. 54 they write:

The reason Bitcoin developers haven’t added extra functionality and flexibility directly into its software is that they have prioritized security over complexity. The more complex transactions become, the more vectors there are to exploit and attack these transactions, which can affect the network as a whole. With a focus on being a decentralized currency, Bitcoin developers have decided bitcoin transactions don’t need all the bells and whistles.

This is kind of true but also misses a little history.

For instance, Zerocoin was first proposed as an enhancement directly built into Bitcoin but key, influential Bitcoin developers who maintained the repository, pushed back on that for various technological and philosophical reasons.  As a result, the main authors of that proposal went on to form and launch Zcash.58

On p. 56 they write:

Buterin understood that building a system from the ground up required a significant amount of work, and his announcement in January 2014 involved the collaboration of a community of more than 15 developers and dozens of community members that had already bought into the idea.

I assume the authors mean, following the Bitcoin Miami announcement in January 2014, but they don’t really say.  I’m not sure how they arrive at the specific headcount numbers they did above, would be good to add a footnote in the future.

On p. 56 they write:

The ensuing development of the Bitcoin software before launch mostly involved just two people, Satoshi and Hal Finney.

This assumes that Satoshi is not Hal Finney, maybe he was.  But it should also include the contributions of Ray Dillinger and others.

On p. 56 they write:

Buterin also knew that while Ethereum could run on ether, the people who designed it couldn’t, and Ethereum was still over a year away from being ready for release. So he found funding through the prestigious Thiel Fellowship.

This is inaccurate.

After reading this, I reached out to Vitalik Buterin and he said:59

That’s totally incorrect. Like the $100k made very little difference.

So that should be corrected in the next version.

On p. 57 they write:

Ethereum democratized that process beyond VCs. For perspective on the price of ether in this crowdsale, consider that at the start of April 2017, ether was worth $50 per unit, implying returns over 160x in under three years. Just over 9,000 people bought ether during the presale, placing the average initial investment at $2,000, which has since grown to over $320,000.

There are a few issues with this:

  1. Ethereum did a small private and a larger public sale.  We do have the Terms and Conditions of the public sale but we do not know how many participated in the private sale and under what terms (perhaps the T&Cs were identical).
  2. Over the past 12 months there has been a trend for the “top shelf” ICOs to eschew a public sale (like Ethereum did) and instead, conduct private placement offerings with a few dozen participants at most… typically VCs and HNWIs.
  3. There are lots of dead ICOs.  One recent study found that, “56% of crypto startups that raise money through token sales die within four months of their initial coin offerings.”  Ethereum is definitely an exception to that and should be highlighted as such.

On p. 57 they write:

The extra allocation of 12 million ether for the early contributors and Ethereum Foundation has proved problematic for Ethereum over time, as some feel it represented double dipping. In our view, with 15 talented developers involved prior to the public sale, 6 million ether translated to just  north of $100,000 per developer at the presale rate, which is reasonable given the market rate of such software developers.

Who are these 15 developers, why is that the number the authors have identified?

Also, how much should FOSS developers be compensated and/or the business model around that is a topic that isn’t really addressed at all in this book, yet it is a glaring omission since virtually all of the projects they talk about are set up around funding and maintaining a FOSS team(s).  Maybe some findings will be available for the next version.

On p. 57 they write:

That said, the allocation of capital into founders’ pockets is an important aspect of crowdsales. Called a “founder’s reward,” the key distinction between understandable and a red flag is that founders should be focused on building and growing the network, not fattening their pockets at the expense of investors.

Because coins do not typically provide coin holders any type of voting rights, it is legally dubious how you can hold issuers and “founders” accountable.60

That is why, as mentioned above, there has been an evolution of terms and conditions such that early investors in a private placement for coins may have certain rights and that the founders have certain duties that are all legally enforceable (in theory).

Because no one is publishing these T&Cs, it is hard to comment on what are globally accepted practices… aside from allowing early investors liquidity on secondary markets where they can quickly dump coins.61

Without the ability to legally hold “founders” accountable for enriching themselves at the expense of the project(s), the an interim solution has been to get on social media and yell alot… which is really unprofessional and hit or miss.  Another solution is class action lawsuits, but that’s a different topic.

Also, I put the “founders” into quotes because these seem to be administrators of a network, maybe in the next edition they will be described as such?

On p. 58 they write:

Everyone trusts the system because it runs in the open and is automated by code.

There is lots of different types of open source code that runs on systems that are automated.  For instance, the entire Linux, Apache, and Mozilla worlds predate Bitcoin.  That isn’t new here.62

Also, as mentioned in the previous chapter: Researchers: Last Year’s ICOs Had Five Security Vulnerabilities on Average.  As a result, this has led to the loss of nearly $400 million in ICO funds.

Readers and investors shouldn’t just trust code because someone created a GitHub repo and said their blockchain is open and automated.63

On p. 59 they write:

Most cryptotokens are not supported by their own blockchain.

This is actually true and problematic because it creates centralization risks and the ability for one party to unilaterally censor transactions and/or act as administrators.

For instance, a few days ago, Bancor had a bug that was exploited and about $13.5 million in ETH were stolen… and Bancor was able to freeze the BNT.  That’s because BNT is effectively a centrally administered ERC20 token on top of Ethereum.

Ignoring for the moment whether or not BNT is or is not a security, this is not the first time such issuance and centralization has occurred.  See the colored coin mania from 2014-2015.

On p. 60 they write about The DAO:

Over time, investors in these projects would be rewarded through dividends or appreciation of the service provided.

They mention regulators briefly later on – about SEC views – but most of the content surrounding crowdsales was non-critical and borderline promotional.64  Might be worth adding more meat around this in the next edition.

On p. 61 they write about The DAO:

The hack had nothing to do with an exchange, as had been the case with Mt. Gox and other widely publicized Bitcoin-related hacks. Insted, the flaw existed in the software of The DAO.

Is it really possible to call it a “flaw” or “hack” and not a feature?  See also: “Code is not law” as well as “Cracking MtGox.”

On p. 61 they write:

However, a hard fork would run counter to what many in the Bitcoin and Ethereum communities felt was the power of a decentralized ledger.  Forcefully removing funds from an account violated the concept of immutability.

Just a few pages earlier the authors were saying that the lead developer behind Dash should have restarted the network because that was common and now they’re saying that doing a block reorg is no bueno.  Which is it?

Why should the reader care what a nebulously defined “community” says, if it is is not defined?

The reason we have codes of conduct, terms of service, and EULAs is to specifically answer these types of problems when they arise.

Since public blockchains are supposed to be anarchic, the lack of formal governance is supposed to be a feature, right?   That’s a whole other topic but suffice to say that these two sentences should be reworded in the next edition to incorporate the wisdom found in the Lexicon paper.

On p. 62 they write:

Many complained of moral hazard, and that this would set a precdent for the U.S. government or other powerful entities to come in someday and demand the same of Ethereum for their own interests. It was a tough decision for all involved, including Buterin, who while not directly on The DAO developer team, was an admistrator.

This is the first and only time they point out that key participants collectively making governance decisions are administrators… a point I have been highlighting throughout this review.

I don’t think it is fair to label Vitalik Buterin as a singular administrator, because if he was, he wouldn’t have had to ask exchanges to stop trading ether and/or The DAO token.  Perhaps he was collectively involved in that process, but mining pool operators and exchange managers are arguably just as important if not more so.  See also: Sufficiently Decentralized Howeycoins

On p. 62 they write:

While hard fork are often used to upgrade a blockchain architecture, they are typically employed in situations where the community agrees entirely on the beneficial updates to the architecture. Ethereum’s situation was different, as many in the community opposed a hard fork. Contentious hard forks are dangerous, because when new software updates are released for a blockchain in the form of a hard fork, there are then two different operating systems.

A few things:

  1. Notice the continued use of an ill-defined “the community”
  2. How is agreement or disagreement measured?  During the Bitcoin block size debate, folks tried to use various means to express interest, most of which resulted in sybil attacks such as retweets and upvotes on social media by an army of bots.
  3. Is any fork non-contentious.  Surely if we looked hard enough, we could always find more than a handful of coin owners and/or developers that disagreed with the proposal.  Does that mean you should ignore them?  Whose opinion matters?  These types of questions were never really formally answered either in the case of the Bitcoin Segwit / Bitcoin Cash fork… or in the Ethereum / Ethereum Classic / The DAO fork.  Governance is pretty much an off-chain popularity contest, just like voting for politicians.65

On p. 63 they write:

The site for Ethereum Classic defines the cryptoasset as “a continuation of the original Ethereum blockchain–the classic version preserving untampered history; free from external interference and subjecitve tampering of transactions.”

This could be revised since Ethereum Classic itself has now had multiple forks.

As mentioned in a previous post last year:

Ethereum Classic: this small community has held public events to discuss how they plan to change the money supply; they video taped this coordination and their real legal names are used; only one large company (DCG) is active in its leadership; they sponsor events; they run various social media accounts

There has been lots of external interference, that’s been the lifeblood of public blockchains… because they don’t run themselves, people run and administer them.

Continuing on p. 63 they write:

While many merchants understably complain about credit card fees of 2 to 3 percent, the “platform fees” of Airbnb, Uber, and similar platform services are borderline egregious.

Maybe they are, maybe they are not.66 What is the right fee they should be?  Miners take a cut, exchanges take a cut, developers take a cut via “founder’s funds.”

The next edition should give a step-by-step comparison to show why fee structures are egregious (maybe they are, it just is not clear in this book).

On p. 64 they wrote about Augur.  Incidentally, Augur finally launched in early July while writing this review.  I have an origin story but will keep that for later.

On p. 65 they wrote about Filecoin:

For example, a dApp may use a decentralized cloud storage system like Filecoin to store large amounts of data, and another cryptocommodity for anonymized bandwidth, in addition to using Ethereum to process certain operations.

A couple thoughts:

  1. That’s the theory, though Filecoin hasn’t launched yet — why do they get the benefit of the doubt yet other projects don’t?
  2. There is no price or use comparison in this chapter or elsewhere… the book could be strengthened if it provided more evidence of adoption because we have seen that running decentralized services such as Tor or Freenet have been less than spectacular.

On p. 65 they write:

Returning to the fundamentals of investment theory will allow innovative investors to properly position their overarching portfolio to take advantage of the growth of cryptoassets responsibly.

It is still unclear what an “innovative investor” is — at least the way these authors describe it.67

Chapter 6

On p. 69 Tatar writes:

Not only did I decide to inveset in bitcoin, I decided to place the entirety of that year’s allocation for my Simplified Employee Pension (SEP) plan into bitcoin. When I announced what I had done in my article “Do Bitcoin Belong in your Retirement Portfolio?,” it created a stir online and in the financial planning community.

This was one of just a couple places where the authors actually disclose that they own specific coins, next edition they should put it up front.

On p. 70 Tatar writes:

Was I chasing a similar crash-and-burn scenario with bitcoin? Even my technologically and investment savvy son, Eric, initially criticized me about bitcoin. “They have these things called dollar bills, Dad. Stick to using those.”

Eric is probably right: that the authors of this book accepted traditional money for their book (Amazon doesn’t currently accept cryptocurrencies).

Based on their views presented in this book, the authors probably don’t spend (many) coins they may have in the portfolio, instead holding on to them with the belief that other investors will bid up the price (measured in actual money).

On p. 77 they write about the GFC prior to 2008:

Becoming a hedge fund manager became all the rage for business-minded students when it was revealed that the top 25 hedge fund managers earned a total of $22.3 billion in 2007 and $11.6 billion in 2008.

Coincidentally a similar “rage” for running cryptocurrency-related funds has occured in the past 18 months, especially for ICOs.

More than two hundred “funds” quickly popped up in order to gobble up coins during coin mania.  At least 9 have closed down through April and many more were down double digits due to a bear market (and not hedging).

Chapter 7

On p. 83 they write:

Bitcoin is the most exciting alternative asset in the twenty-first century, and it has paved the way for its digital siblings to enjoy similar success.

It is their opinion that this is the case, but the authors don’t really provide a lot of data to reinforce it yet, other than the fact that there have been some bull runs due to exuberance.68 Worth rewording in the next edition.

On p. 83 they write:

Because bitcoin can claim the title of being the oldest cryptoasset…

Historically it is not.  It may be the oldest coin listed on a liquid secondary market, but there were cryptocurrencies before bitcoin.

On p. 85 Berniske writes:

Similarly, I (Chris) didn’t even consider investing in bitcoin when I first heard about it in 2012. By the time I began considering bitcoin for my portfolio in late 2014, the price was in the mid $300s, having increased 460,000-fold from the initial exchange rate.

I believe this is the only time in the book that Burniske discloses any coin holdings.

On p. 85 they make some ridiculous comparison with the S&P 500, DJIA, NASDAQ 100… and Bitcoin.

The former three are indices of multiple regulated securities.  The latter is just one coin that is easily influenced and manipulated by external unaccountable parties.  How is that an apples to apples comparison?

On p. 87 they continue by comparing Bitcoin with Facebook, Google, Amazon, and Netflix.

Again, these are regulated securities that reflect cash flows and the financial health of multinational companies… Bitcoin has no cash flows and isn’t (yet) setup to be a company… and isn’t regulated (no KYC/AML at the mining farm or mining pool level).

Bitcoin was originally built to be an e-cash transmission network, a decentralized MSB.69 How is comparing it with non-MSBs a useful comparison?

On p. 88 they write:

Remember that, as of January 2017, bitcoin’s network value was 1/20, 1/22, 1/3, and 1/33 that of the FANG stocks respectively. Therefore, if bitcoin is to grow to a similar size much opportunity remains.

This whole section should be probably be modified because these aren’t apples-to-apples comparisons.  FANG stocks represent companies that have to build and ship multiple products in order to generate continuous revenue.

With Bitcoin, it is bitcoin that is the product, nothing else is being shipped nor is revenue being generated70

Maybe the price of a bitcoin — as measured with actual money — does reach a 1:1 or even surpass the stocks above.  But a new version of this book could be strengthened with an outline on how it could do so sustainably.

Also, the whole “market cap” topic should be removed from next edition as well.  About 20% of all bitcoins have been lost or destroyed and this is never reflected in those exuberant “market cap” stories.  See: Nearly 4 Million Bitcoins Lost Forever, New Study Says

On p. 92 they write about volatility:

Upon launch, cryptoassest tend to be extremely volatile because they are thinly traded markets.

Actually, basically all cryptocurrencies including the ones that the authors endorse throughout the book — are still very volatile.

Below is one illustration:

Source: JP Koning

The authors do have a couple narrow, daily volatility charts in the book, but none that provide a similar wideview comparison with something that is remotely comparable (Bitcoin versus Twitter doesn’t make any sense).

On p. 101 they write:

Cryptoassets have near-zero correlation to other captial market assets.

That’s loosey goosey at best.71

For instance, as pointed out in multiple articles this year: Bitcoin and other cryptocurrencies tend to be locked together – and that’s a big problem

On p. 102 they write:

In contrast, the past few years have been more nuanced: bitcoin’s volatily has calmed, yet it retains a low correlation with other assets.

That first part is untrue, as shown by the chart above from JP Koning.  The second part is relative.72

Chapter 8

On p. 107 they write:

The Securities and Exchange Commission has thus far steered clear of applying a specific label to all cryptoassets, though in late July 2017 it did release a report detailing how some cryptoassets can be classified as securities, with the most notable example being The DAO.

That’s pretty much the extent of the authors analysis of the issue.  Granted they aren’t lawyers but this is a pretty big deal, maybe in the next edition beef this up?

On p. 107 they write:

While it’s a great validation of cryptoassets that regulators are working to provide clarity on how to classify at least some of them, most of the existing laws set forth suffer from the same flaw: agencies are interpereting cryptoassets through the lens of the past.

From this wording it seems that the authors want laws changed or modified to protect their interests and the financial interests of their LPs.  This isn’t the first or last time that someone with a vested interest lobbies to get carve outs, exceptions, or entire moratoriums.

Maybe that it is deserved, but it’s not well-articulated in this chapter other than to basically call regulators “old-fashioned” and out of touch with technology.73 Could be worth rethinking the wording here.

On p. 107 they write:

Just as there is diversity in equities, with analsts segmenting companies depending on their market capitalization, sector, or geography, so too is there diversity in cryptoassets. Bitcoin, litecoin, monero, dash, and zcash fulfill the three definitions of a currency: serving as a means of exchange, store of value and unit of account.

This is empirically incorrect.  None of these coins functions as a unit of account, they all depend on and are priced in… actual money.74

There are lots of reasons for why this is case but that is beyond the scope of this review. 7576

On p. 110 they write about ETFs:

It should be noted that when we talk about asset classes we are not doing so in the context of the investment vehicle that may “house” the underlying asset, whether that vehicle is a mutual fund, ETF, or separately managed account.

They don’t really discuss it in the book, but just so readers are aware, there have been about 10 Bitcoin-only ETFs proposed in the US, all of which have been rejected by the SEC (or applications were voluntarily removed).

Curious to know why?  See the March 10, 2017 explanation from the SEC.

Note: this hasn’t stopped sponsors from re-applying.  In the process of writing this review, the CBOE filed for a Bitcoin ETF.

On p. 111 they write:

Much of the thinking in this chapter grew out of a collaboration between ARK Invest and Coinbase through late 2015 and into 2016 when the two firms first made the claims that bitcoin was ringing the bell for a new asset class.

Just to be clear: the joint paper they published in that time frame was a bit superficial as it lacked actual user data from Coinbase exchanges (both GDAX and the consumer wallet).  I pointed that out back then and this book is basically an expanded form of that paper: where is specific usage data on Coinbase?  The only way we have learned any real user numbers about Coinbase is from an IRS lawsuit.

For instance, a future edition should try to differentiate on-chain activity that is say, gambling winnings or miners payouts from exchange arbitrage or even coin shuffling.  Their analysis should be redone once they remove the noise from the signal (e.g., not all transactional activity is the same).

This is a real challenge and not a new issue.  For instance, see: Slicing data.

On p. 112 they write:

Cryptoassets adhere to a twenty-first century model of governance unique from all other asset classes and largely inspired by the open source software movement. The procurers of the asset and associated use cases are three pronged. First, a group of talented software developers decide to create the blockchain protocol or distributed application that utilizes a native asset. These developers adhere to an open contributor model, which means that over time any new developer can earn his or her way onto the development team through merit.

There is no new governance model.

In practice, changes are done via social media popularity contests.  We saw that with the Bitcoin blocksize debate and Ethereum hard fork.  And in some ways, strong vocal personalities (and cults of personality) is how other FOSS projects (like Python) are managed and administered.

The fluffy meritocracy feel-goodism is often not the order of the day and we see this in many projects such as Bitcoin where the commit access and BIP approval process is limited to a small insular clique.

Source: Jake Smith (section 3)

The 4 point plan above is a much more accurate break down of how most coin projects are setup.

On p. 112 they write:

However, the developers are not the only ones in charge of procuring a cryptoasset; they only provide the code. The people who own and maintain the computers that run the code–the-miners–also have a say in the development of the code because they have to download new software updates. The developers can’t force miners to update software. Instead, they must convince them that it makes sense for the health of the overall blockchain, and the economic health of the miner, to do so.

But in many projects: developers and miners are one in the same.  This is why it is so confusing to not have seen additional clarity or guidance from FinCEN because of how centralized most projects are in practice.

Be sure to look at “arewedecentralizedyet.”77

On p. 113 they write:

These companies often employ some of the core developers, but even if they don’t, they can assert significant influence over the system if they are a large force behind user adoption.

Maybe that is the case for some cryptocurrencies.78  Should “core” developers be licensed like professional engineers are?

Also, isn’t their statement above evidence that most projects are fairly centralized because the division of labor results in specialization?

On p. 113 they write:

These users are constantly providing feedback to the developers, miners, and companies, in whose interest it is to listen, because if users stop using the cryptoasset, then demand will go down and so too will the price.  Therefore, the procurers are constantly held accountable by the users.

Except this isn’t what happens in practice.

Relatively little activity takes place at all on most of these coin platforms and most of what does occur involves arbitrage trading and/or illicit activity.

This activity seems to have little direct connection to the price of the coin because the price of the coin is still largely determined by the whims of speculative demand.

For instance, above is a two-year transactional volume chart for bitcoin.  The price of bitcoin in the summer of 2016 was in the $600-$700 range whereas it is 10x that today.  Yet daily transaction volume is actually lower than it was back then.  Which means: the two are separate phenomenon.

Also, arguably the only direct way coin owners can — in practice —  hold maintainers accountable is via antics on social media.  That is why control of a specific reddit, Telegram, or Twitter account is very important and why hackers target those channels in order to influence prices.

On p. 113 they write about supply schedules:

For example, with oil, there’s the famous Organization of the Petroleum Exporting Countries (OPEC), which has had considerable control over the supply levels of oil.

Inadvertently they actually described how basically all proof-of-work coins operate: via a small clique of known miners and mining pools.  A cartel?

Source: Jameson Lopp

While these miners have not yet increased or decreased the supply of bitcoins, mining is a specialized task that requires certain capital and connections in order to be successful at.  These participants could easily collude to change the money supply, censor transactions, etc. and there would be no immediate legal recourse.

On p. 115 they write:

Cryptoassets, like gold, are often constructed to be scarce in their supply. Many will be even more scarce than gold and other precious metals. The supply schedule of cryptoassets typically is metered mathematically and set in code at the genesis of the underlying protocol or distributed application.

How to measure scarcity here?

Despite what alchemists tried for centuries to do: aside from particle accelators, on Earth the only way of increasing the supply of gold and silver is via digging it out of the ground.  For cryptocurrencies, it is relatively easy to fork and clone both code and chains.  Digital scarcity for most — if not all — public chains, seems to be is a myth.

In the next edition, maybe remove the “backed by maths” trope?  None of these chains run themselves, they all depend on humans to run the equipment and maintain the code.

On p. 115 they write:

As discussed earlier, Satoshi crafted the system this way because he needed initially to bootstrap support for Bitcoin which he did by issuing large amounts of the coin for the earliest contributors.  As Bitcoin matured, the value of its native asset appreciated, which means less Bitcoin is over eight years old, it provides strong utility to the world beyond as an investment, which drive demand.

Satoshi likely mined around 1 million bitcoins for himself/herself.  Because of how centralized and small the network originally was in 2009, he/she probably could have unilaterally stopped the network and relaunched it and effectively removed that insta-mine. 79

In addition, there was almost no risk to either be a developer or a miner… the entry/exit costs were very low… so why did he issue large amounts of coins for these contributors?80

Also, how does it provide strong demand beyond investment?  How many people do the authors know regularly use Bitcoin itself for retail payments?81

Also, through Bitcoin’s evolution, arguably some of its utility was removed by going down a specific block size path.  The counterargument is that payments will be done via some other networks (such as Lightning) attached to Bitcoin, but as of this writing, that hasn’t panned out.

One last comment about this passage, FOSS is historically charity work and difficult to build a sustainable operation. A couple notable exceptions are Red Hat and SUSE (which was just acquired by EQT).

On p. 115 they write:

The Ethereum team is currently rethinking that issuance strategy due to an intended change in its consensus mechanism.

In the second edition is it possible to be consistent on this one point: how is an “official” or “centralized” development team congruent with the idea of having a “decentralized ecosystem”?

Also, the administrators of Ethereum Classic modified the money supply last year and most folks were blasé.  Where is the relevant FinCEN guidance?

On p. 115 they write:

Steemit’s team pursued a far more complicated monetary policy with its platform, composed of steem (STEEM), steem power (SP), and steem dollars (SMD).

[…]

They have also chosen to modify their monetary policy post-inception.

The authors of this book need to be consistent in their wording because in other places they criticize centralized financial institutions but do not criticize centralized monetary supply decision of coin makers.  Also, again, why or how does a decentralized project have a singular team?

On p. 116 they write:

Crypotassets can be likened to silicon. They have come upon the scene due to the rise of technology, and their use cases will grow and change as technology evolves.  Currently, bitcoin is the most straightforward, with its use case being that of a decentralized global currency. Ether is more flexible, as developers use it for computational gas within a decentralized world computer.

This isn’t a good analogy.  Silicon exists as a naturally occurring element… whereas cryptocurrencies do not naturally arise — humans create them.

In addition, bitcoin is arguably not the most straightforward due to a long divorce and schism process the past three years.  One distinct group of promoters calls it “digital gold” and another distinct group calls it a “payment system” — the two groups are almost violently opposed to one another’s existence.

On p. 116 they write:

Then there are the trading markets, which trade 24/7, 365 days a year. These global and eternally open markets also differentiate cryptoassets from other assets discussed herein.

The FX markets are open globally almost 24/6 for most of the year, so that’s not really a braggable claim.82 There are legal, regulatory, and practical reasons why most capital markets operate in the time windows they do… it is not because of some technological limitation.  Worth rewording in the next edition.

On p. 116 they write:

In short, the use cases for cryptoassets are more dynamic than any preexisting asset class. Furthermore, since they’re brought into the world and then controlled by open-source software, the ability for cryptoassets to evolve is unbounded.

In the next edition, maybe remove the pomp and circumstance unless there is actual data to back up the platitudes.  We can all easily conjure up lots of potential use cases for just about any type of technology, but unless they are built and used, the hype should be turned down a few notches.

Also, there are many other open source software projects that have actually shipped frequently used productivity tools and no one is yelling from the mountain tops about how they have unbounded potential.  How are internet coins any different?

On p. 117 they write:

Cryptoassets have two drivers of their basis of value: utility and speculative.

In theory, perhaps.  But in practice, most coins just have potential utility because with few exceptions, most buyers typically hold with the expectation the coin will appreciate.  Maybe that change in the future.

On p. 117 the write:

For example, Bitcoin’s blockchain is used to transact bitcoin and therefore much of the value is driven by demand to use bitcoin as a means of exchange.

Perhaps, though in the next edition recommend modifying the wording to include: “… as a means of exchange or investment…”  Currently, we know a large portion of activity is likely movement (arbitrage) between exchanges.8384

But even ignoring this data (from analytics companies) this scenario has been diced-up elsewhere:

On p. 117 they write:

Speculative value is driven by people trying to predict how widely used a particular cryptoasset will be in the future.

If there are systematic surveys of actual buyers and sellers perhaps add those in the second edition.85

On p. 118 they write:

With cryptoassets, much of the speculative value can be derived from the development team. People will have more faith that a cryptoasset will be widely adopted if it is crafted by a talented and focused development team. Furthermore, if the development team has a grand vision for the widespread use of the cryptoasset, then that can increase the speculative value of the asset.

This is false.

For starters, the value of a new coin is almost entirely a function of the marketing effort from the coin issuers: that’s why nearly all ICOs carve out a portion of their funding pie to market, promote, and advertise… spreading the sexy gospel of the new coin.

This is a big bucks opaque industry, with all sorts of shenanigans that take place just to get listed on secondary markets… with coin issuers paying more than $1 million to get listed.

While $1 million or even $3 million may sound like a lot to get listed, the issuers know it is worth it because the retail speculators on the other end will at least temporarily pump the coin price up often long enough for the original insiders and investors to cash out.

Now the coin issuers may talk a big game and at eloquent length about how their grand vision: that their coin will end world hunger and save the environment, but they often have no ability to execute and build the product(s) they claimed in their whitepaper.

As mentioned above, one recent study found that, “56% of crypto startups that raise money through token sales die within four months of their initial coin offerings.”

Also, how does a decentralized cryptocurrency have an official singular development team?

On p. 118 they write:

As each cryptoasset matures, it will converge on its utility value. Right now, bitcoin is the furthest along the transition from speculative price support to uility price support because it has been around the longest and people are using it regularly for its intended utility use case.

And what is its intended use case?  The maximalist vision (digital gold) or the originalist payments vision?

On p. 118 they write:

For example, in 2016, $100,000 of bitcoin was transacted every minute, which creates real demand for the utility of the asset beyond its trading demand. A great illustration of bitcoin’s price support increasingly being tied to utility came from Pantera Capital, a well-respected investment firm solely focused on cryptoassets and technology. in Figure 8.2 we can see that in November 2013 bitcoin’s speculative value skyrocketed beyond its utility value, which is represented here by transactions per day using Bitcoin’s blockchain (CAGR is the compound annual growth rate).

But this didn’t happen.

Pantera has a habit of cherry picking dates and using different types of graphs (such as log versus linear) in order to talk its book.

For instance, they conjured up and pushed the “bitcoin absorbs the value of gold” narrative back in late 2014.  Then a year later, they became part of the “great pivot” by rebranding everything “blockchain” instead of bitcoin.

Putting those aside, the transactional part of the graph (Figure 8.2) from Pantera was published in early 2017 and has not held up to further scrutiny by mid-2018.

Source: Pantera

Compare that with the actual transactional volume for the past two years, including the most recent bull run:

Perhaps for some unknown reason the up-and-to-the-right hockey stick graph that Pantera tried to create with its dotted lines will germinate.  But for now, as of this writing, their transactional / utility thesis is incorrect.

Why?  Because the assumptions were the same as the authors of this book: they assume retail or institutional users will flock to using bitcoin for non-speculative reasons, but that has not occurred yet.

On p. 119 they write:

Speculative value diminishes as a cryptoasset matures because there is less speculation regarding the future markets the cryptoasset will penetrate. This means people will understand more clearly that demand for the asset will look like going forward. The younger the cryptoasset is, the more its value will be driven by speculative vlaue, as shown in Figure 8.3. While we expect cryptoassets to ossify into their primary use cases over time, especially as they become large system that supports significant amounts of value, their open-source nature leaves open the possiblity that they will be tweaked to pursue new tangential use cases, which could once again add speculative value to the asset.

Their wording in this and other passages has definitive certainty without any hedging.

This is unfounded.  Recall, what can be presented without evidence can be dismissed without evidence.  This also makes a circular argument that the next edition needs to provide evidence for (or just remove it).

Chapter 9

On p. 122 the write:

For example, currently the bond markets are undergoing significant changes, as a surprising amount of bond trading is still a “voice and paper market,” where trades are made by institutions calling one another and tangible paper is processed. This makes the bond market much more illiquid and opaque than the stock market, where most transactions are done almost entirely electronically: With the growing wave of digitalization, the bond markets are becoming increasingly liquid and transparent. The same can be said of markets for commodities, art, fine wine, and so on.

In re-reading this I can’t tell if the authors recognize that the bond market, as well as all of the other markets listed, started out in pre-electronic and even pre-industrial times.

That’s not to defend the status quo, only that if modern day trading platforms and automation existed a couple hundreds years ago, it is likely that bonds trading would have migrated much earlier than 2018… maybe even on a blockchain!

On p. 122 they write:

Cryptoassets have an inherent advantage in their liquidity and trading volume profile, because they are digital natives. As digital natives, cryptoassets have no physical form, and can be moved as quickly as the Internet can move the 1s and 0s that convey ownership.

This is conflating digitization/digitalization with blockchains.  You can have one without the other and in fact, do.

For instance, with US equities, beginning in the ’60s through the ’70s, stocks were dematerialized then immobilized in CSDs and ownership is now transferred electronically.86

Perhaps there is something to be said about this market infrastructure further evolving in time with a blockchain of some kind.

For example in the US, the DTCC (a large CSD) has:

Virtually every major CSD, stock exchange, and clearing house has likewise publicly opined or participated in some blockchain-related initiatives.  But that is a separate topic maybe worth looking into for the next edition.

On p. 123 they write:

Even though they are growing at an incredible clip, separation between cryptoasset markets and traditional investor capital pools still largely remains the case.

How much real money has actually entered the cryptocurrency market?

There have been several attempts to quantify it and it is still rather small, maybe up to $10 billion came in during 2017.

On p. 125 they write:

For example, in 2016, Monero experienced a sizeable increase in notoriety–largely because its privacy features began to be utilized by a well-known dark market–which sent its average trading volume skyrocketing. In December 2015, daily volume for the asset was $27,300, but by December 2016 it was $3.25M, well over a hunderfold increase. The price of the asset had appreciated more than 20-fold in the same period, so some of the increase in trading volume was due to price appreciation, but clearly a large amount was due to increased interest and trading activity in the asset.

But how do the authors know this “clearly” was the case?  Did they do some random sample surveys?  The next edition they need to prove their assumption, not just make them.  After all, it is hard — perhaps impossible — to externally ascertain what is going on at an exchange simply by looking at self-published volumes.

Also, the exchanges that these coins trade on are still typically unregulated, with little optics into how often manipulation occurs.  That is why a number of them have been subpoenaed by various governmental bodies; in the US this includes the SEC, CFTC, IRS, FBI, and even separate states acting in coordination.

On p. 129 they write:

From these trends, we can infer that this declining volatility is a result of increased market maturity. Certainly, the trend is not a straight line, and there are significant bumps in the road, depending on particular events. For example, monero had a spike in volatility in late 2016 because it experienced a significant price rise. This shows volatility is not only associated with a tanking price but also a skyrocketing price. The general trend, nonetheless, is of dampening volatility […].

This is not true either.  Maybe there are cherry picked dates in which there is relatively lower volatility than normal, but this year alone prices as measured in real money, declined between 60-100% for basically all crypotocurrencies and this involved a roller coaster to achieve.

In fact, in the process of writing this review, there were multiple days in which prices increased 5-10% for most coins and then a few days later, saw the same size of loses.  Erratic volatility has not disappeared.

On p. 133 they write:

Despite the many PBOC interventions, Chinese citizens used bitcoin to protect themselves against the erosion in value of their national currency.

Who in China did this?

I have spent an enormous amount of time visiting China the past several years on business trips and not once did someone say they had shifted their wealth from RMB into bitcoin because of RMB depreciation.  There are many speculators and miners, but to my knowledge there has not been a formal survey of buyers and their motivations… and the result being because of RMB depreciation.

The next edition should either remove this statement or add a citation.

On p. 134 they write:

As bitcoin rose and fell, so too did these assets. This reinforces the need for the innovative investor to become knowledgeable about these assets’ specific characteristics and recognize where correlations may or may not occur.

Recommend removing “innovative investor” in this location.87

Chapter 10

On p. 137 they write:

On its path to maturity, bitcoin’s price has experienced euphoric rise and harrowing drops, as have many cryptoassets. One of the most common complaints among bitcoin and cryptoasset naysayers is that these fluctuations are driven by the Wild West nature of the markets, implying that cryptoassets are a strange new breed that can’t be trusted. While each cryptoasset and its associated markets are at varying levels of maturity, associating Wild West behavior as unique to cryptoasset markets is misleading at best.

No it isn’t.  The authors do not even define or provide some kind of way to measure “maturity.”  This paragraph creates a strawman.

The burden-of-proof rests on the party making the positive claim.  In this case, the party claiming that a coin is becoming mature must provide objective evidence this is taking place.  Should reword in the next edition.

On p. 138 they write:

Broadly, we categorize five main patterns that lead to markets destabilizing: the speculation of crowds, “This time is different,” Ponzi schemes, Misleading information from asset issuers, Cornering.

Those are valid patterns, in full agreement here.  But this edition does not help in dispelling these problems and arguably even contributes to some of the speculative frenzy.

On p. 138 they write:

Sometimes they do this to capitalize on short-term information they believe will move the market, other times they do it because they expect to ride the momentum of the market, regardless of its fundamentals. In short, they try to profit within the roller-coaster ride.

What are the fundamentals of any coin described in this book?  Next edition, clearly write out 5-10 if possible.

On p. 139 they write:

As America was struggling through the Great Depression, which many pinned on the stock market crash of 1929, there was strong resentment against speculators. Every crisis loves a scapegoat.

And in Bitcoinland there is no difference.  Bitcoiners love to blame: bankers, the Illuminati, naysayers, concern trolls, academics, the government, Jamie Dimon, big blockers, small blockers, weak hands, statists, other coins, China, George Soros, Warren Buffett, Mike Hearn… virtually every month there is a new boogeyman to blame something on.  I’ve even been blamed many times and I’m not involved at all in the market.

On p. 143 they write:

Cheap credit often fuels asset bubbles, as seen with the housing bubble that led to the financial crisis of 2008. Similarly, cryptoasset bubbles can be created using extreme margin on some exchanges, where investors are effectively gambling with money they don’t have.

Fully agree, good point.

On p. 144 they write:

The best way to avoid getting burned in this manner is to do proper due diligence and have an investment plan that is adhered to.

Fully agree, good point.

On p. 145 they write:

The key to understanding bitcoin’s value is recognizing it has utility as “Money-over-Internet-Protocol”( MoIP)–allowing it to move large amounts of value to anyone anywhere in the world in a matter of minutes–which drives demand for it beyond mere speculation.

This might be partially true but is has the same feel-good narrative that folks like Andreas Antonopoulos have been getting paid handsomly to regurgitate.  Bitcoin (the network) does not move anything beyond bitcoins (the coin).  Users still have to convert bitcoins into actual money at end points.

Converting a large amount — greater than $10,000 — will likely require KYC and AML and maybe even sanctions checks.  This adds time and money which is one of the reason why the remittance use-case didn’t really get much traction after the hype in 2014 – 2015 and why companies such as Abra had to pivot a few times.

With that said, their metapoint is valid on the edges: despite the frictions that may exist, some participants are willing to go through this experience in order to gain more anonymity for uses they might not otherwise be able to do using traditional methods.88

Over the past three years there has also been an expansion of country- and region-based payment schemes worldwide to achieve near-real-time transfers, with Europe being one of the most significant accomplishments.89

In parallel, there are on-going experimentation and scaling of private blockchain-based ‘rails’ like Swift gpi or Alipay with GCash which have a potential to surpass volumes of the Bitcoin network.90

On p. 145 they write:

When Mt. Gox was established, bitcoin finally became accessible to the mainstream.

One nitpick:

Up until recently it was difficult for even diehard users to get onboarded onto most exchanges.  And specifically in 2010 with the launch of Mt. Gox, Jed McCaleb used Paypal to help facilitate the transfer of money… until Paypal dropped Mt. Gox because of too many chargebacks.  To get money into and out of Mt. Gox often was a frictionfull task, unless you lived in Japan.

On p. 149 they write:

As shown in Figure 10.4, steem’s price in bitcoin terms would fall from its mid-July peak by 94 percent three months later, and by 97 percent at the end of the year. This doesn’t mean the platform is bad. Rather, it shows the speculation and excitement about its prospects fueled a sharp rise and fall in price.

In hindsight, everything is 20-20.  The same truism in their last sentence can be said just about with every coin that sees the meteoric rise that Steemit did in 2016.91

On p. 150 they write:

While zcash has since stabilized and continues to hold great promise as a cryptoasset, its rocky start was caused by mass speculation.

