Book review: The Truth Machine

A friend of mine sent me a copy of The Truth Machine which was published in February 2018.  Its co-authors are Michael Casey and Paul Vigna, who also previously co-wrote The Age of Cryptocurrency a few years ago.

I had a chance to read it and like my other reviews, underlined a number of passages that could be enhanced, modified, or even removed in future editions.

Overall: I do not recommend the first edition. For comparison, here are several other reviews.

This book seemed overly political with an Occupy Wall Street tone that doesn’t mesh well with what at times is a highly technical topic.

I think a fundamental challenge for anyone trying to write book-length content on this topic is that as of 2018, there really aren’t many measurable ‘success’ stories – aside from speculation and illicit activities – so you end up having to fill a couple hundred pages based on hypotheticals that you (as an author) probably don’t have the best optics in.

Also, I am a villain in the book. Can’t wait?  Scroll down to Chapter 6 and also view these specific tweets for what that means.

Note: all transcription errors are my own. See my other book reviews on this topic.

Preface

on p. x they write:

The second impact is the book you are reading. In The Age of Cryptocurrency, we focused primarily on a single application of Bitcoin’s core technology, on its potential to upend currency and payments.

Would encourage readers to peruse my previous review of their previous book. I don’t think they made the case, empirically, that Bitcoin will upend either currency or payments. Bitcoin itself will likely exist in some form or fashion, but “upending” seems like a stretch at this time.

On p. xi they write in a footnote:

We mostly avoid the construct of “blockchain” as a non-countable noun.

This is good. And they were consistent throughout the book too.

Introduction

They spent several pages discussing ways to use a blockchain for humanitarian purposes (and later have a whole chapter on it), however, it is unclear why a blockchain alone is the solution when there are likely other additional ways to help refugees.

For instance, on p. 3 they write:

Just as the blockchain-distributed ledger is used to assure bitcoin users that others aren’t “double-spending” their currency holdings – in other words, to prevent what would otherwise be rampant digital counterfeiting – the Azraq blockchain pilot ensures that people aren’t double-spending their food entitlements.

But why can’t these food entitlements be digitized and use something like SNAP cards? Sure you can technically use a blockchain to track this kind of thing, but you could also use existing on-premise or cloud solutions too, right?  Can centralized or non-blockchain solutions fundamentally not provide an adequate solution?

On p. 4 they write:

Under this new pilot, all that’s needed to institute a payment with a food merchant is a scan of a refugee’s iris. In effect, the eye becomes a kind of digital wallet, obviating the need for cash, vouchers, debit cards, or smartphones, which reduces the danger of theft (You may have some privacy concerns related to that iris scan – we’ll get to that below.) For the WFP, making these transfers digital results in millions of dollars in saved fees as they cut out middlemen such as money transmitter and the bankers that formerly processed the overall payments system.

Get used to the “bankers” comments because this book is filled with a dozen of them. Intermediaries such as MSBs and banks do take cuts, however they don’t really dive into the fee structure. This is important because lots of “cryptocurrency”-focused startups have tried to use cryptocurrencies to supposedly disrupt remittances and most basically failed because there are a lot of unseen costs that aren’t taken into account for.

Another unseen cost that this book really didn’t dive into was: the fee to miners that users must pay to get included into a block.  They mention it in passing but typically hand-waved it saying something like Lightning would lower those costs.  That’s not really a good line of reasoning at this stage in development, but we’ll look at it again later.

On p. 6 they write:

That’s an especially appealing idea for many underdeveloped countries as it would enable their economies to function more like those of developed countries – low-income homeowners could get mortgages, for example; street vendors could get insurance. It could give billions of people their first opening into the economic opportunities that the rest of us take for granted.

That sounds amazing, who wouldn’t want that?  Unfortunately this is a pretty superficial bit of speculation.  For example, how do street vendors get insurance just because of the invention of a blockchain?  That is never answered in the book.

On p. 7 they write:

The problem is that these fee-charging institutions, which act as gatekeepers, dictating who can and cannot engage in commercial interactions, add cost and friction to our economic activities.

Sure, this is true and there are efforts to reduce and remove this intermediation. The book also ignores that every cryptocurrency right now also charges some kind of fee to miners and/or stakers. And with nearly all coins, in order to obtain it, a user typically must buy it through a trusted third party (an exchange) who will also charge a markup fee… often simultaneously requiring you to go through some kind of KYC / AML process (or at least connect to a bank that does).

Thus if fee-charging gatekeepers are considered a problem in the traditional world, perhaps this can be modified in the next edition because these type of gatekeepers exist throughout the coin world too.

On p. 8 they list a bunch of use-cases, some of which they go into additional detail later in the book. But even then the details are pretty vague and superficial, recommend updating this in the next edition with more concrete examples.

On p. 9 they write:

Silicon Valley’s anti-establishment coders hadn’t reckoned with the challenge of trust and how society traditionally turns to centralized institutions to deal with that.

There may have been a time in which the majority of coders in the Bay area were “anti-establishment” but from the nearly 5 years of living out here, I don’t think that is necessarily the case across the board. Recommend providing a citation for that in the future.

On p. 10 they write:

R3 CEV, a New York-based technology developer, for one, raised $107 million from more than a hundred of the world’s biggest financial institutions and tech companies to develop a proprietary distributed ledger technology. Inspired by blockchains but eschewing that lable, R3’s Corda platform is built to comply with banks’ business and regulatory models while streamlining trillions of dollars in daily interbank securities transfers.

This whole paragraph should be updated (later in Chapter 6 as well):

  • The Series A funding included over 40 investors, not 100+.
  • The ‘community’ version of Corda is open sourced and available on github, so anyone can download, use, and modify it. There is also a Corda Enterprise version that requires a license and is proprietary.
  • While initially eschewing the term “blockchain,” Corda is now actively marketed as a “blockchain” and even uses the handle @cordablockchain on Twitter, on podcast advertisements, and in public presentations.1
  • I am unaware of any current publicly announced project that involves streamlining trillions of dollars in daily interbank securities transfers. Citation?

On p. 10 they briefly mention the Hyperledger Project.  Recommend tweaking it because of its own evolution over the years.

For example, here is my early contribution: what is the difference between Hyperledger and Hyperledger.

On p. 11 they write:

While it’s quite possible that many ICOs will fall afoul of securities regulations and that a bursting of this bubble will burn innocent investors, there’s something refreshingly democratic about this boom. Hordes of retail investors are entering into early stage investment rounds typically reserved for venture capitalists and other professional.

This paragraph aged horribly since the book was published in February.

All of the signs were there: we knew even last year that many, if not all, ICOs involved overpromising features and not disclosing much of anything to investors. As a result, virtually every week and month in 2018 we have learned just how much fraud and outright scams took place under the guise and pretext of the “democratization of fund raising.”

For instance, one study published this summer found that about 80% of the ICOs in 2017 were “identified scams.” Another study from EY found that about 1/3 of all ICOs in 2017 have lost “substantially all value” and most trade below their listing price.

Future versions of this book should remove this paragraph and also look into where all of that money went, especially since there wasn’t – arguably – a single cryptocurrency application with a real user base that arose from that funding method (yet).

On p. 11 they write:

Not to be outdone, Bitcoin, the grandaddy of the cryptocurrency world, has continued to reveal strengths — and this has been reflected in its price.

This is an asinine metric. How exactly does price reflect strength? They never really explain that yet repeat roughly the same type of explanation in other places in this book.

Interestingly, both bitcoin’s price and on-chain transaction volume have dramatically fallen since this book was first published. Does that mean that Bitcoin weakened somehow?

On p. 12 they write:

Such results give credence to crypto-asset analysts Chris Burniske and Jack Tatar’s description of bitcoin as “the most exciting alternative investment of the 21st century.”

Firstly, the Burniske and Tatar book was poorly written and wrong in many places: see my review

Secondly, bitcoin is a volatile investment that is arguably driven by a Keynesian beauty contest, not for the reasons that either book describes (e.g., not because of remittance activity).

On p. 12 they write:

The blockchain achieves this with a special algorithm embedded into a common piece of software run by all the computers in the network.

To be clear: neither PoW nor PoS are consensus protocols which is implied elsewhere on page 12.

On p. 12 they write:

Once new ledger entries are introduced, special cryptographic protections make it virtually impossible to go back and change them.

This is not really true. For coins like Bitcoin, it is proof-of-work that makes it resource intensive to do a block reorganization. Given enough hashrate, participants can and do fork the network. We have seen it occur many times this year alone. There is no cryptography in Bitcoin or Ethereum that prevents this reorg from happening because PoW is separate from block validation.2

On p. 13 they write:

Essentially, it should let people share more. And with the positive, multiplier effects that this kind of open sharing has on networks of economic activity, more engagement should in turn create more business opportunities.

These statement should be backed up with supporting evidence in the next edition because as it stands right now, this sounds more like a long-term goal or vision statement than something that currently exists today in the cryptocurrency world.

On p. 13 they mention “disintermediation” but throughout the book, many of the cryptocurrency-related companies they explore are new intermediaries. This is not a consistent narrative.

On p. 14 they write:

If I can trust another person’s claims – about their educational credentials, for example, or their assets, or their professional reputation – because they’ve been objectively verified by a decentralized system, then I can go into direct business with them.

This is a non sequitur. Garbage in, garbage out (GIGO) — in fact, the authors make that point later on in the book in Chapter 7.

On p. 15 they write:

Blockchains are a social technology, a new blueprint for how to govern communities, whether we’re talking about frightened refugees in a desolate Jordanian output or an interbank market in which the world’s biggest financial institutions exchange trillions of dollars daily.

This is vague and lacks nuance because there is no consensus on what a blockchain is today. Many different organizations and companies define it differently (see the Corda example above).

Either way, what does it mean to call a blockchain “social technology”? Databases are also being used by refugee camp organizers and financial infrastructure providers… are databases “social technology” too?

Chapter 1

On p. 17 they write:

Its blockchain promised a new way around processes that had become at best controlled by middlemen who insisted on taking their cut of every transaction, and at worst the cause of some man-made economic disasters.

This is true and problematic and unfortunately Bitcoin itself doesn’t solve that because it also has middlemen that take a cut of every transaction in the form of a fee to miners. Future editions should add more nuance such as the “moral hazard” of bailing out SIFIs and TBTF and separate that from payment processors… which technically speaking is what most cryptocurrencies strive to be (a network to pay unidentified participants).

On p. 18 they write:

Problems arise when communities view them with absolute faith, especially when the ledger is under control of self-interested actors who can manipulate them. This is what happened in 2008 when insufficient scrutiny of Lehman Brother’s and other’s actions left society exposed and contributed to the financial crisis.

This seems to be a bit revisionist history. This seems to conflate two separate things: the type of assets that Lehman owned and stated on its books… and the integrity of the ledgers themselves. Are the authors claiming that Lehman Brother’s ledgers were being maliciously modified and manipulated? If so, what citation do they have?

Also a couple pages ago, the authors wrote that blockchains were social technology… but we know that from Deadcoins.com that they can die and anything relying on them can be impacted.

Either way, in this chapter the authors don’t really explain how something Bitcoin itself would have prevented Lehman’s collapse. See also my new article on this topic.

On p. 19 they write:

A decentralized network of computers, one that no single entity controlled, would thus supplant the banks and other centralized ledger-keepers that Nakamoto identified as “trusted third parties.”

Fun fact: the word “ledger” does not appear in the Bitcoin white paper or other initial emails or posts by Nakamoto.

Secondly, perhaps an industry wide or commonly used blockchain of some kind does eventually displace and remove the role some banks have in maintaining certain ledgers, but their statement, as it is currently worded, seems a lot like of speculation (projection?).

We know this because throughout the book it is pretty clear they do not like banks, and that is fine, but future editions need to back up these types of opinions with evidence that banks are no longer maintaining a specific ledger because of a blockchain.

On p. 20 they write:

With Bitcoin’s network of independent computers verifying everything collectively, transactions could now be instituted peer to peer, that is, from person to person. That’s a big change from our convoluted credit and debit card payment systems, for example, which routes transactions through a long sequence of intermediaries – at least two banks, one or two payment processors, a card network manager (such as Visa or Mastercard), and a variety of other institutions, depending on where the transaction take place.

If we look back too 2009, this is factually correct of Bitcoin at a high level.3 The nuance that is missing is that today in 2018, the majority of bitcoin transactions route through a third party, some kind of intermediary like a deposit-taking exchange or custodial wallet.4 There are still folks who prefer to use Bitcoin as a P2P network, but according to Chainalysis, last year more than 80% of transactions went through a third party.5

On p. 20 they write:

Whereas you might think that money is being instantly transferred when you swipe your card at a clothing store, in reality the whole process takes several days for the funds to make all those hops and finally settle in the storeowner’s account, a delay that create risks and costs. With Bitcoin, the idea is that your transaction should take only ten to sixty minutes to fully clear (not withstanding some current capacity bottlenecks that Bitcoin developers are working tor resolve). You don’t have to rely on all those separate, trusted third parties to process it on your behalf.

This is mostly incorrect and there is also a false comparison.

In the first sentence they gloss over how credit card payment systems confirm and approve transactions in a matter of seconds.6 Instead they focus on settlement finality: when the actual cash is delivered to the merchant… which can take up to 30+ days depending on the system and jurisdiction.

The second half they glowingly say how much faster bitcoin is… but all they do is describe the “seen” activity with a cryptocurrency: the “six block” confirmations everyone is advised to wait before transferring coins again. This part does not mention that there is no settlement finality in Bitcoin, at most you get probabilistic finality (because there is always chance there may be a fork / reorg).

In addition, with cryptocurrencies like Bitcoin you are only transferring the coins. The cash leg on either side of the transaction still must transfer through the same intermediated system they describe above. We will discuss this further below when discussing remittances.

On p. 20 they write:

It does so in a way that makes it virtually impossible for anyone to change the historical record once it has been accepted.

For proof-of-work chains this is untrue in theory and empirically. In the next edition this should be modified to “resource intensive” or “economically expensive.”

On p. 20 they write:

The result is something remarkable: a record-keeping method that brings us to a commonly accepted version of the truth that’s more reliable than any truth we’ve ever seen. We’re calling the blockchain a Truth Machine, and its applications go far beyond just money.

It is not a “truth machine” because garbage in, garbage out.

In addition, while they do discuss some historical stone tablets, they don’t really provide a metric for how quantitatively more (or less) precise a blockchain is versus other methods of recording and witnessing information. Might be worth adding a comparison table in the next edition.

On p. 21 they write:

A lion of Wall Street, the firm was revealed to be little more than a debt-ravaged shell kept alive only by shady accounting – in other words, the bank was manipulating its ledgers. Sometimes, that manipulation involved moving debt off the books come reporting season. Other times, it involved assigning arbitrarily high values to “hard-to-value” assets – when the great selloff came, the shocking reality hit home: the assets had no value.

The crash of 2008 revealed most of what we know about Wall Street’s confidence game at that time. It entailed a vast manipulation of ledgers.

This was going well until that last sentence. Blockchains do not solve the garbage in, garbage out problem. If the CFO or accountant or book keeper or internal counsel puts numbers into blocks that do not accurately reflect or represent what the “real value” actually is, blockchains do not fix that. Bitcoin does not fix that.

Inappropriate oversight, rubber stamp valuations, inaccurate risk models… these are off-chain issues that afflicted Lehman and other banks. Note: they continue making this connection on pages 24, 28, and elsewhere but again, they do not detail how a blockchain of some kind would have explicitly prevented the collapse of Lehman other other investment banks.

See also: Systemically important cryptocurrency networks

On p. 22 they write:

The real problem was never really about liquidity, or a breakdown of the market. It was a failure of trust. When that trust was broken, the impact on society – including on our political culture – was devastating.

How about all of the above? Pinning it on just one thing seems a little dismissive of the multitude of other interconnecting problems / culprits.

On p. 22 they write:

By various measures, the U.S. economy has recovered – at the time of writing, unemployment was near record lows and the Dow Jones Industrial Average was at record highs. But those gains are not evenly distributed; wage growth at the top is six times what it is for those in the middle, and even more compared to those at the bottom.

If the goal of the authors is to rectify wealth inequalities then there are probably better comparisons than using cryptocurrencies.

Why? Because – while it is hard to full quantify, it appears that on cursory examination most (if not all) cryptocurrencies including Bitcoin have Gini coefficients that trends towards 1 (perfectly unequal).

On p. 23 they write about disinformation in the US and elsewhere.  And discuss how trust is a “vital social resource” and then mention hyperinflation in Venezuela. These are all worthy topics to discuss, but it is not really clear how any of these real or perceived problems are somehow solved because of a blockchain, especially when Venezuela is used as the example. The next edition should make this more clear.

On p. 29 they write:

On October 31, 2008, whil the world was drowning in the financial crisis, a little-noticed “white paper” was released by somebody using the pen name “Satoshi Nakamoto,” and describing something called “Bitcoin,” an electronic version of cash that didn’t need state backing. At the heart of Nakamoto’s electronic cash was a public ledger that could be viewed by anybody but was virtually impossible to alter.

One pedantic note: it wasn’t broadly marketed beyond a niche mailing list on purpose… a future edition might want to change ” a little-noticed” because it doesn’t seem like the goal by Nakamoto was to get Techcrunch or Slashdot to cover it (even though eventually they both did).

Also, it is not virtually impossible to alter.7 As shown by links above, proof-of-work networks can and do get forked which may include a block reorganization. There is nothing that technically prevents this from happening.

See also: Interview with Ray Dillinger

On p. 31 they write:

Szabo, Grigg, and others pioneered an approach with the potential to create a record of history that cannot be changed – a record that someone like Madoff, or Lehman’s bankers, could not have meddled with.

