Prior to eight years ago I did not intend to read and/or review blockchain-related books. See the full list here.
The first one I published covered The Age of Cryptocurrency, a book I thought was so bad that it immediately needed a second edition.1 And no one would believe me if I simply tweeted that.
So I manually typed up all of the passages I thought were inaccurate and boy what a chore. To save time I should have just gotten the Kindle version, will try to do so going forward.
The second book reviewed, Digital Gold, is a solid book even though its review is longer than both Blockchain Revolution and The Business Blockchain, neither of which were good.
It will sound strange but I think the critique of Cryptoassets itself mostly aged well (spoiler alert: it was not a good book) but that the lead author – Chris Burniske – is someone who I think has turned the lemon into lemonade. Can’t say that I agree with everything he opines on today, but of all the “bad books,” he seems to have had the most positive growth as a commentator/investor. I probably just jinxed everyone by saying that.
The Truth Machine is about as bad as its predecessor: The Age of Cryptocurrency.
The Cryptopians was a pleasant surprise and contained virtually no errors which is accomplishment due to its length and a testament to Shin’s effort to independently fact-check the manuscript.
The Billionaire’s Folly was a fun breeze written by one of the few people that I met at pre-Covid events who didn’t immediately come across as a scammer.
This summer, after I published the review for Popping the Crypto Bubble, I spoke with one of the co-organizers (“Bob”) of The Financial Times sponsored anti-blockchain event. Even though Diehl – one of the co-authors of the book – was a speaker at the event, Bob said he still hadn’t read Diehl’s book but stated that my review was outrageously long. I responded: if you had read the book you would have seen it was filled with errors every other page.2
And last but certainly not least is Number Go Up, another pleasant surprise. It was an informative page turner, or as I call it, a palate cleanser after having read a pretty bad take from some anti-coiners – Easy Money – just a couple weeks earlier.
Obviously these are my opinions, however I try to back up each counterclaim/argument with a link or reference. So readers can fact-check my fact-checking.
What are the numbers thus far?
Below is each title listed in chronological order of review with the paperback/hardback page length in parenthesis followed by how long my review was.
Age of Cryptocurrency (368 pgs) – 23100 words in the review
Digital Gold (435 pgs) – 7500
Blockchain Revolution (368 pgs) – 7100
The Business Blockchain (393 pgs) – 5800
Cryptoassets (368 pgs) – 39900
The Truth Machine (320 pgs) – 27700
The Cryptopians (496 pgs) – 9000
The Billionaire’s Folly (264 pgs) – 500
Popping the Crypto Bubble (308 pgs) – 46900
Easy Money (304 pgs) – 42100
Number Go Up (444 pgs) – 21000
What does this look like?
In general, the longer the book, the better it is. But the longer the book review, the worse the book was. In fact, 5-out-5 worst books I have reviewed all exceeded 23,000 words. Coincidence, I think not. That was not intentional on my part, rather, it illustrates just how many mistakes those authors made. In fact, if anything, the most recent reviews have been atypically longer due to wanting to include longer passages from the book so the reader can have more context and not just rely on a pithy snippet.
Not too dissimilar from the Anna Karenina principle, the worst books (above) flopped in different ways.3 For instance, (9) and (10) were more ideologically driven then empirical driven; making claims without sources went downhill fast. (5) Used poor analogies (such as the adoption of Twitter) to compare Bitcoin’s adoption rate. (1) and (6) were written by the same authors but Casey’s jump from topic-to-topic without firm conclusions – in both – comes across like Ian Bremmer.
With apologies to Tolstoy above, one common overlap: most of these lemons were written by people with a vested interested in pushing the narratives across the finished line. For instance both (5) and (10) were written by guys who later disclosed their bags; one of them had his phone hacked and lost money and told the NYT, the other took out a $250,000 short on coins and lost money and told The Guardian.
In contrast, the top four books I have done a review, as of this writing, all had a few things in common: a single author, which reduced the need for reconciling differing tones and voices. It probably helped that three out of four were already journalists.
These were largely non-ideological explorations of a cast of characters – and subject matter experts – central to a given coin ecosystem. Digital Gold focused on the early years of Bitcoin; The Cryptopians and The Billionaire’s Folly described the Ethereum world; and Number Go Up primarily looked into Tether and all of the things it touched. All four were written for a mainstream audience yet didn’t treat the audience like unsophisticated rubes.