Two comments:

  • Do the authors own any Zcash (or other cryptocurrencies mentioned in this book besides bitcoin)?
  • In late 2016 there were oodles of “thought leaders” talking about how Zcash was — for a moment — valued at a trillion dollars because of the very thin supply that was trading on exchanges.  It was a headscratching meme that illustrates a shortcoming to the common “market cap” valuation mehtod.92

On p. 152 they write:

The idea of valuation, which we will tackle in the next chapters, is a particularly challenging one for cryptoassets. Since they are a new asset class, they cannot be valued as companies are, and while valuing them based on supply and demand characteristics like that of commodiites has some validity, it doesn’t quite suffice.

Then why spend an entire chapter (Chapter 7) comparing coins such as bitcoin, to companies and their stock?

You can’t have it both ways.  Either heavily modify Chapter 7 in the next edition, or remove this comment.

Chapter 11

On p. 155 they write:

Given the emerging nature of the cryptoasset markets, it’s important to recognize that there is less regulation (some would say none) in this arena, and therefore bad behavior can persist for longer than it may in more mature markets.

And there are now full-time lobbyists and trade associations — sponsored by donors whom have benefited from this unregulated / underregulated market — that actively push back against sensible regulations being applied.  But that’s a different conversation beyond this post.

On p. 155 they write:

As activity grows in bitcoin and crypotasset markets, investors must look beyond the madness of the crowd and recognize that there are bad actors who seek easy prey in these young markets.

Even for a book published in late 2017, this is pretty much lip service.  Volumes of books can be written about the shenanigans within nearly every public ICO and high-profile coin project.  The authors should either modify the statement above or ideally expand it to detail specific egregious examples besides just OneCoin.

For instance, a new study found that: More Than Three-Quarters of ICOs Were Scams.  And these were ICOs done in 2017.

On p. 158 they write:

While a truly innovative crypotasset and its associated architecture requires a heroic coding effort from talented developers, because the software is open source, it can be downloaded and duplicated. From there, a new cryptoasset can be issued wrapped in slick marketing. If the innovative investors doesn’t do proper due diligence on the underlying code of read other trusted sources who have, then it’s possible to fall victim to a Ponzi scheme.

Enough with the “heroic” adjectives, let’s not put anyone on a pedestal, especially if the platform is not being used by anyone besides speculators and illicit actors.

Secondly, a minor grammar question: other uses of “open-source” in this book have a dash and the one above does not.

Lastly, recommend readers look into “Nakomoto Schemes” described in this article: The Problem with Calling Bitcoin a “Ponzi Scheme”

On p. 158 they write:

Millions of dollars poured into OneCoin, whose technology ran counter to the values of the cryptoasset community: its software was not open source (perhaps out of fear that developers would see the holes in its design), and it was not based on a public ledger, so no transactions could be tracked.

First, what are the “values” that the “community” has?  Are these explicity written somewhere?  Who decided those?

Second, those actually don’t sound too uncommon.

For instance, one recent study found: “Security researchers have found, on average, five security flaws in each cryptocurrency ICO (Initial Coin Offering) held last year. Only one ICO held in 2017 did not contain any critical flaws.”

And remember, these projects are “open source” yet most buyers and investors didn’t bother looking at the code.  OneCoin is par for the course.

On p. 159 they write:

The swift action revealed the strength of a self-policing, open-source community in pursuit of the truth.

In my most popular post last year, I went through in detail explaining how self-policing is an oxymoron in the cryptocurrency world.

For example, “the community” actively listed OneCoin on secondary markets and profited from its trading.  Did exchange operators return those gains to victims?  In addition, “the community” has thus far, not set up any self-regulating organization (SRO) that has any ability or teeth to enforce a code-of-conduct.

In fact, it was agencies from Sweden, the UK, and other governments that acted and cracked down on OneCoin… not a collective effort from exchanges or VCs or twitter personalities.

On p. 159 they explain googling for code on GitHub:

If nothing pops up with signs of the code on GitHub, then the cryptoasset is likely not open source, which is an immediate red flag that a cryptoasset and investment should be avoided.

Sure, but it doesn’t include the fact(s) that even in 2017 we knew that many coin projects had bugs in it… because there is no incentive to independently audit this code or to publish it in an objective manner.

For example, often when someone tries to help highlight problems, they are demonized as a “concern troll” as the coin tribes brigade their Twitter and reddit threads.  There are a couple of sites like ConcourseQ that now do help highlight problems, but most “crypto thought leaders” on social media spend their time rallying retail investors to buy coins instead of busting or calling out the legitimate coin scams.

On p. 161 they write about John Law:

Fortunately, today it’s quite easy to find information on just about anyone through Google searches.

Yes and no.  And that still doesn’t act as a shield against fraud.  The founders of Centra had shady, criminal pasts but were still able to raise more than $30 million in an ICO.  Their misdeeds only became widely known after a New York Times article explored it… this was not a story that was investigated by any of the “coin media” who collectively have a vested interested not to “self-police” the market they cover.

Furthermore, prior to getting busted and sued, Centra became a dues paying member of: Hyperledger, the Enterprise Ethereum Alliance, and the Chamber of Digital Commerce.  What are the filtering mechanisms in place at these types of organizations?  How do they determine who can join and if a coin is a security?

On p. 165 they write:

As with most panics, the contagion spread from the Gold Exchange.  Because of Gould’s cornering of the market, stock prices dropped 20 percent, a variety of agricultural exports fell 50 percent in value, and the national economy was disrupted for several months. Gould exited with a cool $11 million profit from the debacle, and scot-free from legal charges. It is all too common that character like Gould escape unscathed by the havoc they create, which then allows them to carry on with their machinations in other markets.

These kinds of panics and manipulation are part and parcel to retail traders on cryptocurrency exchanges.  Scapegoats and the blame game consist of a myriad of boogeymen — but typically the culprits are never found.93

On p. 167 they write:

In addition to miners, in Dash there are entities called masternodes, which are also controlled by people or groups of people. Masternodes play an integral role in performing near instant and anonymous transaction with Dash.

Putting aside whether Dash is or is not anonymous… the fact that the authors state that humans play a direct role in running the infrastructure raises a bunch of questions that I have repeated in this review.

How are these participants held accountable?  How is governance managed?  Have these participants registered with FinCEN?  Why or why not?

On p. 168 they write about the Bitcoin Rich List:

Another 116 addresses hold a total of 2.87 million bitcoin, or 19 percent of the total outstanding, which is sizeable. Unlike dash, however, these holders aren’t necessarily receiving half the newly minted bitcoin, and so their ability to push the price upward is less.

Should there be a thorough investigation of how any one party or set of parties can artificially move prices around based on control of the money supply?  In our current real-world framework, there are frequent public hearings and audits done.  When will minters of cryptocurrencies be publicly audited?

Chapter 12

On p. 171 they write:

Each cryptoasset is different, as are the goals, objectives, and risk profiles of each investor. Therefore, while this chapter will provide a starting point, it is by no means comprehensive. It’s also not investment advice.

Throughout the book the authors have repeatedly endorsed or not-endorsed specific coins.  The second edition needs to be a lot more consistent.

On p. 172 they write:

Currently, there is no such thing as sell-side research for cryptoassets, and this will require innovative investors to scour through the details on their own or rely on recognized thought leaders in the space.

This is a sad truth: it is nearly impossible to get neutral, objective research on any coin that has been created.

Why?  Because all coin holders basically have an incentive to promote and advertise the coins they own and talk down other coins they perceive as competition.  Paying “researchers” has happened and will continue to do so.

Also, here’s another appearance of “innovative investor” — can that be removed altogether?

And lastly, how to know who the “recognized thought leaders” are?  Based on the amount of twitter followers they have?  That has been gamed.  Based on how popular their Youtube account is?  That has been gamed.

For example, these two article explain some of this payola world:

Another instance, a couple weeks ago a government department in China (CCID) released its second ranking table of coins: China’s Crypto Ratings Index Puts EOS in Top Slot, Drops Bitcoin

It’s unclear if this is due to lobbying efforts or maybe the researchers owned a bunch of EOS coins.  At this time, the EOS block producing and arbitrator framework are both broken.  Block producers paused the network a few weeks ago and the arbitrators / constitutions will probably be scrapped.

How can this rating system be trusted?

On p. 173 they write about white papers:

Any cryptoasset worth its mustard has an origination white paper. A white paper is a document that’s often used in business to outline a proposal, typically written by a thought leader or someone knowledgeable on a topic. As it relates to cryptoassets, a white paper is the stake in the ground, outlining the problem the asset addresses, where the asset stands in the competitive landscape, and what the technical details are.

During the Consensus event this past May, someone accidentally dropped a napkin on the floor and someone loudly said: watch out, that’s the latest multimillion dollar white paper.

And that’s the situation where we are in now.  Readers: the passage above was not at all critical of the real mess we are in today.  For instance, Tron literally plagiarized in its whitepaper, raised a ton of money in its ICO and recently bought BitTorrent.

There is no direct connection between a “good” or “bad” whitepaper and the performance of the coin.  Retail investors do not typically care and haven’t done much research.  Yet another reason agencies such as the SEC will be overwhelmed in the coming years due to rampant fraud and deceit.  Worth looking into the next edition.

On p. 173 they write:

Some of these white papers can be highly technical, though at the very least perusing the introduction and conclusion is valuable.

This seems like an incongruent statement compared to other advice in the book about doing deep research.  Recommend revising.

On p. 174 they write:

A number of cryptoasset-based projects focus on social networks, such as Steemit and Yours, the latter of which uses litecoin. While we admire these projects, we also ask: Will these networks and their associated assets gain traction with competitors like Reddit and Facebook? Similarly, a cryptoasset service called Swarm City (formerly Arcade City) aims to decentralize Uber, which is already a highly efficient service. What edge will the decentralized Swarm City have over the centralized Uber?

And that in a nutshell is why the second edition of the book arguably needs to be slimmed down by 25%+.  Virtually all of the use cases in this book are simply potential use cases and have shown little or even no traction in reality.  For example, if the authors were as critical to Bitcoin and Zcash as they were to Swarm City then the second edition might be perceived as more balanced.

Specifically, in their promotion of Bitcoin as a payments platform, they have not done a deep dive into other existing payment networks, such as Visa or an RTGS from a central bank.94 They should do that in the next edition otherwise these come across as one-sided arguments.

Also, Yours switched from Litecoin over to Bitcoin Cash last year (around the time the book was published) and Swarm City is still not very active at the time this review was written.

On p. 175 they write about The Lindy Effect

The same applies to cryptoassets. The longest-lived cryptoasset, bitcoin, now has an entire ecosystem of hardware, software developers, companies, and users built around it. Essentially, it has created its own economy, and while a superior cryptocurrency could slowly gain share, it would have an uphill battle given the foothold bitcoin has gained.

This is untrue in theory and practice.

While maximalists would vocally claim that there can only be one-chain-to-rule-them-all, there is no real moat that Bitcoin has to prevent users from exiting or switching to other platforms (see discussion on substitute goods).

In practice, effectively all proof-of-work cryptocurrencies depend on external capital to stay afloat, often in the form of venture capital. ((See Robert Sams on rehypothecation, deflation, inelastic money supply and altcoins)) Part of the reason is that miners need to pay their bills in traditional currency and therefore must liquidate some or all of their coins to do so.  Another issue is that because many participants think or believe that coin prices as measured in real money will increase in the future, they hold.  Yet the expenses of service providers (exchanges, wallets, etc.) typically need to be paid with traditional money.

As a result, this creates sell-side pressure.  And unlike the traditional FX market which has “natural” buyers in the form of international merchants and multinational corporations: there still is no “natural” buyers of cryptocurrencies outside of illicit activity (e.g., darknet market participants).

To compound this situation is that there is still no real circular flow of income, no real economy for any of these cryptocurrencies.95  And with the exception of a few cases each year, miners typically do not directly invest their coin holdings into companies, so crypotcurrency-related startups are dependent on foreign currency.

On p. 175 they write:

The demise of The DAO significantly impacted Ethereum (which The DAO was built on), but through leadership and community involvement, the major issues were addressed, and as of April 2017 Ethereum stands solidly as the second largest cryptoasset in terms of network value.

In the second edition, could the authors explicitly lay out how they define “leadership” in this context as well as what the “community” is?  If it is singular and centralized, how is that fitting for an entity that is supposed to be decentralized?

Also, for readers interested in The DAO, here’s a short fiery thread on that topic.

On p. 176 they discuss “utility value and speculative value”

For bitcoin, its utility is that it can safely, quickly, and efficiently transfer value to anyone, anywhere in the world.

That may have been the original vision expressed in the whitepaper but it is not what the maximalists now claim Bitcoin is.  Who’s promotion around utility is something we should take into consideration?

Also, considering how easy and common it is to hack cryptocurrency intermediaries such as exchanges, I think it is debatable that Bitcoin is “safe” for unsophisticated retail users, but that’s a separate topic.

On p. 176 they write:

The merchants wants to use bitcoin because it will allow her to transfer that money within an hour as opposed to waiting a week or more. Therefore, the Brazilian merchant buys US$100,000 worth of bitcoin and sends it ot the Chinese manufacture.

They explain a little more but the difficulties with this example starts here.  The authors only focus on the bitcoins themselves, they don’t explore the actual full lifecycle that international merchants and manufacturers have to go through in order to exchange bitcoins into real money that they can use to pay bills.

That is to say: the Brazilian merchant and Chinese manufacture do not hold onto coins, so it is not just a matter of how fast they can send or receive the coins.  What ultimately matters to them is how quickly they can receive the real money from a bank.

So the next edition needs to include the full roundtrip costs and frictions including the on-ramps and off-ramps into the traditional financial system.  This is why many Bitcoin remittance companies struggled and ultimately had to pivot out of that cross-border use case (such as Abra).  For the next edition, a side-by-side cost comparison would be helpful.96

On p. 177 they write:

That means on average each of these addresses is holding US$5.5 million worth of bitcoin, and it’s fair to assume that these balances are not those of merchants waiting for their transactions to complete. Instead, these are likely balances of bitcoin that entities are holding for the long term based on what they think bitcoin’s future utility value will be. Future utility value can be thought of as speculative value, and for this speculative value investors are keeping 5.5 million bitcoin out of the supply.

This seems like euphemisms.  We understand that time preferences and discounted utility come into dramatic effect here.  Maybe worth rewording?

For example, a large portion of those coins could be permanently destroyed (e.g., someone deleted the private key or threw away the hard drive).  Though a significant portion could also be maximalists holding onto their coins with the hope that other investors create sufficient demand to move the price — as measured in real money — upward and upward.  So they can then cash out.

If daily and weekly anecdotes on twitter and reddit are any indication, that’s arguably the real utility value of most coins, not just bitcoin.  And there is some analytics to back up that argument too.

On p. 177 they write:

At the start of April 2017, there were just over 16 million bitcoin outstanding. Between international merchants needing 10 million bitcoin, and 5.5 million bitcoin held by the top 1,000 investors, there are only roughly 500,000 bitcoin free for people to use.

Citation needed. If the authors have any specific information that can share with the audience about any of these numbers, that’d be very helpful.  Especially regarding the merchants needing 10 million bitcoin.  If anything, there may be fewer merchants actively accepting bitcoin today than there were a couple years ago.

On p. 177 they write:

If demand continues to go up for bitcoin, then with a disinflationary supply schedule, so too will its price (or velocity).

Couple of things:

  • Bitcoin’s current supply schedule is perfectly inelastic (whereas say gold, is elastic).
  • It would be good to see what the authors think the velocity of bitcoin is.  I’ve tried to track down and write about it in the past.  See all of Chapter 9.

On p. 177 they write:

In other words, those investors no longer feel bitcoin has any speculative value left, and instead its price is only supported by current utility value.

As mentioned above, it would be helpful in the next edition if the authors included specific definitions and characteristics in a chart for what utility versus speculative value are.

Also, I don’t endorse the post in its entirety, but about five years ago Rick Falkvinge wrote an interesting note about the transactional value from illicit activity as it relates to Bitcoin.  That has some actual data in it (though very old now).

On p. 178 they write:

For bitcoin, instead of looking at the “domestically produced goods and services” it will purchase in a period, the innovative investor must look at the internationally produced goods and services it will prucahse. The global remittances market–currently dominated by companies that provide the ability for people to send money to one another internationally–is an easy graspable example of service within which bitcoin could be used.

This whole section should probably be culled because this isn’t really a viable, scalable use case that bitcoin itself can solve.

For example, between 2014-2016, tens of millions of dollars were invested in more than a dozen “rebittance” companies (Bitcoin-focused remittance) and most either failed or pivoted.

Those that still exist had to build additional services and bitcoin were a means to an end.  In all cases, these companies had to build their own cryptocurrency exchange and/or partner with several cryptocurrency exchanges in order to liquidate the coins — they need to hedge and limit their exposure to volatility.  Bitcoin also doesn’t solve for the last-mile problem at all… but that is a separate topic.97

On p. 179 they write:

If each bitcoin needs to be worth $952 to service 20 percent of the remittance market and $11,430 to service the demand for it as digital gold, then in total it needs to be worth $12,382. There is no limit to the number of use cases that can be added in this process, but what is extremely tricky is figuring out the percent share of the market that bitcoin will ultimately fulfill and what the velocity of bitcoin will be in each use case.

This is highly debatable.  And it is exactly what Pantera stated four years ago.  Sources should be cited in the next edition; and also provide a velocity estimate for the potential use cases.

On p. 180 they write:

Taking the concepts of supply and demand, velocity, and discounting, we can figure out what bitcoin’s value should be today, assuming it is to serve certain utility purposes 10 years from now. However, this is much easier said than done, as it involves figuring out the sizes of those markets in the future, the percent share that bitcoin will take, what bitcoin’s velocity will be, and what an appropriate discount rate is.

An actual asset would certainly need these blanks filled, but Bitcoin doesn’t behave like a normal asset.  For instance, it goes through enormous speculative bubbles and busts.  It reached just under $20,000 per coin in mid-December last year not for any utility reason but pure speculation… yet many of the “thought leaders” at the time said it was because new buyers were going to use it for its utility.

On p. 180 they write:

Already there have been reports, such as those from Spence Bogart at Needham & Company, as well as Gil Luria at Webush, that look at the fundamental value of bitcoin.

I’ve read most of their reports, they’re nearly all based on edge-case assumptions or one-off anecdotes that never saw much traction (such as remittances).  In addition, arguably both of their analysis may have been colored by their coin investments at the time they published their work.  That’s not to say their material is discredited but I would discount some of their cryptocurrency-related reports.98

On p. 180 they write:

The valuations these analysts produce can be useful guides for the innovative investor, but they should not be considered absolute dictations of the truth. Remember, “Garbage in, garbage out.” We suspect that as opposed to these reports remaining proprietary, as is currently the case with much of the research of equities and bonds, many of these reports will become open-source and widely accessible to all levels of investors in line with the ethos of cryptoassets.

This has not happened.  If anything, the market has been flooded with junk marketing material that masquerades as “research.”  Universities are now getting funded by coin issuers and asked to co-publish papers.  Even if there are no explicit shenanigans going on, there is now a shadow of doubt that hangs over these organizations.

Also, the next edition needs to define what “the ethos of cryptoassets” is somewhere up front.  And dispense with “innovative investor”?99

On p. 182 they write about getting to know “the community and the developers”:

In getting to know the community better, consider a few key points. How committed is the developer team, and what is their background? Have they worked on a previous cryptoasset and in that processrefined their ideas so that they now want to alunch another?

[…]

If information cannot be found on the developers, or the developers are overtly anonymous, then this is a red flag because there is no accountability if things go wrong.

Satoshi clearly wouldn’t have been able to pass this test.  Nor BitDNS originally (which later became Namecoin).

It is a double-standard to want accountability here yet promote an ill-defined “decentralization” throughout this book.  You really can’t have it both ways.

Remember, the reason why administrators and operators of financial market infrastructure are heavily regulated is to hold participants legally responsible and accountable for when mistakes and accidents occur.

Cryptocurrencies were designed to be anarchic and purposefully were designed to not make a single participant accountabile.  Trying to merge those two worlds creates the worst of both: permissioned-on-permissionless.

On p. 183 they write:

If Ethereum gets big enough, there may eventually be those who call themselves Ethereum Maximalists!

Yes, they exist and largely self-selected themselves into the Ethereum Classic world… you can see that by their antics on social media.

On p. 183 they write about issuance models:

Next, consider if the distribution is fair. Remember that a premine (where the assets are mined before the network is made widely available, as was the case with bytecoin) or an instamine (where many of the assets are mined at the start, as was the case with dash) are both bad signs because assets and power will accrue to a few, as opposed to being widely distributed in line with the egalitarian ethos.

Let’s tone down the talk on egalitarianism in a market fueled by greed and a perpetually high Gini coefficient.

In practice as of July 2018, many ICOs are pre-mined or pre-allocated, most as ERC20 tokens that are controlled by a singular entity (usually an off-shore foundation).100

Is this a “bad sign”?  It would be helpful to see what the explicit criteria around token distribution should be in the next edition.101

On p. 183 they write:

For example, Ethereum started with one planned issuance model, but is deciding to go with another a couple years into launch. Such changes in the issuance model may occur for other assets, or impact those assets that are significatnly tied to the Ethereum network.

Those decision are made by individuals.  Perhaps by the next edition we will know what FinCEN and other regulatory positions on individuals creating monetary policy and running financial market infrastructure.

On p. 184 they write:

With Dogecoin we saw that it needed lots of units outstanding for it to function as a tipping service, which justifies it currently having over 100 billion units outstanding, a significantly larger amount than Bitcoin. With many people turning to bitcoin as gold 2.0, an issuance model like Dogecoin’s would be a terrible idea.

What?  Why?  This passage conflates many different things.

  1. As Jackson Palmer has repeatedly said: Dogecoin was set up as a joke, based on a meme.  The authors seem to be taking its existence a little too seriously.
  2. Dogecoin was originally based on Luckycoin which had a random money supply, so its original hashrate charts were all over the map, bipolar.
  3. Its money supply was changed in part because it ran into an exitential crisis that it later (mostly) solved by merge mining with Litecoin in 2014

How does any of this have to do with maximalist narrative of “gold 2.0”?

On p. 186 they write:

The only way attackers can process invald transactions is if they own over half of the computer power of the network, so it’s critical that no single entity ever exceeds 50 percent ownership.

Technically this is not quite right.

The actual figure to sucessfully censor and/or reorg the chain may be as low as 33% and perhaps even 25% (dubbed “selfish mining“).102  More than 50% would mean the participants could do so repeatedly until their hashrate declines and/or a permanent fork occurs.

Aside from pressure on social media, there is nothing to prevent such “ownership” from taking place.  And there is no legal recourse or accountability in the event it happens.  And such “attacks” have occured on many different cryptocurrencies.103

On p. 186 they write:

In other words, miners are purley economically rational individuals–mercenaries of computer power–and their profit is largely driven by the value of the crypotasset as well as by transaction fees.

This should be reworded from the next edition because it is not true.  Miners and mining pools are operated by people and they have various incentives, including to attack networks or abandon them altogether.

On p. 186 they write:

A clearly positively reinforcing cycle sets in that ensures that the larger the asset grows, the more secure it becomes–as it should be.

This is not true for proof-of-work coins.

If anything, mining and development have both trended towards centralization.  For instance, it is estimated that Bitmain-manufactured hashing equipment currently generates 60-80% of the network hashrate and Bitmain-affiliated mining pools comprise about 50%+ of the current Bitcoin network.  Maybe that is just momentary but singular entities on the mining side dominate many other cryptocurrencies as well.  Perhaps that changes later in the year so it is worth revisiting in the next edition.

Recommended reading:

On p. 187 they write:

At the risk of being repetitive, more hash rate signifies more computers are being added to support the network, which signifies greater security.

This is a non sequitur.  A new hashing machine capable of generating 10 times the amount of hashes as the previous machine could — ceteris paribus — result in other machines being turned off.  In practice, you often have the Red Queen Effect take place (see Chapter 3).

Either way, depending on the costs of more efficient ASIC design, there could actually be fewer (or more) hashing machines added to a network depending on the expected price of the coin minus operating costs.

And in some cases, the network may become more centralized and therefore arguably less secure.  Worth revising in next edition.

On p. 188 they write:

While hash rate often follows price, sometimes price can follow hash rate. This happens in situations where miners expect good things of the asset in the future, and therefore proactively connect machines to help secure the network. This instills confidence, and perhaps the expected good news has also traveled to the market, so the price start going up.

This passage has entered Rube Goldberg territory, where a series of specific events turn into a virtuous cycle in which prices go up and up but not down?  How can we ever know what caused certain price increases or decreases with this type of asymmetric information occurring in the background?  Suggest scrapping it in the next edition.

On p. 188 they write:

Ethereum’s mining network, on the other hand, is less built out because it’s a younger ecosystem that stores less value. As of March 2017, a 230 megahash per second (MH/s) mining machine could be purchased for $4,195, and it would take 70,000 of these machines to recreate Ethereum’s hash rate, totaling $294 million in value. Also, because Ethereum is supported by GPUs and not ASICs, the machines can more easily be constructed piecemeal by a hobbyist on a budget.

There are a few issues with this:

  1. How do the authors measure or quantify “less built out”?  Is there a line that is crossed in which Ethereum or other coins are “more built out” or the right size?
  2. About a year ago a coin reporter asked me to detail the hypothetical lower bound costs for recreating the hashrate of the Bitcoin network.  I provided those numbers based on Bitmain’s latest device… but the article instead ignored any of that and instead quoted some random conspiracy theory from a Twitter personality.  Rather than rehashing the full story here, keep in mind that the geographic distribution and control of mining equipment is arguably as important as the aggregate network hashrate.
  3. Their last sentence does not make much sense.  How to define a hobbyist?  If a hobbyist is defined as an individual who can afford to spend $4,195… then they can probably also buy ASIC equipment as well for other cryptocurrencies, including Ethereum today.

On p. 188 they write:

This range is a good baseline for the innovative investor to use for other cryptoassets to ensure they are secured with a similar level of cpaital spend as Bitcoin and Ethereum, which are the two best secured assets in the blockchain ecosystem.

There is another appearance of the “innovative investor,” remove in next edition?

Also, if security is solely measured by hashrate then yes, Bitcoin (BTC) and Ethereum (ETH) might be the “best secured.”  But that assumes a purely Maginot Line attack and not a BGP or wrench attack.

On p. 189 they write:

Overall, hash rate is important, but so too is decentralization. After all, if the hash rate is extremely high but 75 percent of it is controlled by a single entity, then that is not a decentralized system. It is actually a highly centralized system and therefore vulnerable to the whims of that one entity.

This probably should come at the beginning of the chapter, not in this location.  Also recommend adding some citations to the Onename and BGP posts.

On p. 189 they write:

It’s apparent that Litecoin is the most centralized, while Bitcoin is the most decentralized. A way to quanitfy the decentralization is the Herfindahl Hirschman Index (HHI), which is a metric to measure competition and market concentration.

HHI is used with known, legally identifiable parties.  With cryptocurrencies such as Bitcoin, Litecoin, and Ethereum — the mining entities were not originally supposed to be known at all — over time they self-doxxed themselves.104

Should the Department of Justice and similar organizations coordinate and carry out HHI analysis on mining pools to prevent monopolization, oligopolization, and/or coordination?   What happens if participants refuse to comply?

On p. 191 they write:

Blockchain networks should never classify as a highly concentrated marketplace, and ideally, should always fall into the competitive market place category.

Okay, but what if they don’t and no one cares?  Who should enforce this?

Recommend reading a relevant paper published this past winter: Decentralization in Bitcoin and Ethereum Networks

On p. 193 they write:

At times, Bitcoin has been a moderately concentrated marketplace, just as Litecoin mining is currently a moderately concentrated marketplace. Litecoin recognizes the impact that large mining pools can have on the health of its ecosystem and the quality of its coin. To that point, Litecoin developers have instituted an awareness campaign called “Spread the Hashes” for those mining litecoin to consider spreading out their mining activies. The campaign recommends that litecoin computers mine with a variety of mining pools rather than concentraing solely in one.

The anthropomorphism needs to be removed in the second edition.  “Litecoin” does not recognize anything because Litecoin is not a singular autonomous entity.

There are individual people, developers who work on a certain implementation of Litecoin that may promote something — and if they coordinate (which they do) then perhaps they could be classified as administrators.

Either way, this “Spread the Hashes” campaign didn’t seem to work:

Source: Litecoinpool.org visited on July 11, 2018

As the pie chart above illustrates, just 5 entities currently account for about 90% of the network hashrate.  And the largest 3 effectively could coordinate to control the network if they wanted to.

Worth noting that similar marketing campaigns to “spread the hashes” have been done on other networks.  Back in 2014 when GHash.io reached the 50% mark, reddit was filled with discussions imploring miners to switch to P2Pool.

Why don’t miners move to smaller pools?  Two words: reliable revenue.  Recommended reading: The Gambler’s Guide To Bitcoin Mining

On p. 194 they write:

Not all nodes are made equal. A single node could have a large number of mining computers behind it, hence capturing a large percentage of the overall network’s hash rate, while another node could have mining computer supporting it, amounting to a tiny fraction of Bitcoin’s hash rate.

Sort of.  There are two different nodes: nodes that fully validate and attempt to append the blockchain by submitting a proof-of-work that meets the necessary difficulty threshold… and nodes that don’t.  In practice, today we call the former “mining pools” and the latter, just nodes.

For instance, in Bitcoinland there was a vicious war of words from 2015-2017 waged by several parties who did not operate mining pools, or nodes that generated proofs-of-work.105  One subset of these parties used various means and channels to insist that miners did not ultimately matter, that it was “users” who truly controlled the network and they labeled themselves “UASF.”  And some of the most vocal members of this “populism wing” insisted that the nodes run by mining pools were no more important than the nodes run by some hobbyist in an apartment.

The views were irreconcilable and the ultimate result is that one group involved in that battle, forked off and created a new chain called Bitcoin Cash (BCH), whereas many of the other parties coalesced with what is called Bitcoin (BTC).  There is a lot more to the story, a messy emotional divorce that still continues today.

Technically the decision to fork or not fork is made by mining pools and the nodes they each manage, but there are more nuances and politics involved that go beyond the scope of this review.

On p. 194 they write:

William Mougayar, author of The Business Blockchain, has written extensively about how to identify and evaluate new blockchain ventures and sums up the importance of developers succinctly: “Before users can trust the protocol, they need to trust the people who created it.” As we touched upon in the prior chapter, investigate the prior qualifications of lead developers for a protocol as much as possible.

Two problems with this:

  1. I wrote a lengthy book review of Mougayar’s book and found it disappointing and do not recommend because of statements like the one above.
  2. What were Satoshi’s qualifications?  No one knows, but no one really cares either.  Similarly, what were Vitalik Buterin’s qualifications?  He was 19 when he announced Ethereum at Bitcoin Miami and had recently dropped out of college.  Similarly, Gavin Wood was a 34 year-old developer building music-related apps prior to co-founding Ethereum.  Would these two key guys been deemed qualified?  What are the qualifications necessary to be a blockchain wizard?

On p. 194 they write:

Developers have their own network effect: the more smart developers there are working on a project, the more useful and intriguing that project becomes to other developers. These developers are then drawn to the project, and a positively reinforcing flywheel is created. On the other hand, if developers are exiting a project, then it quickly becomes less and less interesting to other developers, ultimately leaving no one to captain the software ship.

A couple of thoughts:

  1. This is a nice sounding theory, but that’s not really what happens with most of these projects.  Generally developers are attracted due to the compensation they can receive… they do a risk-reward analysis.  I’ve met and spoken to dozens, perhaps north of 100 cryptocurrency-related teams in the past 12 months across the globe.  Attracting talented developers is not nearly as easy and clear cut as the authors make it sound above.
  2. Also, having a single “captain of the ship” seems like a single point of failure and a centralization risk.  Is that part of the undefined ethos?

On p. 195 they write:

Recall that this is how Litecoin, Dash, and Zcash were created from Bitcoin: developers forked Bitcoin’s code, modified it, and then re-released the software with different functionality. Subscribers refer to people wanting to stay actively involved with the code. In short, the more code repository points, the more developer activity has occured around the cryptoasset’s code.

That’s not necessarily true, and in fact, has been gamed by coin issuers who want to make it look like there is a lot of independent activity and traction with developers… by creating spam accounts and very small changes to simple documents (like grammar).

It can be a helpful metric but you need someone technically inclined to dive into the code that is being added/removed/modified.  See: Increased Github Scrutiny Means Lazy ICO Developers Have No Place to Hide

Readers may also be interested in CoinGecko to see how this acitivity is weighted.

On p. 198 they write:

A different approach is to monitor the number of companies supporting a cryptoasset, which can be done by tracking venture capital investments. CoinDesk provides some of this information as seen in Figure 13.13. Though as we will address in Chapter 16 on ICOs, the trend in this space is moving away from venture funding and toward crowdfunding.

Actually, as mentioned a couple time earlier, there has been a noticeable divergence the past 12 months: coin sales that are done as private placements versus coin sales that have a public facing sale.

In general, most of the coins that have raised capital through private placement deals typically have less than 100 investors, many of which are the aforementioned “crypto hedge funds” and coin-focused venture funds such as Andreessen Horowitz and Union Square Ventures.

The public facing sales are generally eschewed by venture funds.  If venture funds are involved in a coin that does a public sale, they typically are involved in what is called a “pre-sale” where they receive preferential terms and conditions, such as discounted coins.

Upon the conclusion of the “pre-sale” the actual public sale begins with heavy marketing on social media towards retail investors.  Sometimes these sales have hundreds or even thousands of individual participants.  That could be called a “crowdsale” and these participants typically get worse terms than those who participated in the pre-sale.

On p. 199 they write:

Another good proxy for the increased acceptance of a cryptoasset and its growing offering by highly regulated exchanges is the amount of fiat currency used to purchase it.

Maybe consider revising because we have all been told that cryptocurrencies would not only displace “fiat currency” but also topple and replace the existing financial system… how does measuring these new internet coins with old money help achieve that?

For instance, at the time of this writing none of the US-based retail exchanges with domestic bank accounts have recently listed an ICO (with the exception of ETH and ETC).  This includes: itBit, Bitflyer, Coinbase, and Gemini.106  Kraken’s retail exchange uses payment processors and banking partners outside of the US.107

On p. 199 they write:

in the one-year period from March 2016 to March 2017, ether went from being traded 12 percent of the time with fiat currency to 50 percent of the time. This is a good sign of the maturation of an asset, and shows it is gaining wider recognition and acceptance.

Why is that specific ratio or percentage deemed good?  The next edition should include a table explaining this in further because it is unclear why it is good, neutral, or bad.

On p. 201 they write about wallets from Blockchain.info:

Clearly, having more users that can hold a cryptoasset is good for that asset: more users, more usage, more acceptance. While the chart shows an exponential trend, there are a few drawbacks for this metric. For one, it only shows the growth of Blockchain.info’s wallet users, but many other wallet providers exist. For example, as of March 2017, Coinbase had 14.2 million wallets, on par with Blockchain.info. Second, an individual can have more than one wallet, so some of these numbers could be due to users creating many wallets, a flaw which extends to other wallet providers and their metrics as well.

In the past I have written extensively on how these headline wallet numbers are basically gimmicks and don’t accurately measure users or user activity.

Why?  Because it costs nothing to open one.  And often there is no KYC or AML involved in creating one as well.  As a result, bots can be used to create many each day to inflate the metric.

Coinbase has actually removed usage data in the past and they still don’t define what the difference between a user or wallet is.  Nor do either company provide traditional DAU / MAU metrics.  It’s not hard to do and it is unclear why they don’t.  The only way we have some semblance of an idea of what Coinbase user numbers were between 2013-2015 is because of the IRS lawsuit mentioned above.

On p. 201 they write about a search trend, “BTC USD,” first described by Willy Woo:

If we assume this to be true, then Woo’s analysis indicating a doubling in bitcoin users every year and an order of magnitude growth every 3.375 years. He calls this Woo’s Law in honor of Moore’s Law […] It will be interesting to see how Woo’s Law holds up over time.

How has it done?  “Woo’s Law” has thus far not held up.

For instance, below is a 5 year trend chart of the same search term promoted by Woo and others last year:

As we can see above, this term has some correlation between interest in coins specifically during price bubbles.  But this has not translated into large quantities of new daily users.108

The next edition of this book should remove this faux eponym because it has not withstood the test of time and doesn’t measure actual users.

On p. 202 they write:

Figure 13.17 shows the hyper growth of Ethereum’s unique address count. With Ethereum, an address can either store a balance of either, like Bitcoin, or it can store a smart contract. Either denotes an increase in use.

Below is a screenshot of a recent address count:

Source: Etherscan

The next edition should include a caveat because it is unclear from this chart alone what kind of use is taking place.  Is it coin shuffling, miner payouts, gambling payouts, Crypokitty activity, etc.?  Maybe it is just someone spamming the network?

For instance, according to DappRadar which tracks 650 ethereum Dapps, over the past 24 hours there have only been 9,926 users sending 43,652 transactions.  That may sound intriguing but… nearly about 2/3rd of all these users are using decentralized exchanges (DEX).  If trading and arbitraging are the “killer apps” of cryptocurrencies, then the next edition of this book could be a lot slimmer than it is now.

As described in “Slicing data,” not all transactions are the same and a deep dive needs to be done to fully describe the behavior taking place.

On p. 204 they cite a “Dollar Value of Transactions” chart:

Source: Blockchain.info

But this is just an estimate from Blockchain.info and is likely widely exaggerated because Blockchain.info — like most wallet providers — probably has no idea what the intent behind those transactions are.  We need data from all of the exchanges, payment processors, and merchants that accept coins in order to conclusively know what activity was commercial versus non-commercial in nature.

For instance, a large portion of those transactions could simply be “change address.”

Not to get too technical, but with Bitcoin, in order to manually send X amount of bitcoin on-chain, users typically must enter a “change address” unless the whole amount of UTXO is consumed.  It’s kind of like a bank teller moving money from one till to another between shifts.  No new economic activity is actually taking place in the bank or in the real economy, but in this specific chart above, there is no way to differentiate “change address” activity with real commercial activity and so it all gets mixed and muddied.

On p. 204 they write:

If the network value has outpaced the transactional volume of that asset, then this ratio will grow larger, which could imply the price of the asset has outpaced its utility. We call this the crypto “PE ratio,” taking inspiration from the common ratio used for equities.