I still think that the authors are being a little too liberal with what a blockchain can do. What Madoff did and Lehman did were different from one another too.

Either way, a blockchain would not have prevented data – representing fraudulent claims – from being inserted into blocks. Theoretically a blockchain may have allowed auditors to detect tampering of blocks, but if the information in the blocks are “garbage” then it is kind of besides the point.

On p. 32 they write:

Consider that Bitcoin is now the most powerful computing network in the world, one whose combined “hashing” rate as of August 2017 enabled all its computers to collectively pore through 7 million trillion different number guesses per second.

[…]

Let the record show that period of time is 36,264 trillion trillion times longer than the current best-estimate age of the universe. Bitcoin’s cryptography is pretty secure.

This should be scrapped for several reasons.

The authors conflate the cryptography used by digital signatures with generating proofs-of-work.8 There are not the same thing. Digital signatures are considered “immutable” for the reasons they describe in the second part, not because of the hashes that are generated in the first.9

Another problem is that the activity in the first part — the hash generation process — is not an apples-to-apples comparison with other general computing efforts. Bitcoin mining is a narrowly specific activity and consequently ASICs have been built and deployed to generate these hashes. The single-use machines used to generate these hashes cannot even verify transactions or construct blocks. In contrast, CPUs and GPUs can process a much wider selection of general purpose applications… including serialize transactions and produce blocks.

For example: it would be like comparing a Falcon 9 rocket launch vehicle with a Toyota Prius. Sure they are nominally both “modes of transportation” but built for entirely different purposes and uses.

An additional point is that again, proof-of-work chains can and have been forked over the years. Bitcoin is not special or unique or impervious to forks either (here’s a history of the times Bitcoin has forked). And there are other ways to create forks, beyond the singular Maginot Line attack that the authors describe on this page.10

On p. 33 they write:

Whether the solution requires these extreme privacy measures or not, the broad model of a new ledger system that we laid out above – distributed, cryptographically secure, public yet private – may be just what’s needed to restore people’s confidence in society’s record-keeping systems. And to encourage people to re-engage in economic exchange and risk-taking.

This comes across as speculation and projecting. We will see later that the authors have a dim view of anything that is not a public blockchain. Why is this specific layout the best?

Either way, future versions should include a citation for how people’s confidence level increase because of the use of some kind of blockchain. At this time, I am unaware of any such survey.

On p. 34 they quote Tomicah Tilleman from the Global Blockchain Business Council, a lobbying organization:

Blockchain has the potential to push back against that erosion and it has the potential to create a new dynamic in which everyone can come to agree on a core set of facts but also ensure the privacy of facts that should not be in the public domain.

This seems like a non sequitur. How does a blockchain itself push back on anything directly? Just replace the word “blockchain” with “database” and see if it makes sense.

Furthermore, as we have empirically observed, there are fractures and special interest groups within each of these little coin ecosystems. Each has their own desired roadmap and in some cases, they cannot agree with one another about facts such as the impact larger block sizes may have on node operators.

On p. 35 they write:

If it can foster consensus in the way it has been shown to with Bitcon, it’s best understood as a Truth Machine.

This is a non sequitur. Just because Nakamoto consensus exists does not mean it that blockchains are machines of truth. They can replicate falsehoods if the blocks are filled with the incorrect information.

Chapter 2

On p. 38 they write:

Consider how Facebook’s secret algorithm choose the news to suit your ideological bent, creating echo chambers of like-minded angry or delighted readers who are ripe to consume and share dubious information that confirms their pre-existing political biases.

There are some really valid points in this first part of the chapter. As it relates to cryptocurrencies, a second edition should also include the astroturfing and censoring of alternative views that take place on cryptocurency-related subreddits which in turn prevent people from learning about alternative implementations.

We saw this front-and-center in 2015 with the block size debate in which moderators of /r/bitcoin (specifically, theymos and BashCo) banned any discussion from one camp, those that wanted to discuss ways of increasing the block size via a hardfork (e.g., Bitcoin XT, Bitcoin Classic).

This wasn’t the first or last time that cryptocurrency-related topics on social media have resulted in the creation of echo chambers.

On p. 43 they write:

The potential power of this concept starts with the example of Bitcoin. Even though that particular blockchain may not provide the ultimate solution in this use case, it’s worth recalling that without any of the classic, centrally deployed cybersecurity tools such as firewalls, and with a tempting “bounty” of more than $160 billion in market cap value at the time we went to print, Bitcoin’s core ledger has thus far proven to be unhackable.

There is a lot to unpack here but I think a future edition should explain in more detail how Bitcoin is a type of cybersecurity tool. Do they mean that because the information is replicated to thousands of nodes around the world, it is more resilient or redundant?

Either way, saying that “Bitcoin’s core ledger” is “unhackable” is a trope that should be removed from the next edition as well.

Why? Because when speaking about BTC or BCH or any variant of Bitcoin, there is only one “ledger” per chain… the word ‘core’ is superfluous. And as described above, the word “unhackable” should be changed to “resource intensive to fork” or something along those lines. “Unhackable” is anarchronistic because what the authors are probably trying to describe is malicious network partitions… and not something from a ’90s film like The Net.

Continuing on p. 43 they write:

Based on the ledger’s own standards for integrity, Bitcoin’s nine-year experience of survival provides pretty solid proof of the resiliency of its core mechanism for providing decentralized trust between users. It suggest that one of the most important non-currency applications of Bitcoin’s blockchain could be security itself.

This last sentence makes no sense and they do not expand on it in the book. What is the security they are talking about? And how is that particularly helpful to “non-currency applications of Bitcoin’s blockchain”? Do they mean piggy-backing like colored coins try to do?

On p. 44 they write:

The public ledger contains no identifying information about the system’s users. Even more important, no one owns or controls that ledger.

Well technically speaking, miners via mining pools control the chain. They can and do upgrade / downgrade / sidegrade the software. And they can (and do) fork and reorg a chain. Is that defined as “control”? Unclear but we’ll probably see some court cases if real large loses take place due to forks.

On p. 44 they write:

As such there is no central vector of attack.

In theory, yes. In practice though, many chains are highly centralized: both in terms of block creation and in terms of development. Thus in theory it is possible to compromise and successfully “attack” a blockchain under the right circumstances. Could be worth rephrasing this in the next edition.

On p. 44 they write:

As we’ll discuss further in the book, there are varying degrees of security in different blockchain designs, including those known as “private” or “permissioned” blockchains, which rely on central authorities to approve participants. In contrast, Bitcoin is based on a decentralized model that eschews approvals and instead banks on the participants caring enough about their money in the system to protect it.

This is a bit of a strawman because there are different types of “permissioned” blockchains designed for different purposes… they’re not all alike. In general, the main commonality is that the validators are known via a legal identity. How these networks are setup or run does not necessarily need to rely on a centralized authority, that would be a single point of trust (and failure). But we’ll discuss this later below.

On p. 44 they write:

On stage at the time, Adam Ludwin, the CEO of blockchain / distributed ledger services company Chain Inc., took advantage of the results to call out Wall Street firms for failing to see how this technology offers a different paradigm. Ludwin, whose clients include household names like Visa and Nasdaq, said he could understand why people saw a continued market for cybersecurity services, since his audience was full of people paid to worry about data breaches constantly. But their answers suggested they didn’t understand that the blockchain offered a solution. Unlike other system-design software, for which cybersecurity is an add-on, this technology “incorporates security by design,” he said.

It is unclear from the comments above exactly how a blockchain solves problems in the world of cybersecurity. Maybe it does. If so, then it should be explored in more detail than what is provided in this area of the book.

As an aside, I’m not sure how credible Ludwin’s comments on this matter are because of the multiple pivots that his companies have done over the past five years.11

On p. 45 they write:

A more radical solution is to embrace open, “permissionless” blockchains like Bitcoin and Ethereum, where there’s no central authority keeping track of who’s using the network.

This is very much a prescriptive pitch and not a descriptive analysis. Recommend changing some of the language in the next edition. Also, they should define what “open” means because there basically every mining pool doxxes themselves.

Furthermore, some exchanges that attempt to enforce their terms-of-service around KYC / AML / CTF do try to keep track of who is doing what on the network via tools from Chainalysis, Blockseer, Elliptic and others. Violating the ToS may result in account closures. Thus, ironically, the largest “permissioned” platforms are actually those on the edges of all cryptocurrencies.

See: What is Permissioned-on-Permissionless

On p. 45 they write:

It’s not about building a firewall up around a centralized pool of valuable data controlled by a trusted third party; rather the focus is on pushing control over information out to the edges of the network, to the people themselves, and on limiting the amount of identifying information that’s communicated publicly. Importantly, it’s also about making it prohibitively expensive for someone to try to steal valuable information.

This sounds all well and good, definitely noble goals. However in the cryptocurrency world, many exchanges and custodial wallets have been compromised and the victims have had very little recourse. Despite the fact that everyone is continually told not to store their private keys (coins) with an intermediary, Chainalysis found that in 2017 more than 80% of all transactions involved a third-party service.

On p. 45 they write:

Bitcoin’s core ledger has never been successfully attacked.

They should define what they mean by “attacked” because it has forked a number of times in its history. And a huge civil war took place resulting in multiple groups waging off-chain social media campaigns to promote their positions, resulting in one discrete group divorcing and another discrete group trying to prevent them from divorcing. Since there is only de facto and not de jure governance, who attacked who? Who were the victims?

On p. 45 they write:

Now, it will undoubtedly be a major challenge to get the institutions that until now have been entrusted with securing our data systems to let go and defer security to some decentralized network in which there is no identifiable authority to sue if something goes wrong. But doing so might just be the most important step they can take to improve data security. It will require them to think about security not as a function of superior encryption and other external protections, but in terms of economics, of making attacks so expensive that they’re not worth the effort.

This seems a bit repetitive with the previous couple of page, recommend slimming this down in the next edition. Also, there are several class action lawsuits underway (e.g., Ripple, Tezos) which do in fact attempt to identify specific individuals and corporations as being “authorities.” The Nano lawsuit also attempted to sue “core developers.”

On p. 46 they write:

A hacker could go after each device, try to steal the private key that’s used to initiate transactions on the decentralized network, and, if they’re lucky, get away with a few thousand dollars in bitcoin. But it’s far less lucrative and far more time-consuming than going after the rich target of a central server.

The ironic part of this is that generally speaking, the private keys controlling millions of bitcoins are being housed in trusted third parties / intermediaries right now. In some cases these are stored on a centralized server. In other cases, the cold wallet managed by hosting providers such as Xapo (which is rumored to secure $10 billion of bitcoin) does geographically split the keys apart into bunkers. Yet at some point those handling the mutli-sig do come together in order to move the coins to a hot wallet.12

On p. 47 they write:

It seems clear to us that the digital economy would benefit greatly from embracing the distributed trust architecture allowed by blockchains – whether it’s simply the data backups that a distributed system offers, or the more radical of an open system that’s protected by a high cost-to-payout ratio.

What does this mean? Are they saying to add proof-of-work to all types of distributed systems? It is only useful in the Bitcoin context in order to make it expensive to Sybil attack the network… because participants were originally unknown. Does that same problem exist in other environments that they are thinking of? More clarity should be added in the next edition.

On p. 48 they write:

The idea, one that’s also being pursued in different forms by startups such as Gem of Los Angeles and Blockchain Health of San Francisco, is that the patient has control over who sees their records.

This is one of the difficulties in writing a long-form book on this general topic right now: projects and companies frequently pivot.

For instance, a couple months after the book was published, Gem announced its “Universal Token Wallet,” a product which currently dominates its front page and social media accounts of the company. There have been no health care-related announcements from the company in over a year.

Similarly, Blockchain Health no longer exists. Its CEO left and joined Chia as a co-founder and the COO has joined the Neighborly team.

On p. 50 they write:

It was a jury-rigged solution that meant that the banking system, the centralized ledger-keeping solution with which society had solved the double-spend problem for five hundred years, would be awkwardly bolted onto the ostensibly decentralized Internet as its core trust infrastructure.

I think there are some legitimate complaints to made towards how online commerce evolved and currently exists but this seems a tad petty. As backwards as financial institutions are (rightly and wrongly) portrayed, it’s not like their decision makers sat around in the early ’90s trying to figure out how to make integrating the Web an awkward process.

On p. 50 they write:

Under this model, the banks charged merchants an interchange fee of around 3 percent to cover their anti-fraud costs, adding a hidden tax to the digital economy we all pay in the form of higher prices.

Again, like their statement above: there are some very legitimate gripes to be had regarding the existing oligopolistic payment systems, but this specific gripe is kind of petty.

Fraud exists and as a result someone has to pay for it. In the cryptocurrency world, there is no recourse because it is caveat emptor. In the world of courts and legal recourse, fees are levied to cover customer service including fraud and insurance. It may be possible to build a payment system in which there is legal recourse and simultaneously no oligopolistic rent seeking but this is not explored in the book. Also, for some reason the fee to miners is not brought up in this section, yet it is a real fee users must pay… yet they do not receive customer service as part of it.

Lastly, the Federal Reserve (and other central banks) monitor historical interchange fees. Not all users are charged the ~3% as mentioned in the book.

For instance (see below): Average Debit Card Interchange Fee by Payment Card Network

Source: Statista

On pages 52 and 53 they write uncritically about Marc Andresseen and VCs who have invested in Bitcoin and cryptocurrencies.

a16z, the venture firm co-founded by Andresseen, arguably has a few areas that may be conflicts-of-interest with the various coin-related projects it has invested in and/or promoted the past several years (e.g., investing in coins which are listed on an exchange they also are an investor and board member of such as 0x). Those ties are not scrutinized in a chapter that attempts to create a black and white narrative: that the legacy players are centralized rent-seekers and the VCs are not. When we know empirically that some VCs, including a16z, have invested in what they believe will become monopolies of some kind.

On page 54 and 55 they write about “Code is not law,” a topic that I have likewise publicly presented on.

Specifically they state:

One risk is that regulators, confused by all these outside-the-box concepts, will overreact to some bad news – potentially triggered by large-scale investors losses if and when the ICO bubble bursts and exposes a host of scams. The fear is that a new set of draconian catchall measures would suck the life out of innovation in this space or drive it offshore or underground. To be sure, institutions like the Washington-based Coin Center and the Digital Chamber of Commerce are doing their best to keep officials aware of the importance of keeping their respective jurisdictions competitive in what is now a global race to lead the world in financial technology.

This is word for word what coin lobbyists have been pitching to policy makers around the world for years. Both Coin Center and Digital Chamber of Commerce lobby on behalf of their sponsors and donors to prevent certain oversight on the cryptocurrency market.13 An entire book could probably be written about how specific people within coin lobbying organizations have attempted to white wash and spin the narrative around illicit usage, using carefully worded talking points. And they have been effective because these authors do not question the motivations and agenda these special interest groups have.

Either way, Bitcoin and many other cryptocurrencies were born in the “underground” and even “offshore.” It is unclear what the authors are trying to excuse because if anything, regulators and law enforcement have arguably been very light handed in the US and most regions abroad.

If anything, once a foreign registered ICO or coin is created, often the parent company and/or foundation opens an office to recruit developers in San Francisco, New York, and other US cities. I know this because all the multiple “blockchain” events I have attended overseas the past two years in which organizers explain their strategy. The next edition of this book could explore this phenomenon.

On p. 57 they write:

By The DAO founders’ own terms, the attacker had done nothing wrong, in other words. He or she had simply exploited one of its features.

Excellent point that should be explored in further detail in the next edition. For instance, in Bitcoin there have been multiple CVEs which if exploited (at least one was) could have resulted in changes in the money supply. Is that a feature or a bug?

And the most recent one, found in pre-0.16.3, was partially downplayed and hidden to prevent others from knowing the extent of potential damage that could have been done.

On p. 59 they write:

The dependence on a trusted middleman, some cryptocurrency purists would argue, overly compromises a blockchain’s security function, rending it unreliable. For that reason, some of them say, a blockchain is inappropriate for many non-currency applications. We, however, view it as a trade-off and believe there’s still plenty of value in recording ownership rights and transfers to digitally represented real-world assets in blockchains.

I think this whole section should be reworded to describe:

  1. what types of blockchains they had in mind?
  2. how the legal hooks into certain blockchains behave versus anarchic chains?
  3. being more precise with the term purist… do they mean maximalists or do they mean someone who points out that most proposed use-cases are chainwashing?

On pages 59 and 60 they write:

Permissioned blockchains – those which require some authorized entity to approve the computers that validate the blockchain – by definition more prone to gatekeeping controls, and therefore to the emergence monopoly or oligopoly powers, than the persmissionless ideal that Bitcoin represents. (We say “ideal” because, as we’ll discuss in the next chapter, there are also concerns that aspects of Bitcoin’s software program have encouraged an unwelcome concentration of ownership – flaws that developers are working to overcome.)

It would be beneficial in the next edition to at least walk through two different “permissioned blockchains” so the reader can get an idea of how validators become validators in these chains. By not including them, each platform is painted in the same light.

And because they are still comparing it with Bitcoin (which was designed for a completely different type of use-case than ‘permissioned chains’ are), keep in mind that the way mining (block making) is done in 2018 is very different than when it was first proposed in the 2008 paper. Back then, mining included a machine that did two things: validated blocks and also generate proofs-of-work. Today, those two functions are completely separate and because of the relatively fierce competition at generating hashes, there are real exit and entry costs to the market.

In many cases, this means that both the mining pool operators and hash generators end up connecting their real world government-issued identities with their on-chain activity (e.g., block validation). It may be a stretch to say that there is an outright monopoly in mining today, but there is a definite trend towards oligopoly in manufacturing, block producing, and hash generation the past several years. This is not explored beyond a superficial level in the book.