Are you an aspiring writer looking to fill a void left in the book marketplace?4
I think there are at least a few topics that still haven’t gotten much attention:
Non-hagiographic, non-shilling exploration of the world of proof-of-work mining. The market needs an author willing to visit these facilities and not play footsy with NDAs like the Easy Money authors did. Currently we’re left with an emboldened industry lobby and a seemingly out-to-lunch WWF.
A dressing down of the top 20 ICOs from the 2016-2018 boom and bust cycle. Where are they now, what have they delivered, what funds do they still have, did they spread the wealth and/or enrich themselves, how often do their (co)founders engage on social media now versus then? How decentralized is the base layer infrastructure? What law firms did they use to get deferred prosecution agreements from law enforcement? How many former prosecutors joined defense counsel in obtaining them? Which of the ICO boom/bust influencers received a proffer (“queen for a day”) from prosecutors? What PR firms did they hire back then and currently work with today? If it worked for them, why not tell the world how to do it?
An exploration into the partisan world of the Horseshoe Theory. Recall that some Bitcoin maximalists and anti-coiners often use the same a priori cudgel to brow beat their audience. Who is funding each of their narratives? For instance, in the U.S., how much money (from “institutes”) has been spent on lobbying state and federal government agencies on behalf of miners? How many independently wealthy anti-coiners fund opposing efforts? What PR firms do either group(s) currently work with today?
Coin lobbyists. There are probably more coin lobbying organizations than actual users on most layer 1 blockchains. Yet there is little insight into the level of coin donations they receive and where it goes. Are those who received BTC and ETH years ago sitting on large treasuries? Apart from playing with their Tungsten cubes in their large homes, what else do the lobbyists spend their gains on? How many expats are funding them?
Romance-scams. One of the strengths of Number Go Up was the author flew out to Cambodia to see first hand what “pig butchering” scams looked like (trigger alert: they are compounds guarded by guys with guns and filled with slaves who sext message you). What other romance scams rely on cryptocurrency-specific infrastructure?
Or maybe those are just the topics I think are interesting, that the marketplace lacks, but there is little demand for it. Maybe I’m, as that anonymous coward on Twitter recently said, an imbecile.
I dunno though. An investigative journalist flying out to Tbilisi to follow-up on this mining story could win a prize that rhymes with mulitzer. Give it a thought.
One of my former colleagues at R3 regularly sent me the XKCD comic, Duty Calls, whenever I started fact-checking. [↩]
As an aside, it is a little odd that few people have reviewed the book since Diehl’s views go largely uncontested by any side of the aisle. For example, a portion of the ending was cribbed by the anti-Web3 letter (he also co-authored) word-for-word, two weeks after the book was published. That is astroturfing. [↩]
And if you’re counting at home, that leaves two books that reside in purgatory. Let’s let them simmer as they are closer to bad than good. [↩]
Even writers who have formed their priors should spend time in the trenches to look at existing product-market fit and infrastructure-market fit. It can be boring and often relies on speaking to people working at FMIs. [↩]
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.
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:
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.
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
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.
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: tellingThe 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
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.
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.
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.
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:
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):
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.
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.”
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.”
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.
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.
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:
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
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?”
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.
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.
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?
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.
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:
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.
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:
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:
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.
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:
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.
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.
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:
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.
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?
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.
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 bookrelied entirely on second-hand information, its references should have been significantly longer. [↩]
Unless your name ends in Ellison or Singh or Wang, best to sit this one out. [↩]
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. [↩]
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. [↩]
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. [↩]
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? [↩]
This quote actually first appeared in Faux’s BusinessWeek piece on Tether. [↩]
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. [↩]
Both IBM and Microsoft have been actively involved in blockchain-related projects for years, but to my knowledge, nothing directly intersecting with an ICO. [↩]
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. [↩]
I.e., someone inside was helping them navigate the controls and approval process. [↩]
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. [↩]
I previously mentioned his real name back in February 2022 in section 5. [↩]
He sometimes calls himself Andrew. Are there more aliases? [↩]
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. [↩]
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. [↩]
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. [↩]
Earlier this year, Wiredpublished an interesting article on this topic, but the individual named by others does not appear in it. Maybe I was provided incorrect information? [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
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? [↩]
Probably not a huge surprise since both Carter and Srinivasan have publicly stated they are betting against the U.S. [↩]
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. [↩]
The Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction. [↩]
In 2017-2019, Project Jasper, World Wire, and the USC consortium, all had to tackle these thorny issues. [↩]
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.” [↩]
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. [↩]
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 Hanyeczdid – 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:
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?