Except, without a thorough deep dive from an analytics provider who has mapped out activity into all of the exchanges, payment processors, and merchants — it is very difficult to actually differentiate the noise from the actual transactional utility.109

Here the authors take all on-chain transaction volume at face value.  The next edition should scrap this section unless they get access to a thorough deep dive.

On p. 204 they write:

One would assume that an efficient price for an asset would indicate a steadiness of network value to the transaction volume of the asset. Increasing transactional volume of an asset should be met by a similar increase in the value of that asset. Upside swings in pricing without similar swings in transaction volume could indicate an overheating of the market and thus, overvaluation of an asset.

That is a popular model but could be incorrect.

I recommend readers check-out this excellent recent thread started by Nathaniel Popper as well as Debunking Bitcoin’s Remittance Valuation. Featuring a Lead Pipe by Anshuman Mehta.

On p. 207 they write about technical analysis:

In Figure 13.22 the top line is called the resistance line, indicating a price that bitcoin is having trouble breaking through. Often these lines can be numbers of psychological weight, in this case the $300 mark.

I looked it up and couldn’t find a definition for what “psychological weight” is, so this should either be defined in the book or removed in the next edition.110

On p. 209 they write:

You’ll find many instances of newer cryptoassets experiencing wild price swings after their creation, but over time these younger assets begin to follow the rules of technical analysis. This is a sign that these assets are maturing, and as such, are being followed by a broader group of traders. This indicates they can be more fully analyzed and evaluated using technical analysis, allowing the innovative investor to better time the market and identify buy and sell opportunities.

Technical analysis may have its uses but by itself it is basically cargo cult science.

Recommend rephrasing it and maybe inserting this great reference: The Vomiting Camel has escaped from Bitcoin zoo

Chapter 14

On p. 211 they write:

Since cryptoassets are digital bearer instruments, they are unlike many other investments that are held by a centralized custodian. For example, regardless of which platform an investor uses to buy stocks, there is a centralized custodian who is “housing” the assets and keeping track of the investor’s balance. With cryptoassets, the innovative investor can opt for a similar situation or can have full autonomy and control in storage. The avenue chosen depends on what the innovative investor most values, and as with much of life there are always trade-offs.

This is true: there are many choice.  But in practice, as noted above by Jonathan Levin, a significant majority of transactions typically involves a 3rd party intermediary.

Why?  Because Securing a bearer instrument can be a major hassle, as a result companies like Coinbase and Xapo offer custodial services.  While re-introducing an intermediary helps with coin management that kind of defeats the purpose of having a pseudonymous bearer asset in the first place.111 But that’s a different discussion.112

On p. 212 they write:

Anyone with a computer can connect to Bitcoin’s network, download past blocks, keep track of new transactions, and crunch the necessary data in pursuit of the gold hash. Such open architecture is one of Bitcoin’s strongest points.

It may sound like a irrelevant nitpick but this is not unique to Bitcoin.  Nearly every cryptocurrency listed on Coinmarketcap has the same set of “features.”  Similarly, many enterprise vendors also are open source and anyone could set up their own network with the software.  Future editions should include a more nuanced definition of “open.”

On p. 213 they write:

The first computer – or mining rig – with ASIC chips that were specifically manufactured for the process was connected in January 2013.

The citation the authors included was for Avalon.  This is true insomuch as these systems were available for purchase to the general retail public.  But the first known ASIC-mining system was launched in late 2012: ASICMiner privately run out of Hong Kong (from BitQuan and BitFountain). 113

On p. 214 they write:

For perspective, the combined compute power of Bitcoin’s network is over 100,000 times faster than the top 500 supercomputers in the world combined.

This type of stat is frequently repeated throughout the Bitcoin world but it is not an apples-to-apples comparison and should be removed in the next edition.  The supercomputers are largely comprised of CPUs and GPUs which — as their names suggest — are flexible and capable of handling many different types of general purpose tasks.

ASICs on the other hand, are focused and specialized: capable of doing just one set of tasks over and over.  ASICs found in a Bitcoin mining farm are not even capable of creating blocks to propagate on the network: they simply generate hashes.  That is how limited they are in functionality.

On p. 214 they write:

Conceptually, mining networks are a perfect competition, and thus as margins increase, new participants will flood in until economic equilibrium is once again achieved. Thus the greater the value of the asset, the more money miners make, which draws new miners into the ecosystem, thereby increasing the security of the network. It’s a virtuous cycle that ensures the bigger the network value of a cryptoasset, the more security there is to support it.

I think this could be rewritten in the next edition to be closer with what happens in practice.114

For instance, as coin prices decrease, margins are squeezed and “marginal” operators exit, leaving fewer overall miners.  In the past this has led to bankruptcies, such as KnC and HashFast.

Does this lead to a less secure network?

Maybe, maybe not.  Depends on how we define secure and insecure.  Pure hashrate is just one attribute… geographical location, amount of participants, and diversity of participants could be others as well.  For example, see the discussion earlier on selfish-mining.

On p. 215 they write:

Before investing in a cloud-based mining pool, conduct research on the potential investment. If it sounds too good to be true, it probably is.

This is good advice.

Also worth mentioning that “cloud-based mining” kind of the defeats the purpose of pseudonymous mining.  If you have to trust the infrastructure provider to manage and operate the hashing equipment, why not just buy the coins?  Why take that risk and also have to divulge your identity?

Incidentally, NiceHash is one of the most well-known cloud mining services available today.  It partly cemented its notoriety (this is not an endorsement) as its mining units have been rented and used to attack several different cryptocurrencies.  A site called Crypto51.app categorizes the costs of doing a brute force attack on dozens of coins and even lists the amount of hashrate NiceHash has in order to perform a hypothetical attack.

On p. 216 they write:

However, Ethereum will potentially switch to proof-of-stake early in 2018, as it is more efficient from an energy perspective, and therefore many claim is more scalable.

Quick note: this transition has been delayed again until at least the end of 2018 and more likely sometime in 2019 (although it has been moved many times before as well).

On p. 217 they write:

To this end, today numerous quality exchange are available to investors looking to gain and transact the more than 800 cryptoassets that currently exist.

In the next edition it is worth clarifying and defining what “quality” means because just about every retail / consumer-facing exchange has had its share of problems, including hacks and thefts.115 This is one of the reasons the SEC has denied ETF proposals.

With that said, there are a number of OTC trading desks run by reputable financial organizations that enable investors to trade, however, typically the minimum order size (buy/sell) is $100,000.116

On p. 218 they write:

Cryptoasset transactions are irreversible; therefore chargebacks are impossible. While an irreversible transaction may sound scary, it actually benefits the efficiency of the overall system. With credit card chargebacks, everyone has to bear the cost, whereas with cryptoassets only those who are careless bear the cost.

Two comments worth considering for the next edition:

  1. Transactions in cryptocurrencies are possible through block reversals, which can and do happen.  Often times they are relatively expensive to do, but during a “51% attack” it can occur, thus it is not impossible.  In fact, as part of the Nano class action lawsuit, one of the suggested remedies is a roll-back.
  2. As far as credit card chargebacks: this is largely borne by the merchant (not everybody).  In fact, charge backs are largely a consumer-friendly feature, a type of insurance.117

On p. 221 they discuss insurance at exchanges.

At this time, no retail cryptocurrency exchange actually insures a users coin deposit.  As a result, most custodians and intermediaries have had to self-insure (e.g., create their own insurance entity).  There are institutional products (vaults) which are attempting to get 3rd party insurance.

For example, see: Insurers gingerly test bitcoin business with heist policies

On p. 224 they write:

Prior to the hack, Bitfinex had settled with the CFTC for $75,000 primarily because its cold storage of bitcoin ran afoul of CFTC regulations. The move to place all clients’ assets into hot wallets is cited by many as due to the fine and CFTC regulations. Either way, this hack proved that no matter the security protocols put in place, hot wallets are always more insecure than properly executed cold storage because the hot wallet can be accesssed from afar by anyone with an Internet connection.

This passage should be revised in the next edition for a few reasons:

First, as mentioned earlier, Bitcoiners like to find a good boogeyman and in this hacking incident, they blamed the CFTC.

For example, Andreas Antonopoulos tweeted:

Source: Twitter

Several people told him he got the facts wrong.

For instance, I reached out to Zane Tackett who — at the time — was head of communications for Bitfinex.

According to Tackett: “We migrated to the bitgo setup before any discussions or anything with the CFTC happened”

I then publicly pointed out, to Antonopoulos and others, that the CFTC blame game was false.  But instead of deleting that tweet and focusing on who actually hacked Bitfinex, the ideological wing of the Bitcoin tribe continues to push this false narrative.

Tackett even explicitly answered this question in detail on reddit that same day.

So either Tackett is lying or Antonopoulos is wrong.  In this case, it is likely the latter.

The second point worth adding to the passage above in the book is that after nearly two years we still haven’t been told exactly what happened with the hack and theft.  This, despite the fact that Bitfinex has said on more than one occasion that it would provide an audit and public explanation.

Incidentally, this hack and the response, set in motion a series of events that included socialized loses, a lost correspondent banking relationship, and even a heightened reliance on Tether.118 For more, see: How newer regtech could be used to help audit cryptocurrency organizations

Chapter 15

On p. 231 they write:

Founded by Barry Silbert, a serial entrepreneur and influential figure in the Bitcoin community, some would say that DCG is in the early stages of becoming the Berkshire Hathaway of Bitcoin.

Perhaps DCG achieves that, however it hasn’t been done in a classy manner.  For example, see: Ex-banker cheerleads his way to cryptocurrency riches and Barry Silbert and the Cost of Bitcoin’s Malfeasance Culture

On p. 235 they write

An ETF is arguably the best investment vehicle to house bitcoin.

This is debatable.  Last year Jack Bogle – founder of Vanguard, a firm that popularized broad market index ETFs – implored the public to avoid bitcoin like the plague for several reasons.  Critics say he is out of touch, but even if that were true that doesn’t mean his expert views on structuring ETFs should be dismissed.

On p. 238 they write:

Regardless of what people expected going into the SEC decision most everyone was taken aback by the rigidity of the SEC’s rejection. Notably the SEC didn’t spend much time on the specifics of the Winklevoss ETF but focused more on the overarching nature of the bitcoin markets. Saying that these markets were unregulated was an extra slap to the Winklevosses, who had spent significant time and money on setting up the stringently regulated Gemini exchange. In focusing on the bitcoin markets at large, the rejection implied that an ETF will not happen in the United States for some time.

For the next edition, this paragraph should probably be removed.

The facts of the Bitcoin markets today are as follows:

  1. Mining is the process of minting new coins as well as processing transactions and… is largely unregulated in any jurisdiction.
  2. Many exchanges, in particular those outside the US, comply with a hodge podge of regulations, often without the same strict KYC / AML / sanctions checks required for US exchanges.

Gemini and the Winklevoss have no ability to police these unregulated trading venues and unregulated coin minters.  That probably won’t change in the near future.

Perhaps the SEC will eventually approve an ETF, but they arguably were not being rigid — they were being practical.  In their view: why allow an unregulated asset whose underlying genesis and trading market is still very opaque and frequently is used for illicit activity?

Lastly the next edition should include a citation for who “most everyone” includes, because in my own anecdotal experience, the majority of traders at US exchanges I interact with did not think it would be allowed at that time.  Note: my deep dive on the COIN ETF and its ever changing history, can be found here.

On p. 238 they write:

On Monday, naysarers were faced with the reality that bitcoin was once again back over $1,200, and the network for all cryptoassets had increased $4 billion since the SEC decision. Yes, $4 billion in three days.

A couple of thoughts:

  1. Typo: naysarers should be naysayers
  2. Recommend removing this sentence in the next edition because the attitude comes off as a little smug and has an ad hominem.  People are allowed to have different views on the adoption of technology which is separate from what the price of a coin will be.  And justifying a trading position based on price movements which are based on the mood of retail investors should probably not be the takeaway message for a mainstream book.

On p. 240 they write:

By purchasing XBT Provider, GABI strengthened the reliability of the counterparty to the bitcoin ETNs and added a nice asset to its growing bitcoin investing platform for institutions.

For the next edition, recommend removing “nice” because that is a subjective word.  There are other ways to describe this acquisition.

On p. 242 they write:

It also created an independent advisory committee, including bitcoin evangelist Andreas Antonopoulos to oversee its pricing model, which utilized prices from various exchanges throughout the world.

Why is this specific person considered an expert on futures?  There are a lot of articulate developers involved in promoting cryptocurrencies, but their expertise is typically not in finance.  If anything, this specific person has a vocal disdain for regulators, financial institutions, and regulated instruments… just see his tweet above in Chapter 14.119

Maybe in the next edition discuss the controversy of having a futures contract that is not physically deliverable.  Could also include how the CFTC has subpoenaed the four partner exchanges working with the CME: Coinbase, Kraken, itBit, and Bitstamp.  These four exchanges create the price used in bitcoin futures by the CME.

Chapter 16

On p. 249 they write:

For first-time founders who want to approach venture capitalists for an investment, often they must know someone-who-knows-someone. Having such a connection allows for a warm introduction as opposed to being among the hundreds of cold calls that venture capitalists inevitably receive. To know someone-who-knows-someone requires already being in the know, which creates a catch-22.

This is a very good point.  However, it would be worth adding in the next version how most ICOs and coin sales now require knowing someone because most private sales involve roughly the same insular, exclusive set of funds and investors as the “old method” did.

On p. 252 they write:

Before we dive into the specifics of how a cryptoasset offering is carried out, the innovative investor needs to understand that the model of crowdfunding cryptoassets is doubly disruptive. By leveraging crowdfunding, cryptoasset offering are creating room for the average investor to stand alongside venture capitalists, and the crowdfunding structure is potentially obviating the need for venture capitalists and the capital markets entirely.

In the next edition, worth mentioning that this was the general pitch for ICOs starting with Mastercoin (2013) all the way up through 2016.  But over the past two years and certainly in the past 12 months it has dramatically shifted back towards the traditional venture route.

One of the reasons why is because of the filtering and diligence process.  Those that don’t get selected and/or those ICOs that don’t meet the requirements of this small group of funds often decide to do a public sale.  And many of these ideas were half-baked and sometimes fraudulent, according to one recent report: More Than Three-Quarters of ICOs Were Scams

On p. 253 they write:

Monegro’s thesis is as follows: The Web is supported by protocols like the transmission control protocol/Internet protocol (TCP/IP), the hypertext transfer protocol (HTTP), and simple mail transfer protocol (SMTP), all of which have become standards for routing information around the internet. However, these protocols are commotidized, in that while they form the backbone of our internet, they are poorly monetized.

It could be argued that Monegro’s thesis has failed to live up to its hype thus far.  And counterfactually, if “tcpipcoin” existed, it may have actually stunted the growth of the internet as Vinton Cerf and Bob Kahn would have allocated more time promoting the coin rather than the technology.    We can disagree about this alternative scenario, but I have mentioned it before in Section 8.

For example, we frequently see that dozens of nonsensical conferences and meetups conducted on a weekly basis globally try to promote a shiny new protocol coin of some kind.  Trying to monetize a public good with a coin thus far has not removed the traditional incentive and sustainability issues around a public good.  That would also be worth discussing in the next edition.120

On p. 253 they write:

All the applications like Coinbase, OpenBazaar, and Purse.io rely on Bitcoin, which drives up the value of bitcoin.

Worth updating this because Purse.io added support to Bitcoin Cash.  And OpenBazaar switched over to Bitcoin Cash altogether.

Also, Coinbase has become less maximalist over time and now provides trading support for four different coins.121  Though it probably wouldn’t be technically correct to call Coinbase or Purse a Bitcoin application.  In the case of Coinbase, users use an off-chain database to interact and Coinbase controls the private key as a custodian / deposit-taking institution.

On p. 254 they write:

Interestingly, once these blockchain protocols are released, they take on lives of their own. While some are supported by foundations, like the Ethereum Foundation or Zcash Foundation, the protocols themselves are not companies. They don’t have income statements, cash flows, or shareholders they report to. The creation of these foundations is intended to help the protocol by providing some level structure and organization, but the protocol’s value does not depend on the foundation.

This is another reason to heavily modify chapter 7 in future versions because it is not an apples-to-apples comparison: coins and coin foundations are not the same thing as for-profit companies that issue regulated instruments (stocks, bonds, etc.).

Also, the very last sentence is highly debatable because of how often foundation and foundation staff are integral to the longevity of a coin.

Recall that blockchains do not maintain or market themselves, people do.  And is often the case: staff and contractors of these foundations frequently use social media to promote potential upgrades as well as publicize the coins attributes to a wider audience.  In many cases it could be the case that the protocol’s value does depend on the work and efforts of others including specifically those at a coin foundation.122

On p. 254 they write:

Furthermore, as open-source software projects, anyone with the proper merits can join the protocol development team. These protocols have not need for the capital markets because they create self-reinforcing economic ecosystems. The more people use the protocol, the more valuable the native assets within it become, drawing more people to use the protocol, creating a self-reinforcing positive feedback loop. Often, core protocol developers will also work for a company that provides application(s) that use the protocol, and that is a way for the protocol developers to get paid over the long term. They can also benefit from holding the native asset since inception.

There are several points here that should be modified or removed in the next edition:

For instance, with Bitcoin, due to a variety of political fights and personality conflicts, multiple “core” developers have had their access rights removed including: Jeff Garzik, Mike Hearn, Gavin Andresen, and Alex Waters.  Thus it is not true that anyone can join a team.  It is also unclear what those merits may be as most of the projects don’t explicitly provide those in written format yet.

In addition, internet coins are often traded on secondary markets in order to provide liquidity to coin holders such as developers.  They all need access to capital markets to stay afloat.  No project is self-sustainable at this time because no coin is being used as a unit of account — miners and developers must liquidate coins in order to pay their bills which are denominated in foreign currency.

Lastly, in practice, there are many coins that have died or lost any developer support yet initially they may have had a small army of programmers and media attention.  According to Coinopsy, more than 1,000 coins are dead.  Thus in the next edition the “self-reinforcing” loop should probably be removed too.

On p. 256 they write:

ICOs have a fixed start and end date, and often there is a bonus structure involved with investing earlier. For instance, investing at an early stage may get an investor 10 to 20 percent more of a cryptoasset. The bonus structure is meant to incentivize people to buy in early, which helps to assure that the ICO will hit its target offering. There’s nothing like bonuses followed by scarcity to drive people to buy.

This should definitely be removed.  In May, the SEC released a parody website called “HoweyCoins” which explicitly points to this precise FOMO behavior as a big no-no for both issuers and investors alike.

Also recommend the inclusion of the Munchee Order in this chapter as it would help illustrate what regulators such as the SEC perceive as improper fundraising techniques.  Specifically, include this in the “announcing the ICO” section.

On p. 258 and 259 they discuss the Howey Test.  It is strongly recommended that these two pages be reworded and modified based on the enforcement actions and guidance from the SEC and other securities regulators.

For instance, they write:

A joint effort by Coinbase, Coin Center, ConsenSys, and Union Square Ventures with the legal assistance of Debevoise & Plimpton LLP, produced a document called, “A Securities Law Framework for Blockchain Tokens.” It is especially important for the team behind an ICO to utilize this document in conjunction with a lawyer to determine if a cryptoasset sale falls under SEC jurisdiction. The SEC made it clear in July 2017 that some cryptoassets can be considered securities.

The first sentence should probably be moved into a footnote and the second sentence removed altogether because this document did not age well.

In fact, the current version of the document – as it exists on Coinbase – informs readers in bright red that:

Please note that since this document was originally published on December 7, 2016, the regulatory landscape has changed. The information contained in this document, including the Framework may no longer be accurate. You should not rely on this document as legal advice and you should seek advice from your own counsel, who is familiar with the particular facts and circumstances of what you intend and can give you tailored advice. This Framework is provided “as is” with no representations, warranties or obligations to update, although we reserve the right to modify or change this Framework from time to time. No attorney-client relationship or privilege is created, nor is this intended to be attorney advertising in any jurisdiction.

On p. 259 they write:

Does the token sale tout itself as an investment? It should instead be promoted for its functionality and use case and include appropriate disclaimers that identify it as a product, not an investment.

This is arguably not good advice and should be removed.  Why?  Courts in the US will likely see through this euphemism.  For other things not to do, recommend reading the ICO Whitepaper Whitepaper from Stephen Palley.

On p. 260 they write:

One of the oldest groups of angel investors in the blockchain and bitcoin space is called BitAngels. Michael Terpin of BitAngels has been active in angel investing in blockchain companies for as long as the opportunities have existed. Terpin’s annual conference, CoinAgenda, is one of the best opportunities for investors to see and hear management from blockchain startups present their ideas and business models.

For the next edition, I’d reconsider including this type of endorsement.123 There are some interesting stories that involving these specific entities worthy of a different post.

Chapter 17

On p. 263 they write:

For instance, if Bitcoin influences how remittances are handled, what impact may that have on stocks like Western Union, a remittances kingpin? If Ethereum takes off as a decentralized world computer, will that have any effect on companies with cloud computing offerings, such as Amazon, Microsoft, and Google? If companies can get paid more quickly with lower transaction fees using the latest cryptocurrency, will that have an impact on credit card providers like Visa and American Express.

For the next edition, this paragraph — or at least argument — should come earlier, perhaps even in Chapter 7 (since there is a discussion of specific publicly traded companies).

Another thing that should have been added to this section is actual stock prices for say, the past five years of the companies mentioned: Western Union, Visa, and American Express.

I have included those three below:

If the narrative is that Bitcoin or the “latest cryptocurrency” will erode the margins and even business models of existing payment providers, then at some point that should be reflected in their share prices.

As shown above, that does not seem to be the case (yet).

Perhaps that will change in the future, but consider this: all three of the companies above have either directly invested in and/or are collaborating in blockchain-related platforms — most of which do not involve any coin.  Perhaps these firms never use a blockchain.  In fact, maybe they find blockchains to be unhelpful as infrastructure altogether.

That is possible, hence the need to update this chapter to reflect the actual realities.

In addition, the other three companies listed by the authors have publicly discussed various blockchain-related efforts beyond just pilot offerings.

For instance, both Amazon and Microsoft have supported blockchain-as-a-service (BaaS) offerings in production for over a year.  Google has been a laggard but has internal projects attempting to leverage some of these ideas as well.

On p. 266 they write:

In 2016, the father-son team of Don and Alex Tapscott published the book Blockchain Revolution: How the Technology behind Bitcoin Is Changing Money, Business, and the World, and William Mougayar published the book, The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology.

I wrote lengthy reviews of both.  The short summary is that both were fairly superficial in their dive into use cases and vendors.  The Mougayar book felt like it could use a lot more detailed meat.  The Tapscott book was riddled with errors and unproven assertions.  Would reconsider citing them in the next edition (unless they each dramatically update their content).

On p. 266 they write:

For companies pursuing a DLT strategy, they will utilize many of the innovations put forth by the developers of public blockchains, but they don’t have to associate themselves with those groups or share their networks. They pick and choose the parts of the software they want to use and run it on their own hardware in their own networks, similar to intranets (earlier referred to as private, permissioned blockchains).

These are pretty broad sweeping comments that should be modified in the next edition.  Not every vendor or platform provider uses the same type of chain or ledger.  These are not commoditized (yet).

There are many nuances and trade-offs for each platform.  For the next edition, it would be helpful worth doing a comparison of: Fabric, Pantheon, Quorum, Corda, and other enterprise-focused platforms.  In some cases, they may have an on-premise requirement and in others, nodes can run in a public cloud.

But the language of “intranets and the internet” should not be used in the next edition as it is a misleading analogy.

On p. 267 they write:

We see many DLT solutions as band-aids to the coming disruption. While DLT will help streamline existing processes–which will help profit margins in the short term–for the most part these solutions operate within what will become increasingly outdated business models.

Perhaps that it is true, but again, this language is very broad sweeping and definitive.  It needs citations and references in the next edition.

On p. 267 they write:

The incumbents protect themselves by dismissing cryptoassets, a popular example being JPMorgan’s Jamie Dimon, who famously claimed bitcoin was “going to be stopped.” Mr. Dimon and other financial incumbents who dismiss cryptoassets are playing exactly to the precarious mold that Christensen outlines:

[…]

Disruptive technologies like cryptoassets initially gain traction because they’re “cheaper, simpler, smaller.” This early traction occurs on the fringe, not in the mainstream, which allows incumbents like Mr. Dimon to dismiss them. But cheaper, simpler, smaller things rarely stay on the fringe, and the shift to mainstream can be swift, catching the incumbents off guard.

For the next edition it would be good to remove the misconceptions repeated in the statement above.  Jamie Dimon was specifically dismissing the exuberance of coin mania, not the idea of enhancing IT operations with something like a blockchain.

Worth adding to future versions: JPMorgan has financial sponsored Quorum, an open-source fork of Ethereum modified for enterprise-related uses.  The bank has also invested in Digital Asset.  It is also a member of three industry organizations: EEA, Hyperledger, and IC3.  In addition, JP Morgan has filed blockchain-related patents, has launched a blockchain-based payment network with several banking partners, and also partnered with the parent company of Zcash to integrate ZSL into Quorum.

While Jamie Dimon may not share the same bullish views about coins as the authors do, the firm he is the CEO seems to be taking “blockchains” seriously.

On p. 267 they write:

One area long discussed as ripe for disruption is the personal remittances market, where individuals who work outside of their home countries send money back home to provide for their families.

This specific use case is a bit repetitive as it has been mentioned 5-6 times before in other chapters.  Should probably remove this in future editions unless there is something different to add that wasn’t already explained before.

On p. 268 they write:

It’s no stretch then to recognize that bitcoin, with its low cost, high speed, and a network that operates 24/7, could be the preferred currency for these types of international transactions. Of course, there are requirements to make this happen. The recipient needs to have a bitcoin wallet, or a business needs to serve as an intermediary, to ultimately get the funds to the recipient. While the latter option creates a new-age middleman–which potentially has its own set of problems–thus far these middlemen have provided to be much less costly than Western Union. The middleman can be a pawnshop owner with a cell phone, who receives the bitcoin and pays out local currency to the intended recipient.

This should be modified in the next versions because it is a stretch to make those claims.  That is the reason why multiple Bitcoin-focused remittance companies have pivoted or branched out because “moving” bitcoins across borders is the only easy part of the entire process.  For instance, the KYC / AML checks during the on- and off-ramps are costly and are required in most countries.  This should be included in any analysis.

Also, there are no citations in this paragraph.  And the last sentence is describing the pawnshop owner as a money transmitter / money service business which is a regulated operation.  Maybe the laws change, which is possible.  But for the next version, the authors should include specific corridors and the costs and margins for MSBs operating in those corridors.

Lastly, any future analysis on this topic should also include the online and app-based product offerings from traditional remittance players such as Western Union.  In nearly all cases, these products and services are faster and cheaper in the same corridors relative to traditional in-person visits.

Recommended reading:

On p. 268 they write:

The impact of this major disruption in teh remittance market should be recognized by the innovative investor not only because of the threat it creates to a publicly traded company like Western Union (WU) but for the opportunities it provides as well.

It is strange to hear this repeated multiple times without providing quantifiable specifics on how to measure this threat.

As mentioned a few pages earlier, if competitors (including, hypothetically cryptocurrencies) were to erode the margins of publicly traded companies, we should be able to see that eventually reflected in the share price.  But Western Union has been doing more or less the same as it has the past couple of years.

What about others?

Above is the five year performance of Moneygram, another remittance service provider.

What happened the past two years?  Did Bitcoin or another cryptocurrency pound its share value into the ground?  Nope.

What happened is that one of Alibaba’s affiliates – Ant Financial – attempted to acquire Moneygram.  First announced in early January 2017, Ant Financial wanted to acquire it for $880 million.  Despite approval from the Moneygram board, the deal faced scrutiny from US regulators.  Then in January 2018, the deal was axed as the US government blocked the transaction on national security grounds.

This hasn’t stopped Alibaba and its affiliates with finding other areas to grow.  For instance, last month Alipay (part of Ant Financial) announced it had partnered with G Cash to in the Hong Kong – Philippines corridor, using a blockchain platform for remittances.  No coin was needed in this process so far.

There may be some success stories of new and old MSBs that utilize cryptocurrencies in ways that make them more competitive, those should be included in the next edition along with more metrics readers can compare.124

On p. 270 they write:

For the long term investor, careful analysis should be undertaken to understand if insurance companies are pursing DLT use cases that will provide a lasting and meaningful solution. Lastly, some of the major consulting firms may be so entrenched in incumbent ideology that they too may be blind to the coming distruption.

A few comments that should be finnesed in the next version:

  1. What is the definition of “incumbent ideology”?
  2. Virtually every major insurance and reinsurance company is hands-on involved with some kind of blockchain-related consortium and/or enterprise-focused platform.  This includes both B3i and RiskBlock as well as Asia-based reinsurers.  Recommended reading: RiskBlock’s blockchain targets entire insurance industry
  3. Similarly, every major consulting company and systems integrator has a team or two dedicated to helping clients build and integrate applications with specific enterprise-related “blockchain” platforms.  Many of them have joined related consortia too.  There are too many to even list here so it is unlikely they will get collectively blind-sighted as alluded to in the passage above.

On pgs. 272 and 273 they write about consortia:

Another consortium, The Hyperledger Project, offers more open membership than R3. Remember, one of the strengths and defining aspects of an effective blockchain project is its open source ethos.

[…]

While the [EEA] consoritum will work on software outside of Ethereum’s public blockchain, the intent is for all software to remain interoperable in case companies want to utilize Ethereum’s open network in the future.

Based on the passages above the next edition should incorporate a few changes.

The Hyperledger Project (HLP) is a non-profit group that does not itself aim to commercialize or deploy or operate any technology.125 The membership dues are largely used to maintain code repositories and sponsor events which educate attendees on projects incubated within HLP.  It currently has around 200 members, including R3 which was a founding member.  There are more than 5 codebases that are officially incubated, the most well-known is Fabric.  However, HLP seeks to maintain a neutral position on which platform its members should use.  Other notable platforms incubated within HLP include Iroha and Sawtooth (Lake).

In contrast, R3 is a for-profit company that set up a consortium in order to commercialize and deploy technology within the regulated financial industry.126 Its membership model has changed over time and it is the main sponsor for Corda, an open source platform.  The consortium composition initially started with 42 banks and now includes about 200 entities including insurance companies, central banks, financial market infrastructure operators, and others.

The third most known consortium is the Enterprise Ethereum Alliance (EEA).  It is kind of like the combination of the two above.  It is a non-profit organization and itself does not aim to commercialize or deploy or operate any technology.  It seeks to be a neutral entity within the greater Ethereum ecosystem and has many different working groups that span topics similar as the other two consortia above.  It has hundreds of members and the main efforts have been around formalizing an enterprise-focused specification (EEA 1.0) that other vendors can create implementations of (such as Pantheon).

Like the members of the other two consortia above, nothing prevents an EEA member from using any other platform.  Thus the authors usage of “open network” is superfluous because all of the codebases in each of these three consortia is open, anyone can download and use.  The key differences are: what are the trade-offs with using each platform versus what are the benefits of membership for joining the consortia.  These are two separate points that could be discussed further in the next edition.

On p. 276 they write:

The CFTC Director of Enforcement, Aitan Goelman, tried to clarify his opinion with this satement, “While there is a lot of excitement surrounding bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets.” It is clearly confusing that the Direct of Enforcement of the agency that ruled bitcoin a commodity also called it a “virtual currency.”

For the next edition the authors should remove the unnecessary attitude in the last sentence.

Up through 2017, most US and even foreign regulators used the term “virtual currency” — not as a slight against Bitcoin or cryptocurrencies, but because that was the catchall term of art used for many years.

For instance, in March 2013, FinCEN released its guidance and it was entitled: “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies”

Throughout the guidance, the term “virtual currency” is used more than 30 times.

And one relevant passage – especially for this book review – involves the definition of an administrator.  According to FinCEN’s guidance:

“An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.”

As it relates to the CFTC, earlier this year a federal judge in New York ruled that: “virtual currencies can be regulated by CFTC as a commodity.”

The ruling (pdf) specifically uses the phrase “virtual currency” not as a slight, but as a term of art.  Perhaps other terms are used over time.  For instance, in its new customer advisory issued this week, the CFTC mentioned potential scams that describe themselves as “utility coins” or “consumption coins.”  Worth revisiting in the next edition.

Chapter 18

On p. 280 they write:

Here’s another Burniske-Tatar Rule: Don’t invest in bitcoin, ether, or any other cryptoasset just because it’s doubled or tripled in the last week. Before investing, be able to explain the basics of the asset to a friend and ascertain if it fits well given the risk profile and goals of your investment portfolio.

This is good advice.  And while the eponymous rule was coined several chapters ago,  future editions should probably drop the name of that rule… because similar advice with slightly different wording has existed for decades (e.g., don’t invest more than you can afford to lose, do your own research, etc.).

On p. 282 they write:

Are millenials turning to bitcoin and cryptoassets for their investment? Is a Vanguard fund or a small investment in Apple any better?  Whereas the Vanguard fund has a minimum investment amount and buying an equity will require commission, millennials see cryptoasset markets as a way to begin investing with a modest amount of money and in small increments, which is is often not possible with stocks or funds.

They also include a footnote that reads:

Each bitcoin can be divided into 100 million units, making it easy to buy 1/2, 1/10, 1/100 or 1/1000 of a bitcoin

Would recommend removing this passage altogether because there really aren’t many good surveys that indicate who actually bought coins versus who was just interested in them.

For instance, a flawed Finder.com survey that is still being cited, says that 8% of Americans have invested in cryptocurrencies.127  While it says the majority of investors are “millenials,” the survey doesn’t ask the most important question: does the investor control the private key.  If you do not control the private key then you do not control the coin, someone else does.

In addition, there are online brokerages that do allow investors to invest with modest amounts, the most notable being Robinhood (which coincidentally also allows users to purchase several different cryptocurrencies).  There are also a variety of spare change investment apps and robo-advisor products that allow users to have some exposure to regulated capital market too.

Lastly, regarding the footnote they provide: due to the fees required by Bitcoin miners, in practice over the past several months 1/1000 of a bitcoin is typically the minimum transaction fee.  This is one reason why many investors simply leave coins on cryptocurrency exchanges: so they don’t have to pay fees to move them to other wallets.128

On p. 282 they write:

The important point is that at least they’re doing something to invest their funds and build the groundwork for a healthy financial future. We have seen firsthand millenials who have learned about investing from buying cryptoassets and have implemented investing approaches, such as taking profits at certain price points, seeking diversification into multiple assets, and so on.

This should probably be removed too because the same thing can be said to a new cohort of investors twenty years ago, such as the ones that invested in dotcom-related companies.  Who remembers Beenz?

Conclusion

I fully expect some reaction towards this review along the lines that it was too picky or too pedantic.  Perhaps this a little true but consider: what is the right size for a thorough book review in the age of so-so fact-checking?129 Also, most of my previous reviews were about the same length, or at least used the same page-by-page model.

There is obvious room for disagreement in areas involving opinions, but there are many technical and non-technical mistakes that the authors made, not just a small handful.  By highlighting these, not only could the next edition be significantly improved but it helps readers new to this space get a better understanding of what the prevalent themes versus realities are.

The goal of this review was not to be overbearing but to be dispassionate about supposed common wisdom promoted in the cryptocurrency world.

For example, just the other day I noticed in a chatroom the following statement from a maximalist:

HODLer = DAU.  Bitcoin has the most DAUs on any protocol.

HODLing is bitcoinspeak for “hoarding.”

Several people in the room agreed with those this statement and they are not alone.  If the reader is interested in learning about the sociology and subculture of many Bitcoin enthusiasts, its worth skimming reddit and twitter occasionally to see how passionate coin investors think.130

But for businesspeople who are not part of the inner sanctum of Bitcoinland, the statement above from the chatroom may make you shrug.

After all, HODLing a dollar doesn’t make you a dollar user.  HODLing a barrel of oil doesn’t make you a oil user.  HODLing a brick of gold doesn’t make you a gold user.  HODLing a digitized Pokemon card doesn’t make you a Pokemon user.  HODLing a Stradivarius violin doesn’t make you a violin player.  HODLing an Olympic medal doesn’t make you an Olympic athlete.  And so forth.  The valuation of an auction house isn’t measured by the amount of rare collectibles it sells in a day, why should internet coins and their platforms be an exception to that rule?131

Inactivity isn’t how activity is measured.  Or to look at this argument from another angle: HODLing is not ‘active’ anything.  If all an investor did was buy bitcoin and then lose their keys, they would accomplish the same thing described in the chatroom.132

Sure it is possible to redefine what Bitcoin or cryptocurrencies are supposed to do, but that’s after the fact.  For example, if Satoshi had wanted to explicitly build “digital gold” he/she would likely have mentioned it in the original paper at least once and even architected Bitcoin to be something different than what it looked like in 2009.133  As mentioned above, the first app he looked at building was for poker.

This is definitely a topic worth including in the next edition, but I digress.134

Other general areas for improvement:

  • Add a glossary.
  • Add financial disclosures of coins owned by each author.
  • Provide specific definitions for vague terms like “the community,” “administrator,” and the attributes of a target investor; ditch the “innovative” investor nomenclature.
  • Chapter 7 probably should be removed until more accurate comparisons can be found and Chapter 17 seemed a bit unfocused and covered a wide array of topics instead of just one or two… even dropping in thoughts about regulators. Future versions likely need an entire set of chapters focused on regulations, not just mentioned in passing.
  • Based on the incorrect view of financing mentioned in Chapter 5, interview Vitalik Buterin and other co-founders regarding how Ethereum was bootstrapped.
  • In one of the future regulatory chapters, would be good to have a discussion around PFMI, CBDCs, and settlement finality.
  • Provide a lot more references and citations regarding cryptocurrency-focused use cases, especially remittance providers.  This seemed to be the most repeated use case but nary a mention of a specific Bitcoin remittance company, its valuation, or volume corresponding to the use case.

Have a book or paper you’d like me to look at?  Feel free to send it across.  Also, it just came out but this one sounds like a doozy already.  See my other book reviews.