On p. 60 they write:

Until law changes, banks would face insurmountable legal and regulatory opposition, for example, to using a system like Bitcoin that relies on an algorithm randomly assigning responsibility at different stages of the bookkeeping process to different, unidentifiable computers around the world.

This is another asinine comment because they don’t explicitly say which laws they would like changed. The authors make it sound like the PFMIs are holding the world back when the opposite is completely true. These principals and best practices arose over time because of the systemic impact important financial market infrastructures could have on society as a whole.

Proof-of-work chains, the ones that are continually promoted in this book, have no ability to prevent forks, by design. Anarchic chains like Bitcoin and Ethereum can only provide probabilistic finality. Yet commercial best practices and courts around the world demands definitive settlement finality. Why should commerce be captured by pseudonymous, unaccountable validators maintained in jurisdictions in which legal recourse is difficult if not impossible?

On p. 60 they continue:

But that doesn’t mean that other companies don’t have a clear interest in reviewing how these permissioned networks are set up. Would a distributed ledger system that’s controlled by a consortium of the world’s biggest banking institutions be incentivized to act in the interest of the general public it serves? One can imagine the dangers of a “too-big-to-fail blockchain” massive institutions could once again hold us hostage to bailouts because of failures in the combined accounting system.

This has been one of Michael Casey’s talking points for the past three years. I was even on a panel with him in January 2016 in which he called R3 a “cartelchain,” months before Corda even existed. His justified disdain towards traditional financial institutions — and those involved with technology being developed in the “permissioned” world — pops up throughout this book. I do think there are some valid critiques of consortia and permissioned chains and even Corda, but those aren’t presented in this edition of the book.

He does make two valid observations here as well: regulated commerce should have oversight. That is one of the reasons why many of the organizations developing “permissioned blockchains” have plans to or already have created separate legal entities to be regulated as some type of FMI.

The other point is that we should attempt to move away from recreating TBTF and SIFI scenarios. Unfortunately in some cases, “permissioned chains” are being pitched as re-enabler of that very scenario. In contrast, dFMI is a model that attempts to move away from these highly intermediated infrastructures. See also my new article on SICNs.

On p. 60 they write:

Either way, it’s incumbent upon us to ensure that the control over the blockchains of the future is sufficiently representative of broad-based interests and needs so that they don’t just become vehicles for collusion and oligpolistic power by the old guard of finance.

The ironic part of this statement is — while well-intended — because of economies of scale there is an oligopoly or even monopoly in most PoW-mined coins. It is unclear how or why that would change in the future. In addition, with the entrance of Bakkt, ErisX, Fidelity and other large traditional financial organizations (e.g., the old guard) into the cryptocurrency world, it is hard to see how “permissionless ecosystems” can prevent them from participating.

On p. 61 they write:

As we stated in The Age of Cryptocurrency, Bitcoin was merely the first crack at using a distributed computing and decentralized ledger-keeping system to resolve the age-old problem of trust and achieve this open, low-cost architecture for intermediary-free global transactions.

But as the authors have stated elsewhere: proof-of-work chains are inherently costly. If they were cheap to maintain then they would be cheap to fork and reorg. You cannot simultaneously have a cheap (“efficient”) and secure PoW network… that’s a contradiction.

See:

Chapter 3

On pages 64 and 65 they provide a definition of a blockchain. I think this could be more helpful more earlier on in the book for newer audiences.

A few other citations readers may be interested in:

On p. 66 they write:

That way, no authorizing entity could block, retract, or decide what gest entered into the ledger, making it censorship resistant.

Could be worth referencing Eligius, a pool run by Luke-Jr. that would not allow Satoshi Dice transactions because its owners religious views.14

On p. 67 they write:

These computers are known as “miners,” because in seeking to win the ten-minute payout, they engage in a kind of computational treasure hunt for digital gold.

I understand the need to make simple analogies but the digital gold one isn’t quite right because gold does not have an inflexible supply whereas bitcoin does. I’ve pointed this out in other book reviews and it bears repeating because of how the narrative of e-cash to HODLing has changed over the last few years.1516

Readers may be interested of a few real life examples of perfectly inelastic supplies.

On p. 67 they write:

Proof of work is expensive, because it chews up both electricity and processing power. That means that if a miner wants to seize majority control of the consensus system by adding more computing power, they would have to spend a lot of money doing so.

This is correct. Yet six pages earlier they say it is a “low-cost” infrastructure. Needs to be a little more consistent in this book. Either PoW is resource intensive or it is not, it cannot be both.

On p. 68 they write:

Over time, bitcoin mining has evolved into an industrial undertaking, with gigantic mining “farms” now dominating the network. Might those big players collude and undermine the ledger by combining resources? Perhaps, but there are also overwhelming disincentives for doing so. Among other considerations, a successful attack would significantly undermine the value of all the bitcoins the attacking miner owns. Either way, no one has managed to attack Bitcoin’s ledger in nine years. That unbroken record continues to reinforce belief in Bitcoin’s cost-and-incentive security system.

It’s worth pointing out that there are ways to fork Bitcoin beyond the singular Maginot Line attack. As mentioned above, Bitcoin and many other coins have forked; see this history. Hundreds of coins have died due to lack of interest by miners and developers.

It could also be argued that between 2015-2017, Bitcoin underwent a social, off-chain attack by multiple different groups attempting to exert their own influence and ideology onto the ecosystem. The end result was a permanent fracture, a divorce which the principal participants still lob social media bombs at one another. There isn’t enough room to discuss it here, but the astroturfing actions by specific people and companies in order to influence others is worth looking into as well. And it worked.

On p. 71 they write:

The caveat, of course, is that if bad actors do control more than 50 percent of the computing power they can produce the longest chain and so incorporate fraudulent transactions, which other miners will unwittingly treat as legitimate. Still, as we’ve explained, achieving that level of computing power is prohibitively expensive. It’s this combination of math and money that keeps Bitcoin secure.

I probably would change some of the wording because with proof-of-work chains (and basically any cryptocurrency), there are no terms of service or end user license agreement or SLA. At most there is only de facto governance and certainly not de jure.

What does that mean? It means that we really can’t say who the “bad actors” are since there is no service agreement. Barring an administrator, who is the legitimate authority in the anarchic world of cryptocurrencies? The original pitch was: if miners want to choose to build on another tree or fork, it’s their decision to do so… they don’t need anyone’s permission to validate blocks and attempt to update the chain as they want to. The next edition should explicitly say who or what is an attacker or what a fraudulent transaction is… these are points I’ve raised in other posts and book reviews.

Also, the authors mention that computational resources involved in PoW are “prohibitively expensive” here. So again, to be consistent they likely should remove “low-cost” in other places.

On p. 71 and 72 they write:

In solving the double-spend problem, Bitcoin did something else important: it magically created the concept of a “digital asset.” Previously, anything digital was too easily replicated to be regarded as a distinct piece of property, which is why digital products such as music and movies are typically sold with licensing and access rights rather than ownership. By making it impossible to replicate something of value – in this case bitcoins – Bitcoin broke this conventional wisdom. It created digital scarcity.

No it did not. This whole passage is wrong. As we have seen with forks and clones, there really is no such thing as this DRM-for-money narrative. This should be removed in the next edition.

Scarcity effectively means rivalrous, yet anyone can copy and clone any of these anarchic chains. PoW might make it relatively expensive to do a block reorg on one specific chain, but it does not really prevent someone from doing what they want with an identically cloned chain.

For instance, here is a list of 44 Bitcoin forked tokens that arose between August 2017 and May 2018. In light of the Bitcoin and Bitcoin Cash divorce, lobbying exchanges to recognize ticker symbols is also worth looking into in a future edition.

On p. 73 they write:

Many startups that were trying to build a business on top of Bitcoin, such as wallet providers and exchanges, were frustrated by an inability to process their customers’ transactions in a timely manner. “I’ve become a trusted third party,” complained Wences Casares, CEO of bitcoin wallet and custodial service Xapo. Casares was referring to the fact that too many of his firms’ transactions with its customers had to be processed “off-chain” on faith that Xapo would later settle the transaction on the Bitcoin blockchain.

This is one of the most honest statements in the book. The entire cryptocurrency ecosystem is now dominated by intermediaries.

Interestingly, Xapo moved its main office from Palo Alto to Switzerland days after Ripple was fined by FinCEN for violating the BSA. Was this just a coincidence?

On p. 73 they wrote:

Making blocks bigger would require more memory, which would make it even more expensive to operate a miner, critics pointed out. That could drive other prospective miners away, and leave Bitcoin mining even more concentrated among a few centralized players, raising the existential threat of collusion to undermine the ledger.

This wasn’t really the argument being made by the “small blockers.” Rather, it was disk space (not memory) that was — at the time — perceived as a limitation for retail (home) users in the long run. Yet it has been a moot point for both Bitcoin and Bitcoin Cash as the price per gigabyte for a hard drive continues to decline over time… and because in the past year, on-chain transactions on both chains have fallen from their peak in December 2017.

In practice, the “miners” that that authors refer to are the roughly 15 to 20 or so mining pools that in a given day, create the blocks that others build on. Nearly all of them maintain these nodes at a cloud provider. So there is already a lot of trust that takes place (e.g., AWS and Alibaba are trusted third parties). Because of economies of scale, spinning up a node (computer) in AWS is relatively inexpensive.

It really isn’t discussed much in the book, but the main argument throughout the 2nd half of 2017 was about UASF — a populist message which basically said miners (mining pools) didn’t really matter. Followers of this philosophy emphasized the need to run a node at home. For instance, if a UASF supporter based in rural Florida is attempting to run a node from his home, there could be a stark difference between the uptime and bandwidth capacity he has at home versus what AWS provides.

On p. 74 they write:

Without a tally of who’s who and who owns what, there was no way to gauge what the majority of the Bitcoin community, composed of users, businesses, investors, developers, and miners, wanted. And so, it all devolved into shouting matches on social media.

I wrote about this phenomenon in Appendix A in a paper published in November 2015. And what eventually happened was a series of off-chain Sybil attacks by several different tribes, but especially by promoters of UASF who spun up hundreds — thousands of nodes — and acted as if those mattered.

Future editions should also include a discussion on what took place at the Hong Kong roundtable, New York agreement, and other multilateral governance-related talks prior to the Bitcoin Cash fork.

On p. 74 they write:

A hard-fork-based software change thus poses a do-or-die decision for users on whether to upgrade or not. That’s bad enough for, say, word processing software, but for a currency it’s downright problematic. A bitcoin based on the old version could not be transferred to someone running software that support the new version. Two Bitcoins. Two versions of the truth.

The authors actually accidentally proved my earlier point: that public chains, specifically, proof-of-work chains, cannot prevent duplication or forks. Proof-of-work only makes it resource intensive to do double-spend on one specific chain.

This is one of the reasons why regulated financial organizations likely will continue to not issue long lifecycle instruments directly onto an anarchic chain like Bitcoin: because by design, PoW chains are forkable.

Also, future editions may want to modify this language because there are some counterarguments from folks like Vitalik Buterin that state: because hard forks are opt-in and thus lead to cleaner long-term outcomes (e.g., less technical debt).

On p. 75 they write a lot about Lightning Network, stating:

So, there are no miners’ fees to pay and no limit on how many transaction can be done at any time. The smart contracts prevent users from defrauding each other while the Bitcoin blockchain is used solely as a settlement layer, recording new balance transactions whenever a channel is opened or closed. It persists as the ultimate source of proof, a guarantee that all the “off-chain” Lightning transactions are legitimate.

What is not discussed in this edition is that:

  1. Lightning has been massively hyped with still relatively subdued traction
  2. Lightning is a separate network – it is not Bitcoin – and thus must be protected and secured through other non-mining means
  3. Lightning arguably distorts the potential transition to a fee-based Bitcoin network in much the same way that intermediaries like Coinbase do. That is to say, users are paying intermediaries the fees instead of miners thus prolonging the time that miners rely on block rewards (as a subsidy) instead of user fees.

Also, it bears mentioning that Bitcoin cannot in its current form act as a legal “settlement layer” as it cannot provide definitive settlement finality as outlined in the PFMIs (principle #8).

On p. 75 they write:

The SegWit/Lightning combination was in their minds the responsible way to make changes. They had a duty, they believed, to avoid big, disruptive codebase alterations and instead wanted to encourage innovators to develop applications that would augment the powers of the limited foundational code. It’s a classic, security-minded approach to protocol development: keep the core system at the bottom layer of the system simple, robust, and hard to change – some of the words “deliberately dumb” – and thus force innovation “up the stack” to the “application layer.” When it works you get the best of both worlds: security and innovation.

The authors should revise this because this is just repeating the talking points of specific Core developers, especially the last line.

Empirically it is possible to create a secure and “innovative” platform… and do so with multiple implementations of a specification. We see that in other cryptocurrencies and blockchain-related development efforts including Ethereum. The Bitcoin Core participants do not have a monopoly on what is or is not “security minded” and several of them are vocally opposed to supporting multiple implementations, in part, because of the politics around who controls the BIP process.

In fact, it could be argued that by insisting on the SegWit/Lightning approach, they caused a disruption because in point of fact, the amount of code that needed to be changed to increase the block size is arguably less than what was needed to build, verify, and release SegWit.

It’s not worth wading deep into these waters in this review, but the next edition of this book should be more even handed towards this schism.

On p. 76 they write:

But a group of miners with real clout was having none of it. Led by a Chinese company that both mined bitcoin and produced some of the most widely used mining equipment, this group was adamantly opposed to SegWit and Lightning. It’s not entirely clear what upset Jihan Wu, CEO of Bitmain, but after lining up with early Bitcoin investor and prominent libertarian Roger Ver, he launched a series of lobbying efforts to promote bigger blocks. One theory was that Bitmain worried that an “off-chain” Lightning solution would siphon away transaction fees that should be rightly going to miners; another was that because such payment channel transactions weren’t traceable as on-chain transactions, Chinese miners were worried that their government might shut them down. Bitmain’s reputation suffered a blow when revelations emerged that its popular Ant-miner mining rigs were being shipped to third-party miners with a “backdoor” that allowed the manufacturer-cum-miner to shut its opponents’ equipment down. Conspiracy theories abounded: Bitmain was planning to subvert SegWit. The company denied this and vowed to disable the feature. But trust was destroyed.

There is a lot of revisionism here.

But to start with, in the process of writing this review I reached out and contacted both Roger Ver and separately an advisor at Bitmain. Both told me that neither of the authors of this book had reached out to them for any comment. Why would the authors freely quote Bitcoin Core / SegWit developers to get their side of this debate but not reach out to speak with two prominent individuals from the other side to get their specific views? The next edition should either include these views and/or heavily revise this section of the book.

There are a few other problems with this passage.

Multiple different groups were actively lobbying and petitioning various influential figures (such as exchange operators) during this time period, not just Jihan and Roger. For instance, as mentioned above, the Hong Kong roundtable and New York agreement were two such examples. Conversely, SegWit and UASF was heavily promoted and lobbied by executives and affiliates at Blockstream and a handful of other organizations.

Regarding this “backdoor,” let’s rewind the clock and look at the overt / covert tempest in a teapot.

Last April Bitmain was alleged by Greg Maxwell (and the Antbleed campaign) of having maybe kinda sorta engaged in something called covert mining via Asicboost. Jimmy Song and others looked into it and said that there was no evidence covert was happening. At the time, some of the vocal self-identified “small block” supporters backing UASF, used this as evidence that Bitmain was a malicious Byzantine actor that must be purged from Bitcoinland. At the time, Greg proposed changing the PoW function in Bitcoin in order to prevent covert Asicboost from working.

In its defense, Bitmain stated that while Asicboost had been integrated into the mining equipment, it was never activated… partly because of the uncertain international IP / patent claims surrounding Asicboost. Recently, they announced a firmware upgrade that miners could activate overt Asicboost… a few days after another organization did (called “braiins”).

So why revisit this?

Two months ago Sia released code which specifically blocked mining equipment from Bitmain and Innosilicon. How and why this action is perceived as being fair or non-political is very confusing… they are definitely picking favorites (their own hardware). Certainly can’t claim to be sufficiently decentralized, right?

Yet in this section of the book, they don’t really touch on how key participants within the tribes and factions, represented at the time. Peruse both lists and look at all of the individuals at the roundtable that claim to represent “Bitcoin Core” in the governance process versus (the non-existent) reps from other implementations.

Even though the divorce is considered over, the tribes still fling mud at one another.

For example, one of the signatories of the HK roundtable, Adam Back, is still heckling Bitmain for supposedly not being involved in the BIP process. Wasn’t participation supposed to be “voluntary” and “permissionless”? Adam is also now fine with “overt” Asicboost today but wasn’t okay with it 18 months ago. What changed? Why was it supposedly bad for Bitmain to potentially use it back then but now it’s kosher because “braiins” (Slush) is doing it? That seems like favoritism.

Either way, the book passage above needs to be rewritten to include views from other camps and also to remove the still unproven conspiracy theories.

On p. 76 they write:

Meanwhile, original bitcoin went on a tear, rallying by more than 50 percent to a new high above $4,400 over a two-week period. The comparative performance of the pair suggested that small-block BTC and the SegWit reformers had won.

The next edition should change the wording because this comes across one-sided.

While an imperfect comparison, a more likely explanation is that of a Keynesian beauty contest. Most unsophisticated retail investors had heard of Bitcoin and hadn’t heard of Bitcoin Cash. Bitcoin (BTC) has brand recognition while Bitcoin Cash and the dozens of other Bitcoin-named forks and clones, did not.

Based on anecdotes, most coin speculators do not seem to care about the technical specifications of the coins they buy and typically keep the coins stored on an intermediary (such as an exchange) with the view that they can sell the coins later to someone else (e.g., “a greater fool“).