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.
(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?
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.
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.”
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
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:
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:
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.
“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:
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.
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.
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.
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.
I have not had a chance to read Michael Lewis’s new book, but according to his 60 Minutesinterview, Lewis still has some affinity for SBF.
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:
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:
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.
On p. 66 they write:
But that does not mean returning to the gold standard would be any better.
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:
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 officialadvisors 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 Postarticle 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.
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.
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.
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 notallow 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 coupleof 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?
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.
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.
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:
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.
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.
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.
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 theywould 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:
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:
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, Protospublished 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:
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):
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:
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 ideawhat 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:
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:
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?
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:
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.
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:
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
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 , 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 CoinDeskstory 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.
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!
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.
This is a copy/paste from the SEC website.
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.
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?
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.
In Number Go Up, Zeke Faux also writes his book in first-person, but doesn’t make the story about him. [↩]
For example, were the authors aware that one of the events McKenzie attended was a front for BSV? [↩]
By the end of Q3 2023, tokenized U.S. Treasuries hovered around $665 million. [↩]
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. [↩]
Fun fact: in January 2018 I spoke with one of the producers of that John Oliver episode and provided some fact-checking and clarification. [↩]
CMC also has a little 2m+ figure in the top left, that clearly is larger than the figure the authors use. [↩]
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. [↩]
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. [↩]
Speaking of which, does everyone remember when Anthony Pompliano stopped using “The Virus is Spreading” as his catch phrase circa March 2020? [↩]
Jeff Garzik got on an airplane in order to receive one of the first Avalon ASIC miners. [↩]
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. [↩]
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 [↩]
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. [↩]
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. [↩]
Marc Hochstein unfortunately normalized its mainstream usage. [↩]
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. [↩]
We moved three times in the span of ten months, all with a one-year old in tow. [↩]
The Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction. [↩]
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. [↩]
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). [↩]
I wrote long newsletters outlining the antics and shadiness of parts of the coin industry. [↩]
This past summer, McKenzie trolled the birdapp by saying “have fun staying poor” as well. [↩]
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.” [↩]
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. [↩]
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. [↩]
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? [↩]
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 Forbesreported 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. [↩]
I previously mentioned his real name back in February 2022 in section 5. [↩]
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. [↩]
“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. [↩]
It seems USDT-related development is about the only thing active on Liquid at the moment. [↩]
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. [↩]
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.) [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
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 McKenziefalsely 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. [↩]
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. [↩]
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. [↩]
Coincidentally, in the process of writing this review the DTCC acquired Securency, to help with their tokenization efforts. [↩]
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? [↩]
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. [↩]
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. [↩]
Seems like this purity contest over who is the most OG “critic” is stolen valor. And the supposed award nominations? Jumping the shark. [↩]
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. [↩]
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. [↩]
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. [↩]
Not an endorsement but there are attempts to build self-custodial exchanges in the DeFi world, such as C3. [↩]
Look no further than the Board of Directors at registered clearing agents to illustrate possible synergies and conflicts. [↩]
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. [↩]
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. [↩]
Allen also made a number of incorrect claims regarding Ethereum’s “Merge” last year. [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
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. [↩]
Zelle is operated by Early Warning who partnered with The Clearing House a couple of years ago. [↩]
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.” [↩]
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. [↩]
The case has not gone to trial yet, but Saylor did lose a bid to quickly quash the suit. [↩]
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. [↩]
Following the Hamas terrorist attacks, Stark dinged his credibility in a pair of sensationalistictweets. 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. [↩]
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. [↩]
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.” [↩]
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. [↩]
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? [↩]
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. [↩]
Will certain crypto reporters from TheFinancial Times be held to the same standard they often criticize coin reporters of not reaching? [↩]
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. [↩]
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? [↩]
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. [↩]
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? [↩]
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? [↩]
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.
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:
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.
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 widelydocumented 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.
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.
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
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
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
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.
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.
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
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.
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:
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.”
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
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.
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. 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.
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.
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.
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 spotexchanges 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.
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.
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:
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:
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.
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.
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?
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.
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.
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.
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:
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 prioriargument 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. Cryptocurr