End notes

  1. To be fair, Burniske is not the only analyst-turned-VC who has not publicly disclosed his trading positions of coins, but that’s a separate topic. []
  2. One reviewer mentioned: “Likely it was partially intentional to release in late 2008 / early 2009, but did in fact coincide mainly with internal constraints. We could also argue that the GFC commenced in mid-2007 when BNP Paribas froze two mortgage-backed security funds which became the catalyst of the summer 2007 credit crunch, but that is neither here nor there. I also debate the argument that it was ‘intended’ as anything other than a solution to the double-spend problem, be it a payments system or an investment.” []
  3. As an aside, Brian Kelly, frequently promotes various coins on CNBC.  Unclear what his trading positions are on each coin at the time of recording.  While that may not be illegal, it’s arguably not classy. []
  4. One reviewer mentioned: “This was literally the ethos that led to the GFC. Securitization and Mark-to-model were heralded as “innovation” and championed for their ability to move faster than the academic foundation and until 2007 seen as a way to ‘completely engineer risk out of from the system.'” []
  5. See: Robert Sams on rehypothecation, deflation, inelastic money supply and altcoins []
  6. See tcpipcoin in Section 8 []
  7. See: Digitalization or Automation – Is There a Difference? from Gartner []
  8. One reviewer mentioned: “The authors also miss that “value” is still a function of ‘the market’, i.e. supply and demand. Simply by fixing supply does not equalize demand. I also take massive issue with the governance in “a [de]centralized and democratic manner.” Are the authors able to write C++ or GOLang protocol code for Bitcoin Core or GETH? Likely not. So if anything this walks us towards a new form of governance, except where we elect leaders in the US who ultimately appoint Fed governors in cryptocurrencies there are generally no elections. Long story short, in all cases, it ain’t democratic and it probably remained at least partially centralised at a given point in time.” []
  9. See Central bank digital currencies from the BIS.  I know, I’ll get spammed by all the “sound money” promoters out there who insist that Bitcoin will replace central banks — it’s a religious zeal to many. []
  10. For example, about a month ago, Jonathan Levin from Chainalysis did an interview and mentioned that: “So we can identify, it is quite hard to know how many people. I would say that 80% of transactions that occur on these cryptocurrency ledgers have a counterparty that is a 3rd party service. More than 80%.” []
  11. For instance, on p. xxvi they list “the top 50” coins at the end of 2016 and don’t disclose if they own any specific ones at all, but talk about many of them in positive ways.  Adding a disclosure would be helpful. []
  12. Bitcoin has ‘no intrinsic value,’ Brookfield CEO says: ‘It’s not for us’ from Financial Post []
  13. The Economist wrote a nice short article on this behavior — the greater fool – last year. []
  14. For example, on p. 9 they write: “Shortly thereafter, Satoshi vanished.  Some speculate it was for the good of Bitcoin. After all, being the creator of a technology that has the potential to replace much of the current financial system is bound to eventually invoke the wrath of powerful government and private sector forces.”  This seems like a strawman.  Bitcoin was designed for just one simple thing: payments.  The financial system is an interwoven network of hundreds of regulated and unregulated goods and services, not just payments.  Also, this paragraph, like a few others later, has elements of conspiratorial boogeymanism.  Just around the corner, the government is preparing to shut down Bitcoin!  Nothing like that has happened in the past 9+ years.  In fact, the opposite has been true as most jurisdictions have been pretty accommodating, arguably even too lenient on the issuance and usage of cryptocurrencies, but that is a topic for a different post. []
  15. See Layer 2 and settlement []
  16. See Breakthrough IT Banking from McKinsey and Bank IT spending to hit $241bn across four major global regions from ComputerWeekly []
  17. One reviewer mentioned: “Are the authors aware that CMOs first appeared in 1983, and that in many countries where they were heavily utilised including in the late 2000s they worked as advertised? In fact many CMOs in the US performed as modelled. The issue was, and is, always liquidity, over-leverage and most of all deteriorating lending standards. Cryptocurrencies will most likely be looked at as catalysts of these risks should their notional rise substantially, not their saviour.” []
  18. One reviewer commented: “Are they arguing that people would have been more able to pay their mortgages or that home values wouldn’t have fallen if CMOs were on a blockchain?” []
  19. One reviewer explained: “When someone claims that blockchain would have prevented the mortgage crisis, they are revealing their ignorance of their ignorance.  I worked with some of that CMO data. One former colleague works for one of the large consulting firms ‘blockchain’ practices. He posted something about how blockchain would address the problems with mortgage servicing . When I privately asked him how it would do so,and that the problems with mortgage servicing that I was aware of were either failure to do certain required activities or their failure to record that they did them, as opposed to someone changing the record after it was entered, he did not respond.” []
  20. See also: The Problem with Calling Bitcoin a “Ponzi Scheme” by Preston Byrne []
  21. For example, at the time of this writing, Coinmarketcap tracks 1641 different types of coins and tokens.  Many of these are likely ERC20 tokens and thus rely on Ethereum itself and are not independent blockchains. []
  22. Worth re-reading the recent DoJ indictment of GRU officers as the DoJ provides a reason for why Bitcoin was used versus other transmission methods. []
  23. Someone should create a website that tracks all of the gigantic bullish claims from Bitcoin promoters on how it will topple banks and destroy governments.  There are at least more than 100 such public predictions each month. []
  24. But “be your own payment processor” isn’t a catchy phrase. []
  25. Readers should check out: “The Path of the Blockchain Lexicon (and the Law)” by Angela Walch. []
  26. It ignores how mining pools can unilaterally determine what transactions to include and how much a fee a transaction should include in order to be included in a block. []
  27. For example, KARMA : A Secure Economic Framework for Peer-to-Peer Resource Sharing by Vivek Vishnumurthy, Sangeeth Chandrakumar and Emin Gun Sirer []
  28. Recommended reading: The Economic Limits of Bitcoin and the Blockchain by Eric Budish []
  29. Some literature describes the proof-of-work process used in Bitcoin as a “scratch-off puzzle.” []
  30. One reviewer mentioned: “A model that I like to describe this with is how the main professional soccer leagues are selected in Europe and other regions. For example, France specifically has an annual selection of the “League 1” after the Coupe de French. Basically any team can enter, but practically there is minimal turnover because a team from a town of 5,000 people is unlikely to reasonably beat a team like Paris or Lyon which has multi-million euro budgets. There are few upsets, but these can generally be modeled by statistical chance.” []
  31. For example, Coin Center circulated a borderline defamatory note to ESMA with regards to Corda – even before the Corda introductory whitepaper was released – likely because its author was unfamiliar with how the platform actually worked. []
  32. It seems to be a euphemism and code word for “someone with money who should buy coins.” []
  33. Based on public information, over the past four years pretty much the only cryptocurrency-related companies that probably were profitable equity investments were: exchanges and handful of mining companies operating outside of the US (e.g., some service providers have also generated steady income including several law firms and conference organizers). []
  34. In both cases, consensus is achieved by the longest chain rule. []
  35. May not be a Freudian slip here, but keep in mind all blockchains have operators and maintainers.  See “arewedecentralizedyet” for more. []
  36. It arguably could have been a self-fulfilling prophecy: investors outside of Cyprus hear news about the Cyprus bailout and bitcoin… thereby marketing bitcoin to new retail investors who then go out and buy bitcoins to try it out. []
  37. See also the background of R3 / DLG as well. []
  38. It is common to see Bitcoin promoters regularly demonize these companies who are trying to improve and automate infrastructure, vilified as a bourgeoisie activity that must be shunned.  Worth revisiting to see if this changes over time. []
  39. One of the few exceptions is the Brave browser. []
  40. Creating and marketing coins to retail investors is relatively easy… building infrastructure that customers actually regularly use for commerce is another level altogether. []
  41. If measured by price, there was a large bubble that popped in December 2017, but that was something that happened after publication. []
  42. I have given several public presentations in the past year explaining the “trough of disillusionment” phenomenon in this context, including in Seoul and Tokyo during July 2017. []
  43. See also: Tokens: Investment Vehicle or Medium of Exchange (Not Both) by Cathy Barrera and MV=P…Que? Love and Circularity in the Time of Crypto by Anshuman Mehta and Brian Koralewski []
  44. Furthermore, in September 2014 I gave a presentation (video) (slides) that similarly tried to bucket different types of proposed coins as “commodities” and the like.  And I know I wasn’t the first to try and do so.  Recommend readers do a bit more digging on this topic if they’d like to see a more thorough origin story. []
  45. One reviewer mentioned: “The native tokens / coins / assets inside a ledger are “cryptocurrencies”, they are currency in the single sense that they the only form of compensation accepted by the miner / staker in a network. This cryptoasset business really only makes sense in the context of units which are not used to pay for the security of a blockchain.” []
  46. But that doesn’t necessarily excite speculators and coin holders. []
  47. See: Bitcoin Is Now Just A Ticker Symbol and Stopped Being Permissionless Years Ago []
  48. There are few religious undertones here that could be removed in the next edition. []
  49. As mentioned above, The Economist wrote a nice short article on this behavior — the greater fool – last year. []
  50. The authors of this book are likely unintentionally promoting coin buying with a security-like mentality, the wording could be modified in the next edition. []
  51. One reviewer mentioned: “Unless the authors explain how ETH is worth precisely zero based on the same logic then their statement seems disingenuous. Not that I believe that is the case, but I am not the one stating that scarcity in the future is the reason for the value.” []
  52. See Saifedean Ammous: The Bitcoin Standard — making the Austrian School case for Bitcoin by David Gerard, The Bitcoin Standard – a critical review by Frances Coppola, and The Politics of Bitcoin by David Golumbia []
  53. Why?  Most probably are unaware and the typical retail investors seems to just want the USD number to go up so they can sell the coin to someone else. []
  54. Also worth reviewing Consensus-as-a-service and The Blockchain Threat Has Drastically Sped Up Cross-Border Payments []
  55. Since the authors are making this claim, would they be willing to disclose or be transparent about their own coin holdings for the date when they published this book? []
  56. The most likely answer is: speculators bought these coins because they knew others would buy it too thus driving the price higher. []
  57. Or conversely, you are considered “one of us” if you promote the policies and antics of said coin promoters. []
  58. Note: it should be apparent at this stage that “Bitcoin developers” should be in quotes because it is certain key individuals — and centralized organizations such as “Core” — who have the power to sway decisions such as BIP approval.  These are arguably administrators of financial market infrastructure.  See also: In Code(rs) We Trust: Software Developers as Fiduciaries in Public Blockchains []
  59. Personal correspondence on June 5, 2018 []
  60. This is mentioned in the new CFTC warning: CFTC Issues Customer Advisory on Digital Tokens []
  61. It is these types of passages that make a reader scratch their head as to whether or not the lessons for why equity ownership — and the rights afforded to equity holders — evolved to where they have in developed countries. []
  62. This narrative needs to be buried but probably won’t. []
  63. This is a common refrain that needs to stop being repeated. []
  64. A few months before Cryptoassets was published, the SEC published a report that said they found The DAO to have all the hallmarks of a security but they never enforced any specific legal action on its creators. []
  65. See Appendix A: Internal governance []
  66. On p. 63 they write: “For example, a fully functional decentralized insurance company, Airbnb, or Uber all hold great promise, and developer teams are working on similar use cases.”  Why do these hold great promise?  Because everyone else says that on stage? []
  67. One takeaway is that other speculators may buy your coins at a later date when the prices go up, so you should get in before they do. []
  68. One of the biggest flaws in Chapter 7 is that all of the pricing information for the coins are based on markets that are opaque and unregulated… some of whom may be considered bucket shops of yesteryear.  Lack of transparency is one of the reasons why all of the Bitcoin-related ETFs have been (so far) axed by the SEC.  See: Comments on the COIN ETF. []
  69. Are Public Blockchain Systems Unlicensed Money Services Businesses in Disguise? by Ciaran Murray []
  70. With the exception from maybe transaction fees to miners, but those could arguably also be classified as donations.  See p. 65 in The Anatomy []
  71. See: Spurious correlations []
  72. For example, later on p. 104 they write: “More surprisingly, the portfolio with bitcoin would have had lower volatility.” Because of the time period?  We could probably find other things with the same or lower volatility.  That seems like cherry picking. []
  73. Maybe they are both, but that still doesn’t mean that the coins, say that Placeholder Capital invested in, shouldn’t be classified as securities. []
  74. See also: Tokens: Investment Vehicle or Medium of Exchange (Not Both) by Cathy Barrera and MV=P…Que? Love and Circularity in the Time of Crypto by Anshuman Mehta and Brian Koralewski []
  75. Also, these are all arguably poor stores of value because of their relatively high volatility.  For instance, “number goes up” or rapid price increases is not the definition for a store of value.  Claiming bitcoin is a good store of value because it sees swift increases in price appreciation as measured by actual money is a contortionist view which ignores the empirical reality of how money is used. []
  76. For example, later on p. 110 they write: “While many cryptoassets are priced by the dynamics of supply and demand in markets, similar to more traditional C/T assets, for some holder of bitcoin — like holder of gold bars — it is solely a store of value. Other investors use cryptoassets beyond bitcoin in a similar way, holding the asset in the hope that it appreciated over time.” Spoiler alert: everyone that owns internet coins hope they appreciate over time. []
  77. And there are specific projects — such as Bitcoin — in which one clique of developers waged an effective propaganda campaign against miners.  For more on this, look into the actors and organizations behind the Segwit / Segwit2x / UASF online debates. []
  78. Not to rekindle the flames of the Bitcoin blocksize debate but in retrospect, several Blockstream employees and contractors were arguably more effective at swaying public opinion than Coinbase was, even though the latter generates significantly more revenue and has actual customers whereas the former is largely just a R&D dev shop. This discussion deserves its own post but neither company is very forthcoming about client or partnerbase… although Coinbase has published a bit more information over the years relative to Blockstream. []
  79. See also: The Problem with Calling Bitcoin a “Ponzi Scheme” by Preston Byrne []
  80. A large portion of blocks between 2009-2010 also included relatively few transactions, yet miners were being rewarded the same revenue irrespective of the volume or labor involved. []
  81. This is a topic I’ve written extensively about in the past, see (1) A pre-post-mortem on BitPay and (2) Looking at public information for quarterly usage []
  82. There is a small window between when FX markets in San Francisco close on a Friday afternoon and when FX markets open in New Zealand on Monday morning. []
  83. See Bitcoin’s $30 billion sell-off from Chainalysis []
  84. Does trading between exchanges represent 90+% of the total volume on- and off-exchanges?  Without full optics into all major intermediaries, that would be a tough claim to definitively prove. []
  85. In informal surveys most speculators of coins have the same mentality of speculators of other things that are traded on secondary markets: they think the number will go up. []
  86. See When Paper Paralyzed Wall Street: Remembering the 1960s Paperwork Crisis from Finra and The Remaking of Wall Street, 1967 to 1971 from HBS and Dole Food Had Too Many Shares from Matt Levine []
  87. Also recommend Spurious correlations []
  88. The book downplays illicit activity as if it is not a valid, reliable use case when it is.  For instance, the GRU allegedly used bitcoin to finance some of its operations focused on the 2016 US elections and they did so to obfuscate their tracks. []
  89. See The new TARGET instant payment settlement (TIPS) service from the ECB []
  90. For more on this, see: (1) Debunking Bitcoin’s Remittance Valuation. Featuring a Lead Pipe by Anshuman Mehta and (2) Does Bitcoin/Blockchain make sense for international money transfers? from SaveOnSend []
  91. A fundamental problem with this book is that it wants to have it both ways, with no clear goal posts for what a good or bad platform is and how to measure it.  How can an investor know if a coin is any good?  A table of attributes is recommended for the next edition. []
  92. Simply multiplying the amount of mined / pre-mined / pre-allocated coins by the market price to arrive at a “market cap” is a disservice to how market capitalization is actually determined.  See Section 6. []
  93. As an aside, even though there is no law preventing consumers and merchants from using or accepting gold (or silver) as a means of payment in the US, basically no one does because they’d rather hold it with the expectation of future price appreciation. I am sure lots of angry trolls will point out that legal tender laws in the US do not currently include precious metals and neither are cryptocurrencies.  Yet there are other economic reasons why people would rather hold onto an internet coin or a gold bar versus use it as money, and simply blaming legal tender laws is missing those. []
  94. Recommended reading: Distributed ledger technology in payments, clearing, and settlement by the Federal Reserve and Central bank digital currencies from the BIS []
  95. See several articles: The myth of a cheaper Bitcoin network: a note about transaction processing, currency conversion and BitcoinlandWhat is the “real” price of bitcoin?, and What impact have various investment pools had on Bitcoinland? []
  96. Also, as a pre-emption: one of the main reasons why these merchants and manufacturers do not hold on to these coins is because of… volatility.  As shown earlier in this review, that still hasn’t disappeared despite years of promotion that it has.  See also: (1) Debunking Bitcoin’s Remittance Valuation. Featuring a Lead Pipe by Anshuman Mehta and (2) Does Bitcoin/Blockchain make sense for international money transfers? from SaveOnSend []
  97. And as mentioned in the section above, both Zelle and Swift (gpi) will likely make a lot of inroads in the same national and international areas that cryptocurrency advocates were touting… but without needing a coin.  The struggle is real. []
  98. Note: both have since left those jobs.  Bogart became a partner at Blockchain Capital (a venture fund focused on coins) and Luria joined D.A. Davidson []
  99. In the next edition if possible, try to include Placeholder’s research so we can have an idea of the firm’s internal thinking on these issues. []
  100. Recommended: Digital Tulips? Returns to Investors in Initial Coin Offerings by Hugo Benedetti and Leonard Kostovetsky []
  101. Does Placeholder Capital invest in such ICOs? []
  102. Note that selfish mining has some odd game theoretic properties which may not hold up in the real world. But if the selfish mining pool manages to stay a block ahead on average, they can reveal a longer chain whenever they see transactions they want to censor.  It comes with the caveats that it’s not completely reliable in that they aren’t guaranteed to be a block ahead of the rest of the network 100% of the time (due to the inhomogenous Poisson process mentioned earlier). However, if they manage to effect a cohort of self-interested selfish miniers, they could… and that’s the equivalent of a “51% attack.” []
  103. Recommended reading: The Economic Limits of Bitcoin and the Blockchain by Eric Budish []
  104. Recommended: Analysing Costs & Benefits of Public Blockchains (with Data!) by Colin Platt. []
  105. Based on hash rate, the vast majority of mining pools supported Segwit2x and did not support UASF. []
  106. Coincidentally, these have all obtained a Bitlicense from NYS DFS. []
  107. Kraken uses Silvergate for its OTC trading. []
  108. A user can be defined as a person who controls their private keys without relying on a 3rd party intermediary. []
  109. Several analytics providers include: Chainalysis, Blockseer, Elliptic, Scorechain, and CipherTrace. []
  110. This is reminiscent of the BearWhale nonsense a few years ago. []
  111. Recall that historically, humanity went from only having to bearer assets up through the 19th century.  And that for a variety of reasons these became registered and immobilized and then later dematerialized altogether.  Cryptocurrencies recreates a financial order that had already existed. []
  112. See Learning from the past to build an improved future of fintech and Distributed Oversight: Custodians and Intermediaries []
  113. Butterfly Labs began accepting pre-orders in the summer of 2012 but delivered them late in 2013… and got sued by the FTC. []
  114. Regarding ‘perfect competition,’ four years ago Jonathan Levin opined that: “Another simple thing about this is that it is unsurprising that the bitcoin network got into this mess as it is economically rational to join the biggest pool. Minimises variance and ceteris paribus reduce orphans increasing expected return per hash. The other point is that there is still hardware bottlenecks so designing the theoretically most robust system may fail due to market imperfections. Implicitly in many arguments I hear about mining people assume perfect competition. Do we need to remind people what are the necessary conditions for perfect competition? Perfect information, equal access to markets, zero transportation costs, many players ……. this is clearly not going to be a perfectly competitive decentralised market but it certainly should not favour inherently the big players.”  See p. 114 of The Anatomy []
  115. Some of these are detailed in: Comments on the COIN ETF []
  116. For illustrative purposes, this includes: Circle, JUMP Trading, and Cumberland (DRW). []
  117. See also: New Visa chargeback system aims to speed dispute resolution by John Egan []
  118. See U.S. Regulators Subpoena Crypto Exchange Bitfinex, Tether from Bloomberg []
  119. In his public speaking events and social media accounts, Andreas Antonopoulos is quite candid about his dislike of the establishment. []
  120. See Chapter 2 in The Anatomy []
  121. See Brian Armstrong’s tweet in Section 5 []
  122. This raises questions that related to FinCEN and SEC purview but neither has opined at this time on this specific point. []
  123. CoinAgenda Singapore, which took place in June 2018, only had 168 attendees — with ticket prices up to $3,000 apiece. []
  124. Coins.ph and Luno come to mind as examples. []
  125. See What is the difference between Hyperledger and Hyperledger? []
  126. See A brief history of R3 – the Distributed Ledger Group []
  127. Needs a larger sample size conducted in a public venue, and/or with the help of an experienced sampling organization. []
  128. This then leads to incentives to attack and hack exchanges, because they end up acting as deposit-taking institutions, aka banks. []
  129. There were probably 50% more hand-written notes or comments that I could have added that I skipped over. []
  130. The HODLing “digital gold” meme which was only passingly mentioned in this book ultimately degenerates into goldbugism but that’s a topic for a different post. HODLing arguably became a thing once the ideologues realized Bitcoin itself wasn’t a competitive payment system.  An enormous amount of revisionism has taken place since 2014 regarding what Bitcoin was and is and should be. []
  131. Debunking Bitcoin’s Remittance Valuation. Featuring a Lead Pipe by Anshuman Mehta []
  132. One reviewer mentioned: “By hoarding then actively purchasing more coins to hoard, they might temporarily create an effect whereby each marginal contribution to Bitcoin through mining rewards in expanding the effective monetary base is partially neutralized.  In addition to marketing campaigns, this can lead to higher USD values and may incentivize additional mining power, which in turn creates higher hashrate.  However, you cannot make the same argument for gold because simply driving the price of gold up doesn’t make gold harder to find or more secure, and in fact we see the opposite.” []
  133. For instance, the supply of gold is actually elastic whereas many cryptocurrencies including Bitcoin have an inelastic money supply.  Where in the whitepaper does it talk about a store of value?  If that was the goal, surely it would’ve been mentioned in the whitepaper or the first few emails upon Bitcoin’s initial release. []
  134. Recommended reading: The Economic Limits of Bitcoin and the Blockchain by Eric Budish []

What were some of the cash flows into the coin market last year?

A few independent reports have trickled in regarding the amount of real money that came into the cryptocurrency market last year.

One estimate is from Nikolaos Panigirtzoglou at JP Morgan entitled “Flows & Liquidity: The emergence of cryptocurrencies.”  According to his analysis:

The net flow into cryptocurrencies is very much a function of coin creation which is controlled by computer algorithms and in the case of bitcoin is diminishing over time. Figure 6 shows the net amount of money invested every year since 2009. The cumulative amount has totaled around $6bn since 2009, well below the current market cap of $300bn.

He illustrates this over time with the bar chart below:


A cumulative $6 billion figure is a little less than the next estimate below.

Note: that Panigirzoglou’s analysis above was published last month.  It is unclear how much his calculation(s) may adjust upward given the fervent energy through the holiday season.

Robin Wigglesworth, a reporter with the Financial Times, posted a new note from Citi research about a week ago entited: “Cryptocurrencies are the answer; what is the question?”  A couple bullet points from the note:

  • In 2017, cryptocurrencies grew from a market cap of less than $20bn to around $500bn. We estimate this surge was driven by net inflows of less than $10bn.
  • We think current prices require inflows of approximately $25bn/year to be sustainable. For 2018, this seems likely to be exceeded. We would expect bitcoin to continue to make gains but for larger alt-coins, particularly ripple and ethereum, to outperform.

They don’t give a range, but less than $10 billion could sync with the JP Morgan analysis depending on which spot exchanges and OTC service providers they spoke with (in addition to the market data they may have used).

I typically don’t write about price action, however, the price of bitcoin has been especially volatile the past few weeks.  It has declined about $5,000 (~25%) since its most recent all-time high last month.  And both ether and XRP have recently seen new highs.  Will this last throughout the rest of the year?

Note: I was quoted in The Wall Street Journal last month saying this is some kind of bubble:

The most recent moves brought bitcoin’s year-to-date gain to about 1,560%. For many skeptics, though, that is proof that bitcoin is a massive bubble.

“It’s clear that people are putting money in simply because they think other people are going to put in money,” said Tim Swanson, the founder and research director at Post Oak Labs, a San Francisco advisory firm. “We’re seeing the actual illustration of speculation. Somebody should take a snapshot of this and put it in the dictionary.”

Let’s check back in a few months to see if there are any more cash flow estimates.

Update: Chainalysis posted an explanation for the post-December price decline which looks at ‘net inflow’ at exchanges.  See also: J.P. Morgan Perspectives: “Decrypting Cryptocurrencies: Technology, Applications and Challenges” (pdf)

Predictions for 2018

As mentioned in my previous post, below are five thoughts for what could take place in 2018, categorized by degree of likelihood: most likely –> least likely.

(1) Continued mania

The euphoria around cryptocurrencies and ICOs continues due almost entirely because of retail sentiment, not just because of institutional action.  Every valuation model that has been proposed to gauge what the price of a certain coin will be, fails almost entirely because of the inability to model sentiment.  Contra Chris Burniske (note: he did not really disclose that he owned bitcoins while covering cryptocurrencies as an analyst), there are no ‘fundamentals’ to nearly any coin, in fact, many of the “top” coins don’t even do what they claim to do.

Want proof?  Look at the most talked about ICOs and altcoins and airdrops that were created in 2013-2014.  How many of them have actually delivered what they marketed?  Basically none.  Yet, if they are still listed on an exchange, odds are they are trading at near all-time highs because retail investors really don’t care about functionality or utility: they want narratives that paint pictures of Moonlambos in their near future.

This phenomenon is best described as “coin nihilism”:

Source: Twitter

So as long as there is free-entry to create and market a cryptocurrency to the masses, coin domination (who is the king of the castle) will be fluid.  The only entities capable of changing that is law enforcement via coordinated regulatory action (e.g., debanking of exchanges due to regulatory guidance).1

Or as one of my OTC trader friends recently remarked:

“This is why crypto is doomed for pump and dump because the market can’t react to increased demand with more supply. So if interest fades you just keep getting clobbered with new supply like 2014 redux.”

When you have free-entry and no gatekeepers when it comes to creating money supply, people will just create a new coin as it always has more financial upside.

Besides governments, what else could stop the pump train?  Hackers seem focused on low-hanging fruit – no one bothers to actually attack technical weaknesses in a blockchain.  “Early adopters,” old guard (OG) whales cashing out faster than demand can absorb the coin supply may be the only other large counterbalance to the mania.2

(2) Lawsuits

Both criminal and civil lawsuits will continue to be filed against issuers and developers of both cryptocurrencies and ICOs.  On the criminal side, the wrinkle will be that it will not just be securities and/or commodities regulators.  Law enforcement agencies involved with monitoring money transmission (such as FinCEN and FINTRAC) will announce more than one criminal suit against developers who either enabled money laundering to take place on their platforms and/or failed to comply with some other area of BSA (or other regional equivalent).3

Rather than go through the laundry list of all the areas for regulatory and law enforcement action, check out (attorney) Christine Duhaime’s explanation.

With that said, while a case could be made that entities like Bitcoin Core – and its vocal surrogates – behave a lot like administrators, there are few indications that the any development team will be sued right now.

(3) Pumpers and VCs are going to pump and won’t be held accountable

Pretty much the most popular twitter personalities nowadays are the shills and pumpers who benefits from one anothers antics.  It’s a non-stop contest to see who can say the most outrageous things about what cryptocurrencies will do to the world.  The winner gets to cash out on a secondary market and buy a Swiss resort. The loser who said Junkcoin would only jump 10x instead of 100x also gets to cash out and retire in the Hamptons.

Will bagholding be a line on a resume?4

Nope.  Few if any of these personalities will be debunked let alone dragged to court.  Consider this well-crafted title from Bloomberg last month: “The Hottest ICOs Are the Ones That Have Done the Least Amount of Work.”

How many of the most egregious examples of investors and advisors that promoted these will be held accountable?  Probably very few even though the SEC put out a press release specifically around the promotion of ICOs… we still regularly see ads for ICOs on social media (e.g., “general solicitation”).

For those hoping that techbros and their apologists will be held accountable, this is probably not that year.  This includes lobbying groups involved in disinformation campaigns for their own ideological purposes.

(4) Enterprise-related DLT efforts generate recurring enterprise license-based revenue

If we were to aggregate the amount of revenue generated by enterprise-focused DLT vendors, based on the known RFPs that were won last year and are currently being bid on, I’d guesstimate that about $100 – $200 million is at play this year.  This is based on the fact that most RFPs seem to be for less than $10 million.  It’ll take at least 6-12 months to build an MVP and then even longer to get approval for additional phases.

As mentioned in my previous post: unfortunately our sample size of big infrastructure builds on the enterprise side is still limited.  Examples include the the DA / ASX deal (which took 2 years for a final decision to be made).  Another large one is the DTC trade, the vendor of which is IBM.  If built and put into production, these will eventually recoup costs but the bigger revenue will likely come from actual enterprise-licenses: seats to use the network.

For an inside perspective, I reached out to one of my close friends working at a DLT vendor who provided the following view:

This year’s revenue is one thing. There is also recurring revenue (run vs build).  There is also the fact that last year some/many deals were “bought” for marketing and credential building purposes (so they are subsidized).  But I think this year suppliers are less willing to buy the business and bid low on price. We (the industry) could be in steady state production by year end for some implementations.  I think $100-200m is broadly right for revenue to play for this year.

His estimate included Q/A support and SLAs.

I also would predict that, just like last year, there will be very few new enterprise-focused vendors entering the market from the early stage startup world.  And that enterprise vendors struggle as a whole to attract and retain junior developers because they have to compete with cryptocurrency-related projects that may provide higher compensation during this bull market.

(5) Cryptocurrencies as financial market infrastructure

I think this is the least likely theme to occur this – and we should thank the gods – is using a cryptocurrency (anarchic) chain as FMI.  Despite the mud that coin lobbyists and evangelists throw at enterprise-focused DLT vendors, cryptocurrency networks are systemic risks to the financial world and should be avoided at this time.

It is one thing to have a coin bubble driven by unsophisticated retail investors.  It is another to have a coin bubble because of leverage and integration with some real financial instruments.  And it is another to have a coin bubble – and the mission critical systems of the world’s financial intermediaries – directly impacted by these coin fluctuations and not be able to hold any of the validating nodes accountable… because they are pseudonymous miners in a jurisdiction that doesn’t recognize the standing of a foreign lawsuit.

If you are reading this, you are probably not terribly sympathetic to anyone who loses their shirt at this time for buying some random coin.  On the other hand, you would be justified if you are worried that a national payment or securities depository is being run on top of Bitcoin via some kind of colored coin Rube Goldberg system.  Reducing systemic risks to the financial world has been a top priority of financial regulators since 2008.

At the time of this writing, none of the existing cryptocurrencies being built seems to have gone through or respects a PFMI check-off.  Or maybe that is a risk regulators and regulated financial institutions will be willing to take?

Final remarks

As a friend recently said, with cryptocurrencies you always have to expect the unexpected.  People are quick to forget the bear market of 2014-2015.  Will the irrational exuberance die down once most of these cryptocurrency and ICO projects fail to deliver on their promises?  Maybe not, but then again, check out the coin rankings over time on these four charts.

I am actually kind of optimistic for new ideas being tested out in certain ecosystems, like Ethereum (note: this is not an endorsement of Ethereum or ETH/ETC).  Now that proof-of-stake, via Casper, is being brought out of the lab and onto a testnet, we might be able to scratch off the environmental impact issue that is a blight on proof-of-work networks.  CryptoKitties, via ERC721, is a neat demonstration of how to potentially create non-fungible property (assuming courts recognize it as such).  I have been giving this some thought on other areas that this could be reused and commercialized.  Note: there is an entire, virtual zoo of copy cats that has now arrived, including puppies and other animals.

What do you think, will heads begin to roll as law enforcement learns what shenanigans are going on?  Will an ETF-based on bitcoin futures be approved?  It seems likely that the CME and CBOE will add futures trading for ether, what about other coins? Coinbase and several other former bitcoin-only exchanges have already announced that they will add more altcoins and everybody is guessing which one will be next.  Will 2018 be a repeat of 2014 with altcoin mania again dominating mindshare?

Endnotes

  1. One reviewer who works at an OTC desk commented: “Almost all of the OTC trading counterparties and exchange we have use just a couple banks.  It would be trivial to cut the spigot off overnight.  Also if I’m a regulator and want to go after the toxic sludge flowing through the fiat side of this world I hit one of these banks that provides the liquidity.” []
  2. One trader at an OTC desk commented that: “Real institutional liquidity, beyond what we have now, would help. I’d argue part of the reason why things get so out of hand so fast is because the market infrastructure isn’t there to handle it correctly.” []
  3. One reviewer at an exchange commented: “I think regulatory scrutiny is actually gonna land next year from CFTC and SEC in a real way.  The CFTC in particular has a duty now to police spot, wait till we get the first settlement of CME or CBOE where someone intentionally puts the auction in the tank or DoS’s the exchanges.” []
  4. Most traders only brag about their winning trades, not their losses. []

Six bedtime stories from 2017

[Note: I neither own nor have any trading position on any cryptocurrency.  I was not compensated by any party to write this.  The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.  See Post Oak Labs for more information.]

2017 taught us many things, including the fact that no one reads (or writes) or pays for long-form content any more.  Even with lovable memes and animated gifs, keeping an audience’s attention is hard.

Already too distracted to read further?  How about a quick video from JP Sears on how to appropriately Bitcoin Shame your friends and family:

The other takeaway for 2017 is that, if in doubt, open up hundreds of social media accounts and shill your way to riches.  The worst thing that could happen is no one buys your coin.  The best thing that happens is that someone buys your coin and you can then convert the coin into real money, retire, and act like you are super-wise thought leader with oodles of entrepreneurial and investing experience.

Some other stories with revisiting from the past year:

(1) “Legitimization”

If we were being intellectually honest we would say that the only goal post anyone cared about this year was that the price of cryptocurrencies, as measured in real money, and how high they soared.1 And that the main reason this occurred is because Bob knew Alice and Carol were both going to buy a lot of say, bitcoin, thereby pushing up the price, so he did too.  The Economist called it “the greater fool theory.”  But The Economist are great fools for not buying in at $1, so let’s ignore them.

Basically none of the feel-good goals about lowering remittance fees or increasing financial inclusion promoted in previous years by enthusiasts have really materialized.  In fact, at-risk users and buyers in developing economies probably got screwed on the ICO bandwagon as insiders and sophisticated investors who were given privileged early access to pre-sales, dumped the coins on secondary markets and hoi polloi ended up holding the bag on dozens of quarter-baked ICOs.2

Oh, but transaction fees for Bitcoin are at all-time highs, that’s a real milestone right?

There are many reasons for this, including the fact that Bitcoin Core’s scaling roadmap has thus far failed to achieve its advertised deadlines (see section 5 below).3 Maybe that will change at some point.

Shouldn’t higher fees be a cause for celebration with “champaign” (sic)? 4

Some Bitcoin Core representatives and surrogates have created an ever expanding bingo card of scapegoats and bogeymen for why fees have gone up, ranging from:

  • blaming Roger Ver and Jihan Wu as demonic-fueled enemies of Bitcoin
  • to labeling large chunks of transactions as ‘spam attacks’ from nefarious Lizard-led governments5
  • to flat out bitcoinsplaining: higher fees is what to expect when mass adoption takes place!

I’m sure you’ll be on their bingo card at some point too.

Just like Visa and other widely used payment network operators charge higher and higher rates as more and more users join on… oh they don’t.6 But that’s because they censor your freedom loving transactions!  Right?

So what’s the interim solution during this era of higher fees?  Need to send a bitcoin payment to someone?

You know how supermarkets used to hold items on layaway?  They still do, but it’s not as common to use, hence why you googled the term.  Well, in light of high fees, some Bitcoin Core developers are publicly advising people to open up a “tab” with the merchant.  You know, just like you do with your favorite local bartender.

Fun fact: the original title of the Satoshi whitepaper was, Bitcoin: a peer-to-peer electronic layaway system.

This faux comparison didn’t age well.  In 2014 this was supposed to be a parody. (Source)

For example, the ad above was promoted far and wide by Bitcoin enthusiasts, including Andreas Antonopoulos who still tries to throw sand in Western Union’s eye.  Seriously, watch the linked video in which Antonopoulos claims that Bitcoin will somehow help the poor masses save money such that they can now invest in and acquire clean water.  It’s cringe worthy.  Did Bitcoin, or Bitcoin-related businesses, actually do any of the things he predicted?  Beyond a few one-time efforts, not really.7 Never mind tangible outcomes, full steam ahead on the “save the world” narrative!

Many enthusiasts fail to incorporate in their cartoonish models: that the remittance and cross border payment markets have a set of inflexible costs that have led the price structure to look the way it does today, and a portion of those costs, like compliance, have nothing to do with the costs of transacting.8  There may be a way of reducing those costs, but it is disingenuous (and arguably unethical) to pull on the heart strings of those living on subsistence in order to promote your wares.9

Rather than repeat myself, check out the break down I provided on the same Western Union example back in 2014.  Or better yet, look at the frequently updated post from Save on Send, who has the best analysis bar none on the topic.

Back to loathing about ‘adoption’ numbers: few people were interested in actual usage beyond arbitrage opportunities and we know this because no one writes or publishes usage numbers anymore.10 I’ll likely have a new post on this topic next quarter but for a quick teaser: BitPay, like usual, still puts out headline numbers of “328% growth” but doesn’t say what the original 2016 baseline volume was in order to get the new number today.

I don’t strive to pick on BitPay (to be fair they’re like the only guys to actually publish something) but unfortunately for them, the market still has not moved their way: Steam recently dropped support for Bitcoin payments and a Morgan Stanley research note (below) showed that acceptance from top 500 eCommerce merchants dropped from 5 in 2016 to 3 in 2017.11

“This is possibly the saddest bitcoin chart ever” – BI. Source: Morgan Stanley

Due to a lack of relevant animated gifs, a full break down on the topic wouldn’t fit in this article.  But just a quick note, there were a number of startups that moved decisively away from their original stated business case of remittances and instead in to B2B plays (BitPesa, Bitspark) or to wallets (Abra). 12  These would be worth revisiting in a future article.13

So what does this all have to do with “legitimization”?