On p. 77 they write:

Bitcoin had gone through a ridiculous circus, one that many outsiders naturally assumed would hurt its reputation and undermine its support. Who wants such an ungovernable currency? Yet here was the original bitcoin surging to new heights and registering a staggering 650 percent gain in less than twelve months.

The problem with cherry picking price action dates is that, as seen in the passage above, it may not age well.17

For example, during the write-up of this review, the price of bitcoin declined from where it was a year ago (from over $10,000 then down to around $4,000). What does that mean? We can all guess what happened during this most recent bubble, but to act like non-tech savvy retail buyers bought bitcoin (BTC) because of SegWit is a non sequitur. No one but the tribalists in the civil war really cared.

On p. 77 they write:

Why? Well, for one, Bitcoin had proven itself resilient. Despite its civil war, its blockchain ledger remained intact. And, while it’s hard to see how the acrimony and bitterness was an advantage, the fact that it had proven so difficult to alter the code, to introduce a change to its monetary system, was seen by many as an important test of Bitcoin’s immutability.

There are a few issues here.

What do the authors mean by the “blockchain ledger remained intact”? I don’t think it was ever a question over whether or not copies of the Bitcoin blockchain (and/or forks thereof) would somehow be deleted. Might want to reword this in the future.

Segwit2x / Bitcoin Cash proponents were not trying to introduce a change to Bitcoin’s monetary system. The supply schedule of bitcoins would have stayed the same. The main issue was: a permanent block size increase from 1 MB to at least 2 MB. That proposal, if enacted, would not have changed the money supply.

What do the authors mean by “Bitcoin’s immutability”? The digital signatures are not being reversed or changed and that is what provides transactions the characteristic of “immutability.”

It is likely that the authors believe that a “hard fork” means that Bitcoin is not immutable. That seems to conflate “immutability” of a digital signature with finality (meaning irreversibility). By design, no proof-of-work coin can guarantee finality or irreversibility.

Also, Bitcoin had more than a dozen forks prior to the block size civil war.

On p. 77 and 78 they write:

Solid censorship resistance was, after all, a defining selling point for Bitcoin, the reason why some see the digital currency becoming a world reserve asset to replace the outdated, mutable, fiat-currency systems that still run the world. In fact, it could be argued that this failure to compromise and move forward, seen by outsiders as Bitcoin’s biggest flaw, might actually be its biggest feature. Like the simple, unchanging codebase of TCP/IP, the gridlocked politics of the Bitcoin protocol were imposing secure rigidity on the system and forcing innovation up the stack.

This is not what “censorship resistance” means in the context of Bitcoin. Censorship resistance is narrow and specific to what operators of miners could do. Specifically, the game theory behind Nakamoto Consensus is that it would be costly (resource intensive) for a malicious (Byzantine) actor to try and attempt to permanently censor transactions due to the amount of hashrate (proof-of-work) a Byzantine actor would need to control (e.g., more than 50%).

In contrast, what the authors described in this book was off-chain censorship, such as lobbying by various special interest groups at events, flamewars on Twitter, removing alternative views and voices on reddit, and via several other forms.

The “world reserve asset” is a loaded phrase that should be clarified in the next edition because the passage above comes across a bit like an Occupy Wall Street speech. It needs more of an explanation beyond the colorful one sentence it was given. Furthermore, as I predicted last year, cryptocurrencies continue to rely on the unit-of-account of “fiat systems” and shows no signs of letting up in this new era of “stablecoins.”

The authors definitely need to remove the part that says “unchanging codebase of TCP/IP” because this is not true. TCP/IP is a suite of protocol standards and its constituent implementations continue to evolve over time. There is no single monolithic codebase that lies unchanged since 1974 which is basically the takeaway from the passage above.18

In fact, several governing bodies such as IFTF and IAB continue to issue RFCs in order to help improve the quality-of-service of what we call the internet. It is also worth pointing out that their analogy is flawed for other reasons discussed in: Intranets and the Internet. In addition, the next version of HTTP won’t be using TCP.

As far as whether innovation will move “up the stack” remains to be seen but this seems to be an argument that the ends justify the means. If that is the case, that appears to open up a can of worms beyond the space for this review.

On p. 78 there is a typo: “BTH” instead of “BCH”

On p. 78 they write:

That’s what BTC, the original Bitcoin, promises with its depth of talent at Core and elsewhere. BTH can’t access such rich inventiveness because the community of money-focused bitcoin miners can’t attract the same kinds of passionate developers.

Strongly recommend removing this passage because it comes across as a one-sided marketing message rather than a balanced or neutral explanation using metrics. For instance, how active are the various code repositories for Bitcoin Core, Unlimited, and others? The next edition should attempt to measure how to measure “depth.”

For example, Bitmain has invested $50 million into a new fund focused on Bitcoin Cash called “Permissionless Ventures.” 2-3 years from now, what are the outcomes of that portfolio?

On p. 78 they write about permissioned blockchains:

Under these arrangements, some authority, such as a consortium of banks, choose which entities get to participate in the validation process. It is, in many respects, a step backward from Nakamoto’s achievement, since it makes the users of that permissioned system dependent once again, on the say-so of some trusted third party.

This is a common refrain throughout the book: that the true innovation was Bitcoin.

But it’s an apples-to-oranges comparison. Both worlds can and will co-exist because they were designed for different operating environments. Bitcoin cannot provide the same finality guarantees that “permissioned chains” attempt to do… because it was designed to be forkable. That’s not necessarily a flaw because Satoshi wasn’t trying to create a solution to a problem banks had. It’s okay to be different.

On p. 79 they write:

Most importantly, permissioned blockchains are more scalable than Bitcoin’s, at least for now, since their governance doesn’t depend upon the agreement of thousands of unidentified actors around the world; their members can simply agree to increase computing power whenever processing needs rise.

This doesn’t make sense at all. “Permissioned chains” in the broadest sense, do not use proof-of-work. As a result, there is no computational arms race. Not once have I been in a governance-related meeting involving banks in which they thought the solution to a governance-related issue was increasing or decreasing computational power. It is a non sequitur and should be removed in the next edition.

Also, there are plenty of governance issues involving “permissioned chains” — but those are typically tangential to the technical challenges and limitations around scaling a blockchain.

On p. 79 they write:

To us, permissionless systems pose the greatest opportunity. While there may well be great value in developing permissioned blockchains as an interim step toward a more open system, we believe permissionlessness and open access are ideals that we should strive for – notwithstanding the challenges exposed by Bitcoin’s “civil war.”

The authors repeat this statement in a couple other areas in the book and it doesn’t really make sense. Why? Because it is possible for both operating environments to co-exist. It doesn’t have to be us versus them. This is a false dichotomy.

Also, if any of these “permissioned chains” are actually put into production, it could be the case that end users could have “open access” to the platform, with the exception of participating in the validation of blocks. That’s pretty much how most coin users experience a cryptocurrency network today (e.g., via permissioned endpoints on Coinbase).19

On p. 80 they write:

The problem was that Bitcoin’s single-purpose currency design wasn’t ideally suited for these non-currency applications.

A side note maybe worth mentioning in a footnote is that Satoshi did attempt to build a marketplace early on but gave up.

On p. 81 they mention Nick Szabo with respect to smart contracts. Could be worth exploring the work of Martín Abadi which predates Szabo (the idea of distributed programs that perform authorizations predates Szabo’s “smart contracts”).  Mark S Miller has also done work in this area.

On p. 82 they write about Ethereum:

“Android for decentralized apps.” It would be an open platform much like Google’s smartphone operating system, on which people could design any new application they wanted and run it, not on a single company-owned server but in a decentralized manner across Ethereum’s ownerless network of computers.

This is probably not the best analogy because there is a difference between Google Android and Android Open Source Project. One of them includes proprietary tech. Also, Google can and does add and remove applications from the Play store on a regular basis based on its terms and conditions.

Lastly, someone does in fact own each of the computers that constitute the Ethereum blockchain… mining farms are owned by someone, mining pools are owned by someone, validating nodes are owned by someone. And so forth.

On p. 82 they write about Vitalik Buterin:

Now he was building a universally accessible, decentralized global supercomputer.

The next edition should drop the “supercomputer” verbiage because the Ethereum chain is only as powerful as the least powerful mining pool node… which in practice is typically a common computer located in a cloud provider such as AWS. This isn’t something like Summit over at Oak Ridge.

On p. 82 they write:

Now, with more than six hundred decentralized applications, or Dapps, running on Ethereum, he is looking vindicated. In just the first eleven months of 2017, the system’s internal currency, ether, rose from just over $8 to more than $400. By then the entire market cap for ether stood at $39 billion, a quarter that of Bitcoin’s. The success has made the wunderkind Buterin an instant multi-millionaire and turned him into a cultlike figure for the holders of ether and related tokens who’ve become rich.

The next version of the book should explicitly spell out what are the metrics for success. If it is solely price of a coin going up, what happens when the price of the coins goes down like it has in the past year?

For instance, ether (ETH), peaked in mid-January at around $1,400 and has been hovering near $100 the past several weeks. Does that mean Vitalik is no longer vindicated? Also, what is he vindicated from?

Lastly, it would be worth exploring in the next edition what Dapps are currently being used on a regular basis. As of this writing, the most popular Dapps are gambling apps (like proof-of-weak-hands / FOMO3D) and a few “decentralized exchanges” (DEX).

On p. 82 they write:

Ethereum co-founder Joseph Lubin only added to the complexity when he setup ConsenSys, a Brooklyn-based think tank-like business development unit tasked with developing new use cases and applications of the technology.

ConsenSys markets itself as a “venture studio” — a bit like YCombinator which incubates projects and provides some seed financing to get it off the ground. These projects are typically referred to as “spokes” (like a hub-and-spoke model).  As of this writing there are over 1,100 employees spread across several dozen spokes.  There is more to it than that and it would be interesting to see it explored in the next edition.

On p. 83 they write:

For example, the Parity Wallet, which was designed by Ethereum co-founder and lead architect Gavin Wood as a way to seamlessly engage, via a browser, with Ethereum smart contracts, lost $30 million in a hack.

Actually, Parity had a couple issues in 2017 and it is likely that the book may have been sent to publication around the same time the bigger problem occurred on November 13, 2017. The second one involved a Parity-developed multisig wallet… and $150 million in ether that is now locked away and cannot be accessed (barring a hardfork). Most developers — including those at Parity — characterize this instance as a “bug” that was accidentally exploited by a developer.

On p. 84 they write:

These kinds of dynamics, with large amounts of money at stake, can foster concerns that founders’ interests are misaligned with other users. Ethereum’s answer was the not-for-profit Ethereum Foundation, which was tasked with managing the pool of ether and other assets from the pre-mine and pre-sale- a model since used by many of the ICO token sales.

It would be interesting to explore how this foundation was created and how it evolved and who manages it today. For instance, at one point in 2014 there were conversations around creating a commercial, for-profit entity led in part by Charles Hoskinson who later left and founded Cardano.

On p. 85 they write about The DAO:

After a few modest coding changes failed, they settled on a drastic fix: Ethereum’s core developers “hard-forked” the Ethereum blockchain, implementing a backward-incompatible software update that invalidated all of the attacker’s transactions from a certain date forward. It was a radical move. To many in the cryptocurrency community, it threw into question Ethereum’s all-important claim to immutability. If a group of developers can force a change in the ledger to override the actions of a user, however unsavory those actions are, how can you trust that ledger won’t be tampered with or manipulated again in the interest of one group over another? Does that not destroy the whole value proposition?

This passage should probably be revised because of the usage of the word immutable.

Also, it could be argued that Bitcoin Core and other “core” groups act as gate keepers to the BIP process (or its equivalent) could lobby on behalf of special interest groups to push specific code changes and/or favor certain outcomes on behalf of specific stakeholders.

In either case, it is the miners that ultimately install and use the code. While some developers (like Bitcoin Core) are highly influential, without miners installing and running software, the rules on the network cannot be changed.

See Sufficiently Decentralized Howeycoins.

On p. 85 they write:

Well, in many respects, the Ethereum team operated as policymakers do during real-world crises. They made hard decisions that hurt some but were ultimately taken in the interests of the greater good — determined, hopefully, through as democratic a process as possible. The organizers went to great lengths to explain and gain support for the hard fork.

The next edition should strive to be more specific here: what exactly made the decision making around the hard fork democratic. Who participated, who didn’t participate. And so forth.

Continuing on p. 85:

And, much like the Segwit2x and other Bitcoin reform pro-miners didn’t accept it. For all intents and purposes, the fix was democratic – arguably, much more so than non-participatory democratic models through which crisis policymaking is enacted by national governments. And since Ethereum is more of a community of software engineers than of cryptocurrency investors, it was less contentious than Bitcoin’s struggle over hard-fork proposals.

This makes very little sense as it is written because the authors don’t define or specify what exactly made any of the decision making democratic. Who was enfranchised? Who got to vote and make decision? Also, how do the authors know that Ethereum is “more of a community of software engineers than of cryptocurrency investors.” Is there any hard numbers to back that assertion up?

And lastly how do we measure the level of contentiousness? Is there an objective measure out there?

On p. 85 they write about Ethereum Classic:

This created much confusion and some interesting arbitrage opportunities – as well as some lessons for bitcoin traders when their own currency split two years later – but it can also be viewed as the actions of a dissenting group non-violently exercising their right to secede. More than a year later, Ethereum Classic is still around, though it trades at a small fraction of Ethereum’s value, which means The DAO attacker’s funds – whose movements on the public Ethereum blockchain have been closely watched – are of lower value than if they’d been preserved in ETH.

I don’t think we can really say for sure how much the The DAO fund (and child DAO fundss) would be worth since that is an alternative timeline.

Also, there are some vocal maximalists that have created various Ethereum-branded tribes which are okay with The DAO attacker having access to those funds. Will be interesting to see if there are any sociological studies to reference in a new edition.

On p. 86 they write:

These hacks, and the scrambles to fix them, seem nuts, right? But let’s put them in perspective. First, is this monetary chaos anything less unsettling than the financial crisis of 2008? Or the audacity of the subsequent Wall Street trading scandals?

This is a whataboutism. Also, strangely the authors are saying the bar for judgement is as low as the financial engineering and socialized loses of the GFC. Isn’t the narrative that cryptocurrencies are supposed to be held to a higher standard because the coin creators seek to architect a world that doesn’t have arbitrary decision making?

On p. 87 and 88 they write:

When the FBI auctioned the 144,000 bitcoins (worth $1.4 billion as of late November 2017) that it seized from Ross Ulbricht, the convicted mastermind of the Silk Road illicit goods marketplace, those coins fetched a significantly higher price than others in the market. The notion was that hey had now been “whitewashed” by the U.S. government. In comparison, other bitcoins with a potentially shady past should be worth less because of the risk of future seizure. That’s hardly fair: imagine if the dollar notes in your wallet were hit with a 10 percent tax because the merchant knew that five years ago, unbeknownst to you, they had been handled by a drug dealer. To avoid these distortions and create a cryptocurrency that works more like fungible cash, Wilcox’s Zcash uses sophisticated “zero-knowledge proofs” to allow miners to prove that holders of the currency aren’t’ double-spending without being able to trace the addresses.

What the authors likely mean by “whitewashed” is probably “cleansed.” In the US there have been discussions on how this could take place via the existing Uniform Commercial Code (see Section 3.3). To date, there hasn’t been a specific update to the UCC regarding this issue (yet) but it has been discussed in multiple places such as Bitcoin’s lien problem.

As far as the “fairness” claim goes, it could be worth revising the passage to include a discussion around nemo dat quod non habet and bona fide purchasers. Legal tender is explicitly exempt because of the very scenario the authors describe. But cryptocurrencies aren’t legal tender, so that exemption doesn’t exist (yet).

Lastly, only “shielded” transactions in Zcash provide the functionality described in the passage above… not all transactions on Zcash utilize and opt-in to this mode.

On p. 89 they describe EOS. Worth updating this section because to-date, they have not achieved the 50,000 transactions per second on mainnet that is stated in the book. There has also been a bit of churn in the organizations as Ian Grigg (named in the book) is no longer at the organization, nor are employees 2 through 5.

On p. 90 they write about proof-of-stake:

One criticism of the model has been that without the electricity consumption costs of proof of work, attackers in a proof-of-stake system would simply mine multiple blocks to boost their chances of inserting a fraudulent one into the ledger.

This “nothing at stake” scenario is a valid criticism of some early attempts at building a proof-of-stake mechanism but isn’t valid for some other proposals (such as, theoretically, “Slasher“).

Chapter 4

On p. 91 they write:

It was clear that investors bought into Brave’s promise of a token that could fundamentally change the broken online advertising industry.

How do we know this was clear to investors? Anecdotally it appears that at least some investors participated as speculators, with the view that the token price would increase. A future edition should probably change the wording unless there is a reference that breaks down the motivation of the investors.

What about Civil?

On p. 96 they write about StorJ

Other models include that of the decentralized computer storage platform Storj, which allows hard-drive-starved users to access other’s excess space in exchange for storj tokens.

Could be worth pointing out that Storj had two public ICOs and it is still unclear if that will result in legal or regulatory issues. Putting that aside, currently Storj has just under 3,000 users. This stat is worth looking at again in future versions, especially in light of less-than-favorable reviews.

On p. 98 they talk about BAT:

The point is that it’s all on the community – the society of BATs users – not on external investors, to bear the risk of that happening

[…]

Once the 1 billion tokens had sold out in twenty-four seconds, it was revelead that only 130 accounts got them and that the biggest twenty holdings covered more than two-thirds of the total. Those distortions left many investors angry.