If you haven’t seen the Godfather trilogy, it’s worth doing so during or after the holiday break.14

This year we have collectively witnessed the techbro re-enactment of Godfather: Part 3 with the seeming legitimization of online bucket shops and dodgy casinos, aka cryptocurrency intermediaries, you wouldn’t talk about in polite company.

All of the worst elements of society, like darknet market operators, hate groups, and malware developers, effectively got eff you money and a cleansing mainstream “exit” courtesy of financial institutions coming in and regulators overwhelmed by all of the noise.15  Just like in No Country for Old Men, the bad guy(s) sometimes win.  This isn’t the end of that story but the takeaway for entrepreneurs and retail investors: don’t work or build anything. Just shill for coins on social media morning, noon, and night.

(2) Red Scares

I am old enough to remember back in 2013 when Bitcoin “thought leaders” welcomed Chinese Bitcoin users.  In late 2013, during the second bull run of that year, there were frequent reddit threads about how mainland Chinese could use Bitcoin to route around censorship and all the other common civil libertarian tropes.

Guess what happened?  On December 5th, 2013, the People’s Bank of China and four other ministries issued guidance which restricted activities that domestic banks could do with cryptocurrencies, thereby putting spot exchanges in a bit of a bind, causing panic and subsequently a market crash.  Within days there were multiple “blame China” threads and memes that still persist to this day.  Case in point: this thread titled, “Dear China” which had Mr. Bean flipping off people in cars, was voted to the top of /r/bitcoin within a couple months of the government guidance.  Classy.

As I detailed in a previous post, earlier in the autumn, several state organs in China finally closed down the spot exchanges, which in retrospect, was probably a good decision because of the enormous amounts of scams and deception going on while no one in the community was policing itself.16 In fact, some of the culprits that led Chinese exchanges into the dishonesty abyss are still around, only now they’re working for other high-profile Bitcoin companies. 17  Big surprise!

For example, Reuters did an investigation into some of the mainland exchanges this past September, prior to the closure of the spot exchanges.  They singled out BTCC (formerly BTC China) as having a checkered past:

Internal customer records reviewed by Reuters from the BTCChina exchange, which has an office in Shanghai but is stopping trading at the end of this month, show that in the fall of 2015, 63 customers said they were from Iran and another nine said they were from North Korea – countries under U.S. sanctions.

It’s unclear how much volume BTCC processed on behalf of North Koreans, one former employee says the volumes were definitely not zero.18 These were primarily North Koreans working in China, some in Dandong (right across the border).

For perspective: North Korea has been accused of masterminding the WannaCry ransomware attack and also attacking several South Korea exchanges to the tune of around $7 million this year.  Sanctions are serious business, check out the US Department of Treasury resource center to learn more.19

Isn’t China the root of all problems in Bitcoinland?

Source: Twitter

The sensationalism (above) is factually untrue yet look how many people retweeted and liked the quickly debunked conspiracy theory.  It’s almost as if, in the current mania, no one cares about facts.

As Hitchens might say: that which can be asserted without evidence, can be dismissed without evidence.  So to are the conspiracies around Bitcoin in China:

  • Is the Chinese government nationalizing Bitcoin?  No.
  • Is the Chinese government responsible for Bitcoin Cash.  No.
  • Is the Chinese government behind the rise in CryptoKitties. No.

In this bull market it is unclear why Paul has to resort to PR stunts, like making fearmongering tweets or opening a strike/call option at LedgerX with the bet that bitcoin will be worth $50,000 next year.20 There are many other ways to better utilize this capital: rethink investing in funds run by managers who are not only factually wrong but who spread fake rumors around serious issues like nationalization.

For instance, I don’t normally publicly write about who I meet, but this past July, while visiting Beijing I sat down with about a dozen members of their ‘Digital Money‘ team (part of the People’s Bank of China group involved in exploring and researching blockchain-related topics). 21 They had already spoken with my then-current employer as well as many other teams and companies (apparently the Zcash team saw them the very next day). While I don’t want to be perceived as endorsing their views, based on my in-depth discussion that day, this Digital Money team had clearly done their homework and heard from all corners of the entire blockchain ecosystem, both cryptocurrency advocates and enterprise vendors. They were interested in the underlying tech: how could the big umbrella of blockchain-related technology improve their financial market infrastructure?

Look at it another way: the Chinese government (or any government for that matter) has no need to nationalize Bitcoin, what value would it bring to them?  It would just be a cost center for them as miners don’t run for free.22  In contrast, their e-RMB team, based out of Shenzhen, has been experimenting with forks/clones of Ethereum.  This is public information.

But what about Jihan and Bitmain?  Aren’t they out to kill Bitcoin?

I can’t speak on his intentions but consider this: as a miner who manufacturers and sells SHA256 hardware that can be used by both Bitcoin and Bitcoin Cash (as well as any SHA256 proof-of-work coin), Bitmain benefits from repeat business and satisfied customers.  It is now clear that the earlier Antbleed campaign effort to demonize Bitmain was a massive PR effort to create a loss of confidence in Bitmain as it was promoted by several well known Bitcoin Core supporters and surrogates to punish Bitmain for its support for an alternative Bitcoin scaling roadmap and client.  In fact, as of this day, no one has brought forth actual evidence beyond hearsay, that covert ASICBoost is/was taking place.  Maybe they did, but you’d need to prove this with evidence.

Speaking of PR campaigns and mining…

(3a) Energy usage / mining

Over the past two months there have probably been more than a dozen articles whitewashing proof-of-work mining energy consumption numbers.  Coin Center, a lobbying group straight out of Thank You for Smoking, has its meme team out on continuous social media patrols trying to conduct damage control: no one must learn that Bitcoin mining isn’t free or that it actually consumes resources!

Source: Twitter

The title of the article above is complete clickbait BS.  Empirically proof-of-work mining is driving miners to find regions of the world that have a good combination of factors including: low taxes, low wages, low energy costs, quick time-to-market access (e.g., being able to buy and install new hashing equipment), reliable energy, reliable internet access, and low political turmoil (aka stability).23  Environmental impact and “clean energy” are talking points that Van Valkenburgh allege, but don’t really prove beyond one token “we moved to renewables!” story.  The next time Coin Center pushes this agenda item, be sure to just ask for evidence from miners directly.24.

Another example is in a recent Bloomberg View column from Elaine Ou (note: the previous company that she co-founded was shut down by the SEC).  She wrote:

Digital currency is wasteful by design. Bitcoin “miners,” who process transactions in return for new currency, must race to solve extremely difficult cryptographic puzzles. This computational burden helps keep the transaction record secure — by raising the bar for anyone who would want to tamper with it –- but also requires miners to build giant farms of servers that consume vast amounts of energy. The more valuable bitcoin becomes, the more miners are willing to spend on equipment and electricity.

Mining a proof-of-work coin (such as Bitcoin) can only be as ‘cheap‘ or ‘efficient’ as the block reward is worth. As the market price of a coin increases so too does the capital expended by miners chasing seigniorage.  This, we both agree on.

In the long run, proof-of-work miners will invest and consume capital up to the threshold in which the marginal costs of mining (e.g., land, labor, electricity, taxes, etc.) roughly equals the marginal revenue they receive from converting the bitcoins into foreign currency (aka real money) to pay those same costs.  This, we also both agree on.

What Ou makes a mistake on is in her first sentence: digital currencies are not all wasteful, only the proof-of-work variety are.  Digital currency != cryptocurrency.25

I know, I know, all other digital currencies that are not proof-of-work are crap coins and those who make them are pearl-clutching morons.  Contra Ou and Coin Center, it is possible for central banks, and even commercial banks, to issue their own digital currency — and they could do so without using resource intensive proof-of-work.26  The Bank of International Settlements recently published a good paper on the various CBDC models out there, well worth a read.  And good news: no mountains of coal are probably used in the CBDC issuance and redemption process.27

Back to proof-of-work coins: a hypothetically stable $1 million bitcoin will result in a world in which miners as a whole expend up to $1 million in capital to mine.  If the network ever became cheaper to operate it would also mean it is cheaper to permanently fork the network.  You can’t have both a relatively high value proof-of-work coin and a simultaneously non-resource intensive network.

While it is debatable as to whether or not Bitcoin mining is wasteful or not, it empirically does consume real resources beyond the costs of energy and the externalization of pollution onto the environment.  The unseen costs of hash generation for a $20,000 bitcoin is at least $13 billion in capital over a year that miners will eventually consume in their rent-seeking race albeit from a combination of resources.

Data source: BitInfoCharts

I quickly made the chart (above) to illustrate this revenue (or costs depending on the point of view).28 These are the eight largest proof-of-work-based cryptocurrencies as measured by real money market prices.

There are a few caveats: (1) some of the block rewards adjust more frequently than others (like XMR); (2) some of the coins have relatively low transaction fees which equates to negligible revenue so they were not included; (3) the month of December has seen some very high transaction fees that may or may not continue into 2018; (4) because block generation for some of these is based on an inhomogeneous Poisson process, blocks may come quicker than what was supposed to be “average.”

How to interpret the table?

The all-time high price for Bitcoin was nearly $20,000 per coin this year.  If in the future, that price held stable and persisted over an entire year, miners would receive about $13 billion in block rewards alone (not including transaction fees).  Empirically we know that miners will deploy and consume capital up to the point where the marginal costs equals the marginal value of the coin.29  So while there are miners with large operating margins right now, those margins will be eaten up such that about $13 billion will eventually be deployed to chase and capture those rewards.  Consequently, if all 8 of these proof-of-work coins saw their ATH extended through 2018, ceteris paribus, miners would collectively earn about $32.6 billion in revenue (including some fees).

There are a variety of sites that attempt to gauge what the energy consumption is to support the network hashrate.  Perhaps the most frequently cited is Digiconomist.  But Bitcoin maximalists don’t like that site, so let’s put together an estimate they cannot deny (yes, there are climate change denialists in the cryptocurrency world).

For the month of December, the network hashrate for Bitcoin hovered around 13.5 exahash/second or 13.5 million terahash/second (TH/s).

To get a lowerbound on how many hash-generating machines are being used, let’s look at a product called the S9 from Bitmain.  It is considered to be the most “efficient” off-the-shelf product that public consumers can order in volume.30 This mining unit generates around 13.5 TH/s.

So, if we were to magically wave our hands and replace all of the current crop of Bitcoin mining machines into the most efficient off-the-shelf product, we’d need about 1 million of these to be manufactured, shipped, installed, and maintained in order to generate the equivalent hashrate that the Bitcoin network has today.  Multiply 1 million S9’s times the amount of energy individually used by a S9 and you’d get a realistic lowerbound energy usage for the network today.31

Note: this doesn’t factor in land prices, energy costs, wages for employees, building the electrical infrastructure (e.g., installing transformers), and many other line items that are unseen in the chart above.  It also doesn’t include the most important factor: as more mining hashrate is added and the difficulty rating adjust upward, it dilutes the existing labor force (e.g., your mining unit does not improve or become more productive over time).

(3b) Energy usage upperbound

So what are the upperbound costs?

Source: Twitter

The tweet above is not a rare occurrence.  If you are reading this, you probably know someone who tried to mine a cryptocurrency from an office computer or maybe their computer was the victim of ransomware.

You may not think of much of the externalization and socialization of equipment degradation that is taking place, but because mining is a resource intensive process, the machines used for that purpose depreciate far faster than those with normal office usage.32  To date, no one has done a thorough analysis of just how many work-related computers have been on the receiving end of the mining process but we know that employees sometimes get caught, like the computer systems manager for the New York City Department of Education or the two IT staffers in Crimea.33

Even if miners eventually fully utilize renewable energy resources, most hash-generating machines currently deployed do not and will not next year.  These figures also do not factor in the fully validating nodes that each network has that run out of charity (people run them without any compensation) yet consume resources.  According to Bitnodes, Bitcoin has around 11,745 nodes online. According to EtherNodes, Ethereum has around 26,429 nodes online.

So is there an actual upperbound number?

There is, by dividing hashpower by cost and comparing to costs of various known processor types.  For instance, see this footnote for the math on how two trillion low-end laptop CPUs could be used.3435

Just looking at the hash-generating machines, according to Chen Min (a chip designer at Avalon Mining), as of early November, 5% of all transistors in the entire semiconductor industry is now used for cryptocurrency mining and that Ethereum mining alone is driving up DRAM prices.

This is not to say you should march in the streets demanding that miners should forgo the use of coal power plants and only use solar panels (which of course, require consumption of resources including semiconductors), there are after all, many other activities that are relatively wasteful.

But some Bitcoin and cryptocurrency enthusiasts are actively whitewashing the environmental impact of their anarchic systems and cannot empirically claim that their proof-of-work-based networks are any less wasteful or resource intensive than the traditional foreign capital markets they loathe.

In point of fact, while the traditional financial markets will continue to exist and grow without having to rely on cryptocurrencies for rationally pricing domestic economic activity, in 2018, as in years prior, Bitcoinland is still fully dependent on the stability of foreign economies providing liquidity and pricing data to the endogenous labor force of Bitcoin.  Specifically, I argue in a new article, that miners cannot calculate without using a foreign unit of account; that economic calculations on whether or not to deploy and consume capital for expanding mining operations can only be done with stable foreign currency.36

Keep in mind that cryptocurrencies such as Bitcoin only clear (not settle) just one coin (or token) whereas traditional financial markets manage, transact, clear and settle hundreds of different financial instruments each day. 37  For comparison, the Federal Reserve estimates that on any given day about 600 million payment, clearing, and settlement transactions take place in the US representing over $11 trillion in value.38  But this brings up a topic that is beyond the scope of this article.  Next section please.

(4) MIT’s Digital Currency Initiative

On the face of it, MIT’s DCI effort makes a lot of sense: one of the world’s most recognized institutions collaborating with cryptocurrency developers and projects worldwide.

But beneath the slick facade is a potential conflict of interest that has not been looked at by any media outlet.  Specifically, around its formal foray into building tools for central bank digital currency (CBDC).  Rob Ali, a well-respected lawyer turned research scientist (formerly with the Bank of England), was hired earlier this year by DCI to build and lead a team at MIT for the purpose of continuing the research he had started at the BoE.  This is no secret.

Less known is how this research has now morphed into a two-fold business:

  1. DCI charges central banks about $1 million a year to be a partner.39  What this allows the central bank to do is send staff to MIT and tap into its research capabilities.  This includes MIT representatives co-authoring a couple of papers each year focused on topics that the central bank is keen to explore.  Multiple central banks have written checks and are working together with DCI at this time.
  2. Building and licensing tools and modules to central banks and commercial banks.  DCI has hired several Bitcoin developers whom in turn have cloned/forked Bitcoin Core and Lightning.  Using this code as a foundation, DCI is building IP it aims to license to central banks who want to build and issue central bank digital currency.

Where is the conflict of interest?

DCI is housed within MIT’s Media Lab, whose current director is Joi Ito.  Ito is also the co-founder and director of Digital Garage.  Digital Garage is an investor in Blockstream and vocal advocate of Lightning; coincidentally Blockstream is building its own Lightning implementation. Having made several public comments in favor of Bitcoin Core’s hegemony, Ito also appears to be a critic of alternative blockchain implementations.

In looking at his publicly recorded events on this topic Ito does not appear to disclose that the organizations he co-runs and invests in, directly benefit from the marketing efforts that Bitcoin Core and Lightning receive.  Perhaps this is just miscommunication.

I’m all for competition in the platform and infrastructure space and think central bank digital currencies are legit (again check out this BIS paper) but this specific DCI for-profit business should probably be spun off into an independent company.  Why?  Because it would help reduce the perception that Ito – and others developers involved in it – benefits from these overlapping relationships.  After all, Bitcoin Core arguably has a disproportional political clout that his investment (Blockstream) potentially benefits from if/when Lightning goes into production.40 And again, this is not to say there shouldn’t be any private-public partnerships or corporate sponsorships of academic research or that researchers should be prohibited in investing in companies, rather just a recommendation for disclosure and clarity.

(5) Lightning Network

If you haven’t seen The Money Pit (with Tom Hanks), it is well worth it for one specific reason: the contractors and their staff who are renovating Hanks’ home keep telling Hanks that it will be ready in two weeks.

And after those two weeks are over, Hanks is informed yet again that it will be ready in another two weeks.

The Lightning Network, as a concept, was first announced via a draft paper in February 2015. Its authors, Tadge Dryja and Joseph Poon, had initially sketched out some of the original ideas at their previous employer Vaurum (now called Mirror).

Lightning, as it is typically called, is commonly used in the same breath as “the scaling solution,” a silver bullet answer to the current transactional limitations on the Bitcoin network.41 Nearly three years later, after enormous hype and some progress, a decentralized routing version still has not gone into production.  Maybe it will eventually but not one of its multiple implementations is quite ready today unless you want to use a centralized hub.42  Strangely, some of the terminology that its advocates frequently use, “Layer 2 for settlement,” is borderline hokum and probably has not been actually vetted to see if it fulfills the requirements for real “settlement finality.”43

And like multiple other fintech infrastructure projects, some of its advocates repeatedly said it would be ready in less than 6 months, several times.  For instance:

  • On October 7, 2015, Pete Rizzo interviewed multiple developers including Tadge Dryja and Joseph Poon regarding Lightning.  Rizzo wrote that: “In interview, Dryja and Poon suggested that, despite assertions project development could take years, Lightning could take as little as six months to be ready for launch.”
  • On April 5, 2016, Kyle Torpey interviewed Joseph Poon regarding expected time lines, stating that: “Lightning Network co-creator Joseph Poon recently supplied some comments to CoinJournal in regards to the current status of the project and when it will be available for general use. Poon claimed a functional version of the Lightning Network should be ready this summer.”
  • A month later, on May 5, 2016, Kyle Torpey interviewed Adam Back regarding his roadmap.  Torpey wrote that: “While all of these improvements are being implemented on Bitcoin’s base layer, various layer-2 solutions, such as the Lightning Network, can also happen in parallel. The Lightning Network only needs CHECKSEQUENCYVERIFY (along with two other related BIPs) and Segregated Witness to be accepted by the network before it can become a reality on top of the main Bitcoin blockchain.”
  • On November 12, 2016, Alyssa Hertig interviewed several developers including Pierre-Marie Padiou, CEO of ACINQ, one of the startups trying to building a Ligthning implementation.  According to Padiou: “The only blocker for a live Lightning implementation is SegWit. It’s not sure how or when it will activate, but if SegWit does activate, there is no technical thing that would prevent Lightning from working.”

Segregated Witness (SegWit) was activated on August 24, 2017.  More than four months later, Lightning is still not in production without the use of hubs.

Source: Twitter

Not to belabor the point, just this past week, one of the executives at Lightning Labs (which is building one of the implementations) was interviewed on Bloomberg but wasn’t asked about their prior rosy predictions for release dates.  To be fair, there is only so much they could cover in a six minutes allocation.

“Building rock solid infrastructure is hard,” is a common retort.

Who could have guessed it would take longer than 6 months?  Yes, for regular readers of my blog, I have routinely pointed out for several years that architecting and deploying financial market infrastructure (FMI) is a time consuming, laborious undertaking which has now washed out more than a handful of startups attempting to build “enterprise” blockchains.

For example, Lightning as a concept predates nearly every single enterprise-focused DLT vendor’s existence.  While not an equal comparison (they are trying to achieve different goals), there are probably ~5 enterprise-focused, ‘permissioned’ platforms that are now being used in mature pilots with real institutional customers and a couple could flip the “production” button on in the next quarter or so.4445

For what it is worth, enterprise DLT vendors as a whole did a very poor job managing expectations the past couple of years (which I mentioned in a recent interview).  And they certainly had their own PR campaigns during the past couple of years too, there is no denying that.  Someone should measure and quantify the amount of mentions on social media and news stories covering enterprise vendors and proposals like Lightning.46

Better late than never, right?  So what about missed time frames?

In a recent (unscientific) poll I did via Twitter (the most scientific voting platform ever!) found that of the more than 1,600 voters, 81% of respondents thought that relatively inexpensive anonymous Lightning usage won’t really be good to go for at least 6+ months.

Just as Adam Back proposed a moratorium on nebulous “contention” for six months (beginning in August), I propose a moratorium on using the term “Lightning” as a trump card until it is actually live and works without relying on hubs.  But don’t expect to see the crescendo of noise (and some signal) to die down in the meantime, especially once exchanges and wallets begin to demonstrate centralized, MSB-licensed implementations.47

With that suggestion, I can see it now: all of the Lightning supporters flaming me in unison on Twitter for not being a vocal advocate.  Sure beats shipping code!  To be even handed, Lightning’s collective PR effort was just one of many others (hello sofachains!) that could be scrutinized.  A future post could look at all funded infrastructure-related efforts to improve cryptocurrency networks.  Which ones, if any, showed much progress in 2017. 48

Interested in reading more contrarian views on the Lightning Network?  See Gerard and Stolfi (and Stolfi2x) (and Stolfi3x).  Let’s revisit in 6 months to see what has been launched and is in production.

(6) Objective reporting and analysis

Without sugar coating it: with the exception of a few stories, coin media not only dropped the ball on critically, objectively covering ICO mania this past year, but was largely complicit in its mostly corrupt rise.  This includes The Information, which is usually stellar, but seems to have fallen in the tank with the ICO pumpers.  That is, unless you’re a fake advisor and then they’ve got your number.

It took some time, but eventually mainstream and a few not-so-mainstream coverage has brought a much needed spotlight on some of the shady actions that took place this year. There were also a number of good papers from lawyers and academics published throughout 2017.

Your holiday reading list in no particular order:

One of my favorite articles this year should be yours too:

Just a few short months after Stephen Palley published the article above, a lawsuit occurred in which, surprise surprise, the plaintiffs highlighted specific claims in the white paper:

Source: Twitter

Note: that the SEC’s order against the Munchee ICO also relied on highlighting specific claims in the white paper.

Concluding remarks

Unfortunately 2017 will probably go down as the year in which several generations of nerds turned into day-trading schmucks, with colorful technical charts and all.50 This included even adopting religious slogans like:  Buy the dip!  Weakhands!  HODL!  We are the new 1%!  The dollar is crashing!  It’s not a bubble, it’s an adoption curve!

A few parting bits of advice: unfollow anyone that says this time things are different or the laws of economics have changed or calls themselves a “cryptolawyer” or who previously got shutdown by the SEC or who doesn’t have a LinkedIn page.  Rethink donating or investing funds to anyone who makes up rumors about mining nationalization or who was fired for gambling problems or has a communications team solely dedicated to designing memes for Twitter.51

Cryptocurrencies aren’t inherently bad and ideas like ERC721 are even cool.52 But as neat as some of the tech ideas may be, magic internet coins sure as heck continue to attract a lot of Scumbag Steves who are enabled by participants that have turned a blind eye.  It’s all good though, because everyone will somehow get a Moonlambo after the final boss is beaten, right?

Coda

I will have a separate post discussing predictions for 2018 but since we are reflecting on 2017, below are a few other areas worth looking into now that you’re a paper zillionare:

  • We have real empirical observation of hyperdeflation occurring: in which it is more rational to hoard the coin instead of spend it.  As a result, Bitcoin-focused companies that have accumulated bitcoin are still raising capital from external financial markets denominated in foreign currency instead of deploying (consuming) their own bitcoin. And these same startups are receiving valuations measured, not in terms of bitcoin, but in terms of a foreign unit of account.  What would change this trend?
  • Bitcoinland, with its heavy concentration of wealth, looks a lot like a feudal agrarian economy completely dependent on other countries and external financial markets in order to rationally deploy capital and do any economic calculation. Is there a way to build a dynamically adjustable cryptocurrency that does not rely on foreign capital or foreign reference rates?
  • How much proof-of-work related pollution has been externalized and socialized on the public at large due to subsidies in various regions like Venezuela?  What are the effects, if any, on global energy markets?
  • As traditional financial markets add products and solutions with direct ties to cryptocurrencies (futures, options, payments, custody), by the end of 2018 how much of the transactional activity on Bitcoin’s edges will be based on non-traditional financial markets (e.g., LocalBitcoins)?
  • There were a lot of publicity stunts this year.  Working backwards chronologically, the Andreas Antonopoulos donation could have been a publicity stunt, it also could be real.  The argument goes: how is someone with a best selling book, who charges $20,000+ for speaking engagements, and who has been receiving bitcoins for years (here is the public address), still in debt.  Maybe he is, maybe his family fell on hard times.  But few asked any questions when an anonymous person sent what amounted to $1 million in bitcoin enabling him to reset his tax basis.  (Hate me for writing this?  As an experiment, earlier this month I put up a Bitcoin and Ethereum address on the sidebar of the home page, feel free to shower me with your magic coins and prove me wrong.  I promise to convert it all into dirty filthy statist bucks.)  A few months prior to that, Jamie Dimon was accused of everything but eating babies after he said “Bitcoin is a fraud.”  Dozens of “Dear Jamie” letters were written begging him to see Bitcoin with their pure rose-tinted eyes.  At what point will Bitcoin enthusiasts grow some thick skin and ignore the critics they claim don’t matter?  And while we can continue to add PR stunts forever, the “fundraiser” for Luke-Jr’s home after Hurricane Irma had zero proof that it was his house, just a picture that Luke-Jr. says it was and the rest of the Bitcoin Core fan club promoting it.  Trust but verify?

[Note: if you found this research note helpful, be sure to visit Post Oak Labs for more in the future.]

Acknowledgements

Many thanks to the following for their constructive feedback: VB, YK, RD, CM, WG, MW, PN, JH

End notes

  1. Bitcoin fans basically walked onto the field before the football game, toppled the goal posts, and carried it outside the stadium declaring themselves victorious without having actually played the match. []
  2. How many of these unsophisticated buyers have subsequently lost the corresponding private keys?  See “Nearly 4 Million Bitcoins Lost Forever, New Study Says” from Fortune []
  3. I am sure I will be accused of being a “Bitcoin Cash shill” (which obviously I must be, there is no other explanation!) for pointing this out, but last week, one vocal Bitcoin Core supporter even proposed a commit to change the wording on Bitcoin.org surrounding low fees: “These descriptions of transaction features are somewhat open to interpretation; it would probably be best not to oversell Bitcoin given the current state of the network.” []
  4. As an actor on a classic Saturday Night Live sketch said: “You may ask how we at the Change Bank, make money? It’s simple, volume.” []
  5. I take issue with anyone claiming to be able to label transactions specifically as spam without doing an actual graph analysis.  See Slicing Data for more. Proof-of-lizard is not to be conflated with lizardcoin. []
  6. Note: this is not an endorsement of Visa, I do not have any equity or financial stake in Visa. []
  7. One reviewer commented: “One problem that affects all cryptocurrencies whether proof of work or of stake: What reason do most people have for using them that won’t run afoul of social policy objectives? As long as people need to convert them to regular fiat currencies, they have a distinct disadvantage. The only exception would be in failed economies where stable fiat currencies are restricted, until those governments see a cryptocurrency as a potential substitute and ban it. It is not even clear why a government would need to issue a cryptocurrency (not a CBDC). If it wants to serve unbanked people it could open or subsidize a bank for them which is what is being attempted in a few developing countries.” []
  8. One reviewer commented: “Fully peer-to-peer without banks ultimately leads to creating a new currency. A new currency means that for international payments you have the additional costs of converting into the currency and converting out of the currency. A currency not linked to a real world economy is always going to have a more volatile price (assuming it has any price at all). Volatility in FX always, always leads to higher transaction costs for exchange because the bid offer spread has to be wider. This is before you even get into the mining proof or work model and all its inherent flaws, which again ultimately result from trying to build a financial system without banks.” []
  9. One reviewer noted that: “Transferwise, Currency Fair, Revolut, Mondo and other startups are already doing it. And they’re doing it without having to break the rules and laws banks and Western Union have to play by. They’re building actual real, potentially sustainable businesses that are useful to society. They’re just not grabbing the headlines like the greater fool / Nakamoto Scheme is. When you build a real business, your scope for false promise making behind incoherent computer science jargon is pretty small.” []
  10. I even stopped aggregating numbers 18 months ago because fewer companies were making usage numbers public: it’s hard to write about specific trends when that info disappears.  Note: if you think you have some interesting info, feel free to send it my way. []
  11. BitPay has diversified its portfolio of services now, expanding far beyond the original merchant acceptance and recently closed a $30 million funding round.  However, the problem with their growth claims is they are typically measured in $USD volume. So, as the value of bitcoin has grown 10-20x (as measured in USD) in the past year, it is unclear how much BitPay has really grown in terms of new customers and additional transactions.  Note: the same can be said for most Bitcoin-specific companies making big growth-related claims, BitPay is just one example. []
  12. Movements occurred in other areas too, on the enterprise side, Chain was perhaps the most well known company to pivot away from that vertical. []
  13. One reviewer commented: “2017 was a good year for B2B players with some prominent funding rounds (e.g., Bitspark, Veem, BitPesa) and some claimed growth on blockchain “rails” (but also on non-blockchain) namely Veem and BitPesa. A big surprise of 2017 was a much broader awareness of cryptocurrencies, i.e., free massive PR. The Coinbase app became more popular than Venmo (and far ahead of any bank). As a result, one of the most intriguing questions right now for 2018 is if/how Coinbase could capitalize on this opportunity to become a full-fledged bank leveraging the best of banking-like services from players like Xapo, Uphold, and Luno?” []
  14. I suppose it is safe to assume that if you’re reading this, you are coin millionaire so you don’t worry about fiat-mandated holiday breaks like the rest of us. []
  15. Not all medium-to-large coin holders are the adopters you now see wearing suits on television talk shows.  Most coin holders, including the abusive trolls and misogynists on social media, have seen a large pay raise, enabling the worst elements to continue their bullying attacks and illicit activities.  See Alt-right utilizes bitcoin after crackdown on hate speech from The Hill []
  16. Worth pointing out that Ryan Selkis is attempting to push forward with a the self-regulatory effort called Messari.  See also: The Brooklyn Project. []
  17. Earlier this year, right after the law enforcement raids in China, one of the senior executives left BTCC but still remains on the board of the parent company that operates BTCC.  He quickly found a new senior role at another high-profile Bitcoin-focused company and uses his social media accounts to vigorously promote Bitcoin Core and maximalism. []
  18. As explored in a previous post, fake volumes among the Chinese exchanges was not uncommon and several of the large exchanges attempted to gain funding from venture capitalists while simultaneously faking the usage numbers. As one former employee put it: “That was an extraordinary attempt at fraud — faking the numbers through wash trading and simply printing trades, while using that data to attract investment and establish their valuation.” []
  19. Coinbase got into some problems in early 2015 when one of its investor decks highlighted the fact that cryptocurrencies, such as Bitcoin, could be used to bypass sanctions. []
  20. Ari Paul runs a small “crypto” hedge fund called BlockTower Capital (estimated to have between around $50-$80 million AUM) that like many companies in this space, faces an ongoing lawsuit.  Unclear why LPs didn’t just buy and hold cryptocurrencies themselves and cut out the hysteria and management fees. []
  21. Yea, I know, “money” is already digital… I didn’t give them that name, they did. []
  22. One reviewer noted: “The fact remains that if you replace the mining process with a a centralized system for validation of transactions and up-to-date of balances you could run the whole thing on an ordinary sized server for a few thousand dollars per year. Centralisation and a more logical data model are vastly better technically speaking. And it would be far easier to add in compliance and links to banks for more robust and honest methods for exchanging between a centralized bitcoin and fiat. What would the Chinese government gain from mining?” []
  23. One of the often overlooked benefits of setting up a mining farm in China is that many of the parts and components of mining equipment are either manufactured in China and/or final assembly takes place in China.  So logistically it is much quicker to transport and install the hardware on-site within China versus transport and use overseas. []
  24. I know a bunch and could maybe introduce them though some of them make public appearances at conferences so they can usually be approached or emailed. []
  25. In fact, many regulators, such as the ECB, categorize cryptocurrency as a type of “virtual currency,” separate from a “digital currency.” []
  26. There is often confusion conflating “transaction processing” and “hash generation,” the two are independent activities.  Today mining pools handle the transaction processing and have sole discretion to select any transactions from the memory pool to process (historically there have been thousands of ’empty’ blocks) — yet mining pools are still paid the full block reward irrespective of how many transactions they do or not process.  Hash generation via mining farms has been a discrete service for more than 5 years — think of mining pools as the block makers who outsource or subcontract the hash generation out to a separate labor force (mining farms) and then a mining pool packages the transactions into a block once they receive the correct proof-of-work.  Note: “fees” to miners is a slightly different but related topic. []
  27. CBDCs have their own issues, like the risk of crowding out ordinary banks in market for deposits in a low interest rate environment but they have little in common with anarchic crytocurrencies. []
  28. Many thanks to Vitalik Buterin for his feedback and suggestions here. []
  29. See also: Some Crypto Quibbles with Threadneedle Street from Robert Sams []
  30. There are other mining manufacturers, including some who only build for themselves, such as Bitfury. []
  31. Interestingly enough, the market price for one of these machines is around $2,000.  And if you do the math, you’ll see exactly what all professional miners do: it’d only cost $2 billion to buy enough machines to generate 100% of the network hashrate and claim all the $13 billion in rewards to yourself!  In other words, the seigniorage is big, fat, and juicy… and will attract other miners to come and bid up the price of mining to the equilibrium point. []
  32. There are many walk-throughs of bitcoin mining facilities, including this video from Quartz. []
  33. In the process of writing this article, a new story explained how more than 105,000 users of a Chrome extension were unknowingly mining Monero.  Heroic theft of CPU cycles, right? []
  34. In theory, and practice, the upperbound is not infinite.  We know from the hashrate being generated that there are a finite amount of cycles being spent repeatedly multiplying SHA256 over and over.  Perhaps a possible, but improbable way to gauge the upperbound is to take the processing speed of a low-end laptop CPU (which is not as efficient at hashing as its ASIC cousins are).  At 6 MH/s, how many seventh generation i3 chips would it take to generate the equivalent of 13.5 million TH/s?  On paper, over 2 trillion CPUs.  Note: 1 terahash is 1 million megahashes.  So 1 million laptop CPUs each generating 6 MH/s on paper, would collectively generate around 6 TH/s.  The current network hashrate is 13.5 exahash/s.  So you’d need to flip on north of 2 trillion laptop CPUs to reach the current hashrate.  In reality, you’d probably need more because to replace malfunctioning machines: a low-end laptop isn’t usually designed to vent heat from its CPU throttled to the max all day long. []
  35. One China-based miner reviewed this scenario and mentioned another method to arrive at an upperbound: “Look at the previous generation of ASICs which run at 2-3x watt per hash higher.  The previous generation machines normally get priced out within 18 months.  But with differing electricity costs and a high enough price, these machines get turned on.  Or they go to cheap non-petrodollar countries like Russia or Venezuela. So your base load of 1 million machines will have an upperbound of 2x to 3x depending on prevailing circumstances.” []
  36. It may be also worth pointing out that the “evil Chinese miners blocking virtuous Core” narrative is hard to justify because Bitcoin’s current relatively high fees are a direct result of congestion and has consequently increased miner revenue by 33% (based on December’s fees).  So in theory, it’s actually in the miners interest to now promote the small block position.  Instead, in reality, most miners were and are the ones advocating for bigger block sizes, and certain Bitcoin Core representatives were blocking those proposals as described elsewhere but we’re not going down that rabbit hole today. []
  37. One reviewer commented: “Financial instruments that either directly perform a service to our economy and even indirectly via speculation, enable price discovery for things that are important to people’s lives. Who’s lives is Bitcoin really important to right now? To this day the only markets it can claim to have any significant market share in, let alone be leader in, is illicit trade and ransomware. The rest appears to be just people looking to pump and shill.” []
  38. It’s also probably not worth trying to start a discussion about what the benefits, if any, there is for society regarding cryptocurrency mining relative to the resources it collectively consumes, as the comments below or on social media would simply result in a continuous flame war.  Note: colored coins and metacoins create distortions in the security assumptions (and rewards) for the underlying networks.  Watermarked tokens are neither secure nor proper for financial market infrastructure. []
  39. It is not $1 million straight, there are multiple levels and tiers. []
  40. There is an ongoing controversy around key decision makers within Bitcoin Core (specifically those who approve of BIPs) and their affiliation with Blockstream.  One of Blockstream’s largest investors, Reid Hoffman, said Blockstream would “function similarly to the Mozilla Corporation” (the Mozilla Corporation is owned by a nonprofit entity, the Mozilla Foundation). He likened this investment into “Bitcoin Core” (a term he used six times) as a way of “prioritiz[ing] public good over returns to investors.” []
  41. Because it is its own separate network, it actually has cross-platform capabilities.  However, historically it has been promoted and funded for initial uses on the Bitcoin network moreso than others. []
  42. Yes, I am aware of the demo from Alex Bosworth, it is a big step forward that deserves a pat on the back.  Now to decentralize routing and provide anonymity to users and improve the UI/UX for normal users. []
  43. To start with, see the Principles for Financial Market Infrastructures. []
  44. This is not an endorsement of a specific platform or vendor or level of readiness, but examples would include: Fabric, Quorum, Corda, Axcore, Cuneiform, and Ripple Connect/RCL. []
  45. While Lightning implementations should not be seen as a rival to enterprise chains (it is an apples to oranges comparison), the requirements gathering and technical hurdles needed to be overcome, are arguably equally burdensome and maybe moreso for enterprise-focused companies.  Why?  Because enterprise-focused vendors each need approval from multiple different stakeholders and committees first before they deploy anything in production especially if it touches a legacy system; most Lightning implementations haven’t actually formally defined who their end-customer is yet, let alone their needs and requirements, so in theory they should be able to “launch” it faster without the check-off. []
  46. For instance, CoinDesk currently has 229 entries for “lightning,” 279 entries for “DLT,” and 257 entries for “permissioned.” []
  47. It bears mentioning that Teechain, can achieve similar KPIs that Lightning can, via the use of hardware, and does so today.  BitGo’s “Instant” and payment channels from Yours also attempt to achieve one similar outcome: securely transmitting value quickly between participants (albeit in different ways). []
  48. We’d need to separate that from the enterprise DLT world because again, enterprise vendors are trying to solve for different use cases and have different customers altogether.  Speaking of which, on the corporate side, there is a growing impatience with “pilots” and some large corporates and institutions are even pulling back.  By and large, “blockchain stuff” (people don’t even agree on a definition still or if it is an uncountable noun) remains a multi-year play and aside from the DA / ASX deal, there were not many 2017 events that signaled a shorter term horizon. []
  49. Note: both the Fedcoin and CAD-coin papers were actually completed and sent to consortium members in November 2016 then three months later, published online. []
  50. One reviewer commented: “There seems to be a whole new wave of both suckers and crooks to exploit the geeks. I have read some the Chartist analysis on forums for more traditional forms of day-trading such as FX day-trading and it is exactly the same rubbish of trying to inject the appearance of intelligence and analysis into markets that the day-traders (and those encouraging them) simply do not understand.” []
  51. A former Coinbase employee, now running a “crypto” hedge fund, was allegedly fired for gambling issues.  Maybe he wasn’t but there are a lot of addicts of many strains actively involved in trading and promoting cryptocurrencies; remember what one of the lessons of Scarface was? []
  52. ERC20 and ERC721 tokens may end up causing a top-heavy problem for Ethereum. See Watermarked tokens and also Integrating, Mining and Attacking: Analyzing the Colored Coin “Game” []

External facing appearances for the final months of the year

The past several months have been pretty productive especially in terms of education.

For instance, my “Eight Things” article had over 100,000 views in its first week alone thanks largely to landing on the front page Hacker News and reshares on social media. I may write-up an article breaking down its reception at a later date.

And interestingly, one of my older articles from 2014 recently ended up on the front of /r/DataIsBeautiful generating 15k+ views over a couple of days.

Below are some of my outward facing appearances.  If you’re interested in chatting about the topics below, feel free to reach me via Post Oak Labs.

Interviews

Cited and acknowledged

Panels and presentations

How the CME (un)intentionally weighed in on chain splits

For background, this post assumes you have read some (or ideally all) of the previous posts:

Last year, when the CME first announced that it was considering backing a Bitcoin-related futures product, it also announced the CME CF Bitcoin Reference Rate (BRR).  At the time, the reference pricing data came from the following cryptocurrency exchanges: Bitfinex, Bitstamp, GDAX, itBit, Kraken and OKCoin.com (HK).

As of today, the CME has formally whittled down those six into a smaller group of four exchanges: Bitstamp, GDAX, itBit and Kraken.

They did not publicly disclose why they removed Bitfinex and OKCoin, although we can speculate:

  • It is likely they removed OKCoin because of the laws and regulations around cryptocurrencies in China over the past year included various types of bans.  OKCoin’s mainland spot price exchange for yuan <-> cryptocurrency have been shut down.  OKEX, an international subsidiary of OKCoin, replaced the China-based exchanges on its own index (including OKCoin itself).
  • Bitfinex’s corporate and organizational structure has been described in previous articles.  Even though it has the largest trading volume and is the key player to price discovery, it has a lot of red flags around compliance and transparency (described in the links at the top) that likely made organizations such as the CME uneasy.

It bears mentioning that the proposed Winklevoss COIN ETF also went through a similar evolution in terms of how to price the instrument.  The principals initially created and used the Winkdex.  The Winkdex included many different cryptocurrency exchanges over time, including Mt. Gox and BTC-e.  Eventually, in future amended filings to the COIN ETF, the Winkdex was completely discarded in favor of a daily auction price conducted at an exchange (Gemini) that the principals and creators of the COIN ETF owned and managed.  This is chronicled in a paper I wrote last year.

So what does this have to do with the CME and how did the CME (un)intentionally weigh in on the Bitcoin block size debate?

During the recent Bitcoin Core versus SegWit2X (S2X) political battle, one of the four exchanges that constitute the CME reference rate announced which ticker symbol would be attributed to a specific chain.

GDAX (Coinbase), made the following public announcement on October 25:

In our prior blog post we indicated that at the time of the fork, the existing chain will be called Bitcoin (BTC) and the Segwit2x fork will be called Bitcoin2x (B2X).

Since then, some customers have asked us to clarify what will happen after the fork. We are going to call the chain with the most accumulated difficulty Bitcoin.

We will make a determination on this change once we believe the forks are in a stable state. We may also consider other factors such as market cap and community support to determine stability.

It’s important for us to maintain a neutral position in any fork. We believe that letting the market decide is the best way to ensure that Bitcoin remains a fair and open network.

Note: original emphasis is theirs.

There have been several articles that attempted to track and chronicle what all of the exchanges announced with respect to the ticker symbol and the fork.  At the time of this writing, itBit, Kraken, and Bitstamp have not publicly commented on this specific fork (although they have publicly signaled specific views on other proposed forks in the past).

And this creates a challenge for any financial institution attempting to create a financial instrument that is compromised of a basket of cryptocurrency-specific prices from different, independent cryptocurrency exchanges.

Ignoring the lack of adequate market surveillance for the moment, if there is a future fork and the constituent exchanges that comprise the reference data choose different forks to be represented by the same ticker symbol, this will likely create problems for the financial product.

For instance, in a hypothetical scenario in which a fork occurs, and two of the exchanges comprising the BRR index choose one side of the fork to list as “BTC” and the other two exchanges choose the other fork to also represent “BTC,” because these forks are linked to separate different ecosystems and even economic systems the combination could impact the volatility of the product.

Or in short: there is no universal agreement or consensus from cryptocurrency exchanges comprising the BRR about what the ticker symbol, let alone the chain should be defined as.

Concluding remarks

Over the past several years the primary debate has been around scaling, specifically around block sizes.  What if future forks are fought over changes to transaction fees, money supply, or KYC requirements?  This isn’t idle speculation as these have been proposed in the past with both Bitcoin and other cryptocurrencies (Ethereum Classic  held an event last year to focus on what the future money supply generation rate should be).

Obviously this is a situation the CME (and similar financial institutions) wants to avoid at all costs.

In order to do this, it’ll have to pick a side and either:

a) force an errant exchange on its index to fall in line or lose the free marketing; or

b) ditch it from the index

Either way, as by far the largest player in the market, in doing so it will be governing what Bitcoin is.  Unlike what most Bitcoin promoters often think: traders follow liquidity not the other way around so the CME is likely to become kingmaker in Bitcoin political disputes.  It is going to become a key arm in its governance.  That said, as we have seen before, rather than directly get involved with the tribes and religions of development they might simply defer to the incumbent Bitcoin Core rules — so that they can remain above the politics and out of any legal liabilities.

For more detailed commentary on this topic, be sure to read the articles linked to at the top.  This will be worth re-visiting once the CME and other regulated institutions fully launch their proposed products.

Acknowledgements: special thanks to Ciaran Murray for several insights articulated above.

Bitcoin Is Now Just A Ticker Symbol and Stopped Being Permissionless Years Ago

Financial market infrastructure in just one country (Source)

What is FMI?  More on that later.  But first, let’s talk about Bitcoin.

If you aren’t familiar with the Bitcoin block size war and its endless online shouting matches which have evolved into legal and even death threats, then you have probably been a very productive human being and should sell hugs and not wander into a non-stop social media dance off.

Why?  Because tens of thousands of man (and woman) hours have collectively been obliterated over a struggle that has illuminated that Bitcoin’s development process is anything but permissionless.

It also illuminates the poor fiduciary care that some VCs have towards their LPs.  In this case, more than a handful of VCs do not seem to really care about what a few of their funded companies actually produce, unless of course the quarterly KPIs include “have your new Bitcoin meme retweeted 1,000 times once a week.”

In some documented cases, several dozen executives from VC-backed Bitcoin companies have spent thousands of hours debating this size attribute instead of building and shipping commercializable products.  But hey, at least they sell cool hats and built up very large Twitter followings, right?

Fact #1: Satoshi Nakomoto did not ask anyone’s permission to launch, change, or modify the codebase she unilaterally released in 2009.

Fact #2: In 2009, when Satoshi Nakomoto issued and minted a new currency (or commodity or whatever these MLIC are) she did so without asking anyone else’s approval or for their “ack.”

In the approximately seven years since she stopped posting under her pseudonym, influential elements of Bitcoin’s anarchic community have intentionally created a permissioned developer system commonly referred to as the Bitcoin Improvement Proposal (BIP) process.  “Bitcoin Core” is the name for the group that self-selected itself to vet BIPs; involvement is empirically permissioned because you can get kicked off the island.1 There are a small handful of decision makers that control access to the code repository.

For example, if you’re a developer that wants to create and launch a new implementation of Bitcoin that includes different block sizes… and you didn’t get it approved through this BIP process, guess what?  You are doing permissionlessness wrong because you didn’t get permission from the BIP approval committee to do so.

Oh, but you realize that and still want to launch this new Bitcoin implementation with the help of other elements of the community, such as some miners and exchanges?

According to some vocal members of the current BIP approval committee (Bitcoin Core) and its surrogates, this is an attack on Bitcoin.  Obviously this is absurd because there is no de jure or legally defined process for changing or forking Bitcoin, either the chain itself or the code.

There is no terms of service or contract which explicitly states what Bitcoin is and who controls its development process.  Or more historically: if Satoshi didn’t need permission from a (non-existent) BIP approval committee to launch a cryptocurrency, then no other Bitcoin developer needs to either.

Tickers

Fast forward to this current moment in time: if the Bitcoin Cash or Segwit2X forks are an attack on network because either fork did not get ack’ed (approved) by the right people on the BIP approval committee or retweeted by the right “thought leaders” on social media, then transitively every 10 minutes (when a block is generated by a miner) arguably could be an attack on Bitcoin.

Why?  At any time a block maker (miner) could use a different software implementation with different consensus rules.  They, like Satoshi before them, do not need permission to modify the code.

Oh, but other miners may not build on top of that block and some exchanges may not recognize those blocks as “legitimate” Bitcoin blocks?

That is certainly a risk.  In fact, several exchanges are now effectively white listing and black listing — permissioning — Bitcoin-related blocks.

For instance, Bittrex, a large crypto-to-crypto exchange, has said:

The “BTC” ticker will remain the Bitcoin Core chain before the hard fork block. Bittrex will observe the Bitcoin network for a period of 24 to 48 hours to determine if a chain split has occurred and the outcome.

In the event of a chain split, “BTC” will remain the existing Bitcoin chain with 1 MB blocks until the industry and ecosystem demonstrates a clear chain preference for Bitcoin.

Bitfinex, the largest (and most nebulous) cryptocurrency exchange in the world, took this even further by stating:

The incumbent implementation (based on the existing Bitcoin consensus protocol) will continue to trade as BTC even if the B2X chain has more hashing power.

After heavy public (and private) lobbying by members and surrogates of Bitcoin Core, other exchanges have instituted similar policies favoring the incumbent.2  So what can alternative implementations to do?  Bend the knee?

Daenerys Targaryen, Breaker of Chains

Historically miners have built on the chain that is both the longest and also has the most accumulated difficulty… and one that has enough profitability to pay for the electricity bills.  It just happens that this collective block building activity is never called an “attack” because in general, most participants have been happy enough with the status quo.

Visions of what Bitcoin is and how it should be defined have clearly, empirically shifted over time.  But since this network was purposefully designed to be self-sovereign and anarchic — lacking contracts and hooks into any legal system — no one group can claim legitimacy over its evolution or its forks.

As a result, recent war cry’s that Segwit2X is a “51% attack” on Bitcoin are a red herring too because there is no consensus on the definition of what Bitcoin is or why the previous block – in which approximately 51% of the hashrate created a block – is not an attack on Bitcoin. 3

This has now morphed into what the “BTC” ticker on exchanges represents.  Is it the longest chain?  The chain with the most accumulated difficulty?  The chain maintained by Bitcoin Core or now defunct NYA developers?  If a group of block makers can build blocks and exchanges are willing to list these coins as “BTC” then that specific chain has just as much legitimacy as any other fork other miners build on top of and exchanges may list.

Furthermore, if the BIP approval committee gets to say what software miners or exchanges should or should not use (e.g., such as increasing or decreasing the block size), that could mean that existing network is a managed and even administered.  And this could have legal implications.  Recall that in the past, because block making and development were originally separate, FinCEN and other regulators issued guidance stating that decentralized cryptocurrencies were exempt from money transmission laws.

Despite what the trade associations and Bitcoin lobbying groups would like the narrative to be, I recently published an article that went into this very topic in depth and have publicly asked several prominent “crypto lawyers” to provide evidence to the contrary (they have yet to do so).  An argument could be made that these dev groups are not just a loose collective of volunteers.

Financial market infrastructure

I’m not defending S2X or XT or Bitcoin Unlimited.  In fact, I have no coins of any sort at this time.

But even if you don’t own any bitcoins or cryptocurrencies at all, the block size debate could impact you if you have invested in the formal financial marketplace.

For example, if and when the CME (and similar exchanges) get CFTC approval to list cryptocurrency-related futures products and/or the NYSE (and similar exchanges) get SEC approval to list cryptocurrency-related ETFs, these products will likely result in a flood of institutional money.

Once institutions, regulators, and sophisticated investors enter the picture, they will want to hold people accountable for actions.  This could include nebulous “general partnerships” that control GitHub repositories.  Recall, in its dressing down of The DAO, the SEC defined the loose collective building and maintaining The DAO as a ‘general partnership.’  Is Bitcoin Core or other identifiable development teams a “general partnership”?

Maybe.  In fact, the common refrain Bitcoin Core and its surrogates continually use amounts to arguments in favor of a purported natural monopoly.

For instance, Joi Ito, Director of MIT’s MediaLab, recently stated that:

“We haven’t won the battle yet. [But] I think the thing that is interesting is that Bitcoin Core has substantially more brain fire power than any of the other networks.”

This is problematic for a couple reasons.

First, Joi Ito is not a disinterested party in this debate.  Through Digital Garage (which he co-founded) it has invested in Blockstream, a company that employs several influential Bitcoin Core devs.4  Ignoring the potential conflict of interest, Ito’s remarks echo a similar sentiment he also made last year, that Core is basically “The Right Stuff” for NASA: they are the only team capable of sending humans into space.

But this is an empirically poor analogy because it ignores technology transfer and aerospace education… and the fact that multiple countries have independently, safely sent humans, animals, and satellites into space.

It also ignores how competitive verticals typically have more than just one dominant enterprise: aerospace, automobiles, semiconductor manufacturers, consumer electronic manufacturers (smart phones), etc.  Each of these has more than one company providing goods and services and even usually more than just one product development team developing those.  Intel, for example, has dozens of design teams working on many new chips at any given time of the year.  And they are just one of the major semiconductor companies.

Even in the highly regulated markets like financial services there is more than one bank.  In fact, most people are unaware of this but banks themselves utilize what is called “Core Banking Software” and there are more than a dozen vendors that build these (see image below).

It is a bit ironic that Bitcoin Core seeks to have a monopoly on the BIP process yet even banks have more than one vendor to choose from for mission critical software securely managing and processing trillions of dollars in assets each day.5

On the enterprise (non-anarchic) blockchain side of the ecosystem, there are well over a dozen funded teams shipping code, some of which is being used in pilots by regulated institutions that are liable if a system breaks.  Note: this is something I discussed in my keynote speech (slides) at the Korea Financial Telecommunications and Clearings Institute last year.

But as one vocal Core supporter in a WeChat room recently said, Bitcoin Core is equivalent to Fedwire or Swift, there is only one of each; so too does it make sense for only one Bitcoin dev team to exist.

Firstly, this conflates at least four different things: a specific codebase, with permissioned dev roles, with acceptance processes, with a formal organization.

It is also not a good analogy because there are many regulatory reasons why these two systems (Swift and Fedwire) exist the way they do, and part of it is because they were either setup by regulators and/or regulated organizations.  In effect, they have a bit of a legally ring-fenced marketplace to solve specific industry problems (though this is somewhat debatable because there are some alternatives now).6

If this supporter is equating Core, the codebase, with real financial market infrastructure (FMI), then they should be prepared to be potentially regulated.  Bitcoin Core and many other centralized development teams are comprised of self-appointed, vocal developers that are easy to identify (they have setup verified Twitter accounts and attend many public events), so subpoenas and RFI’s can be sent their way.

As I mentioned in my previous article: with great power comes great accountability.  Depending on the jurisdiction, Core and other teams could end up with regulatory oversight since they insist on having a monopoly on the main (only) implementation and process by which the implementation is managed.7

Remember that Venn diagram at the very top?  The companies and organizations that manage FMI today for central banks (RTGSs), central securities depositories (CSDs), and other intermediaries such as custodians and CCPs, have specific legal and contractual obligations and liabilities.

Following the most recent financial crisis, the G-20 and other counties and organizations established the Financial Stability Board (FSB) to better coordinate and get a handle on systemic risks (among other issues).  And while the genesis of the principles for financial market infrastructures (PFMI) had existed prior to the creation of the FSB, how many of the international PFMI standards and principles does Bitcoin Core comply with?

Spoiler alert: essentially none, because Satoshi intentionally wasn’t trying to solve problems for banks.  So it is unsurprising that Bitcoin isn’t up to snuff when it comes to meeting the functional and non-functional requirements of a global payments platform for regulated institutions.  Fact-check me by reading through the PFMI 101 guide.

When presented with these strong legal accountability and international standards that are part and parcel with running a payment system, there is lots of hand waving excuses and justifications from Core supporters (and surrogates) as to why they are exempt but if Core wants to enforce its monopoly it can’t have it both ways.  Depending on the jurisdiction they may or may not be scrutinized as FMI.

But in contrast, in looking at the evolution and development of the enterprise chain ecosystem – as I described in multiple previous articles – there are valuable lessons that can be learned from these vendors as to how they plan to operate a compliant network.  I recall one conversation with several managing directors at a large US investment bank over a year ago: maybe the enterprise side should just have CLS run a blockchain system since they have all the right business connections and fulfill the legal and regulatory check boxes.

Note: CLS is a very important FMI operator.  Maybe existing FMI operators will do just that.  Speaking of which, will Bitcoin Core (or other dev teams) apply to participate with organizations like the FSB that monitor systemically important financial institutions and infrastructure?

Angela Walch has argued (slides) that some coders, especially of anarchic chains, are a type of fiduciary.8  Even if this were not true, many countries have anti-monopoly and anti-trust laws, with some exceptions for specific market segments and verticals.  There are also laws against organized efforts involved in racketeering; in the US these are found within the RICO Act.

Watch the Godfather trilogy

I haven’t seen a formal argument as to why Core or other development teams could meet the litmus test for being prosecuted under RICO laws (though the networks they build and administer are frequently used for money laundering and other illicit activity).  But trying to use the “decentralization” trump card when in fact development is centralized and decisions are made by a few key individuals, might not work.

Look no further than the string-pulling Mafia which tried to decentralize its operations only for the top decision makers to ultimately be held liable for the activities of their minions.9  And using sock puppets and pseudonyms might not be full proof once forensic specialists are brought in during the discovery phase.10

Concluding remarks

Based on observations from how Bitcoin Core evolved and consolidated its power over time (e.g. removing participants who have proposed alternative scaling solutions), the focus on what Bitcoin is called and defined has landed in the hands of exchanges and really just highlights the distance that Bitcoin has walked away from a “peer-to-peer electronic cash” that initially pitched removing intermediaries.  To even care about what ticker symbol ‘Bitcoin’ is on an exchange is to acknowledge the need for a centralized entity that establishes what the “price” is and by doing so takes away the bitcoin holder’s “self-sovereignty.”11

While the power struggles between various factions within the Bitcoin development community will likely rage on for years, by permissioning off the development process, Bitcoin Core (and any other identifiable development groups), have likely only begun to face the potential regulatory mine field they have foisted on themselves.12

Historically blockchain-based systems have and still are highly dependent on the input and decision-making by people: somebody has to be in charge or nothing gets done and upgrades are a mess.  And the goal of appointing or choosing specific teams on anarchic chains seems to be based around resolving political divisions without disruptive network splits.13

The big questions now are: once these teams are in charge, what will governments expectations be?  What legal responsibilities and regulatory oversight will the developers have?  Can they be sued for anti-trust and/or RICO violations?  With billions of dollars on the line, will they need to submit upgrade and road map proposals for approval?

Endnotes

  1. Examples of developers who were removed: Alex Waters, Jeff Garzik, Gavin Andresen []
  2. Thanks to Ciaran Murray for identifying these exchanges. []
  3. Bitcoin mining is in fact based on an inhomogeneous Poisson process; a participant could theoretically find a block with relatively little hash rate.  Although due to the probabilities involved, most miners pool their resources together to reduce the variance in payouts. []
  4. According to one alleged leak, Digital Garage is testing Confidential Assets, a product of Blockstream. []
  5. According to a paper from the Federal Reserve: payment, clearing, and settlement systems in the United States “process approximately 600 million transactions per day, valued at over $12.6 trillion.” []
  6. On AngelList, there are about 3,400 companies categorized as “payments” — most of these live on top of existing FMI, only a handful are trying to build new independent infrastructure. []
  7. A key difference between Bitcoin and say Ethereum is that with Ethereum there are multiple different usable implementations managed by independent teams and organizations; not so with how Bitcoin has evolved with just one (Bitcoin Core) used by miners.  In addition, the Ethereum community early on formally laid out a reference specification of the EVM in its yellow paper; Bitcoin lacks a formal reference specification beyond the Core codebase itself. []
  8. See also The Bitcoin Blockchain as Financial Market Infrastructure: A Consideration of Operational Risk from Angela Walch []
  9. Thanks to Stephen Palley for providing this observation. []
  10. It is unclear why the current Bitcoin Core team is put onto a pedestal.  There are many other teams around the world building and shipping blockchain-related system code used by companies and organizations (it is not like there is only just one dev team that can build all databases or operating systems).  At the time of this writing Core has not publish any papers in peer-reviewed journals and many of them do not have public resumes or LinkedIn profiles because they have burned business and professional relationships in the past.  Irrespective of what their bonafides may or may not be, it is arguably a non sequitur that ‘permissionless’  coordination in open-source code development has to lead to a monopoly on said development. []
  11. Thanks to Colin Platt for this “appeal to authority” observation. []
  12. Bitcoin stopped being permissionless when developers, miners, and exchanges needed to obtain permission to make and use different code.  And likely there are and will be more other cryptocurrency development teams that follow that same path. []
  13. For an informed contrarian view on governance and distributed ledger technology, see The blockchain paradox: Why distributed ledger technologies may do little to transform the economy by Vili Lehdonvirta []

Who are the administrators of blockchains?

[Note: I neither own nor have any trading position on any cryptocurrency.  I was not compensated by any party to write this.  The views expressed below are solely my own and do not necessarily represent the views of any organization I advise.  See Post Oak Labs for more information.]

On All Hallows’ Eve in 2008, an anonymous person (or group of persons) posted a short technical whitepaper on an obscure mailing list about a new virtual coin-based online-only payment system they had been designing for the last eighteen months.1 Several months later, in January 2009, this same person posted the code that created the functionality described in the whitepaper and began minting this new virtual currency.  Less than two years later, the creator walked away from the project and without ever revealing their real identity.

The creator likely stayed anonymous for a variety of reasons, including the fact that by creating and administering a new payment system they may have been violating money transmission laws in multiple countries.2 Despite multiple hoaxes, we still don’t know who this anonymous person was.  But their system – like the Ship of Theseus – continues to exist in a form referred to as Bitcoin.

But before getting to that part of the saga, let’s look at May 2013.  At the end of that month, US federal agents raided a Costa Rica-based company called Liberty Reserve due to money laundering violations (along with a list of other crimes).  Liberty Reserve was a centralized payment platform that marketed to its users the ability to anonymously send funds to one another.

According to the BBC:

The US Justice Department said the scheme had been used to process 78 million transactions with a combined value of $8bn (£5.5bn) – many of which were related to hiding the proceeds of credit card theft, identity fraud, hack attacks and Ponzi scam investment schemes.

Last year the founder of Liberty Reserve, Arthur Budovsky, was convicted and sentenced to twenty years in prison.  Several other insiders also received sentences.  Liberty Reserve had more than 5 million users including more than 200,000 in the US — it is unclear at this time if any of the users are being prosecuted.

According to some cryptocurrency fans, Liberty Reserve’s big blunder was that they attached their legal names to the payment processing enterprise.

But this misses the point.  If you play with a highly regulated industry such as financial services, be prepared for the existing stakeholders such as regulators and law enforcement to increasingly scrutinize your operations as they detect familiar activities, such as the marketing and sale of securities or operating a payment platform.

Cypherpunk cosplay uniform (mostly worn online)

If you spend your weekends cosplaying online as a cypherpunk and yet voluntarily sit on-stage wearing a name tag with your real name at public events and promote financial products and financial market infrastructure to the world at large, consider that there may be people who later watch these videos stored on Youtube. In its report on The DAO, the SEC cited two specific Youtube videos including one from Slock.it, the creators of The DAO.  Recall that Slack stores everything, including your private pump and dump strategies.  If you used cloud-based email, there is a non-zero chance that your successful solicitations and payola to coin media could be discovered after the cloud provider receives a subpoena.

What does this have to do with blockchains?  Below we discuss a few ideas that tie in with money transmission and payment processing.

“Core” development teams

Let me state from the onset that I am unaware of any current or potential criminal or civil cases specifically against developers of cryptocurrency networks.  Furthermore, regulators and law enforcement may not view development teams as administrators at all.  I am not a lawyer and this is not legal advice.

What are administrators?  At a very high level, in the United States, according to guidance published in March, 2013 by FinCEN:

An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.

The rest of the March guidance goes into a little more detail of what administrators are with respect to money exchange itself.

For the purposes of this article, and without diving too much into the technical weeds, let’s consider this hypothetical:

Bob forks/clones Bitcoin in a new GitHub repo that he alone has commit access to.  While other people can submit suggested changes, he alone has commit access to make any changes to the code.  He likes his privacy so he doesn’t actively advertise or market the repo or coin or tell anyone who he is.  And then sets up one mining node, initiates the genesis block, and begins Day 1 of Bobcoin.

Is Bob an administrator?  If so, at what point does he stop being an administrator?  When there are more than one mining nodes in operation?  When more than one developer has commit access?

That’s a decision that regulators and law enforcement will need to make but from this cursory bit of detail, Bob clearly issued his own virtual currency.  Can he redeem it?

Perhaps.3  Either way, he could unilaterally change the code and annul previous or future coins/transactions.  He could change the money supply schedule, doubling or halving it if he so pleased.   He could make a new rule that says block sizes should be arbitrarily larger or smaller.  He could make a new version that separates the digital signatures from other data in the block.  He could change the required transaction fee.  He could add functionality such as P2SH.  He could change how the difficulty setting adjusts.  And so forth.

Even if other participants added computers and joined the Bobcoin network and diluted Bob’s mining hashrate, if the new participants solely rely on the code in his GitHub repo (e.g., are unaware of and/or do not use alternative implementations of Bobcoin code), then Bob remains very influential and could still directly make changes to the network.

Does being very influential — controlling the code repo to a financial network — constitute “administration”?  Arguably yes, but there should be some objective measuring sticks as to what these attributes are (e.g., how many different people have commit access to a repo for financial market infrastructure).

In the proof-of-work-based cryptocurrency world today, we have observed a stark 180 logistical change from Bitcoin in 2009.  Whereas originally all nodes were miners and vice versa, today you have a permanent bifurcation between: fully validating nodes and the mining process itself (hash generation process).  Similarly, many participants in the market, including dozens of developers and miners, use their real legal identities through the use of verified social media accounts and the speaking circuit at fintech events.  They are no longer pseudonymous.

In order for participants to coordinate and administer these types of networks, they did not necessarily need to reveal themselves.  In fact, we still don’t know who many of the original creators of various cryptocurrency networks are that are still in operation (who is BCNext?).  But because many have publicly identified themselves, they could be served with legal process and held responsible if legally liable: hiding behind pseudonymity or anonymity is no longer an option for them.

To borrow a phrase that has been recently used by several regulators, will it come down to the “facts and circumstances” to determine whether or not an entity such as a mining pool operator or core development team is a money service business or fiduciary? 4

Either way, popular euphemisms commonly used by cryptocurrency promoters and lobbyists include supposedly supporting “open” or “public” blockchains – several feelgood words – but as we empirically observe, in many cases these networks are not open to the general public: either as an actual validator or as a developer.  Access can become gated by a clique who determines who can be involved.5

In December 2015, the individuals in the photo above allegedly represented about 90% of the Bitcoin network hashrate: Source

Command and control

According to some, the Bitcoin network is viewed as a “third party payment processor” and because no one single entity administers the network it meets FinCEN’s exemptions.6  Thus, the argument goes, cryptocurrency network creators do not need to obtain a money transmitter license in the US because each activity is separate and run by a different group of participants who meet some kind of legal or regulatory exemption.7

This may have been the case in 2009 and 2010 prior to mining pools and dedicated development teams but it may not stand up to closer scrutiny in 2017.

For instance, over the past couple of years there has been this phenomenon called the “block size” debate.  Rather than go into the different camps and what they want or demand, let’s look at how various participants actually behave and act.

To begin with, let’s look at mining.

As mentioned above, mining in 2017 is different than it was in 2009.  Whereas mining initially meant (1) validation back to the genesis block and (2) generating proofs-of-work (hashes), these two processes are fully separated today.8

Today mining pool operators pick and choose which transactions to include into blocks and validate the chain they are building their blocks, is the chain they intended to do so on.  They can (and do) censor transactions.  For a pre-arranged fee, some will include your transaction before including others, including transactions from the mining pool operator itself.  Mining pools in turn pay miners (those with hash generating equipment) a share of the block reward for the work they do.  Note: miners (hash generators) themselves do not validate blocks and in fact, the machines they use are comprised of ASIC chips, are incapable of doing anything other than some simple multiplication — they can’t even run the software needed to validate the chain, let alone software like Excel.

There is a third stake holder in the mining process; infrastructure managers, who own and operate (or lease) the physical infrastructure that houses the equipment for miners.  Very little has been published on these participants (in English) because most of this infrastructure is managed in countries where English is not the mother tongue.9 These participants negotiate electrical rates and sometimes help install and operate the electrical equipment (transformers and wiring) at the various mining facilities (or outsource and manage that to someone else).

Now let’s look at the software implementation commonly used by many Bitcoin mining pools, called Bitcoin Core.  Until very recently, most mining pools ran a reference implementation of what is called the Bitcoin Core implementation of Bitcoin.  That is to say, the software running their node which builds and validates blocks, comes from a repository managed by a collective describing itself as Bitcoin Core.  This software was originally called the “Satoshi client” (Bitcoin-Qt) and has been renamed a few times along the way to its current name of Bitcoin Core.

In October, 2017 one common refrain from the camp that collectively identifies itself as Bitcoin Core, is that miners do not ultimately operate Bitcoin.  They argue that hashrate follows price and price follows the chain that is best maintained by the best developer team.  This is empty rhetoric.  We know that there are three entities involved in mining: mining pools, hash generators, infrastructure managers.  We know their key importance because they have been lobbied non-stop by many different stakeholders (such as Bitcoin Core and Bitcoin Classic) over the past several years including both open and closed door events on multiple continents.  They have been asked to sign agreements.  And then have seen those same agreements broken.  If miners are not important, they would not be lobbied or demonized at all: they would be ignored entirely.1011

Bitcoin Core is especially interesting because Bitcoin Core proponents claim it does and does not exist.  It is a bit like Schrodinger’s cat: Core exists when it is convenient for its proponents (like rallying supporters to denounce an alternative implementation) but does not exist when it encounters accountability or responsibility for its collective decisions or the decisions made by its surrogates.

Bitcoin Core maintains a website, a verified Twitter profile, Slack and other media channels.12 It even has a public team page of some of the contributors.  It is unclear how they precisely coordinate, but they work closely together with the owners and maintainers of Bitcoin.org and Bitcoin Core GitHub repo.  Note: Bitcoin.org, Bitcoin Talk and /r/Bitcoin are all controlled by the same individual, “theymos.”13 The other channels are owned and controlled by a set of unknown participants.  This collective does not have any known trademarks or copyrights at this time.  While no one has yet identified the actual decision makers, Bitcoin Core has multiple surrogates who are publicly known and actively engaged in media.

When there are disputes over decisions, some individuals who have identified themselves on the Bitcoin Core contributor list, will come out defending Bitcoin Core.  This includes asking for Bitcoin Core alleged lookalikes and doppelgangers to stop existing.  Schrodinger’s cat strikes again: Bitcoin Core wants to own the term Bitcoin Core on social media so that others can’t use it, but do not want the accountability when the collective or someone from the collective makes a decision.  Whose identification documents were used to create a verified Twitter (KYC’ed) account?  What about the web domains?  Those people are arguably actual representatives of the collective.

Bitcoin Core does not have a trademark on the Bitcoin logo, the Bitcoin ticker symbol, etc.  The original code base was released under an MIT License and “Satoshi Nakomoto” is still the copyright owner.14 Tibanne KK (the parent company of Mt. Gox) actually has a trademark on “Bitcoin” in the UK; although since the logo was originally placed in the public domain it is unclear if Tibanne can enforce these claims.  While the representatives and surrogates of Bitcoin Core argue over alternative implementations, if the entity called Bitcoin Core sued, this could open them up for a few things:

  1. they might need to incorporate in order to have legal standing;15
  2. they’d likely have to reveal their legal names (who is the verified Twitter entity?);
  3. they could be liable for complying with state, federal and international laws around operating financial market infrastructure.

Some developers want the power to control a code repo but not the accountability that comes with it.   Source: Spider-Man

Note: if you have a few moments, Angela Walch has a great paper on this topic worth reading.  Recall one of the common refrains from multiple full-time cryptocurrency developers is that they must be conservative in how they upgrade the chain they are working on, “as billions of dollars are at risk.”  These statements are arguably self-incrimination for being a fiduciary.16

It is unclear if Bitcoin Core itself will remain pseudonymous to avoid lawsuits and countersuits.  But recall, no one currently owns “Bitcoin” — the network itself is a public good, a commons.  However, Bitcoin Core does control the GitHub repo and tightly controls the commit access, occasionally removing those that do not align with their political views.17

What is the big deal?  Isn’t this software similar to a browser?

No.  The several thousand ISPs that are connected to each other forming “the Internet” are not dependent on the existence of Firefox or Internet Explorer or any browser.  These ISPs use protocols which are developed and managed by various non-profit and for-profit entities, some with clearer governance than others (like ICANN and IETF).  Network traffic will continue to flow irrespective of what browser is being used.

Bitcoin Core (the software) is not like a browser.18  If it was, the miners could simply switch out and use a different implementation and then start building blocks based on this new implementation.  But as noted above, miners have been lobbied not to use anything but Bitcoin Core or face the consequences if they did.  For instance, this past spring a group of Bitcoin Core affiliated developers threatened to change the proof-of-work mechanism.  These same developers even created a Twitter account (hence deleted) and still maintain a website dedicated to promoting this change.

With threats like this, arguably miners aren’t really free to choose what implementation to run.  To use Walch’s description, Bitcoin Core (and other identifiable developer teams) could arguably be a fiduciary if not an administrator.

bitfury

Source: Twitter

George Kikvadze is an executive and vice chairman of BitFury, a large Bitcoin mining company based in the Republic of Georgia.  Seven months ago he tweeted the statements above in reaction to a Bitcoin Core developer that threatened to change the proof-of-work algorithm used in Bitcoin in order to punish miners for using non-Bitcoin Core code.

Neither threat was carried out but this scenario raises interesting questions: if representatives of Bitcoin Core (or other development teams) who had commit access did change the proof-of-work mechanism to something the ASIC miners that BitFury designed was no longer capable of monetizing, is Bitcoin Core (or other developer teams) itself liable for the loss in revenue suffered by BitFury and other miners?  Is it just the person who submitted the documents to get a verified Twitter account?

No terms of service

One of the fundamental challenges for any anarchic chain is coming to agreement on defining the chain in the first place.19 What is Bitcoin?  Is it the chain with the most proof-of-work?  The longest chain?  The one that gets the most retweets?  The one with the most starred repo on GitHub?

As I mentioned in a paper a couple years ago (Appendix A), because there is no de jure process to handle governance issues, the various communities and tribes rallying and fighting around their disparate visions must rely on ad hoc de facto processes, much of which spills over onto social media

Fundamentally there does not appear to be any contract rights involved in using or operating Bitcoin (the network).  Who do users have contractual relationships with?  If someone does, then you could theoretically sue them.  But there is not even a click-through agreement or EULA when downloading Bitcoin Core (or any other alternative implementation).

This is relevant because earlier this month there were several Bitcoin Core contributors and surrogates, some of whom used their real names, claimed that alternative implementations such as Bitcoin Segwit2X (and its developers) could be violating the Computer Fraud and Abuse Act in the event that Segwit2X successfully creates a new fork next month.

If the CFA Act or money transmission laws are being broken post-Segwit2X then they are probably being broken now because of how various forks and updates are currently rolled out by developers and miners.  While it is unclear if any regulators or law enforcement would see the interpretation of the CFA Act the same way as Bitcoin Core representatives do, this hypothetical legal threat raises a few interesting points:

  1. What legal standing does anyone have in the event of a fork on an anarchic chain?  Code is not law.
  2. What country has jurisdiction and who has contractual relationships with one another?
  3. Would such a lawsuit create precedence or chilling effect on anyone wanting to fork/clone code in the future?  Who is liable for orphaned blocks?
  4. What happens in the event of an accidental fork like the one in March 2013?

By pushing any interpretation of the CFA Act onto anarchic cryptocurrency networks, it could create interesting legal precedents for Bitcoin Core because once the government gets involved in deliberating which fork is and is not legitimate or which miners can or cannot participate, then you no longer have a pseudonymous anarchic network.  Recall there was no EULA or Terms of Service on purpose when Bitcoin was launched years ago.

Another recent example, a Bitcoin Core surrogate who used his real name, publicly asked the New York State Department of Financial Services (DFS) to look into Coinbase’s support of Segwit2x.  Does Coinbase violate the BitLicense for supporting one chain versus another?  Last month a Bitcoin Core contributor who also used his real name, penned a letter to the SEC about why it should not approve an ETF because the company applying for it supported Segwit2X, an alternative Bitcoin implementation.20

A couple weeks later the same author of the SEC letter publicly said:

But, yea, lets be clear, I dont know a singla significant contributor to Core who will ever work on btc1/Segwit2XCoin. If all the miners switch over, most likely some folks will buy hashrate and there will be a Bitcoin chain again to work on. If, somehow inexplicably, the entire community gives up on Bitcoin and uses 2xCoin, then most likely the vast majority of Core contributors will just move on to something other than Bitcoin, though given how 2x has been going, I find that highly, highly unlikey.

The term “2XCoin” is intended to be an inside baseball pejorative towards the developers and supporters of Segwit2X.  Other Core developers have publicly stated that other Core developers will walk away from (quit) the project if an alternative implementation successfully creates a fork.