There is currently a debate around whether these types of ICOs in 2017 (and earlier) were investment contracts (e.g., securities). In the US, this has led to more than a hundred subpoenas with some quiet (and not so quiet) enforcement action.

The language used in this chapter (and elsewhere in the book) suggests that the participants involved in the ICO were investing with the expectation of profit in a common enterprise managed by the Brave team. Worth revisiting in a future edition.

On p. 102 they write about ERC20 tokens:

But because of the ERC-20 solution, they didn’t need to develop their own blockchain with all the independent computing power that would require. Instead, Ethereum’s existing computing network would do the validation for them.

This piggybacking may be initially helpful to token issuers but:

  1. it is a form of centralization which could have legal and regulatory consequences with respect to being viewed as not sufficiently decentralized
  2. in the long run this could create a top-heavy issue as miners are not being compensated in proportion to the amount of value they are trying to secure (see Section 2.1)

On p. 102 they write:

This low-cost solution to the double-spending challenge launched a factory of ICOs as issuers found an easy way to tap a global investing community. No painful negotiations with venture capitalists over dilution and control of the board. No wining and dining of Wall Street investment banks to get them to put their clients on the order book. No wait for SEC approval. Just straight to the general public: here are more tokens; they’re cool, buy them. It was a simple, low-cost formula and it lowered the barrier to entry for some brilliant innovators to bring potentially world-changing ideas to market. Unfortunately, it was also a magnet for scammers.

Could be worth updating this section to include more details on the scams and fraud that took place throughout 2017. Many of the tokens that raised capital from outside investors during this time not only have not delivered a working product, but in most cases, the token underperformed both ether and bitcoin.

Also bears mentioning that beginning in late 2017 through the time of this writing, there was a clear divergence between public sale ICOs and private sale of tokens… the latter of which basically involves a private placement to accredited investors, including the same type of funds that the passage above eschewed.

On p. 104 they write about Gnosis:

With the other 95 percent controlled by the founders, those prices meant that the implied valuation of the entire enterprise stood at $300 million – a figure that soon rose above $1 billion as the Gnosis token promptly quadrupled in price in the secondary market. By Silicon Valley standards, it meant we had the first ICO “unicorn.”

Actually, Ethereum did an ICO back in 2014 — and as the price of ether (measured in USD) increased, it is likely that ETH could be seen as the first ICO “unicorn.” But that’s not really an apples-to-apples comparison though because ETH (or Gnosis) holders do not have say, voting rights, which equity holders of a traditional company would.  Plus, “marketcap” is a poorly defined metric in the coin world (see Section 6).

On p. 104 and 105 they write:

One day, Paul received a call from a businessman who’d read one of his stories in The Wall Street Journal and wanted more information about how to get started and where to get legal advice. The man said he’d tried to reach the lawyer Marco Santori, a partner at the law firm Cooley who’d been quoted in the story, but couldn’t get through. Santori later told us that he was getting so many calls about ICOs, he simply couldn’t answer them all.

In January 2018, the SEC Chairman gave a public speech in which he singled out the “gatekeepers” (legal professionals) regarding the advice they gave clients. Could be worth revisiting who the main ICO-focused lawyers and lawfirms were during this time period and where they are now and if there were any enforcement actions undertaken.

On p. 105 they write:

“Most of these will fail,” said Olaf Carlson-Wee, the CEO of Polychain Capital, citing poorly conceived ideas and a lack of coding development. “Most of these are bad ideas from the beginning.” That said, Polychain is an investment firm that Carlson-Wee founded expressly to invest in these new projects. In fact, most of the people investing seemed to be taking a very VC-like approach to it. They understood that most of the projects would fail. They just hoped to have a few chips down on the one winner.

Carlson-Wee’s comments seem accurate insofar as the inability of many projects to execute and deliver based on the narratives each pitched investors. However, it could be worth digging into Polychain itself, which among other drama, may have “flipped” tokens due to a lack of lock-up periods.20 21

On p. 108 and 109 they compare Blue Apron and block.one (EOS). Even though it’s not an apples-to-apples comparison could be worth revisiting this in the future because of the churn and drama with both organizations.

Pages 110 and 111 aged quickly as most of the ICO rating websites and newsletters have fallen to the wayside due to payola scandals and inability to trust the motivations behind the ratings.

Similarly, the authors describe accredited investors and SAFTs. There is a typo here as the authors likely mean that an individual needs to have an income of $200,000 not $200 million. The SAFT model has fallen out of favor for several reasons that could be explored in a future version.22

On p. 112 they write about ASICs:

But developers of Vertcoin have shown that it’s also possible to create a permanent commitment to ASIC-resistance by introducing something from the real, non-digital world of social organizations: a pact. If the platform’s governing principles include a re-existing commitment from all users of the coin to accept a fork – a change to the code – that would add new, ASIC-resistant elements as soon as someone develops such a chip, the coin’s community can protect the distributed, democratic structure of a GPU-led mining network.

Putting aside the fanciful ASIC-resistance utopia that is peddled by some coin issuers, the passage above raises a couple flags.

Who gets to decide what the governing principles are? Do these principles get to change overtime? If the answer is yes to either, who are those decision makers and how are they chosen? So far, there has not really been any “democratic” way of participating in that decision making process for any cryptocurrency. How can that change in the future?

Why is a GPU-led mining network considered more democratic? In practice, most of these farms are located in basically the same type of structure and geography as ASIC-based equipment… in some cases they are swapped out over time. In light of the Sia coin fork… which clearly shows favoritism at play, a future edition of the book could include a chart or spectrum explaining how the mining of one coin more or less democratic versus another.

On p. 113 there is more discussion of ICOs and token sales as it relates to “open protocols” but in practice it has largely been reinventing the same intermediated system we have to do, but with fewer check and balances or even recourse for retail investors.

On p. 114 they speculate that:

This speaks to our broader notion that tokens, by incentivizing the preservation of public goods, might help humanity solve the Tragedy of the Commons, a centuries-in-the-making shift in economic reality.

That’s a big claim that requires evidence to back it. Let’s revisit next time.

On p. 115 they write:

Much like Wall Street bond traders, these will “make markets” to bring financial liquidity to every countervailing pair of tokens – buying some here and selling other there – so that if anyone wants to trade 100 BATs for a third of a Jackson Pollock, they can be assured of a reasonable market price.

But how does a blockchain actually do this? They mention Lykke as an startup that could help match tokens at a fair price… but to-date there is nothing listed on Lykke that really stands out as different than what you could fine at other cryptocurrency exchanges. Perhaps a future version of the book could walk the reader step-by-step through how a blockchain can enable this type of “fairness” whereas previous technology could not.

On p. 116 they discuss several projects they label as “interoperability” initiatives including Interledger, Cosmos, sidechains, and Lightning. It may be helpful for the reader to see a definition for what “interoperability” means because each of these projects — and its supporters — may be using the term in a different way. Perhaps a comparison chart showing the similarities and differences?

On p. 117 they write:

In an age where U.S. presidents peddle “alternative facts” and pundits talk openly about our “post-truth society,” using the truth machine to put a value on honesty sounds appealing.

On the face of it, that end goal seems like more than a stretch because it’s unclear how a blockchain (today) controls off-chain behavior. The example they go on to use is Augur. But Augur is a futures market and there are many of those already in existence. How would Augur or a futures market “with a blockchain” prevent politicians from lying? Walking through this process could be helpful to the reader.

On p. 118 they mention Erick Miller’s investment fund called CoinCircle… and a couple of “special value tokens” called Ocean Health Coin and Climate Coin.

Maybe worth following up in the next edition because neither has launched and each of the pitches sounds very handwavy, lacking in substance. Also, one of the ICOs CoinCircle advised – Unikrn – is part of a class action lawsuit.

Most of p. 119 and 120 come across as more political discourse, which is fine… but unclear how a blockchain in some form or fashion could directly impact the various issues raised. Perhaps the next edition could include a chart with a roadmap in how they see various projects achieving different milestones?

Chapter 5

If the reader is unfamiliar with IoT then the first 1/3 of chapter five is pretty helpful and informative.

Then there are some speedbumps.

On p. 130 they write about authenticating and verifying transactions involving self-driving cars:

The question, though, is: would this transaction be easily processed if it were based on a private blockchain? What are the chances, in a country of more than 230 million cars, that both vehicles would belong to the same closed network run by a group of permissioned validating computers? If they weren’t part of the same network, the payment couldn’t go through as the respective software would not be interoperable.

This is a red herring. Both “permissioned” and “permissionless” blockchains have similar (though not identical) scaling challenges. And interoperability is a separate issue which has been a known hurdle for years.

In fact, recently the Hyperledger Fabric team announced that it now supports the EVM. This comes a couple weeks after Hyperledger joined EEA as a member and vice-versa. Maybe none of these immediate efforts and experiments amount to many tangible outputs in the short-run but it does show that several ecosystems are attempting to be less tribal and more collaborative.

Also, the issue of payments is also separate from a blockchain-related infrastructure. Payments is a broad term and can include, for instance, a proposed central bank digital currency (e.g., “cash on ledger”)… or it can involve plugging into existing external payment systems (like Visa or ACH). It would be helpful if the next edition was more specific.

Continuing on p. 130 they write:

Other car manufacturers might not want to use a permissioned verification system for which, say GM, or Ford, is the gatekeeper. And if they instead formed a consortium of carmakers to run the system, would their collective control over this all-important data network create a barrier to entry for newer, startup carmakers? Would it effectively become a competition-killing oligopoly?

These are possible scenarios and good questions but this is kind of an unfair characterization of consortia. Let’s flip it around: why shouldn’t carmakers be allowed to build their own blockchains or collaborate with others who do? Do they need someones permission to do so? Depending on local regulations, maybe they do need permission or oversight in a specific jurisdiction. That could be worth exploring in another version.

On this topic they conclude that:

A truly decentralized, permissionless system could be a way around this “walled-garden” problem of siloed technology. A decentralized, permissionless system means any device can participate in the network yet still give everyone confidence in the integrity of the data, of the devices, and of the value being transacted. A permissionless system would create a much more fluid, expansive Internet of Things that’s not beholden to the say-so and fees of powerful gatekeepers.

That sounds well and good and a bit repetitive from earlier passages which said something similar. The passage aboves seems to be redefining what make something “permissioned” and “permissionless.” What does it mean for every device participate on a ‘decentralized, permissionless system’? Does that mean that each device is capable of building and/or creating a new block? If so, how do they choose which chain to build on?

And why is it so hard to imagine a world in which open-sourced platforms are also permissioned (e.g., validation is run by known, identifiable participants)… and these platforms are interoperable. Could be worth exploring because that scenario may be just as likely as the ones presented in this chapter.

Lastly, how does a “permissionless system” create a more fluid IoT world? These claims should be explored in more detail next time.

On p. 131 and 132 they write about IOTA, a specific project that markets itself as a purpose-built blockchain for IoT devices. But that project is beset by all kinds of drama that is beyond the scope of this review. Suffice to say that the February software build of IOTA cannot be run on most resource constrained IoT devices.

On p. 138 they mention in passing:

Exergy is a vital concept for measuring energy efficiency and containing wasteful practices; it doesn’t just measure the amount of energy generated but also the amount of useful work produced per each given amount of energy produced.

Fun fact: back in May 2014 I wrote an in-depth paper on Bitcoin mining that utilized the concept of “exergy.”

On pages 139-145 they talk about a number of vendors, use-cases, and platforms typically centered around the supply chain management world. Would be interesting to see which of these gained traction.

On p. 147 they write:

Blockchain-proven digital tokens point to what blockchain consultant and entrepreneurs Pindar Wong calls the “packetization of risk.” This radical idea introduces a negotiable structure to different phases of the chain. Intermediate goods that would otherwise be encumbered by a pre-established chain of unsettled commitments can instead be put out to bid to see if other buyers want to take on the rights and obligations associated with them.

It would be useful in this explanation to have a diagram or two to explain what Pindar proposes because it is a bit hard to follow.

On p. 147 they write:

This is why many people believe that the concept of a “circular economy” – where there is as much recycling as possible of the energy sources and materials in production – will hinge on the transparency and information flows that blockchain systems allow.

Does this mean that other “non-blockchain” systems do not allow transparency and information flows?

On p. 147 they write:

The principal challenge remains scaling. Open-to-all, permissionless blockcahins such as Bitcoin’s and Ethereum’s simply aren’t ready for the prime time of global trade. If all of the world’s supply chains were to pass their transactions through a permissionless blockchain, there would need to be a gargantuan increase in scalability, either off-chain or on-chain. Solutions may come from innovations such as the Lightning Network, discussed in chapter three, but they are far from ready at this stage.

Can we propose a moratorium on additional usages of “Lightning” in the next edition unless there is significant adoption and usage of it? Also, it is unclear why the worlds supply chains should for some reason be connected onto an anarchic chain: what is the benefit of putting this information onto a chain whose operators are unaccountable if a fork occurs?

On p. 148 they write:

Instead, companies are looking at permissioned blockchains, which we’ll discuss in more detail in chapter six. That makes sense because many big manufacturers think of their supply chains as static concepts, with defined members who have been certified to supply this or that component to a finished product. But in the rapidly changing world of the Fourth Industrial Revolution, this might not be the most competitive option. Emerging technologies such as additive manufacturing, where production can be called up anywhere and delivered by anyone with access to the right software files and a sufficiently configured 3D printer, are pointing to a much more fluid, dynamic supply-chain world, where suppliers come and go more easily. In that environment, a permissionless system would seem necessary. Once scaling challenges are resolved, and with robust encryption and reliable monitoring systems for proving the quality of suppliers work, permissionless blockchain-based supply chains could end up being a big leveler of the playing field for global manufacturing.

There are way too many assumptions in this paragraph to not have somewhere written that there are many assumptions.

Is a blockchain really needed in this environment? If so, a future edition should explain how a 3D printer would be more useful connected to a blockchain than some other network. Also, this seems to be a misuse of the term “permissionless” — why does the network need to be anarchic? How would the supply chain benefit from validators who are unknown?

On p. 148 they write:

It will be difficult to marry that old-world body of law, and the human-led institutions that manage it, with the digital, dematerailized, automated, and de-nationalized nature of blockchains and smart contracts.

How are blockchains “de-nationalized”? As of this writing there are probably a couple dozen publicly announced state-sponsored blockchain platforms of some kind (including various cryptocurrency-related initiatives). This phrase should probably be removed.

On p. 150 they write about the Belt and Road Blockchain Consortium:

Hence the opportunity for blockchain technologies to function as an international governance system. Hong Kong’s role will be important: the territory’s British legal traditions and reputation for respecting property rights have made it a respected safehouse for managing intellectual property and other contractual obligations within international trade. If the blockchain is to be inserted into global trade flows, the region’s bridging function may offer the fastest and most impactful route. For Hong Kong residents who want the territory to retain its British legal traditions, that role could be a vital protection against Beijing undermining them.

From publicly available information it is unclear if the Belt and Road Blockchain Consortium has seen much traction. In contrast, the Ping An-led HKMA trade finance group has turned on its “blockchain” platform.

Chapter 6

On p. 151 they wrote about a public event held on August 5, 2015:

As far as bankers were concerned, Bitcoin had no role to play in the existing financial system. Banking institutions thrive on a system of opacity in which our inability to trust each other leaves us dependent on their intermediation of our transactions. Bankers might give lip service to reforming the inner workings of their system, but the thought of turning it over to something as uncontrollable as Bitcoin was beyond heresy. It wasn’t even conceivable.

This is a bit of a red herring. I’ve been in dozens of meetings with banks and financial institutions over the past four years and in general there is consensus that Bitcoin – the network – is not fit for purpose as financial market infrastructure to handle regulated financial instruments. Why should banks process, say payments, on a network in which the validators are neither accountable if a problem occurs nor directly reachable in case users want to change or upgrade the software? Satoshi wasn’t trying to solve interbank-related issues between known participants so this description shouldn’t be seen as a slight against Bitcoin.

Now, bitcoin, the coin, may become more widespread in its usage and/or ownership at banks. In fact, as of this writing, nearly every large commercial bank owns at least a handful of cryptocurrencies in order to pay off ransomware issues. But the passage above seems to conflate the two.

See also: Systemically important cryptocurrency networks

On p. 151 they write:

At the same time, committed Bitcoin fans weren’t much interested in Wall Street, either. Bitcoin, after all, was designed as an alternative to the existing banking system. An improvement.

This is a bit revisionist. For instance, the original whitepaper uses the term “payment” twelve times. It doesn’t discuss banking or specific product lines at banks. Banks do a lot more than just handle payments too. Satoshi attempted to create an alternative payment system… the “be your own bank” narrative is something that other Bitcoin promoters later added.

On p. 152 they discuss the August 2015 event:

In essence, Symbiont was promising “blockchain without bitcoin” – it would maintain the fast, secure, and cheap distributed network model, and a truth machine at its center that validated transactions, but it was not leaderless, permissionless, and open to all. It was a blockchain that Wall Street could control.

This has some hyperbole in it (does “Wall Street” really control it?) but there is a kernel that the authors could expand on in the next version: vendor-dependence and implementation monopoly. In the example above, the authors could have pointed out that the same market structure still exists, so what benefit does a blockchain provide that couldn’t already be used? In addition to, what do the authors mean by “cheap distributed network model” when they have (rightly) mentioned that proof-of-work is resource intensive? As of this writing, Symbiont uses BFT-SMaRt and doesn’t use PoW.

Also, the authors seem to conflate “open to all” with blockchains that they prefer. Yet nearly all of the blockchains they seem to favor (like Bitcoin) involve relatively centralized gatekeeping (BIP process) and permissioned edges via exchanges.

Again, when I wrote the paper that created this distinction in 2015, the “permissionless’ness” is solely an attribute of mining not on sending or receiving coins.