Another common war cry during the summer was that Bitcoin Cash, a fork and airdrop of Bitcoin up to a certain block height, “was an attack on Bitcoin.”  This statement raises a number of questions:

(1) there are multiple existing forks of Bitcoin that continue to exist (such as Bitcoin Dark), were these also attacks on Bitcoin?  Where is the passionate uproar against the dozens of Bitcoin clones and forks including the ones that used line-for-line the same code but simply rebranded?

(2) Bitcoin needs to first be defined, since there is no 100% consensus or agreement on what it is (longest chain?) or even agreement on how to measure consensus, to prove that there is an attack you would need to at least agree on what Bitcoin is and what exactly was attacked.  Since Bitcoin was designed from the outset to be forked and for those with the most hashrate to decide what is and is included in a block — and the rules therein — how is Bitcoin Cash any different in terms of legitimacy than Bitcoin?

If there is a regulatory arbitrator stating which fork is the legitimate legal one, you have a permissioned network.  And I truly could talk all day about those because I popularized that term with this (now dated) paper more than two years ago and currently advise a couple companies involved in building those.  Inquire within!

The tactics used by different cryptocurrency tribes versus others is not new.  In fact, if you look as recent as the 1960s, during the Cultural Revolution in China there were struggle sessions in which the accused (class enemies) were captured and dragged out in front of the public and denounced for crimes that they didn’t commit.21

We see this type of behavior in the cryptocurrency world on a monthly basis, just look at the “Antbleed” hatchet job.  This was a manufactured controversy and coordinated attempt to discredit a company (Bitmain) that had publicly spoken out against one specific Bitcoin implementation in favor of another.2223 Nearly six months later, the original accusations (of covert usage) are still unproven yet some of the promoters of this theory, several of which who are affiliated with Bitcoin Core, continue to attack anyone who stands in the way of their own vision.  Many elements in the community thrive on both real and fake controversy in order to stay relevant: it is in a state of permanent lynching mode.

Other cryptocurrency chains

Lest I be accused of picking favorites, I should point out that future researchers could create an infographic depicting how all chains evolved over time.24

Below is a non-exhaustive list of other chains that have highly coordinated behavior between influential persons that look administrator-like:

  • Dash Core: run by a company (with a CEO no less); can identify the major participants involved and how they coordinate to make changes; they sponsor events and attempt to speak on behalf of the community while making any upgrades; they run various social media accounts
  • Ethereum Classic: this small community has held public events to discuss how they plan to change the money supply; they video taped this coordination and their real legal names are used; only one large company (DCG) is active in its leadership; they sponsor events; they run various social media accounts
  • Bitcoin Cash: an airdrop based on Bitcoin prior to a certain block height; can identify the major participants involved and how they coordinate to make changes; they run various social media accounts and events
  • Bitcoin Segwit2X: can identify the major participants involved and how they coordinate to make changes; they have met to formalize this process in multiple meetings including the New York Agreement (NYA); they run various social media accounts and claim to be the equivalent of Bitcoin Core
  • Bitcoin XT: defunct, in its terms they explicitly said one set of named individuals would be administrators
  • Litecoin: leaders are self-doxxed; have a formal Foundation as well; they run various social media accounts and events
  • Dogecoin: leaders are self-doxxed and publicly coordinated merged mining with Litecoin three years ago; there have a formal Foundation; they run various social media accounts
  • Ethereum: can identify and name specific people in the Ethereum Foundation and mining community who publicly coordinated several hard forks; these stakeholders sponsor public events and code changes; they run various social media accounts; the Ethereum Foundation has a registered trademark
  • Bitcoin Gold: an upcoming airdrop based on Bitcoin prior to a certain block height; can identify the major participants involved and how they coordinate to make changes; they run various social media accounts
  • Zcash: this was created by a company (Zerocoin Electric Coin Company); can identify and name specific people in the Zcash Foundation and mining community who publicly coordinate updates; these stakeholders sponsor public events, grants, and code changes; they run various social media accounts
  • Bitcoin: before Bitcoin Core consolidating itself, there was The Bitcoin Foundation which attempted to speak as the voice of Bitcoin… then it pretty much went morally and financially bankrupt
  • Dozens if not hundreds of others

Whereas the Bitcoin creator “walked away” (or is he lurking in the CoinDesk comment section?) most ICO issuers could have the same legal problems described above.  Even ignoring the issuance of unregistered securities through ERC20 and ERC20-like standards, many of these these ICO coins and tokens were centrally issued and administered.

One reviewer singled out Factom, Tierion, Ripple, and Stellar as well, but these communities have slightly different nuances worth looking into independent of this article.  It bears mentioning that Ripple was penalized and settled with FinCEN in May 2015, but this was due to non-compliance with BSA requirements with respect to not filing suspicious activity reports (SAR) from a side fund it operated. 25 It was not about operating the nodes on the network.26 Furthermore, centralized issuance and operation of a network through watermarked tokens (e.g., Counterparty, Omni (Mastercoin), all colored coins) is still taking place today (see Tether).

This is not to say that you shouldn’t create a cryptocurrency nor a foundation.  There are likely ways to create a new cryptocurrency and structure its governance in a legally compliant (or exempt) manner.

But some of those who issued a cryptocurrency which they centrally operate and mint could be on thin ice depending on how strict regulators and law enforcement are.27 Maybe they aren’t strict at all.

If it is centrally administered for 2 minutes versus 2 hours versus 2 years (like Satoshi did), at what point is that line crossed?  What about a network like Stellar that was originally decentralized and then in an emergency, centralized (running off of one node) due to a break in its consensus mechanism?  The Stellar organization itself operated the single validation node for months before re-decentralizing.  That is clearly administering a network especially since they issued lumens to begin with (lumens are the native currency of the Stellar network).

Forks as securities

A friend of mine that is the CEO of a Bitcoin-focused company recently hired an attorney to look at the upcoming Bitcoin Segwit2X (S2X) fork proposal and thinks there could be an argument that the fork is a security based on the Howey test.

His rationale is the following, reused with his permission:28

  • S2X is a common enterprise based on the efforts of the signers of the NYA
  • Many of the signers of the NYA have long touted the benefits and profit expectations of increasing the block size
  • S2X was assembled by a promoter/ third party: the organizers of the NYA and its signers
  • Anyone who purchased bitcoin between May 2017 and the fork date is an investor, in particular if that person bought bitcoin in anticipation / expectation of the fork

If this is true, then you could likely insert and replace S2X and NYA with various cryptocurrency developer groups (including Litecoin, Ethereum, Ethereum Classic, Bitcoin Core, Bitcoin XT and others listed in the section above) and just modify the date to argue that each of these coordinated efforts is effectively a common enterprise seeking to profit from the expectations of X, Y, or Z features.  It could be smaller or bigger blocks, sidechains, slower or faster block generation times, etc.  In other words, if Segwit2X is a security, then arguably many coordinated “soft” and “hard” forks are.29

At this time, in the US, neither the SEC nor CFTC have publicly issued their position on how a fork falls within their scope and mandate.30

However, if any regulator or court does formally publish guidance or a ruling siding with a specific fork, the cryptocurrency community will have institutionalized permissioned-on-permissionless chains.  An expensive contradiction.

Relevancy towards enterprise chains

Since you do not need proof-of-work to maintain all blockchains, enterprise focused blockchain and DLT-related companies (commonly referred to as private or permissioned chains) typically started off with the realization a couple years ago that:

  1.  In order for changes and upgrades to take place on a decentralized network, some clear governance needs to be created to manage that process;
  2.  Network validators, the nodes involved in validating transactions, would be run via known, identifiable (KYC’ed) operators who had specific contractual obligations that ultimately would rely on courts as arbiters (e.g., if there is a fork, only one chain would be deemed the legitimate de jure chain);
  3.  If an entity formally governs one of these networks it is likely that it would also be regulated under existing laws and regulations;
  4.  If an entity or group of entities has the power to coordinate and unilaterally make these changes at will without legal recourse, then this could be a single point of failure that could be abused.  How to design a network that prevents this security hole from forming yet comply with existing laws and regulations all while providing recourse to the users in the event of disputes arising?

Note: all of the vendor platforms have their own differences and nuances; from an architectural standpoint they cannot all be lumped together as a monolithic entity.

But in this case, many of these companies took roughly the same tact: one which attempts to hold validating parties accountable ultimately through the existing legal system (via contracts and if need be courts).  As a result, so far the vendors have generally gotten to bypass most of the drama around factional in-fighting described above.  But each vendor still has their own challenges ahead.  Once an enterprise chain’s mainnet is turned on in production and real value is being moved across their network, whoever administers and operates the network(s) could be legally liable for complying with a whole slew of regulations from multiple different jurisdictions.

That is why some operating models involve banks or other existing financial institution running the validating nodes — because they already have the necessary licenses and compliance structures put in place. That is also why some of the vendors created a consortium from the get-go because they foresaw the need to bring on different types of stakeholders early on.  But ignoring the consortium approach for the moment, once real legal names are touching and managing real financial instruments, regulators and law enforcement begin to pay much closer attention.

Final remarks

In the US there is no private right of action under the FinCEN guidelines.  Only FinCEN can initiate an enforcement proceeding, and based on conversations with legal experts who reviewed this article, these experts do not expect such actions right now given that FinCEN hasn’t thus far.

Can private parties initiate litigation?  Based on one conversation with an interested party, it seems that there is arguably a private right of action under the CEA, under certain state money transmission business (MTB) laws and under securities laws.  Will they?  My guess is that as more real value (e.g., real money like USD) is associated with any of these anarchic blockchains, the odds of lawsuits due to any type of fork (intentional or not), trends closer to probably.

With that said, networks such as blockchains, do not maintain themselves.  They do not upgrade themselves or automatically fix bugs that arise.  They are not anti-fragile.  They need people to do all of these pesky maintenance things.  And with people comes politics and social engineering.31

Empirically if there isn’t disharmony in a blockchain community it is because most participants agrees who the administrator or administrators are.32

If there is a disagreement, as we have seen multiple times, a political struggle often takes place and a fork or two may happen: either a fork in the chain or a fork in the community.  With hundreds of dead or zombie blockchains, it is clear that blockchains do not work without some kind of administrator and decision maker.  Whether or not FinCEN or other money transmitter regulators come to the same conclusion is a different matter.

The takeaway from this piece isn’t that no one should be formally or informally engaged with anarchic chains such as cryptocurrencies.  Or that passion and enthusiasm should be discouraged.  Rather, it is about consistency and the rule of law.  If you do not like the development or evolution in a community-without-formal-rules — such as the fractured tribes of Bitcoin — using the government as a club of convenience to get what you want and not expect consequences for their intervention on your behalf is shortsighted.

While a few dozen cryptocurrency startups have already begun using trade associations to lobby regulators on their behalf for a “hands-off” regulatory approach, at some stage the appearance of formalized governance of financial market infrastructure — even if it is marketed as self-sovereign, decentralized, open, and anarchic — could lead to increased regulatory oversight due to how the crypocurrency governance activity actually behaves in reality.  This is definitely a topic worth revisiting in a year to see if any regulator publicly opines on the topic. 33

[Note: if you found this research note helpful, be sure to visit Post Oak Labs for more in the future.]

Acknowledgements

To protect the privacy of those who provided feedback, I have only included initials: RD, CP, SP, CM, VB, DG, CK, AW.

Endnotes

  1. Both Ray Dillinger and Hal Finney have stated they analyzed and gave feedback to Satoshi on Bitcoin prior to its public announcement; perhaps there were others too. []
  2. See these two articles written by Daniel Friedberg: “FinCEN Guidance Validates Bitcoin Industry but Targets Satoshi” and “Bitcoin hard fork conspiracy treacherous” []
  3. It is possible to create a redeemable asset on Counterparty and several other platforms connected to Bitcoin. []
  4. One reviewer opined that: “I think it will be a technical legal definition that comes down to whether you can exert reasonable control before enforcing MSB rules.  Whether you are an administrator or not will be a boring court decision: they could look at whether you were mining or developing with a high enough impact. []
  5. On the mining side, the capital costs of running a mining farm and pool that actually validates blocks on many of the larger cryptocurrency networks is relatively expensive and out of reach for most users; mining pools have been documented at attacking one another on the network itself (e.g., DDOS attacks).  On the developer side, as discussed throughout this article, while it varies depending on the cryptocurrency, the control over the repo (specifically who has commit access) is often restricted to a few insiders who can permit and restrict who can be involved in the development process (e.g., they can remove a developer from mailing lists, forums, events, code repositories, etc.). []
  6. Cryptocurrency miners typically only have the ability to instruct payments of keys they control (although they can censor and/or fork as well).  Thus, it is argued, the miners typically just perform IT services. []
  7. In the UK, there is some relevant guidance from HM Revenue and Customs with respect to money laundering and money service businesses []
  8. See SPV wallets for a user-specific example. []
  9. This past summer Quartz published a series of articles detailing some of this physical infrastructure in China.  See: The lives of bitcoin miners digging for digital gold in Inner MongoliaPhotos: Inside one of the world’s largest bitcoin mines; and Take a 360 walk around one of the world’s biggest bitcoin mines []
  10. A year ago the narrative that miners were a key component of Bitcoin dramatically shifted in the minds of a group that lobbied for a change known as UASF: User Activated Soft Fork.  The proposal – which thus far has not been activated – attempts to remove miners and replace their role with nodes controlled by UASF advocates, pretty much removing Sybil protection.  Instead of buying hardware and pushing hashrate one way or the other, UASF advocates used social media to promote their views.  Incidentally some of the same people promoting “no2x” (opposed to Segwit2x) were actively part of the “UASF” campaign. []
  11. One reviewer mentioned that: “It’s worth noting that in Ethereum, miners actually don’t have a large role in decision-making. Ironically enough, I think the reason for this is that Bitcoin prefers soft forks for governance, whereas Ethereum prefers hard forks, and soft forks naturally depend more heavily on miner support in order to succeed.” []
  12. Its Twitter account actively retweets and highlights specific content from a common group of promoters, advocating and endorsing their viewpoints. []
  13. “theymos” is his/her username; his real name is allegedly Michael Marquardt but little is publicly known about who he is beyond his control of the most highly trafficked Bitcoin-specific developer sites.  Other pseudonyms that co-own some of these domains include “cobra.” []
  14. In the US, copyrights are unregistered.  The copyright owner of the original source code still belongs to “Satoshi Nakomoto” however as of this writing, no one has stepped forward to claim this copyright ownership. []
  15. Alternatively they could be a “general partnership;” this was discussed in the SEC paper on The DAO (pgs 14-15). []
  16. One reviewer provided a counterpoint: “There’s a difference between voluntarily taking on responsibility and being legally assigned it. For example, if I suddenly decide that I feel morally obligated to make sure all children in some village in Africa are properly fed, I do not become their legal guardian.” []
  17. Alex Waters, Jeff Garzik, and Gavin Andresen (among others) have been removed in this fashion. []
  18. If we replaced “browser” with “TCP/IP” that would likely create massive economic disruption and finger pointing for blame. []
  19. See also: Emochain and Statistchain []
  20. I touched on this same issue last year in a paper, see Comments on the COIN ETF (SR-BatsBZX-2016-30) []
  21. One reviewer pointed out that: “If you’re looking for parallels with authoritarian regimes, there are many. Bitcoin Core’s arguments that there must be only one reference implementation to “preserve stability”; them playing linguistic games to deny the opposition legitimacy, high levels of censorship, etc. There are also parallels on the other side of this, where the “opposition parties,” despite having many legitimate grievances, are all good at protesting but focus on negativity and are not nearly technically competent enough to effectively form their own “government”. This happens in Russia, to some extent Singapore, China (think Hong Kong independence movement), etc. You can probably expand this out into an entire blog post.” []
  22. Bitmain is the largest manufacture of mining equipment, Antminer is the brand of one of its product lines. []
  23. See also Just How Profitable is Bitmain? by Jimmy Song and Former Bitmain Chip Designer Seeks to Revoke Mining Giant’s Patent from CoinDesk []
  24. One reviewer suggested that future researchers and analysts could also look at several other attributes: (1) Basing oneself in a country as an incorporated entity; (2) Having developers heavily concentrated in a country; (3) Heavily marketing in a country, especially if it’s the same country as above; (4) The operation of a chain being controlled by one implementation and one company (as opposed to Ethereum’s geth/Parity/now harmony split []
  25. One reviewer opined that: “Though it is worth noting that their ability to operate the network in a way that gives users permissionlessness was compromised as a result of these side activities. A useful cautionary tale.” []
  26. XRP Ledger Decentralizes Further With Expansion to 55 Validator Nodes from Ripple Insights []
  27. One reviewer commented that: “I think it’s worth making a distinction here between convertibility and central administration of tech. Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Dash, etc are all not immediately convertible; the portion of tokens that actually are convertible is relatively low and I think everyone already agrees that those are regulated.” []
  28. Private correspondence on October 16, 2017. []
  29. For a related discussion see, Are Public Blockchain Systems Unlicensed Money Services Businesses in Disguise? from Ciaran Murray []
  30. One reviewer mentioned that in the event a fork occurs, there could be legal repercussions pursuant to Commodities Exchange Act (namely, section 6(c), rule 180). []
  31. Even some of the proposed “self-governing” blockchains ultimately start out fairly centralized, arguably as administrators and MTBs.  And due to the amount of coins that insiders and creators of these chains have, they could heavily influence the direction of votes (e.g., in a staking model, large coin holders are politically powerful entities who could coordinate and collude to fork in their own interest).  Will they always remain as administrators? []
  32. Many thanks to Ciaran Murray for providing this observation. []
  33. One of the reviewers asked how several current and proposed proof-of-stake coin-based projects would fit in here as potential solutions.  Since most of these are young and/or not even launched, see footnote 31 above.  Some have governance challenges already, see Backroom battle imperils $230 million cryptocurrency venture from Reuters.  Another reviewer opined that: “Systems like Bitshares, EOS, Tezos, et al will in practice be secure primarily precisely because there are large premines held by the foundations and developers themselves. It’s like a kind of ‘centralized administration without looking like centralized administration.'” []

Eight Things Cryptocurrency Enthusiasts Probably Won’t Tell You

[Note: I neither own nor have any trading position on any cryptocurrency.  I was not compensated by any party to write this.  The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.  See Post Oak Labs for more information.]

Alternative title: who will be the Harry Markopolos of cryptocurrencies?

If you don’t know who Harry Markopolos is, quickly google his name and come back to this article.  If you do, and you aren’t completely familiar with the relevance he has to the cryptocurrency world, let’s start with a little history.

Background

Don’t drink the Koolaid

With its passion and perma-excitement, the cryptocurrency community sometimes deludes itself into thinking that it is a self-regulating market that doesn’t need (or isn’t subject to) government intervention to weed out bad actors.1 “Self-regulation,” usually refers to an abstract notion that bad actors will eventually be removed by the action of market forces, invisible hand, etc.

Yet by most measures, many bad actors have not left because there are no real consequences or repercussions for being a bad dude (or dudette).

Simultaneously, despite the hundreds of millions of dollars raised by VCs and over a couple billion dollars raised through ICOs in the past year or so, not one entity has been created by the community with the power or moral authority to rid the space of bad apples and criminals.  Where is the regulatory equivalent of FINRA for cryptocurrencies?2

Part of this is because some elements in the community tacitly enable bad actors. This is done, in some cases, by providing the getaway cars (coin mixers) but also, in other cases, with a wink and a nod as much of the original Bitcoin infrastructure was set-up and co-opted by Bitcoiners themselves, some of whom were bad actors from day one.3

There are many examples, including The DAO.4 But the SEC already did a good dressing down of The DAO, so let’s look at BTC-e.

BTC-e is a major Europe-based exchange that has allegedly laundered billions of USD over the span of the past 6 years.  Its alleged operator, Alexander Vinnik, stands accused of receiving and laundering some of the ill-gotten gains from one of the Mt. Gox hacks (it was hacked many many times) through BTC-e and even Mt. Gox itself.5 BTC-e would later go on to be a favorite place for ransomware authors to liquidate the ransoms of data kidnapping victims.

Who shut down BTC-e?

It wasn’t the enterprising efforts of the cryptocurrency community or its verbose opinion-makers on social media or the “new 1%.”  It was several government law enforcement agencies that coordinated across multiple jurisdictions on limited budgets.6 Yet, like Silk Road, some people in the cryptocurrency community likely knew the operators of the BTC-e and willingly turned a blind eye to serious misconduct which, for so long as it continues, represents a black mark to the entire industry.

In other cases, some entrepreneurs and investors in this space make extraordinary claims without providing extraordinary evidence.  Such as, using cryptocurrency networks are cheaper to send money overseas than Western Union.  No, it probably is not, for reasons outlined by SaveOnSend.7

But those who make these unfounded, feel-good claims are not held accountable or fact-checked by the market because many market participants are solely interested in the value of coins appreciating.  Anything is fair game so as long as prices go up-and-to-the-right, even if it means hiring a troll army or two to influence market sentiment.

And yet in other cases, the focus of several industry trade associations and lobbying groups is to squarely push back against additional regulations and/or enforcement of existing regulations or PR that contradicts their narrative.8

Below are eight suggested areas for further investigation within this active space (there could be more, but let’s start with this small handful):

(1) Bitfinex

Bitfinex is a Hong Kong-based cryptocurrency exchange that has been hacked multiple times.9  Most recently, about 400 days ago, $65 million dollars’ worth of bitcoins were stolen.

Bitfinex eventually painted over these large losses by stealing from its own users, by socializing the deficits that took place in some accounts across nearly all user accounts.10  Bitfinex has – despite promising public audits and explanations of what happened – provided no details about how it was hacked, who hacked it, or to where those funds were drained to.11 It has also self-issued at least two tokens (BFX and RRT) representing their debt and equity to users, listed these tokens on their own exchange and allowed their users to trade them.12

There have been suggestions of impropriety, with its CFO (or CSO?) Phil Potter publicly explaining how they handle being de-banked and re-banked:

“We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you… shift to a new corporate entity, lots of cat and mouse tricks that everyone in Bitcoin industry has to avail themselves of.”

Yet there is little action by the cryptocurrency community to seek answers to the open questions surrounding Bitfinex.  I wrote a detailed post several months ago on it and the only reporters who contacted me for follow-ups were from mainstream press.

There are a lot of reasons why, but one major reason could be that some customers have financially benefited from this lack of market surveillance because relatively little KYC (Know Your Customer) is collected or AML (Anti-Money Laundering) enforced, so some trades and/or taxes are probably unreported.13 This wouldn’t be an isolated incident as the IRS has said less than 1,000 United States persons have been filing taxes related to “virtual currencies” each year between 2013 – 2015.

But that’s not all.

The latest series of drama began earlier this spring: Bitfinex sued Wells Fargo who had been providing correspondent banking access to Bitfinex’s Taiwanese banking partners.  Wells Fargo ended this relationship which consequently tied up tens of millions of USD that was being wired internationally on behalf of Bitfinex’s users.  About a week later Bitfinex dropped the suit and at least one person involved on the compliance side of a large Taiwanese bank was terminated due to the misrepresentation of the Bitfinex account relationship.

This also impacted the price of Tether.

Tether, as its name suggests, is a proprietary cryptocurrency (USDT) that is “always backed by traditional currency held in our reserves.”  It initially used a cryptocurrency platform called Mastercoin (rebranded to Omni) and recently announced an ERC20 token on top of Ethereum.1415

As a corporate entity, Tether’s governance, management, and business are fairly opaque.  No faces or names of employees or personnel can be found on its site.16  Bitfinex was not only one of its first partners but is also a shareholder.  Bitfinex has also created a new ICO trading platform called Ethfinex and just announced that Tether will be partnering with it in some manner.17

Tether as an organization creates coins.  These coins are known as Tethers that trade under the ticker $USDT each of which, as is claimed on their webpage, is directly linked, 1-for-1, with USD and yen equivalents deposited in commercial banks.  But after the Wells Fargo suit was announced, USDT “broke the buck” and traded at $0.92 on the dollar.18   It has fluctuated a great deal during the summer currently trades at $1.00 flat.

Which leads to the question: are the seven banks listed by the recent CPA disclosure aware of what Tether publicly advertises its USDT product as?19

Source: Tether LTD

Who is responsible for issuance, and how if at all can they be redeemed?  Are they truly backed 1:1 or is there some accounting sleight-of-hand taking place behind the scenes?20  Where are those reserves going to be exactly?  Who will have access to them?  Will either Tether (the company) or Bitfinex going to use them to trade?21 These are the types of questions that should be asked and publicly answered.

The only reason anyone is learning anything about the project is because of an anonymous Tweeter, going by the handle @Bitfinexed, who seemingly has nothing better to do than listen to hundreds of hours of audio archives of Bitcoiners openly bragging about their day trading schemes and financial markets acumen (in that order).

Despite myself and others having urged coin media to do so, to my knowledge there have been no serious investigations or transparency as to who owns or runs this organization.  Privately, some reporters have blamed a lack of resources for why they don’t pursue these leads; this is odd given the deluge of articles posted every month on the perpetual block size debate that will likely resolve itself in the passage of time.

The only (superficial) things we know about Tether (formerly Realcoin) is from the few bits of press releases over time.22  Perhaps this is all just a misunderstanding due to miscommunication.23  Who wants to fly to Hong Kong and/or Taiwan to find out more?

(2) Ransomware, Ponzi’s, Zero-fee and AML-less exchanges

Last month a report from Xinhua found that:

China’s two biggest bitcoin exchanges, Huobi and OKCoin, collectively invested around 1 billion yuan ($150 million) of idle client funds into “wealth-management products.”

In other words, the reason these exchanges were able to operate and survive while charging zero-fees is partially offset by these exchanges using customer deposits to invest in other financial products, without disclosing this to customers.24

Based on conversations with investigative reporters and former insiders, it appears that many, if not most, mid-to-large exchanges in China used customer deposits (without disclosing this fact) to purchase other financial products.  It was not just OKCoin and Huobi but also BTCC (formerly BTC China) and others.  This is not a new story (Arthur Hayes first wrote about it in November 2015), but the absence of transparency in how these exchanges and intermediaries are run ties in with what we have seen at BTC-e.  While there were likely a number of legitimate, non-illicit users of BTC-e (like this one Australian guy), the old running joke within the community is that hackers do not attack BTC-e because it was the best place to launder their proceeds.

Many exchanges, especially those in developing countries lacking KYC and AML processes, directly benefited from thefts and scams.  Yet we’ve seen very little condemnation from the main cheerleaders in the community.25

For example, two years ago in South Africa, MMM’s local chapter routed around the regulated exchange, patronizing a new exchange that wouldn’t block their transactions.26  MMM is a Ponzi scheme that has operated off-and-on for more than twenty years in dozens of countries.  In its most current incarnation it has raised and liquidated its earnings via bitcoin.  As a result, the volume on the new exchange in South Africa outpaced the others that remained compliant with AML procedures.  Through coordination with law enforcement it was driven out for some time, but in January of this year, MMM rebooted and it is now reportedly back in South Africa and Nigeria.  The same phenomenon has occurred in multiple other countries including China, wherein, according to inside sources, at least one of the Big 3 exchanges gave MMM representatives the VIP treatment because it boosted their volume.

It was a lack of this market surveillance and customer protections and outright fraud that eventually led to many of the Chinese exchanges being investigated and others raided by local and national regulators in a coordinated effort during early January and February 2017.27

Initially several executives at the non-compliant exchanges told coin media that nothing was happening, that all the rumors of investigation was “FUD” (fear, uncertainty, doubt).  But they were lying.28

Regulators had really sent on-site staff to “spot check” and clean up the domestic KYC issues at exchanges.  They combed through the accounting books, bank accounts, and trading databases, logging the areas of non-compliance and fraud.  This included problems such as allowing wash-trading to occur and unclear margin trading terms and practices.29 Law enforcement showed these problems (in writing) to exchange operators who had to sign and acknowledge guilt: that these issues were their responsibility and that there could be future penalties.

Following the recent government ban on ICO fundraising (described in the next section), all exchanges in China involved in fiat-to-cryptocurrency trades have announced they will close in the coming weeks, including Yunbi, an exchange that was popular with ICO issuers.30  On September 14th, the largest exchange in Shanghai, BTCC (formerly BTC China), announced it would be closing its domestic exchange by the end of the month.31 It is widely believed it was required to do so for a number of compliance violations and for having issued and listed an ICO called ICOCoin.32

Source: Tweet from Linke Yang, co-founder of BTCC

The two other large exchanges, OKCoin and Huobi, both announced on September 15th that they will be winding down their domestic exchange by October 31st.33  Although according to sources, some exchange operators hope this enforcement decision (to close down) made by regulators will quietly be forgotten after the Party Congress ends next month.34

One Plan B is a type of Shanzhai (山寨) hawala which has already sprung up on Alibaba whereby users purchase discrete units of funds as a voucher from foreign exchanges (e.g., $1,000 worth of BTC at a US-based exchange).35  Many exchanges are trying to setup offices and bank accounts nearby in Hong Kong, South Korea, and Japan, however this will not solve their ability to fund RMB-denominated trades.36

It is still unclear at this time what the exact breakdown in areas of non-compliance were largest (or smallest).37  For instance, how common was it to use a Chinese exchange for liquidating ransomware payments?

As mentioned in an earlier post, cryptocurrencies are the preferred payment method for ransomware today because of their inherent characteristics and difficulty to reclaim or extract recourse.  One recent estimate from Cybersecurity Ventures is that “[r]ansomware damage costs will exceed $5 billion in 2017, up more than 15X from 2015.”  The victims span all walks of life, including the most at-risk and those providing essential services to the public (like hospitals).

But if you bring up this direct risk to the community, be prepared to be shunned or given the “whataboutism” excuse: sure bitcoin-denominated payments are popular with ransomware, but whatabout dirty filthy statist fiat and the nuclear wars it funds!

Through the use of data matching and analytics, there are potential solutions to these chain of custody problems outlined later in section 8.

(3) Initial coin offerings (ICOs)

Obligatory South Park reference (Credit: Jake Smith)

Irrespective of where your company is based, the fundraising system in developed – let alone developing countries – is often is a time consuming pain in the rear.  The opportunity costs foregone by the executive team that has to road show is often called a necessary evil.

There has to be a more accessible way, right?  Wouldn’t it just be easier to crowdfund from (retail) investors around the world by selling or exchanging cryptocurrencies directly to them and use this pool of capital to fund future development?

Enter the ICO.

In order to participate in a typical ICO, a user (and/or investor) typically needs to acquire some bitcoin (BTC) or ether (ETH) from a cryptocurrency exchange.  These coins are then sent to a wallet address controlled by the ICO organizer who sometimes converts them into fiat currencies (often without any AML controls in place), and sends the user/investor the ICO coin.38

Often times, ICO organizers will have a private sale prior to the public ICO, this is called a pre-sale or pre-ICO sale.  And investors in these pre-sales often get to acquire tokens at substantial discounts (10 – 60%) than the rate public investors are offered.39.  ICO organizers typically do not disclose what these discounts are and often have no vesting cliffs attached to them either.

The surge in popularity of ICOs as a way to quickly exploit and raise funds (coins) and liquidate them on secondary markets has transitively led to a rise in demand of bitcoin, ether, and several other cryptocurrencies.  Because the supply of most of the cryptocurrencies is perfectly inelastic, any significant increase (or decrease) in demand can only be reflected via volatility in prices.

Hence, ICOs are one of the major contributing factors as to why we have seen record high prices of many different cryptocurrencies that are used as gateway coins into ICOs themselves.

According to one estimate from Coin Schedule, about $2.1 billion has been raised around the world for 140 different ICOs this year.40  My personal view is that based on the research I have done, most ICO projects have intentionally or unintentionally created a security and are trying to sell it to the public without complying with securities laws.41 Depending on the jurisdiction, there may be a small handful of others that possibly-kinda-sorta have created a new coin that complies with existing regs.42  Maybe.

Ignoring the legal implications and where each fits on that spectrum for the moment, many ICOs to-date have pandered to and exploited terms like “financial inclusion” when it best suits them.43  Others pursue the well-worn path of virtue signaling: Bitcoiners condemning the Ethereum community (which itself was crowdfunded as an ICO), because of the popularity in using the Ethereum network for many ICOs… yet not equally condemning illicit fundraising that involves bitcoin or the Bitcoin network or setting up bucket shops such as Sand Hill Exchange (strangely one of its founders who was sued by the SEC now writes at Bloomberg).

The cryptocurrency community as a whole condemned the “Chinese government” for its recent blanket ban on fundraising and secondary market listing of ICOs.44 The People’s Bank of China (PBOC) is one of seven regulators to enforce these regulations yet most of the public antagonism has been channeled at just the PBOC.45

Irrespective of whether you think it was the right or wrong thing to do because you heart blockchains, the PBOC and other regulators had quite valid reasons to do so: some ICO creators and trading platforms were taking funds they received from their ICO and then re-investing those into other ICOs, who in turn invested in other ICOs, and so forth; creating a fund of fund of funds all without disclosing it to the public or original investors.46 ICO Inception (don’t tell Christopher Nolan).

In China and in South Korea, and several other countries including the US, there is a new cottage industry made of up entities called “community managers” (CM) wherein an ICO project hires an external company (a CM) who provides a number of services:

  1. for X amount of BTC the CM will actively solicit and get your coin listed on various exchanges;
  2. the CM takes a sales commission while marketing the coin to the public such that after the ICO occurred, they would take a juicy cut of the proceeds; and several other promotional services.47

The ICO issuers and fundraising/marketing teams usually organize a bunch of ICOs weekly and typically employ a market maker (known as an “MM” in the groups) whose role is to literally pump and dump the coin.  They engage in ‘test pumps’ and ‘shakeouts’ to get rid of the larger ICO investors so they can push the price up on a thin order book by 10x, 20x, or 30x before distributing and pulling support. You can hire the services of one of these traders in many of the cryptocurrency trading chat groups.48

There were even ICO boot camps (训练营) in China (and elsewhere) usually setup with shady figures with prior experience in pyramid schemes.49  Here they coached the average person to launch an ICO on the fly based on the ideas of this leader to people of all demographics including the vulnerable and at-risk.50  Based on investigations which are still ongoing, the fraud and deceit involved was not just one or two isolated incidents, it was rampant.51 Obtaining the training literature that was given to them (e.g., the script with the promises made) would make for a good documentary and/or movie.

Scene from Boiler Room

In other words, the ICO rackets have recreated many aspects of the financial services industry (underwriters, broker/dealers) but without any public disclosures, organizational transparency, investor protections, or financial controls.  Much like boiler rooms of days past.  It is no wonder that with all of this tomfoolery, according to Chainalysis, that at least $225 million worth of ETH has been stolen from ICO-related fundraising activity this past year.52

At its dizzying heights, in China, there were about sixty ICO crowdfunding platforms each launching (or trying to launch) new ICOs on a monthly basis.53  And many of these platforms also ran and operated their own exchanges where insiders were pumping (and dumping) and seeing returns of up to 100x on coins that represented “social experiments to test human stupidity” such as the performance art pictured below.

One recent estimate from Reuters was that in China, “[m]ore than 100,000 investors acquired new cryptocurrencies through 65 ICOs in January-June [2017].”54  It’s still unclear what the final straw was, but the universal rule of don’t-pitch-high-risk-investment-schemes-to-grandmothers-on-fixed-incomes was definitely breached.

As a result, the PBOC and other government entities in China are now disgorging any funds (about $400 million) that ICOs had raised in China.55  This number could be higher or lower depending on how much rehypothecation has taken place (e.g., ICOs investing in ICOs).  All crowdfunding platforms such as ICOAGE and ICO.info have suspended operations and many have shut down their websites.  In addition, several executives from these exchanges have been given a travel ban.56

Cryptocurrency exchanges (the ones that predated the ICO platforms) have to delist ICOs and freeze plans from adding any more at this time.  Multiple ICO promotional events, including those by the Fintech Blockchain Group (a domestic fund that organized, promoted, and invested in ICOs) have been canceled due to the new ban.57  Several well-known promoters have “gone fishing” overseas.  This past week, Li Xiaolai, an early Bitcoin investor and active ICO promoter, has publicly admitted to having taken the ICO mania too far (using a car acceleration example), an admission many link to the timing of this crackdown and ban.58

A real ICO in China: “Performance Art Based on Block Chain Technology” (Source)

For journalists, keep in mind this is (mostly) just one country described above.  It would be a mistake to pin all of the blame on just the ICO operators based in China as similar craziness is happening throughout the rest of the world (observe the self-serving celebrity endorsements).  Be sure to look at not just the executives involved in an ICO but also the advisors, investors, figureheads, and anyone who is considered “serious” lending credibility to dodgy outfits and dragging the average Joe (and Zhou) and his fixed income or meager savings into the game.

There may be a legitimate, legal way of structuring an ICO without running afoul of helpful regulations, but so far those are few and far between.  Similarly, not everyone involved in an ICO is a scammer but it’s more than a few bad apples, more like a bad orchard.  And as shown above with the initial enforcement actions of just one country, short sighted hustling by unsavory get-rich-quick partisans unfortunately might deep-six the opportunities for non-scammy organizations and entrepreneurs to utilize a compliant ICO model in the future.59

(4) VC-backed entities

Theranos, Juicero, and Hampton Creek, meet Coinbase, 21.co, Blockstream, and several others.

Okay, so that may be a little exaggerated.  But still the same, few high-profile Bitcoin companies are publishing daily active or monthly active user numbers for a variety of reasons.

Founded in May 2012, the only known unicorn to-date is Coinbase.  Historically it has kept traction stats close to the chest but we got a small glimpse at what Coinbase’s user base was from an on-going lawsuit with the IRS.  According to one filing, between 2013-2015 (the most recent publicly available data) Coinbase had around 500,000 users, of which approximately 14,355 accounts conducted at least $20,000 in business.60 This is a far cry from the millions of wallets we saw as a vanity statistic prominently displayed on its homepage during that same time period.61

What did most users typically do?  They created an account, bought a little bitcoin, and then hoarded it – very few spent it as if it were actual money which is one of the reasons why they removed a publicly viewable transaction chart over a year ago.62

To be fair, the recent surge in market prices for cryptocurrencies has likely resulted in huge user growth.  In fact, Coinbase’s CEO noted that 40,000 new users signed up on one day this past May.  But some of this is probably attributed to new users using Coinbase as an on-and-off ramp: United States residents acquiring bitcoin and ether on Coinbase and then participating in ICOs elsewhere.63

After more than $120 million in funding, 21.co (formerly 21e6) has not only seen an entire executive team churn, but a huge pivot from building hardware (Bitcoin mining equipment) into software and now into a pay-as-you-go-LinkedIn-but-with-Bitcoin messaging service.  Launched with much fanfare in November 2015, the $400 Amazon-exclusive 21.co Bitcoin Computer was supposed to “return economic power to the individual.”