On p. 153 they write:

But these permissioned systems are less open to experiments by computer engineers, and access rights to the data and software are subject to the whim of the official gatekeeper. That inherently constrains innovation. A private blockchain, some say, is an oxymoron. The whole point of this technology is to build a system that is open, accessible, and public. Many describe them with the generic phrase “distributed ledger technology” instead of “blockchain.”

This is why it would be important for the authors to explicitly mention what “blockchain” they are referring to. In many cases their point is valid: what is the point of using a blockchain if a single entity runs the network and/or monopolizes the implementation?

Yet their argument is diminished by insisting on using loaded phrases like “open” and “public.” What does it mean to be open or public here? For instance, in order to use Bitcoin today, you need to acquire it or mine it. There can be substantial entry and exit costs to mining so most individuals typically acquire bitcoins via a trusted, permissioned gateway (an exchange). How is that open?

Lastly, the euphemism of using the term “blockchain” instead of using the term “bitcoin” dates back to late 2015 with investors like Adam Draper explicitly stating that was his agenda. See: The great pivot?

On p. 156 they write:

Though Bitcoin fans frowned upon permissioned blockchains, Wall Street continued to build them. These tweaked versions of Bitcoin shared various elements of the cryptocurrency’s powerful cryptography and network rules. However, instead of its electricity-hungry “proof-of-work” consensus model, they drew upon older, pre-Bitcoin protocols that were more efficient but which couldn’t achieve the same level of security without putting a centralized entity in charge of identifying and authorizing participants.

There is a few issues with this:

  1. Which Bitcoin fans are the authors referring to, the maximalists?
  2. Proof-of-work is not an actual consensus model
  3. There are newer Byzantine fault tolerant protocols such as HoneybadgerBFT which are also being used by different platforms

Their last sentence uses a false dichotomy because there are different security assumptions based on the targeted operating environment that result in tradeoffs. To say that Bitcoin is more or less secure versus say, an instance of Fabric is a bit meaningless because the users have different expectations that the system is built around.

On p. 157 they write about R3:

The biggest winner in this hiring spree was the research and development company R3 CEV, which focused on the financial industry. It sought to build a distributed ledger that could, on the one hand, reap the benefits of real-time securities settlement and cross-industry harmonization but, on the other, would comply with a vast array of banking regulations and meet its members’ proprietary interest in keeping their books private.

This seems like a dated pitch from a couple use cases from mid-2015 because by the time I departed in September 2017, real-time securities settlement wasn’t the primary use (for Corda) being discussed externally.

Also, the “CEV” was formally removed from the name about two years ago. See: A brief history of R3 – the Distributed Ledger Group

By the spring of 2017, R3 CEV had grown its membership to more than one hundred. Each member firm paid annual dues of $250,000 in return for access to the insights being developed inside the R3 lab. Its founders also raised $107 million in venture funding in 2017, mostly from financial institutions.

I don’t think the full details are public but the description of the funding – and what was exchanged for it – is not quite correct. The original DLG members got equity stakes as part of their initial investment. Also, as far as the Series A that was announced in May 2017, all but one of the investors was a financial institution of some kind.

On p. 157 they write:

Some of that money went to hire people like Mike Hearn, a once prominent Bitcoin developer who dramatically turned his back on the cryptocurrency community with an “I quit” blog post complaining about the bitter in fighting. R3 also hired Ian Grigg – who later left to join EOS – another prominent onetime rebel from the cryptocurrency space.

To be clear on the timing: Mike Hearn began working at R3 in October 2015 (along with James Carlyle).23 Several months later he published a widely discussed post about Bitcoin itself. Based on his public talks since January 2016, he still seems to have some passing interest in cryptocurrencies; he did a reddit AMA on /r/btc this past spring.

Also, Ian Grigg has since left EOS and launched a new startup, Chamapesa.

On p. 157 they write about me:

Before their arrival, R3 had also signed on Tim Swanson as research director. Swanson was a distributed ledger/blockchain analyst who was briefly enthused by Bitcoin but who later became disillusioned with the cryptocurrency’s ideologues. He became a vocal, anti-Bitcoin gadfly who seemed to delight in mocking its travails.

This is also revisionist history.

Not to dive too much into the weeds here – and ignoring everything pre-2014 – a quick chronology that could be added if the authors are looking to be balanced is the following:

Over the course of under four months, after doing market research covering a few dozen projects, I published Great Chain of Numbers in March 2014… which was a brief report that quickly became outdated.

Some of the feedback I received – including from Bob, an expert at a data analytics startup – was that I was too charitable towards the claims of cryptocurrency promoters at payment processors and exchanges.24 That is to say, Bob thought that based on analytics, the actual usage of a payment processor was a lot lower than what the executives from that processor told me. In retrospect, Bob was absolutely correct.

A couple months later I ended up – by accident – doing an interview on Let’s Talk Bitcoin. The original guest did not show up and while we (the co-hosts) were waiting, I ended up getting into a small debate with another co-host about the adoption and usage of cryptocurrencies like Bitcoin. You can listen to it here and read the corresponding long-read that provides more citations and supporting links to back up the comments I made in the podcast.

From this moment forward (June 2014) – because I fact-checked the claims and did not blindly promote cryptocurrencies – I quickly became labeled as a pariah by several of the vocal cryptotwitter personalities. Or as the authors of this book unfairly label me: “anti-Bitcoin gadfly.” To call this order of events “disillusionment” is also unfair.

Lastly, a quick fix to the passage in the book: I technically became a formal advisor to R3 at the end of 2014 (after their second roundtable in Palo Alto)… and then later in August 2015 came on full-time as director of market research (although I subsequently wore several different hats).

On p. 158 they write:

Of a similar breed was Preston Byrne, the general counsel of Eris Ltd., later called Monax which designed private blockchains for banks and a variety of other companies. When Byrne’s Twitter feed wasn’t conveying his eclectic mix of political positions – pro-Trump, anti-Brexit, pro-Second Amendment, pro-encryption, anti-software utopianism – or constant references to marmots (the Eris brand’s mascot), it poured scorn on Bitcoin’s fanatic followers. For guys like Swanson and Byrne, Bitcoin’s dysfunctional governance was a godsend.

Again, chronologically I met Preston online in early 2014. He helped edit and contributed to Great Chain of Numbers. Note: he left Eris last year and recently joined a US law firm.

This is an unfair description: “For guys like Swanson and Byrne, Bitcoin’s dysfunctional governance was a godsend.”

This is unfair for several reasons:

  • We were hardly the first people to spend time writing about the governance problems and frictions involved in cryptocurrencies. For instance this includes: Ray Dillinger, Ben Laurie, and likely dozens of others. Nor were we the only ones discussing it in 2014 and 2015.
  • Preston and I have also – separately – written and discussed issues with other cryptocurrencies and blockchains during that time frame… not just Bitcoin.

Thus to single us out and simultaneously not mention others who had similar views, paints us as some type of cartoonish villains in this narrative. Plus, the authors could have reached out to us for comment. Either way, the next version should attempt to fix the word choices and chronology.

I reached out to Preston Byrne and he provided a response that he asked to have included in a footnote.25

On p. 159 they write more about R3:

On the one hand, regulators were comfortable with the familiar membership of R3’s consortium: they were more accustomed to working with bankers than with T-shirt-and-jeans-wearing crypto-investors. But on the other, the idea of a consortium of the world’s biggest banks having say-so over who and what gets included within the financial system’s single and only distributed ledger conjured up fears of excessive banking power and of the politically unpopular bailouts that happened after the crisis. Might Wall Street be building a “too-big-to-fail” blockchain?

This is some strange criticism because many of the developers of Corda (and other pieces of software) wore casual and business casual attire while working in the offices.

Corda is not the “single and only distributed ledger” being used by enterprises. Nearly all of the banks that invested in R3 also invested in other competing entities and organizations including Axoni and Digital Asset. Thus the statement in the middle should be updated to reflect that R3 does not have some kind of exclusivity over banking or enterprise relationships.

Michael Casey has said multiple times in public (even prior to the existence of Corda) that R3 was a “cartel coin” or “cartel chain” — including on at least one panel I was on with him in January 2016.  This is during a time in which R3 did not have or sell any type of product, it was strictly a services-focused company.  Maybe the organization evolves in the future – there may even be some valid criticism of a mono-implementation or a centrally run notary – but even as of this writing there is no Corda Enterprise network up and running.26

Lastly, all of these banks are members of many different types of consortia and multilateral bodies. Simply belonging to or participating in organizations such as IOSCO does not mean something nefarious is afoot.

On p. 160 they write:

The settlement time is also a factor in a financial crisis, and it contributed to the global panic of 2008.

This is a good point and it would be great to go into further details and examples in the next edition.

On p. 160 they write:

This systemic risk problem is what drew Blythe Masters, one of the key figures behind blockchain innovation on Wall Street, into digital ledger technology; she joined Digital Asset Holdings, a blockchain service provider for the financial system’s back-office processing tasks, as CEO in 2014.

Two small quibbles:

  1. Pretty sure the authors meant to say “distributed” not “digital”
  2. Blythe Masters joined as CEO in March 2015, not in 2014

On p. 162 they write:

It’s just that to address such breakdowns, this new wave of distributed ledger system designers have cherry-picked the features of Nakamoto’s invention that are least threatening to the players in the banking system, such as its cryptographic integrity, and left aside its more radical, and arguably more powerful, features, especially the decentralized, permissionless consensus system.

This is revisionist history. Satoshi bundled together existing ideas and libraries to create a blockchain. He or she did not invent cryptography from the ground up. For more details, readers are encouraged to read “Bitcoin is worse is better” from Gwern Branwen. IT systems at financial institutions were (and are) already using various bits of cryptography, encryption, permissioning, data lakes, and distributed storage methods.

Furthermore, because the participants in the financial system are known, there is no reason to use proof-of-work, which is used in Bitcoin because the participants (miners) are unknown.

Lastly, the authors touch on it and do have a valid point about market structure being changed (or unchanged) and should try to expand that in the next edition.

On p. 162 they write:

The DTCC, which settles and clears the vast majority of US stock and bond trades, handles 10,000 transactions per second; Bitcoin, at the time of this writing, could process just seven. And as strong as Bitcoin’s value – and incentive-based security model has proven to be, it’s not at all clear that a few hundred million dollars in bitcoin mining costs would deter rogue traders in New York or London when government bond markets offer billion dollar fraud opportunities.

Firstly, at the time of this writing, on-chain capacity for Bitcoin (even with Segwit activated) is still less than seven transaction per second.

Second, it is not clear how “rogue traders” in New York or London would be able to directly subvert the mining process of Bitcoin. Are the authors thinking about the potential security delta caused by watermarked tokens and colored coins?27

On p. 162 they write:

Either way, for the firms that R3 and Digital Asset serve – managers of the world’s retirement funds, corporate payrolls, government bond issuances, and so forth -these are not security risks they can afford. For now – at least until solutions as Lightning provide large-scale transaction abilities – Bitcoin isn’t anywhere near ready to service Wall Street’s back-office needs.

But Bitcoin is not fit for purpose for regulated financial institutions. Satoshi wasn’t trying to solve back-office problems that enterprises had, why are the authors intent on fitting a round peg in a square hole?

Also, Lightning isn’t being designed with institutions in mind either. Even if one or more of its implementations becomes widely adopted and used by Bitcoin users, it still doesn’t (currently) meet the functional and non-functional requirements that regulated institutions have. Why market it as if it does?

On p. 162 they write:

There are also legal concerns. R3’s Swanson has argued that the mere possibility of a 51 percent attack – that scenario in which a minder gains majority control of a cryptocurrency network’s computing power and fraudulently changes transactions – means that there can never be “settlement finality” in a cryptocurrency transaction. That of perpetual limbo is a scenario that Wall Street lawyers can’t live with, he said. We might retort that the bailouts and various other deals which banks reversed their losses during the crisis make a mockery of “finality,” and that Bitcoin’s track record of irreversibility is many magnitudes better than Wall Street’s. Nonetheless, Swanson’s catchy critique caught on among bankers. After all, he was preaching to the choir.

So there are a few issues with this statement.

I did not invent the concept of “settlement finality” nor did ‘Wall Street lawyers.’  The term dates back decades if not centuries and in its most recent incarnation is the product of international regulatory bodies such as BIS and IOSCO. Regulated financial institutions – starting with financial market infrastructures – are tasked with reducing risk by making sure the payment systems, for instance, are irreversible. Readers should peruse the PFMIs published in 2012.

The next issue is, they make it sound like I lobbied banks using some ‘gotcha’ loophole to scare banks from using Bitcoin. Nowhere in my presentations or speeches have I justified or handwaved away the (criminally?) negligent behavior of individuals at banks that may have benefited from bailouts. This is another unfair characterization that they have painted me as.

To that point, they need to be more specific about what banks got specific transactions reversed. Name and shame the organizations and explain how it would not be possible in a blockchain-based world. Comparing Bitcoin with ‘Wall Street’ doesn’t make much sense because Bitcoin just handles transfers of bitcoin, nothing else. ‘Wall Street’ encompasses many different product lines and processes many other types of transactions beyond payments.

All in all, painting me as a villain is weak criticism and they should remove it in their next edition.

On p. 163 they write about permissioned ledgers:

They’re not racing each other to win currency rewards, which also means they’re not constantly building a wasteful computing infrastructure a la Bitcoin.

They say that as if it is a good thing. Encourage readers to look through the energy costs of maintaining several different proof-of-work networks that handle almost no commerce.

On p. 163 they write:

That’s why we argue that individuals, businesses, and governments really need to support the various hard-core technical solutions that developers are pursuing to help permissionless ledgers like Bitcoin and Ethereum overcome their scaling, security, and political challenges.

This agenda has been pretty clear throughout the book, though it may be more transparent to the reader if it comes earlier in chapter 1 or 2.

From a historical perspective this argument doesn’t make much sense. If Karl Benz had said the same thing in the 19th century about getting engineers to build around his car and not others. Or the Wright Brothers had been ‘more successful’ at suing aerospace competitors. Why not let the market – and its participants – chose to work on platforms they find of interest?

On p. 165 they write about the MIT Digital Currency Inititative but do not disclose that they solicit financial support from organizations such as central banks, some of whom pay up to $1 million a year to collaborate on research projects. Ironically, the details of this program are not public.

On p. 167 they write:

A broad corporate consortium dedicated to a mostly open-source collaborative approach, Hyperledger is seeking to develop nothing less than a common blockchain / distributed ledger infrastructure for the global economy, one that’s targeted not only at finance and banking but also at the Internet of Things, supply chains, and manufacturing.

The next edition should update that passage. All of the projects incubated by the Hyperledger Project are open sourced, there is no “mostly.” And not all of these projects involve a blockchain, some involve identity-related efforts.28

On p. 169 and again on p. 172 the authors quote Joi Ito who compares TCP/IP with “walled gardens” such as AOL and Prodigy.

That is comparing apples-and-oranges. TCP/IP is a suite of protocols, not a business. AOL and Prodigy are businesses, not protocols. AOL used a proprietary protocol and you could use TCP/IP via a gateway. Today, there are thousands of ‘walled gardens’ called ISPs that allow packets to jump across boundaries via handshake agreements. There is no singular ‘Internet’ but instead there are thousands of intranets tied together using common standards.

Readers may be interested in: Intranets and the Internet

On p. 173 they write:

Permissionless systems like those of Bitcoin and Ethereum inherently facilitate more creativity and innovation, because it’s just understood that no authorizing company or group of companies can ever say this or that thing cannot be built.

How are they measuring this? Also, while each platform has its own terms of service, it cannot be said that you need explicit permission to build an application on top of a specific permissioned platform. The permissioning has to do with how validation is handled.

On p. 173 they write:

It’s the guarantee of open access that fosters enthusiasm and passion for “permissionlessness” networks That’s already evident in the caliber and rapid expansion in the number of developers working on public blockchain applications. Permissioned systems will have their place, if nothing else because they can be more easily programmed at this early stage of the technology’s life to handle heavier transaction loads. But the overarching objective for all of us should be to encourage the evolution of an open, interoperable permissionless network.

This is just word salad that lacks supporting evidence. For the next edition the authors should tabulate or provide a source for how many developers are working on public blockchain applications.

The passage above also continues to repeat a false dichotomy of “us versus them.” Why can’t both of these types of ‘platforms’ live in co-existence? Why does it have to be just one since neither platform can fulfill the requirements of the other?

It’s like saying only helicopters provide the freedom to navigate and that folks working on airplanes are only doing so because they are less restricted with distances. Specialization is a real.

On p. 173 they conclude with:

There’s a reason we want a world of open, public blockchains and distributed trust models that gives everybody a seat at the table. Let’s keep our eyes on that ball.

This whole chapter and this specific statement alone comes across as preachy and a bit paternalistic. If the message is ‘permissionlessness’ then we should be allowed to pursue our own goals and paths on this topic.

Also, there are real entry and exit costs to be a miner on these public chains so from an infrastructure point of view, it is not really accurate to say everybody gets a seat at the table.

Chapter 7

This is probably their strongest chapter. They do a good job story telling here. Though there were few areas that were not clear.

On p. 179 they write:

But as Bitcoin and the blockchain have shown, the peer-to-peer system of digital exchange, which avoids the cumbersome, expensive, and inherently exclusionary banking system, may offer a better way.

The authors have said 5-6 times already that proof-of-work networks like Bitcoin can be very costly and wasteful to maintain. It would be helpful to the reader for the authors to expand on what areas the banking system is expensive.

And if a bank or group of banks used a permissioned blockchain, would that reduce their expenses?

On p. 181 they write about time stamps:

The stamp, though, is incredibly powerful. And that, essentially, is the service that blockchains provide to people. This public, recognizable open ledger, which can be checked by any time by anybody, acts in much the same way as the notary stamp: it codified that certain action took place at a certain time, with certain particulars attached to it, and it does this in a way that the record of that transaction cannot be altered by private parties, whether they be individuals or governments.

In the next edition the authors should differentiate time stamps and all the functions a notary does. Time stamps may empower notaries but simply stamping something doesn’t necessarily make it notarized. We see this with electronic signatures from Hello Sign and Docusign.

Also, these blockchains have to be funded or subsidized in some manner otherwise they could join the graveyard of hundreds of dead coins.

On p. 181 they write about Factom and Stampery. It would be good to get an update on these types of companies because the founder of Stampery who they single out – Luis Ivan Cuende – has moved on to join and found Aragon.

On p. 183 they discuss data anchoring: taking a hash of data (hash of a document) and placing that into a blockchain so that it can be witnessed. This goes back to the proof-of-existence discussion earlier on. Its function has probably been overstated and is discussed in Anchor’s Aweigh.

On p. 184 they discuss Chromaway. This section should be updated because they have come out with their own private blockchain, Chromapolis funded via a SAFT.

On p. 185 they write:

The easier thing to do, then, for a reform-minded government, is to hire a startup that’s willing to go through the process of converting all of an existing registry, if one exists, into a digital format that can be recorded in a blockchain.

Why? Why does this information have to be put onto a blockchain? And why is a startup the right entity to do this?

On p. 186 they mention several companies such as Bitfury, BitLand, and Ubiquity. It would be good to update these in the next edition to see if any traction occurred.

On p. 187 they write:

They key reason for that is the “garbage-in/garbage-out” conundrum: when beginning records are unreliable, there’s a risk of creating an indisputable permanence to information that enshrines some abuse of a person’s property rights.

This GIGO conundrum doesn’t stop and isn’t limited to just the beginning of record keeping. It is an ongoing challenge, potentially in every country.

On p. 188-192 they describe several other use cases and projects but it is unclear why they can’t just use a database.

On p. 193 they write:

Part of the problem is that cryptocurrencies continue to sustain a reptutation among the general public for criminality. This was intensified by the massive “WannaCry” ransomware attacks of 2017 in which attackers broke into hospitals’ and other institutions’ databases, encrypted their vital files and then extorted payments in bitcoin to have the data decrypted. (In response to the calls to ban bitcoin that inevitably arose in the wake of this episode, we like to point that far more illegal activity and money laundering occurs in dollar notes, which are much harder to trace than bitcoin transactions. Still, when it comes to perception, that’s beside the point – none of these incidents help Bitcoin’s reputation.)

This is a whataboutism. Both actions can be unethical and criminal, there is no need to downplay one versus the other. And the reason why bitcoin and other cryptocurrencies are used by ransomware authors is because they are genuinely useful in their operating environment. Data kidnapping is a good use case for anarchic networks… and cryptocurrencies, by design, continue to enable this activity. The authors can attempt to downplay the criminal element, but it hasn’t gone away and in fact, has been aided by additional liquidity to coins that provide additional privacy and confidentiality (like Monero).

On p. 193 they write about volatility:

This is a massive barrier to Bitcoin achieving its great promise as a tool to achieve financial inclusion. A Jamaican immigrant in Miami might find the near-zero fees on a bitcoin transaction more appealing than the 9 percent it costs to use a Western Union agent to send money home to his mother.

This financial inclusion narrative is something that Bitcoin promoters created after Satoshi disappeared. The goal of Bitcoin — according to the whitepaper and announcement threads – wasn’t to be a new rail for remittance corridors. Maybe it becomes used that way, but the wording in the passage above as a “great promise” is misleading.

Also, the remittance costs above should be fact-checked at the very handy Save On Send site.

On p. 194 they write about BitPesa. Until we see real numbers in Companies House filings, it means their revenue is tiny. Yet the authors make it sound like they have “succeeded”:

The approach is paying dividends as evident in the recent success of BitPesa, which was established in 2013 and was profiled in The Age of Cryptocurrency. The company, which offers cross-border payments and foreign-exchange transactions in and out of Kenya, Nigeria, Tanzania, and Uganda, reported 25 percent month-on-month growth, taking its transaction volume midway through 2017, up from $1 million in 2016.

They also cited some remittance figures from South Korea to the Philippines which were never independently verified and are old.

On p. 194 they dive into Abra a company they described as a remittance company but earlier this year they pivoted into the investment app category as a Robinhood-wannabe, with a coin index.

On p. 196 they discuss the “Somalia dilemma” in which the entire country is effectively unable to access external financial systems and somehow a blockhain would solve their KYC woes. The authors then describe young companies such as Chainalysis and Elliptic which work with law enforcement to identify suspicious transactions. Yet they do not close the loop on the narrative as to how the companies would help the average person in Somalia.

On p. 198 they discuss a startup called WeTrust and mention that one of the authors – Michael – is an advisor. But don’t disclose if he received any compensation for being an advisor. WeTrust did an ICO last year. This is important because the SEC just announced it has fined and settled with Floyd Mayweather and DJ Khaled for violating anti-touting regulations.

Chapter 8

Chapter 8 dives into self-sovereign identity which is genuinely an interesting topic. It is probably the shortest chapter and perhaps in the next edition can be updated to reflect any adoption that took place.

On p. 209 they write about physical identification cards:

Already, in the age of powerful big data and network analytics – now enhanced with blockchain-based distributed trust systems to assure data integrity – our digital records are more reliable indicators of the behavior that defines who we are than are the error-prone attestations that go into easily forged passports and laminated cards.

How common and how easily forged are passports? Would be interesting to see that reference and specifically how a blockchain would actually stop that from happening.

On p. 212 they write about single-sign ons:

A group of banks including BBVA, CIBC, ING, Societe Generale, and UBS has already developed such a proof of concept in conjunction with blockchain research outfit R3 CEV.

Earlier they described R3 differently. Would be good to see more consistency and also an update on this project (did it go anywhere?).

On p. 213 they describe ConsenSys as a “think tank” but it is actually a ‘venture studio’ similar to an incubator (like 500 Startups). Later on p. 233 they describe ConsenSys as an “Ethereum-based lab”.

On p. 216 they write about Andreas Antonopoulos:

What we should be doing, instead of acting as judge and executioner and making assumptions “that past behavior will give me some insight into future behavior,” Antonpolous argues, is building systems that better manage default risk within lenders’ portfolios. Bitcoin, he sustains, has the tolls to do so. There’s a lot of power in this technology to protect against risk: smart contracts, multi-signature controls that ensure that neither of the two parties can run off with the funds without the other also signing a transaction, automated escrow arrangements, and more broadly, the superior transparency and granularity of information on the public ledger.

There are at least two issues with this:

Nowhere in this section do the authors – or Antonopolous – provide specific details for how someone could build a system that manages default risk on top of Bitcoin. It would be helpful if this was added in the next edition.
And recently, Antonopoulos claims to have been simply educating people about “blockchain technology” and not promoting financial products.

If you have followed his affinity marketing over the past 4-5 years he has clearly promoted Bitcoin usage as a type of ‘self-sovereign bank‘ — and you can’t use Bitcoin without bitcoins.29 He seems to be trying to have his cake and eat it too and as a result got called out by both Nouriel and Buttcoin.

On p. 219 they write:

If an attestation of identifying information is locked into an immutable blockchain environment, it can’t be revoked, not without both parties agreeing ot the reversal of the transaction. That’s how we get to self-sovereignty. It’s why, for example, the folks at Learning Machine are developing a product to prove people’s educational bona fides on Blockcerts, an MIT Media Lab-initiated open-source code for notarizing university transcripts that hashes those documents to the bitcoin blockchain. Note the deliberate choice of the most secure, permissionless blockchain, Bitcoin’s. A permissioned blockchain would fall short of the ideal because there, too, the central authority controlling the network could always override the private keys of the individual and could revoke their educational certificates. A permissionless blockchain is the only way to give real control/ownership of the document to the graduate, so that he/she can disclose this particularly important attribute at will to anyone who demands it.

This disdain for ‘permissioned blockchains’ is a red herring and another example of the “us versus them” language that is used throughout the book. If a blockchain has a central authority that can do what the authors describe, it would be rightly described as a single point of failure and trust. And this is why it is important to ask what ‘permissioned’ chain they had in mind, because they are not all the same.

They also need to explain how they measure ‘most secure’ because Bitcoin – as described throughout this review – has several areas of centralization include mining and those who control the BIP process.

On p. 219 they quote Chris Allen. Could be worth updating this because he left Blockstream last year.

Chapter 9

This chapter seemed light on details and a bit polemical.

For instance, on p. 223 they write:

Many of our politicians seem to have no ideas this is coming. In the United States, Donald Trump pushes a “Buy America First” campaign (complete with that slogan’s echoes of past fascism), backed by threats to raise tariffs, tear up trade deals, boot undocumented immigrants out of the country, and “do good deals for America.” None of this addresses the looming juggernaut of decentralized software systems. IoT systems and 3D printing, all connected via blockchains and smart-contract-triggered, on-demand service agreements, will render each presidential attempt to strong-arm a company into retaining a few hundred jobs in this or that factory town even more meaningless.

Putting the politics aside for a moment, this book does not provide a detailed blue print for how any of the technology listed will prevent a US president from strong-arming a company to do any specific task. How does a 3D printer connected to a blockchain prevent a president from executing on their agenda?

On p. 224 they write about universal basic income:

This idea, first floated by Thomas Paine in the eighteenth century, has enjoyed a resurgence on the left as people have contemplated how robotics, artificial intelligence, and other technologies would hit working-class jobs such as truck driving. But it may gain wider traction as decentralizing force based on blockchain models start destroying middle-class jobs.

This speculation seems like a non sequitur. Nowhere in the chapter do they detail how a “blockchain-based model” will destroy middle class jobs. What is an example?

On p. 227 they write:

In case you’re a little snobbish about such lowbrow art, we should also point out that a similar mind-set of collaborative creation now drives the world of science and innovation. Most prominently, this occurs within the world of open-source software development; Bitcoin and Ethereum are the most important examples of that.

If readers were unfamiliar with the long history of the free open source software movement, they might believe that. But this ignores the contributions of BSD, Linux, Apache, and many other projects that are regularly used each and every day by enterprises of all shapes and sizes.

Also, during the writing of this review, an open source library was compromised — potentially impacting the Copay wallet from Bitpay — and no one noticed (at first). Eric Diehl, a security expert at Sony, has a succinct post up on the topic:

In other words, this is an example of a software supply chain attack. One element in the supply chain (here a library) has been compromised. Such an attack is not a surprise. Nevertheless, it raises a question about the security of open source components.

Many years ago, the motto was “Open source is more secure than proprietary solutions.” The primary rationale was that many eyes reviewed the code and we all know that code review is key for secure software. In the early days of open source, this motto may have been mostly true, under some specific trust models ( see https://eric-diehl.com/is-open-source-more-secure/, Chapter 12 of Securing Digital Video…). Is it still true in our days?

How often do these types of compromises take place in open-source software?

On p. 232 they write:

Undaunted, an unofficial alliance of technologists, entrepreneurs, artists, musicians, lawyers, and disruption-wary music executives is now exploring a blockchain-led approach to the entire enterprise of human expression.

What does that even mean?

On p. 232 they write about taking a hash of their first book and inserting it into a block on the Bitcoin blockchain. They then quote Dan Ardle from the Digital Currency Council who says:

“This hash is unique to the book, and therefore could not have been generated before the book existed. By embedding this hash in a bitcoin transaction, the existence of the book on that transaction date is logged in the most secure and irrefutable recordkeeping system humanity has ever devised.”

These plattitudes are everywhere in the book and should be toned down in the next edition especially since Ardle – at least in the quote – doesn’t explain how he measures secure or irrefutable. Especially in light of hundreds of dead coins that were not sustainable.

On p. 233 they write:

The hope now is that blockchains could fulfill the same function that photographers carry out when they put a limited number of tags and signatures on reproduced photo prints: it turns an otherwise replicable piece of content into a unique asset, in this case a digital asset.

This seems to be solutionism because blockchains are not some new form of DRM.

Continuing on this topic, they write:

Copying a digital file of text, music, or vidoe has always been trivial. Now, with blockchain-based models, Koonce says, “we are seeing systems develop that can unequivocally ensure that a particular digital ‘edition’ of a creative work is the only one that can be legitimately transferred or sold.” Recall that the blockchain, as we explained in chapter three, made the concept of a digital asset possible for the first time.

This is empirically untrue. It is still trivially possible to download and clone a blockchain, nothing currently prevents that from happening. It’s why there are more than 2,000 cryptocurrencies at the time of this writing and why there are dozens of forks of Bitcoin: blockchains did not make the concept of a digital asset possible. Digital assets existed prior to the creation of Bitcoin and attempting to build a DRM system to prevent unauthorized copies does not necessarily require a blockchain to do.

On p. 238 they write:

Yet, given the amssive, multitudinous, and hetergeneous state of the world’s content, with hundreds of millions of would-be creators spread all over the world and no way to organize themselves as a common interest, there’s likely a need for a permissionless, decentralized system in which the data can’t be restricted and manipulated by a centralized institution such as a recording studio.

Maybe, but who maintains the decentralized system? They don’t run themselves and are often quite expensive (as even the authors have mentioned multiple times). How does a decentralized system fix this issue? And don’t some artists already coordinate via different interest groups like the RIAA and MPAA?

On p. 240 they discuss Mediachain’s acquisition by Spotify:

On the other hand, this could result in a private company taking a technology that could have been used publicly, broadly for the general good, and hiding it, along with its innovative ideas for tokens and other solutions, behind a for-profit wall. Let’s hope it’s not the latter.

This chapter would have been a bit more interesting if the authors weren’t as heavy handed and opinionated about how economic activities (like M&A) should or should not occur. To improve their argument, they could include links or citations for why this type of acquisition has historically harmed the general public.

Chapter 10

On p. 243 they write:

Bitcoin, with its new model of decentralized governance for the digital economy, did not spring out of nowhere, either. Some of the elements – cryptography, for instance – are thousands of years old. Others, like the idea of electronic money, are decades old. And, as should be evident in Bitcoin’s block-size debate, Bitcoin is still very much a work in progress.

This statement is strange because it is inconsistent with what they wrote on p. 162 regarding permissioned chains: “… cherry-picked the features of Nakamoto’s invention that are least threatening to the players in the banking system, such as its cryptographic integrity…”

In this section they are saying that the ideas are old, but in the passage above in chapter 6, they make it sound like it was all from Nakamoto. The authors should edit it to be one way or the other.

Also, Bitcoin’s governance now basically consists of off-chain shouting matches on social media. Massive influence and lobbying campaigns on reddit and Twitter is effectively how the UASF / no2x movement took control of the direction of the BIP process last year.

On p. 245 they write:

That can be found in the individual freedom principles that guide the best elements of Europe’s new General Data Protection Regulation, or GDPR.

All blockchains that involve cross-jurisdictional movement of data will likely face challenges regarding compliance with data privacy laws such as GDPR. Michele Finck published a relevant paper on this topic a year ago.

See also: Clouds and Chains

On p. 247 they write about if you need to use a blockchain:

Since a community must spend significant resources to prove transactions on a blockchain, that type of record-keeping system is most valuable when a high degree of mutual mistrust means that managing agreements comes at a prohibitively high price. (That price can be measured in various ways: in fees paid to middlemen, for instance, in the time it takes to reconcile and settle transactions, or in the fact that it’s impossible to conduct certain business processes, such as sharing information across a supply chain.) When a bank won’t issue a mortgage to a perfectly legitimate and creditworthy homeowner, except at some usurious rate, because it doesn’t trust the registry of deeds and liens, we can argue that the price of trust is too high and that a blockchain might be a good solution.

Not all blockchains utilize proof-of-work as an anti-Sybil attack mechanism, so it cannot be said that “a community must spend significant resources”.

In the next edition it would be interesting to see a cost / benefit analysis for when someone should use a blockchain as it relates the mortgage use case they describe above.

On p. 248 they talk about voting:

Every centralized system should be open for evaluation – even those of government and the political process. Already, startups such as Procivis are working on e-voting systems that would hand the business of vote-counting to a blockchain-based backend. And some adventurous governments are open to the idea. By piloting a shareholder voting program on top of Nasdaq’s Linq blockchain service, Estonia is leading the way. The idea is that the blockchain, by ensuring that no vote can be double-counted – just as no bitcoin can be double-spent – could for the first time enable reliable mobile voting via smartphones. Arguably it would both reduce discrimination against those who can’t make it to the ballot box on time and create a more transparent, accountable electoral system that can be independently audited and which engenders the public’s trust.

A month ago Alex Tapscott made a similar argument.

He managed to temporarily unite some of the warring blockchain tribes because he penned a NYT op-ed about how the future is online voting… powered by blockchains. Below is a short selection of some Twitter threads:

  • Arvind Narayanan, a CS professor at Princeton said this is a bad idea
  • Angela Walch, a law professor at St. Mary’s said this is a bad idea
  • Philip Daian, a grad student at Cornell said this is a bad idea.
  • Luis Saiz, a security researcher at BBVA said this is a bad idea
  • Joseph Hall, the Chief Technologist at the Center for Democracy & Technology said this a bad idea
  • Preston Byrne, a transatlantic attorney and father of marmotology said this is a bad idea
  • Matt Blaze, a CS professor at UPenn, said this is a bad idea

NBC News covered the reaction to Tapscott’s op-ed.  Suffice to say, the next edition should either remove this proposal or provide more citations and references detailing why this is a good idea.