In reality it was just a USB mining device (a Raspberry Pi cobbled together with an obsolete mining chip) and was about as costly and useful as the Juicero juicing machine.  It was nicknamed the “PiTato” and unit sales were never publicly disclosed.  Its story is not over: in the process of writing this article, 21.co announced it will be launching a “social token” (SOC) by the end of the year.64

Blockstream is the youngest of the trio.  Yet, after three years of existence and having raised at least $76 million, as far as the public can tell, the company has yet to ship a commercial product beyond an off-the-shelf hardware product (Liquid) that generates a little over $1 million in revenue a year.65  It also recently launched a satellite Bitcoin node initiative it borrowed from Jeff Garzik, who conceived it on a budget of almost nothing about three years ago.66

To be fair though, perhaps it does not have KPIs like other tech companies.  For instance, about two and half years ago, one of their largest investors, Reid Hoffman, said Blockstream would “function similarly to the Mozilla Corporation” (the Mozilla Corporation is owned by a nonprofit entity, the Mozilla Foundation).  He likened this investment into “Bitcoin Core” (a term he used six times) as a way of “prioritiz[ing] public good over returns to investors.”  So perhaps expectations of product roadmaps is not applicable.

On the flipside, some entrepreneurs have explained that their preference for total secrecy is not necessary because they are afraid of competition (that is a typical rationale of regular startups), but because they are afraid of regulators via banks.67  For example, a regulator sees a large revenue number, finds out which bank provides a correspondent service and if the startup is fully compliant with AML, CFT, and KYC processes, starts auditing that bank, and banks re-evaluates NPV of working with a startup and potentially drops it.  Until that changes, we will not know volumes for Abra, Rebit, Luno, and others and that is why a year-old claim about 20% market share in the South Korea -> Philippines remittance corridor remains evidence-free.6869

While we would all love to see more data, this is a somewhat believable argument.  A more insightful question might be if/when we get to a point where supporting Bitcoin players becomes enough of real revenue that banks would agree to higher investments and support.  In the meantime, business journalists should drill down into the specifics about how raised money has been spent, is compliance being skirted, customer acquisition costs, customer retention rate, etc.70

(5) The decline of Maximalism

If you were to draw a Venn diagram, where one circle represented neo Luddism and another circle represented Goldbugism, the areas they overlap would be cryptocurrency Maximalism (geocentrism and all).71  This increasingly smaller sect, within the broader cryptocurrency community, believes in a couple of common tenets but most importantly: that only one chain or ledger or coin will rule them all.  This includes the Ethereum Classic (ETC) and Bitcoin Core sects, among others.

They’re a bit like the fundamentalists in that classic Monty Python “splitters” sketch but not nearly as funny.

If you’re looking to dig into defining modern irony, these are definitely the groups to interview.  For instance, on the one hand they want and believe their Chosen One (typically BTC or ETC) should and will consume the purchasing power of all fiat currencies, yet they dislike any competing cryptocurrency: it is us versus them, co-existence is not an option!  The rules of free entry do not apply to their coin as somehow a government-free monopoly will form around their coin and only their coin.  Also, you should buy a lot of their coin, like liquidate your life savings asap and buy it now.

Artist rendering of proto-Bitcoin Maximalism, circa 14th century

This rigidity has diminished over time.

Whereas, three years ago, most active venture capitalists and entrepreneurs involved in this space were antagonistic towards anything but bitcoin, more and more have become less hostile with respect to new and different platforms.

Source: Twitter

For instance, Brian Armstrong (above), the CEO of Coinbase, two and a half years ago, was publicly opposed to supporting development activities towards anything unrelated to Bitcoin.

But as the adoption winds shifted and Ethereum and other platforms began to see growth in their development communities (and coin values), Coinbase and other early bastions of maximalism began to support them as well.

Source: Twitter (1 2)

There will likely be permanent ideological holdouts, but as of this writing I would guesstimate that less than 20% of the bitcoin holders I have interacted with over the past 6-9 months would label themselves maximalists (the remaining would likely self-identify with the “UASF” and “no2x” tags on Twitter).

So interview them and get their oral history before they go extinct!

(6) Market caps

There is very little publicly available analysis of what is happening with Bitcoin transactions (or nearly all cryptocurrencies for that matter): dormant vs. active, customers vs. accounts, transaction types (self-transfers vs. remittances vs. B2B, etc.).

On-chain transaction growth seems to be slowing down on the Bitcoin network and we don’t have good public insights on what is going on: are there are pockets of growth in real adoption or just more wallet shuffling?

In other words, someone should be independently updating “Slicing data” but instead all we pretty much see is memes of Jamie Dimon or animated gifs involving roller coaster prices.72

In the real world, “market cap” is based on a claim on a company’s assets and future cash flows.  Bitcoin (and other cryptocurrencies) has neither — it doesn’t have a “market cap” any more than does the pile of old discarded toys in your garage.

“Market Cap” is a really dumb phrase when applied to the cryptocurrency world; it seems like one of those seemingly straightforward concepts ported to the cryptocurrency world directly from mainstream finance, yet in our context it turns into something misleading and overly simplistic, but many day traders in this space who religiously tweet about price action love to quote.

The cryptocurrency “market cap” metric is naively simplistic: take the total coin supply, and multiply it by the current market price, and voila!  Suddenly Bitcoin is now approaching the market cap of Goldman Sachs!73

Yeah, no.

To begin with, probably around 25% or more of all private keys corresponding to bitcoins (and other cryptocurrencies too) have been permanently lost or destroyed.74  Most of these were from early on, when there was no market price and people deleted their hard drives with batches of 50 coins from early block rewards without backing them up or a second thought.

Extending this analogy, 25% of the shares in Goldman Sachs cannot suddenly become permanently ownerless.  These shares are registered assets, not bearer assets.  Someone identifiable owns them today and even if there is a system crash at the DTCC or some other CSD, shareholders have a system of recourse (i.e., the courts) to have these returned or reissued to them with our without a blockchain.  Thus, anytime you hear about “the market price of Bitcoin has approached $XXX billion!” you should automatically discount it by at least 25%.

Also, while liquidity providers and market makers in Bitcoin have grown and matured (Circle’s OTC desk apparently trades $2 billion per month), this is still a relatively thinly traded market in aggregate.  It is, therefore, unlikely that large trading positions could simultaneously move into and out of billion USD positions each day without significantly moving the market.  A better metric to look at is one that involves real legwork to find: the average daily volume on fee-based, regulated spot exchanges combined with regulated OTC desks.  That number probably exists, but no one quotes it.  Barring this, an interim calculation could be based on “coins that are not lost or destroyed.”

(7) Buy-side analysts and coin media

We finally have some big-name media beginning to dig into the shenanigans in the space.  But organizations like CoinDesk, Coin Telegraph, and others regularly practice a brand of biased reporting which primarily focus on the upside potential of coins and do not provide equal focus on the potential risks.75  In some cases, it could be argued that these organizations act as slightly more respectable conduits for misinformation churned out by interested companies.76

Common misconceptions include continually pushing out stories like the example above, on “market caps” or covering vanity metrics such as growth in wallet numbers (as opposed to daily active users).  It is often the case that writers for these publications are heavily invested in and/or own cryptocurrencies or projects mentioned in their stories without public disclosure.

This is not to say that writers, journalists, and staff at these organizations should not own a cryptocurrency, but they should publicly disclose any trading positions (including ‘hodling’ long) as the sentiment and information within their articles can have a material influence on the market prices of these coins.

For instance, CoinDesk is owned by Digital Currency Group (DCG) who in turn has funded 80-odd companies over the last few years, including about 10 mentioned in this article (such as Coinbase and BTC China).  DCG also is an owner of a broker/dealer called Genesis Trading, an OTC desk which trades multiple cryptocurrencies that DCG and its staff, have publicly acknowledged at having positions in such as ETC, BTC and LTC.77

What are the normal rules around a media company (and its staff) retweeting and promoting cryptocurrencies or ICOs the parent company or its principals has a stake in?

If coin media wants to be taken seriously it will have to take on the best practices and not appear to be a portfolio newsletter: divorce itself of conflicts of interest by removing cross ownership ties and prominently disclose all of the remaining potential conflicts of interest with respect to ownership stakes and coin holdings.  Markets that transmit timely, accurate, and transparent information are better markets and are more likely to grow, see, and support longer-term capital inflows.78

Source: Twitter

Source: Twitter

For example, if Filecoin is a security in the US (which its creators have said it is), and DCG is an equity holder in Filecoin/Protocol Labs (which it is)… and DCG is an owner in CoinDesk, what are the rules for retweeting this ICO above?  There are currently 16 stories in the CoinDesk archive which mention Filecoin, including three that specifically discuss its ICO.  Is this soliciting to the public?79

Similarly, many of the buy-side analysts that were actively publishing analysis this past year didn’t disclose that they had active positions on the cryptocurrencies they covered.  We recently found out that one lost $150,000 in bitcoins because someone hacked his phone.

At cryptocurrency events (and fintech events in general), we frequently hear buzz word bingo including: smart assets, tokens, resilience, pilots, immutability, even in-production developments, but there is often no clear articulation of what are the specific opportunities to save or make money for institutions if they acquire a cryptocurrency or uses its network to handle a large portion of their business.80

This was the core point of a popular SaveOnSend article on remittances from several years ago.  I recommend revisiting that piece as a model for similar in-depth assessments done by people who understand B2B payments, correspondent banking and other part of global transfers.  Obviously this trickles into the other half of this space, the enterprise world which is being designed around specific functional and non-functional requirements, the SLAs, compliance with data privacy laws, etc., but that is a topic for another day.

What about Coin Telegraph?  It is only good for its cartoon images.81

Source: LinkedIn

There are some notable outliers that serve as good role models and exceptions to the existing pattern and who often write good copy.  Examples of which can be found in long end note.82

Obviously the end note below is non-exhaustive nor an endorsement, but someone should try to invite some or all these people above to an event, emceed by Taariq Lewis.  That could be a good one.

(8) Analytics

What about solutions to the problems and opaqueness described throughout this article?

There are just a handful of startups that have been funded to create and use analytics to identify usage and user activity on cryptocurrency networks including: Chainalysis, Blockseer, Elliptic, WizSec, ScoreChain, Skry (acquired by Bloq) – but they are few and far between.83  Part of the reason is because the total addressable market is relatively small; the budgets from compliance departments and law enforcement is now growing but revenue opportunities were initially limited (same struggle that coin media has).  Another is that the analytic entrepreneurs are routinely demonized by the same community that directly benefits from the optics they provide to exchanges in order to maintain their banking partnerships and account access.

Such startups are shunned today, unpopular and viewed as counter to the roots of (pseudo) anonymous cryptocurrencies, however, as regulation seeps into the industry an area that will gain greater attention is identification of usage and user activities.

For instance, four years ago, one article effectively killed a startup called Coin Validation because the community rallied (and still rallies) behind the white flag of anarchy, surrendering to a Luddite ideology instead of supporting commercial businesses that could help Bitcoin and related ideas and technologies comply with legal requirements and earn adoption by mainstream commercial businesses.  For this reason, cryptocurrency fans should be very thankful these analytics companies exist.

Source: Twitter. Explanation: Wanna Cry ransomware money laundering with Bitcoins in action. Graph shows Bitcoin being converted to Monero (XMR) via ShapeShift.io

More of these analytics providers could provide even better optics into the flow of funds giving regulated institutions better handling of the risks such as the money laundering taking place throughout the entire chain of custody.

Without them, several large cryptocurrency exchanges would likely lose their banking partners entirely; this would reduce liquidity of many trading pairs around the world, leading to prices dropping substantially, and the community relying once again on fewer sources of liquidity run out of the brown bags on shady street corners.84

One key slide from Kim Nilsson’s eye-opening presentation: Cracking MtGox

And perhaps there is no better illustration of how these analytic tools can help us understand the fusion of improper (or non-existent) financial controls plus cryptocurrencies: Mt. Gox.  Grab some warm buttery popcorn and be sure to watch Kim Nilsson’s new presentation covering all of the hacks that this infamous Tokyo-based exchange had over its existence.

Journalists, it can be hard to find but the full order book information for many exchanges can be found with enough leg work.   If anyone had the inclination to really want to understand what was going on at the exchange, there are 3rd parties which have a complete record of the order book and trades executed.

Remember, as Kim Nilsson and others have independently discovered, WillyBot turned out to be true.

Final Remarks

The empirical data and stories above do not mean that investors should stop trading all cryptocurrencies or pass on investing in blockchain-related products and services.

To the contrary, the goal of this article is to elevate awareness that this industry lacks even the most basic safeguards and independent voices that would typically act as a counterbalance against bad actors.  In this FOMO atmosphere investors need to be on full alert of the inherent risks of a less than transparent market with less than accurate information from companies and even news specialists.

Cryptocurrencies aren’t inherently good or bad.  In a single block, they can be used as a means to reward an entity for securing transactions and also a payment for holding data hostage.

One former insider at an exchange who reviewed this article summarized it as the following:

The cryptocurrency world is basically rediscovering a vast framework of securities and consumer protection laws that already exist; and now they know why they exist. The cryptocurrency community has created an environment where there are a lot of small users suffering diffuse negative outcomes (e.g., thefts, market losses, the eventual loss on ICO projects). And the enormous gains are extremely concentrated in the hands of a small group of often unaccountable insiders and “founders.” That type of environment, of fraudulent and deceptive outcomes, is exactly what consumer and investor protection laws were created for.

Generally speaking, most participants such as traders with an active heartbeat are making money as the cryptocurrency market goes through its current bull run, so no one has much motive to complain or dig deeper into usage and adoption statistics.  Even those people who were hacked for over $100,000, or even $1 million USD aren’t too upset because they’re making even more than that on quick ICO returns.

We are still at the eff-you-money stage, in which everyone thinks they are Warren Buffett.85  The Madoffs will only be revealed during the next protracted downturn.  So if you’re currently getting your cryptocurrency investment advice from permabull personalities on Youtube, LinkedIn, and Twitter with undisclosed positions and abnormally high like-to-comment ratios, you might eventually be a bag holder.86

Like any industry, there are good and bad people at all of these companies.  I’ve met tons of them at the roughly 100+ events and meetups I have attended over the past 3-4 years and I’d say that many of the people at the organizations above are genuinely good people who tolerate way too much drivel.  I’m not the first person to highlight these issues or potential solutions.  But I’m not a reporter, so I leave you with these leads.

While everyone waits for Harry Markopolos to come in and uncover more details of the messes in the sections above, other ripe areas worth digging into are the dime-a-dozen cryptocurrency-focused funds.

Future posts may look at the uncritical hype in other segments, including the enterprise blockchain world.  What happened after the Great Pivot?

[Note: if you found this research note helpful, be sure to visit Post Oak Labs for more in the future.]

Acknowledgements

To protect the privacy of those who provided feedback, I have only included initials: JL, DH, AL, LL, GW, CP, PD, JR, RB, ES, MW, JK, RS, ZK, DM, SP, YK, RD, CM, BC, DY, JF, CK, VK, CH, HZ, and PB.

End notes

  1. One reviewer commented: “Another meta-topic is the notion of “community,” which is a myth if you ask me.  Why hasn’t the “community” done “X”? Because the word is mostly a marketing fiction.” See also the discussion of the idea that “Code is not law” []
  2. One former regulator mentioned: “The cryptocurrency community needs to police itself better or it risks being policed more severely by unfriendly and unsympathetic regulators.  Self-regulation is what certain hands-off banking supervisors attempted with US banks and other financial institutions 15 years ago and that ended poorly for many parties including those who were not directly responsible for making the poor decisions in the first place.  Even in sports it is understood, with the exception of golf, it doesn’t work. In this Wild West atmosphere where are the sheriffs?” []
  3. Not unique to cryptocurrencies, but by enabling such bad actors, certain platform operators may even increase their short term profit. []
  4. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO []
  5. For an in-depth look at how the various moving pieces of the ecosystem interact, see: The flow of funds on the Bitcoin network in 2015, Cryptocurrency KYSF: Know Your Source of Funds, and Cryptocurrency KYSF: Know Your Source of Funds part 2 []
  6. Bitcoin Exchange Was a Nexus of Crime, Indictment Says from The New York Times []
  7. For an in-depth look at these different costs, it is highly recommended to read this post from Save on Send.  Some are convinced that this is the case because, on a small scale, the illiquidity of the end points serves to finance the operation, i.e. buying BTC with USD then selling BTC for MXN, may allow an apparent savings when compared with traditional remittance service providers.  Also oft-forgotten is the cost of cash-out and distribution of cash at the end point; also KYC / AML / CFT functions are frequently left-off the calculation. []
  8. One reviewer stated that, “Any working groups advising the government on policy are certainly worthy of investigation. Who are these people and what are their potential conflicts of interest?  For starters, in the US look at The Bitcoin Foundation and the Blockchain Alliance.” []
  9. It has a complex corporate structure and is nominally based in Hong Kong, operations and incorporation of subsidiaries are in other jurisdictions including BVI. []
  10. There were exceptions. Some users reported smaller haircuts as they were customers of SynapsePay.  Another user claims to have retained a lawyer and he did not have any haircut.  I independently verified this with an executive at SynapsePay. []
  11. Phil Potter, an executive at Bitfinex, has spoken about the hack on multiple different podcasts including once in detail, but this has since been deleted. []
  12. Bitfinex also recently announced that they will be doing an ICO (called NEC) to capitalize on the current token mania. []
  13. Bitfinex does do KYC and AML when a user withdraws USD and when they receive subpoenas. []
  14. ERC20 tokens are arguably not the same thing as a cryptocurrency, they are more like colored coins. See “Watermarked tokens and pseudonymity on public blockchains” by Tim Swanson. []
  15. Tether brings tokenised USD to Ethereum network from Finextra []
  16. We only know who is involved through various reddit threads wherein users dox and identify themselves as employees and founders. []
  17. Tether brings tokenised USD to Ethereum network from Finextra []
  18. This wouldn’t be the first time that a peg “broke the buck;” money market funds have been propped up by a parent organization in the past. []
  19. Tether Update []
  20. One reviewer noted that: “Theoretically they could maintain a fractional reserve to service redemptions although this isn’t a problem per se, provided that it is disclosed.  By saying you have “cash” backing, you could have some really bizarre stuff, like USD loans to unsavory entities.  But maybe they do not do this either.”  []
  21. Source for some of these questions. []
  22. One reviewer commented: “Tether offers users a way to move USD from one country to another, much like Western Union. So Tether should be obligated to run KYC/AML checks on not only those who are depositing US$ funds to get new Tethers (as it currently does), but also everyone who uses second-hand Tethers (it doesn’t). Now if Tether was like bitcoin, and had no physical address, it would be complicated for the authorities to enforce this requirement. But Tether is anchored to the brick & mortar banking system, so law enforcement should be easier, will it?” []
  23. One reviewer commented: “Let’s assume the worst for Tether, what does that mean?  If it were to collapse would it harm the small investors or the whales? A few exchanges that allow Tether also allow you to hold your deposits in USD, aside from the ability to send USDT between exchanges, which arguably could actually be a net positive because it allows clients to net positions between exchanges potentially reducing the overall credit in the system. But this goes back to one of their continual issues: lack of communicating and transparency for how the whole money issuance and transmission process works.” []
  24. Note: they did have withdrawal fees which likely generated revenue from arbitrageurs.  Several of the larger exchanges also raised venture capital and setup (and still run) order books outside of China with other business lines which may help offset some costs. []
  25. Described in further detail, “Comments on the COIN ETF (SR-BatsBZX-2016-30)” by Tim Swanson []
  26. See the section “Stopping Predators” within A Kimberley Process for Cryptocurrencies []
  27. China Central Bank Said to Call Bitcoin Exchanges for Talks from Bloomberg []
  28. In addition to lying about being investigated, they were lying about the true volume on their exchanges.  When the zero-fee domestic exchanges were required to add a minimum fee (to discourage wash trading), volume plummeted. []
  29. Central bank warns Bitcoin exchanges over margin trading, money laundering from Xinhua and Chinese bitcoin exchanges resume withdrawals after freeze from Reuters []
  30. Li Xiaolai: Yunbi Is Winding Down In 3 Months from 8BTC []
  31. BTCC to Cease China Trading as Media Warns Closures Could Continue from CoinDesk []
  32. Sources: CNLedger and ICOcoinOfficial []
  33. Huobi, OKCoin to Stop Yuan-to-Bitcoin Trading By October’s End from CoinDesk []
  34. The 19th National Congress of the Communist Party of China starts on October 18th.  All exchanges involving fiat-to-cryptocurrency trades will be closed. Both OKCoin and Huobi have overseas platforms (with independent order books and bank accounts independent of the domestic Chinese exchanges).  These have cryptocurrency-to-cryptocurrency trading and will remain operating.  Currently, users of the domestic fiat-to-currency platform can move their coins to the overseas platforms. []
  35. Something similar was done with voucher codes sold on Taobao in 2014 as well.  See After Crackdown, A New Bitcoin King Emerges in China from Wired []
  36. At one time or another, the spot price for each of the three large Chinese exchanges was a constituent part of several different pricing indices including the Winkdex, TradeBlock XBX index, and others such as OKEX (OKEX is an international subsidiary of OKCoin who replaced these exchanges on its own index).  This is potentially problematic because, as I detailed in my COIN ETF report, these exchanges were prone to mismanagement, crashes, and ultimately quick closure.  Going forward, what other sources of reliable pricing data can ETFs use that also accurately reflect market prices? []
  37. One insider in China noted that: “These exchanges had multiple chances to clean up their act and even self-regulate but because of the competitive pressures in China towards zero-fees, no one wanted to be left behind.  It was a type of collective action failure, so the government finally had to come in and clean up the mess because no one else would.” []
  38. These are mostly ERC20 tokens, not coins. []
  39. One reviewer mentioned: “Depending on the jurisdiction, these pre-arranged discounts might be deemed as structured products.” []
  40. Is There a Cryptocurrency Bubble? Just Ask Doge. from The New York Times []
  41. “How the ICO, OCO, and ECO ecosystem works at a high level” by Tim Swanson and “Comments on the COIN ETF (SR-BatsBZX-2016-30)” by Tim Swanson []
  42. Note: volumes can and will be written on this section alone.  If not on the legalities but on the ‘pump and dumps’ that have taken place. []
  43. One former regulator suggested: “Ignoring for the moment the overarching legal implications of what they did, because these activities took place on blockchains, future researchers should be able to eventually provide very accurate estimates the costs and losses to investors who put their trust and money into deceptive ICO organizers who were unscrupulous.” []
  44. Some argue this ban may just be temporary and cite a CCTV 13 interview with Hu Bing with the Institute of Finance and Banking who says the government will issue licenses in the future. []
  45. As of this writing there are many rumors circulating regarding how these new guidelines could impact cryptocurrency mining operators based in China.  One recent story from the Wall Street Journal articulates a rumor that miners will need to also shut down operations because they are trading cryptocurrencies without a license.  More existentially, if all fiat-to-cryptocurrency exchanges shut down domestically, miners would need a new method to liquidate their coins because they need to pay utilities in RMB (e.g., it doesn’t help to have a JPY or KRW-denominated bank account because Chinese utilities require being paid in RMB). []
  46. This same phenomenon occurred several years ago with “wealth management products” doing the same re-investment into other WMPs; revisiting the P2P Lending scams that came to light in the past two years as well is helpful.  See China’s ICO ban makes more sense in light of its history with fintech by Nik Milanovic []
  47. One insider noted that: “A New Zealand based person (and company) is one of the main men in all of this. I’ve encountered him on a number of occasions. He’s a complete fraudster. For example he told a group I am in that MGO would be listed on Poloniex within weeks of launch. Months later he hasn’t even got it on Bittrex. He’s now buying up lots of it wholesale from disenchanted investors who’ve taken a massive hit recently and will inevitably be sitting on a pile when the intentionally delayed launch and pump happens.” []
  48. Whalepool and The Coin Farm on Telegram are both examples of this type of coordination. []
  49. ICO被定性为涉嫌非法集资,想一夜暴富的“韭菜”们醒醒吧 from Huxiu []
  50. Based on translated stories from after the investigations as well as conversations with observers of these training sessions. []
  51. According to a source close to the investigations, law enforcement are using WeChat correspondence to chronicle the intentional cases of fraud and deceit.  In some cases, ICO organizers would run a public WeChat group, providing investors with false information and then use a private WeChat group with a smaller circle of insiders to “laugh at the stupidity” of these investors and coordinate dumps.  As a result, ICO organizers are leaving WeChat to use platforms like Telegram.  See China’s WeChat crackdown drives bitcoin enthusiasts to Telegram from South China Morning Post []
  52. That is the best case scenario because it assumes that there were not additional losses to fraud and mismanagement, which we know there has been. []
  53. China bans companies from raising money through ICOs, asks local regulators to inspect 60 major platforms from CNBC []
  54. Cryptocurrency chaos as China cracks down on ICOs from Reuters []
  55. Ibid []
  56. China shuts down Bitcoin industry; bans executives from leaving the country from Australian Financial Review []
  57. Another ICO Conference Cancels in Wake of China Ban from CoinDesk []
  58. He had to refund the ICOs he promote (plus with an added premium). []
  59. One reviewer commented: “The inevitability of regulations coming down the pipeline is a certainty (not just “blanket bans”).  Whether it’s 1 month or 1 year, regulations or enforcement of existing regulations will be coming in. A lot of these participants in the market seem to want to get in before regulations come into effect but in many jurisdictions they can still be liable for past actions (depending on the statute of limitations). That’s part of what I think is driving this tremendous amount of ICOs right now.” []
  60. 14,000 Coinbase Customers Could Be Affected by IRS Tax Summons from CoinDesk and Legitimate? IRS Defends Coinbase Customer Investigation in Court Filing from CoinDesk []
  61. At the time of this writing Coinbase has raised more than $225 million.  By January 2015, Coinbase had in aggregate raised just north of $106 million.  The ongoing lawsuit with the IRS states that there were 500,000 users by the end of the 2013 – 2015 period, of which 14,355 had done $20,000 or more of trading.   Future research can look into Coinbase’s customer acquisition costs over time (e.g., switching costs) versus the same costs traditional banks have.  Note: this also does not include the user numbers at GDAX, their platform marketed to professional traders. []
  62. According to an alleged insider (which may be untrue), some Coinbase users allegedly didn’t even know they may have been entitled to things like CLAM coins.  Maybe they weren’t. Tangentially, the continual high percentage of hoarding done by cryptocurrency enthusiasts suggests that this still remains a virtual commodity and continues to fail the medium of exchange test needed to be defined as a transactional currency. []
  63. At this time, it is unclear what the breakdown of these new (or old) users are acquiring cryptocurrencies on Coinbase and then participating in ICOs.  As a company, Coinbase has been publicly supportive of the ICO zeitgeist and hosted multiple meetups where ICO creators presented.  Earlier this year it co-sponsored a publication discussing the securities law framework of tokens.  Based on several interviews for this article, users of both the Coinbase wallet and its subsidiary, GDAX, currently can send bitcoins and ether from their user accounts to participate in ICOs.  It is unclear how often this is screened and/or prevented.  For perspective, a former employee was allegedly fired for sending bitcoins from his Coinbase account to gamble on Chinese web casinos.  Assuming this is true (and it may not be) then Coinbase could have the knowledge and/or ability to prevent users from participating in ICOs or other off-platform activity that violates its terms of service. []
  64. Another tech company that supposedly struggled raising funding and later issued its own coin (through an ICO) is Kik, through its Kin Foundation. []
  65. If this post is true (and it may not be), a dozen or so exchanges paying between $7,000 – $10,000 a month is roughly $1.4 million a year.  The SaaS monthly estimate has been independently validated from conversations with a couple participating exchanges. []
  66. One reviewer recommended: “If I were a journalist, I would more closely scrutinize the social media habits of the executives (and their surrogates) on these teams so the ecosystem can ascertain the relationship between the amount of time senior employees spend opining on Twitter, Reddit, mailing lists, IRC, WhatsApp, Slack, WeChat, Telegram, BitcoinTalk, GitHub, Discord, etc., and the number of hours in a working day, or number of products shipped.  Other social media analytics ideas for journalists: look at the Twitter tribes of Bitcoin (and other cryptocurrencies). Who is aligned with whom and pushing what agendas? Who are the trolls associated with those different tribes?  How many suspect accounts are associated with each group? For example, how many accounts that were just created, or never tweeted before, or only have followers from within their own tribes?” []
  67. One reviewer argued that, “It could also because they want to protect their valuations and because they are privately held companies that may be legally forbidden to divulge this information.” []
  68. This article in Quartz did not provide actual data or evidence that these remittance numbers were real, no one fact-checked it and instead, reproduced similar headlines for several months. []
  69. According to a recent interview with Forbes, after nearly two years of operations Abra only has 73 users per day. They are currently raising another round at this time; it is believed that this will help fund their compliance team and for licenses which they currently lack. []
  70. One reviewer said, “A counterpoint could be: VC returns are even sharper than standard Pareto; 1:9 or even 1:99 as opposed to 2:8. Startups are hard – most fail – why should cryptocurrency world be any different?” []
  71. One reviewer suggested that: “In the future, you should explain why Maximalism is a type of Authoritarianism and is not to be conflated with cypherpunks.” []
  72.  In mid-September, vocal promoters and owners of cryptocurrencies such as Bitcoin collectively spent thousands of hours yelling on social media and conducting letter writing campaigns all to channel their anger towards comments made by Jamie Dimon.  A couple worthwhile followups include: JPMorgan handles bitcoin-related trades for clients despite CEO warning from Reuters and  MUFG CEO on Dimon Remarks: Bank Cryptocurrencies Have ‘Nothing to Do With Bitcoin’ from CoinDesk []
  73. Bitcoin was only used as an example, nearly all cryptocurrencies listed on CoinMarketCap have the same issue in terms of calculating a real “market cap.” []
  74. Learning from Bitcoin’s past to improve its future from Tim Swanson []
  75. The theatrics around “BearWhale”-like events still persists.  For example, one current conspiracy theory is that: “the Chinese government is shutting down Bitcoin miners to mine bitcoins themselves.”  This is most likely false and the proposed solution is to “use satellites.”  But in talking with professional miners in China, many of them have contracts directly with State Grid, so they could lose access to energy in a worst-case scenario and satellites would not be of any use (assuming any of those rumors are true). []
  76. To be fair, this is not unique to the cryptocurrency space. []
  77. Genesis Trading is also the marketing and distribution agent for Bitcoin Investment Trust and Ethereum Classic Investment Trust, two regulated financial products.  DCG also is an owner in Grayscale Investments which is the legal sponsor both of these Trusts []
  78. Research: How Investors’ Reading Habits Influence Stock Prices by Anastassia Fedyk and Effects of Misinformation on the Stock Return: A Case Study by Ahsan et al. []
  79. Some employees in coin media have used social media channels to discuss various cryptocurrencies including ICOs over the past year.  How many of these were sponsored or received a cut of the coins to do so? []
  80. A great paper on this topic is The Path of the Blockchain Lexicon (and the Law) by Angela Walch []
  81. Nearly all of the coin media site allow ICO advertisements as well.  What are the terms and benefits that these media sites receive in exchange for displaying these advertisements and advertorials? []
  82. Note: this is not an exhaustive list and I’ll likely be flamed for not including X but including Y.  Journalists who write good original stories include: Nathaniel Popper, Matt Levine, and Matt Leising.  There have been several good op-eds written by lawyers which have appeared on CoinDesk, including Joshua Stark, Jared Marx, Brian Klein, Benjamin Sauter and David McGill.  Some other original, constructive views that should be highlighted include Stephen Palley, Ryan Straus, George Fogg, Miles Cowan, Patrick Murck, Amor Sexton, Houman Shadab, Angela Walch, Scott Farrell, Claire Warren, Simon Gilchrist, and two perpetual curmudgeons: Izabella Kaminska and Preston Byrne (very prickly at times!).  Non-lawyer thought-leaders, technical, and subject matter experts with bonafides worth interviewing include: Adam Krellenstein, Alex Batlin, Alex Waters, Andrew Miller, Andy Geyl, Antony Lewis, Ari Juels, Arvind Narayanan, Christian Decker, Christopher Allen, Ciaran Murray, Colin Platt, Danny Yang, Dave Hudson, David Andolfatto, David Schwartz, Dominic Williams, Duncan Wong, Elaine Shi, Emily Rutland, Emin Gun Sirer, Ernie Teo, Fabio Federici, Flavien Charlon, Gideon Greenspan, Ian Grigg, Ittay Eyal, Jackson Palmer, Jae Kwon, James Hazard, James Smith, Jana Moser, Jeff Garzik, JP Koning, John Whelan, Jonathan Levin, Jonathan Rouach, Jorge Stolfi, Juan Benet, Juan Llanos, Kieren James-Lubin, Lee Braine, Leemon Baird, Makoto Takemiya, Mark Williams, Matthew Green, Martin Walker, Massimo Morini, Michael Gronager, Mike Hearn, Muneeb Ali, Piotr Piasecki, Richard Brown, Robert Sams, Ron Hose, Sarah Meiklejohn, Stefan Thomas, Stephen Lane-Smith, Vitalik Buterin, Vlad Zamfir, Yakov Kofner, Zaki Manian, Zennon Kapron, and Zooko Wilcox-O’Hearn, as well as dozens of others from several different financial institutions and enterprises too long to list.  I also think that Michael del Castillo, Ian Allison, Simon Taylor, Jon Southurst, and Arthur Falls try to do an honest job reporting too.  Epicenter TV is arguably the best podcast in this space. []
  83. For an example, see Cracking Mt. Gox by WizSec []
  84. Chainalysis has a partnership with Circle which in turn enabled Circle to open up an account with Barclays.  Two years ago, an alleged business plan for Chainalysis was leaked online and unsurprisingly, some in the community were up in arms that this small company provided these forensic services. []
  85. Partially inspired by this tweet. []
  86. Click farms are being used by various ICO and Bitcoin-related online personalities to boost their perceived importance. []

Which regulators have publicly commented on Initial Coin Offerings?

Below are some of the stated positions of several different regulators around the world regarding ICOs.  In chronological order:

    • Brazil’s equivalent of the SEC, the Comissão de Valores Mobiliários (CVM), published (July 13th) initial legislation instruction (Instrução CVM No. 588) regulating crowdfunding via ICOs: (Portuguese announcement)
    • The United States SEC published on July 25th on ICOs: (Report on investigation) (Investor bulletin) (Investor alert)
    • Monetary Authority of Singapore published its views on August 1st on ICOs: (Clarification statement) (Consumer advisory)
    • Canadian Securities Administrators (CSA), including the Ontario Securities Commission, published its views on August 24th on ICOs: (Staff Notice) (Announcement)
    • Israel Securities Authority announced on August 30th that it is forming a committee to look at ICOs: (Hebrew announcement) (English)
    • The Financial Supervisory Commission (FSC) in South Korea announced on September 3rd that it held a joint task force meeting to strengthen regulations around digital currency trading, including fundraising with ICOs: (BusinessKorea)
    • Central Bank of Russia issued a public statement on September 4th that included its views on ICOs: (Russian announcement) (English)
    • The People’s Bank of China, along with 6 other Chinese government bodies including the national securities regulator (CSRC), publicly banned ICO fundraising in China on September 4th: (CN announcement) (English) (Bloomberg) (Reuters)
    • SFC in Hong Kong announced its views on ICOs on September 5th: (Announcement)
    • The UK Financial Conduct Authority (FCA) announced that it was keeping a close eye on ICOs on September 6th: (FT)
    • The Securities Commission (SC) of Malaysia issued a press release cautioning investors in ICOs on September 7th: (DNA)
    • The Dubai Financial Services Authority (DFSA) warned investors that ICOs were risky on September 13th: (Statement)
    • The Securities and Exchange Commission in Thailand issued some statements regarding ICOs on September 14th: (Comments)
    • Gibraltar Financial Services Commission (GFSC) issued an official statement regarding ICOs on September 22nd: (Statement)
    • North American Securities Administrators Association (NASAA) issued its annual paper and warned of risks around cryptocurrencies and ICOs on September 26th: (Press release)
    • Macau Monetary Authority (MMA) announced that banks cannot engage with ICOs and cryptocurrencies either “directly or indirectly” on September 27th: (Statement)
    • The Australian Securities and Investments Commission (ASIC) released formal guidance and comments about ICOs on September 28th: (Information Sheet)
    • The Financial Services Commission in South Korea said all kinds of initial coin offerings (ICO) will be banned as trading of virtual currencies needs to be tightly controlled and monitored on September 29th: (Reuters) (Yonhap)
    • The Financial Market Supervisory Authority (FINMA) in Switzerland announced it is investigating ICO procedures and issued formal guidance on September 29th: (Press Release)
    • SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds on September 29th: (Press release)
    • Abu Dhabi’s Global Market’s Financial Services Regulatory Authority (FSRA) released guidelines on ICOs on October 9th: (Guidelines)
    • The Central Bank of Lithuania announced its position and guidelines regarding ICOs on October 11th: (Press release)
    • The US Commodity Futures Trading Commission (CFTC), through its internal division, LabCFTC, released a primer on cryptocurrencies including ICOs on October 17th: (Press release)
    • The Financial Markets Authority (FMA) released commentaries on cryptocurrencies and ICOs on October 25th: (Press release) (Commentary)
    • Japan’s Financial Services Agency (FSA) issued a short statement warning users and business operators about the risks of ICOs on October 27th: (Statement)
    • The European Securities and Markets Authority (ESMA) issued two public statements on ICOs: one on risks and the other on rules applicable to firms involved in ICOs on November 13, 2017: (Press Release)

What do they all say?  A friend who is an attorney said it concisely: when you sell securities, you have to comply with securities laws.

If you plan to do an ICO or some kind of token sale, be sure to speak with more than one lawyer or law firm to get a legal opinion about what it is you are actually selling (or not).

And if you’re interested, below is an interview of Nick Morgan.  He is an attorney who previously was part of the SEC’s enforcement team.  He discusses The DAO, securities regulations, and the current ICO frenzy.

Bonus:

  • ECB’s Draghi rejects Estonia’s virtual currency idea – Reuters
  • Initial Coin Offerings: Know Before You Invest – FINRA