Throughout this chapter projects like BitNation and the Economic Space Agency are used as examples of projects that are “doing something” — but none of these have gotten much traction likely because it’s doing-something-theater.

On p. 252 – 255 they uncritically mention various special interest groups that are attempting to influence decision makers via lobbying. It would be good to see some balance added to this section because many of the vocal promoters at lobbying organizations do not disclose their vested interests (e.g., coin positions).

On p. 255 they talk about “Crypto Valley” in Switzerland:

One reason they’ve done so is because Swiss law makes it easier to set up the foundations needed to launch coin offerings and issue digital tokens.

MME – the Swiss law firm that arguably popularized the approach described in this section – set up more than a dozen of these foundations (Stiftung) before stopping. And its creator, Luke Mueller, now says that:

“The Swiss foundation actually is a very old, inflexible, stupid model,” he said. “The foundation is not designed for operations.”

Could be worth updating this section to reflect what happened over the past year with lawsuits as well.

On p. 255 they write:

The next question is: what will it take for U.S. policymakers to worry that America’s financial and IT hubs are losing out to these foreign competitors in this vital new field.

This is FOMO. The authors should tabulate all of the companies that have left the US – or claim to leave – and look at how many jobs they actually set up overseas because of these laws. Based on many anecdotes it appears what happens in practice is that a company will register or hold an ICO overseas in say, Singapore or Panama, but then open up a development arm in San Francisco and New York. They effectively practice regulatory arbitrage whereby they bypass securities laws in one country (e.g., the US) and then turn around and remit the proceeds to the same country (the US).

On p. 263 they conclude the chapter with:

No state or corporation can put bricks around the Bitcoin blockchain or whitewash its record. They can’t shut down the truth machine, which is exactly why it’s a valuable place to record the voices of human experience, whether it’s our love poems or our cries for help. This, at its core, is why the blockchain matters.

Their description basically anthropromorphizes a data structure. It also comes across as polemical as well as favoritism towards one specific chain, Bitcoin. Furthermore, as discussed throughout this review, there are clear special interest groups – including VC-backed Bitcoin companies — that have successfully pushes Bitcoin and other cyrptocurrencies – into roadmaps that benefit their organizations.

Conclusion

Like their previous book (AoC), The Truth Machine touches on many topics but only superficially.  It makes a lot of broad sweeping claims but curious readers – even after looking at the references – are left wanting specifics: how to get from point A to point B.

There also seems to be an anti-private enterprise streak within the book wherein the authors condescendingly talk down efforts to build chains that are not anarchic. That becomes tiring because – as discussed on this blog many times – it is not a “us versus them” proposition.  Both types of blockchains can and do exist because they are built around different expectations, requirements, and operating environments.

In terms of one-sided narratives: they also did not reach out to several of the people they villify, such as both myself and Preston Byrne as well as coin proponents such as Roger Ver and Jihan Wu.  The next edition should rectify this by either dropping the passages cited above, or in which the authors reach out to get an on-the-record comment from.

Lastly, while some churn is expect, many of the phrases throughout the book did not age well because it relied on price bubbles and legal interpretations that went a different direction (e.g., SAFTs are no longer popular).  If you are still looking for other books to read on the topic, here are several other reviews.

Endnotes

  1. See A brief history of R3 — the Distributed Ledger Group []
  2. Developers of various coins will include “check points” which do make it virtually impossible to roll back to a specific state. Both Bitcoin and Bitcoin Cash have done this. []
  3. See Why the payment card system works the way it does – and why Bitcoin isn’t going to replace it any time soon by Richard Brown []
  4. See Learning from the past to build an improved future of fintech and Distributed Oversight: Custodians and Intermediaries []
  5. Unsurprisingly users want to be able to hold someone accountable for their lack of care and/or difficulty in safely and securely backing up their keys. []
  6. Ibid []
  7. Technically every orphaned block alters the blockchain, because you thought one thing and now you are asked to think another. []
  8. Readers may be interested in The Path of the Blockchain Lexicon by Angela Walch []
  9. Recall that generating hashes is a means to an end: to make Sybil attacks costly on a network with no “real” identities. []
  10. For instance, Selfish Mining []
  11. Albumatic -> Koala -> Chain.com the Bitcoin API company -> Chain.com the enterprise company, etc. []
  12. This is slightly reminiscent of Dr. Strangelove in which General Turgidson says, “I admit the human element seems to have failed us here.” []
  13. See The Revolving Door Comes to Cryptocurrency by Lee Reiners and Is Bitcoin Secretly Messing with the Midterms? from Politico []
  14. See also his role in attacks on CoiledCoin and BBQcoin []
  15. David Andolfatto, from the St. Louis Fed, also pointed this out back in May 2015, skip to the 28 min mark []
  16. See the “no” side of the debate: Can Bitcoin Become a Dominant Currency? []
  17. Ironically in his most recent op-ed published today, he asks people to “quit this ugly obsession with price.”  There are at least 3-4 instances of the co-authors using price as a metric for “strength” in this book. []
  18. See also this related thread from Don Bailey []
  19. Some exchanges, such as Gemini, want proof of mining activity. See also: What is Permissioned-on-Permissionless []
  20. See also the Polly Pocket Investor Day []
  21. Ryan Zurrer, second-in-command at Polychain, was recently fired from Polychain amid weak performance this year. []
  22. The whole public sale thing is problematic from a MSB perspective. The colorability of the position taken by Cooley in that section was questionable at the time and possibly indefensible now. []
  23. Mike wrote the first line of code for Corda over three years ago. []
  24. The initial conversation with Bob took place in San Francisco during Coin Summit. Bob later became a key person at Chainalysis. []
  25. According to Preston:

    Eris, now Monax, was the first company to look at the combination of cryptographic primitives that make up Bitcoin and attempt to use them to make business processes more efficient. In shorthand, the company invented “blockchains without coins” or “permissioned blockchains.”

    Bitcoin’s dysfunctional governance wasn’t a “godsend” for our business, as we weren’t competing with Bitcoin. Rather we were trying to dramatically expand the usecases for database software that had peer to peer networking and elliptic curve cryptography at its core, in recognition of the fact that business counterparties reconcile shared data extremely inefficiently and their information security could benefit from a little more cryptography.

    In exchange for our efforts, Bitcoiners of all shapes and sizes heaped scorn on the idea that any successor technology could utilize their technology’s components more efficiently. We responded with pictures of marmots to defuse some of the really quite vitriolic attacks on our company and because I like marmots; these little critters became the company’s mascot through that process.

    Subsequent developments vindicated my approach. Cryptographically-secure digital cash being trialled by Circle, Gemini, and Paxos utilizes permissioning, a concept that Circle’s Jeremy Allaire said was impossible in 2015 – “they’re not possible separately” – and I predict that as those USD coins seek to add throughput capacity and functionality they will migrate off of the Ethereum chain and onto their own public, permissioned chains which are direct conceptual descendants of Eris’ work.

    They will compete with Bitcoin in some respects, much as a AAA-rated bond or USD compete with Bitcoin now, but they will not compete with Bitcoin in others, as they will cater to different users who don’t use Bitcoin today and are unlikely to use it in the future.

    Ultimately, whether Eris’ original vision was right is a question of how many permissioned chains there are, operating as secure open financial services APIs as Circle and Gemini are using them now. I predict there will be rather a lot of those in production sooner rather than later. []

  26. Oddly the authors of the book do not name “Corda” in this book… they use the phrase: “R3’s distributed ledger” instead. []
  27. Readers may also be interested in reading the 2016 whitepaper from the DTCC []
  28. At the time of this writing there are: 5 incubated “Frameworks” and 6 incubated “Tools.” []
  29. Antonopolous recently gave a talk in Seattle where he promoted the usage of cryptocurrencies to exit the banking system.  Again, a user cannot use a cryptocurrency without absorbing the exposure and risks attached to the underlying coins of those anarchic networks. []
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Cryptocurrency and blockchain-related book reviews

Over the past few years I’ve had the chance to read through and dissect several cryptocurrency and blockchain-related books.

Below are the reviews I have publicly published (in chronological order):

I’ve provided feedback on a handful of others.  If you’re currently writing a book on the topic – and schedule permitting – feel free to send over a draft for my candid feedback.

 

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Book Review: Cryptoassets

[Disclaimer: The views expressed below are solely my own and do not necessarily represent the views of my clients.  I currently own no cryptocurrencies.]

As a follow-on to my previous book reviews, an old colleague lent me a copy of Cryptoassets by Chris Burniske and Jack Tatar.

Overall they have several “meta” points that could have legs if they substantially modify the language and structure of multiple sections in the book.  As a whole it’s about on par with the equally inaccurate “Blockchain Revolution” by the Tapscotts.

As I have one in my previous book reviews, I’ll go through and provide specific quotes to backup the view that the authors should have waited for more data and relevant citations as some of their arguments lack definitive supporting evidence.

In short: hold off from buying this edition.

If you’re interested in understanding the basics of cryptocurrencies but without the same level of inaccuracies, check out the new The Basics of Bitcoins and Blockchains by Antony Lewis.  And if you’re interested in the colorful background of some of the first cryptocurrency investors and entrepreneurs, check out Digital Gold by Nathaniel Popper.

Another point worth mentioning at the beginning is that there are no upfront financial disclosures by the authors.  They do casually mention that they have bitcoin once or twice, but that’s about it.

I think this is problematic because it is not being transparent about potential conflicts of interest (e.g., promoting financial products you may own and hope to see financial gain from).

For instance, we learned that Chris Burniske carried around a lot of USD worth of cryptocurrencies on his phone from a NYT article last year:

But a particularly concentrated wave of attacks has hit those with the most obviously valuable online accounts: virtual currency fanatics like Mr. Burniske.

Within minutes of getting control of Mr. Burniske’s phone, his attackers had changed the password on his virtual currency wallet and drained the contents — some $150,000 at today’s values.

Some quick math for those at home.  The NYT article above was published on August 21, 2017 when 1 BTC was worth about $4,050 and 1 ETH was worth about $314.  So Burniske may have had around 37 BTC or 477 ETH or a combination of these two (and other coins).

That is not a trivial amount of money and arguably should have been disclosed in this book and other venues (such as op-eds and analyst reports).1 In the next edition, they should consider adding a disclosure statement.

A final comment is that several reviewers suggested I modify the review below to be (re)structured like a typical book review — comparing broad themes instead of a detailed dissection — after all who is going to read 38,000+ words?

That is a fair point.  Yet because many of the points they attempt to highlight are commonly repeated by promoters of cryptocurrencies, I felt that this review could be a useful resource for readers looking for different perspective to the same topics frequently discussed in media and at events.

Note: all transcription errors are my own.


Authors’ Note

On p. xi, the authors wrote:

When embarking on our literary journey, we recognized the difficulty in documenting arguably the world’s fastest moving markets. These markets can change as much in a day – up or down – as the stock market changes in a year.

It is only mentioned in passing once or twice, but we know that market manipulation is a real on-going phenomenon.  The next edition could include a subsection of cryptocurrencies and ICOs that the CFTC and SEC – among other regulators – have identified and prosecuted for manipulation.  More on that later below.

Foreword

On p. xiv, Brian Kelly wrote in the Foreword

The beauty of this book is that it takes the reader on a journey from bitcoin’s inception in the ashes of the Great Financial Crisis to its role as a diversifier in a traditional investment portfolio.

A small quibble: Satoshi actually began writing the code for Bitcoin sometime in mid-2007, before the GFC took place.  It may be a chronological coincidence that it came out when it did, especially since it was supposed to be a payment system, which is just one small function of a commercial bank.23

On p. xv Kelly writes:

As with any new model, there are questions about legality and sustainability, but the Silicon Valley ethos of “break things first, then ask for forgiveness” has found its way to Wall Street.

There are also two problems with this:

  1. Both the SEC and CFTC – among other federal agencies – were set up in the past because of the behavior that Kelly thinks is good: “break things first, then ask for forgiveness” is arguably a bad ethos to have for any fiduciary and prudential organizations.4
  2. Any organization can do that, that’s not hard.  Some have gotten away with it more than others.  For instance, Coinbase was relatively loose with its KYC / AML requirements in 2012-2014 and has managed to get away with it because it grew fast enough to become an entity that could lobby the government.

On p.xv Kelly writes

“Self-funded, decentralized organizations are a new species in the global economy that are changing everything we know about business.”

In point of fact, virtually all cryptocurrencies are not self-funded.  Even Satoshi had some kind of budget to build Bitcoin with.  And basically all ICOs are capital raises from external parties.  Blockchains don’t run and manage themselves, people do.

On p. xv Kelly writes:

“These so-called fat protocols are self-funding development platforms that create and gain value as applications are built on top.”

The fat protocol thesis has not really born out in reality, more on that in a later chapter below.  While lots of crytpocurrency “thought leaders” love to cite the original USV article, none of the platforms are actually self-funded yet.  They all require external capital to stay afloat because insiders cash out for real money.5 And because there is a coin typically shoehorned at the protocol layer, there is very little incentive for capable developers to actually create apps on top — hence the continual deluge of new protocols each month — few actors want to build apps when they can become rich building protocols that require coins. More on this later.6

Introduction

On p. xxii the authors write:

“… and Marc Andreessen developing the first widely used web browser, which ultimately became Netscape.”

A pedantic point: Marc Andreessen was leader of a team that built Mosaic, not to take away from that accomplishment, but he didn’t single handedly invent the web browser.  Maybe worth rewording in next edition.

On p. xxiii they write:

Interestingly, however, the Internet has become increasingly centralized over time, potentially endangering its original conception as a “highly survivable system.”

This is a valid point however it glosses over the fact that all blockchains use “the internet” and also — in practice — most public blockchains are actually highly centralized as well.  Perhaps that changes in time, but worth looking at “arewedecentralizedyet.”

On p. xxiii they write:

Blockchain technology can now be thought of as a general purpose technology, on par with that of the steam engine, electricity, and machine learning.

This is still debatable.  After all, there is no consensus on what “blockchains” are and furthermore, as we have seen in benchmark comparisons, blockchains (however defined) come in different configurations.  While there are a number of platforms that like to market themselves as “general purpose,” the fact of the matter is that there are trade-offs based on the user requirements: always ask who the end-users and the use-cases a blockchain was built around are.

On p. xxiv they cite Don and Alex Tapscott.  Arguably they aren’t credible people on this specific topic.  For example, their book was riddled with errors and they even inappropriately made-up advisors on their failed bid to launch and fund their NextBlock Global fund.

On p. xxiv the authors write:

Financial incumbents are aware blockchain technology puts on the horizon a world without cash – no need for loose bills, brick-and-mortar banks, or, potentially, centralized monetary policies.  Instead, value is handled virtually through a system that has no central authority figure and is governened in a centralized and democratic manner. Mathematics force order in the operations. Our life savings, and that of our heirs, could be entirely intangible, floating in a soup of secure 1s and 0s, the entire system accessed through computers and smartphones.

This conflates multiple things: digitization with automation.7  Retail banking has and will continue its march towards full digital banking.  You don’t necessarily need a blockchain to accomplish that — we see that with Zelle’s adoption already.8

Also, central banks are well aware that they could have some program adjust interest rates, but discretion is still perceived as superior due to unforeseen incidents and crisis. 9

On p. xxv they write:

The native assets historically have been called cryptocurrencies or altcoins but we prefer the term cryptoassets, which is the term we will use throughout the book.

The term seems to have become a commonly accepted term but to be pedantic: most owners and users do not actually utilize the “cryptography” part — because they house the coins in exchanges and other intermediaries they must trust (e.g., the user doesn’t actually control the coin with a private key).10

And as we continue to see, these coins are easily forkable.  You can’t fork physical assets but you can fork and clone digital / virtual ones.  That’s a separate topic though maybe worth mentioning in the next edition.

On p. xxv they write:

It’s early enough in the life of blockchain technology that no books yet have focused solely on public blockchains and their native cryptoassetss from the investing perspective. We are changing that because investors need to be aware of the opportunity and armed both to take advantage and protect themselves in the fray.

Might be worth rewording because in Amazon there are about 760 books that pop up when “investing in cryptocurrencies” is queried.  And many of those predate the publication of Cryptoassets.  For instance, Brian Kelly, who wrote the Forward, published a fluffy coin promotion book a few years ago.

On p. xv they write:

Inevitably, innovation of such magnitude, fueled by the mania of making money, can lead to overly optimistic investors. Investors who early on saw potential in Internet stock encountered the devastating dot-com bubble. Stock in Books-A-Million saw its price soar by over 1,000 percent in one week simply by announcing it had an updated website. Subsequently, the price crashed and the company has since delisted and gone private. Other Internet-based high flyers that ended up crashing include Pets.com, Worldcom, and WebVan. Today, none of those stocks exist.

So far, so good, right?

Whether specific cryptoassets will survive or go the way of Books-A-Million remains to be seen.  What’s clear, however, is that some will be big winners. Altogether, between the assets native to blockchains and the companies that stand to capitalize on this creative destruction, there needs to be a game plan that investors use to analyze and ultimately profit from this new investment theme of cryptoassets. The goal of this book is not to predict the future – it’s changing too fast for all but the lucky to be right- but rather to prepare investors for a variety of futures.

Even for 2017 when the book was publish, this statement is lagging a bit because there were already several “coin graveyard” sites around.  Late last month Bloomberg ran a story: more than 1,000 coins are dead according to Coinopsy.

It is also unclear, “that some will be big winners.”  Maybe modify this part in the next version.11

On p. xxvi they write:

“One of the keys to Graham’s book was always reminding the investor to focus on the inherent value of an investment without getting caught in the irrational behavior of the markets.”

There is a healthy debate as to whether cryptocurrencies and “cryptoassets” have any inherent value either.12  Arguably most coins traded on a secondary market depend on some level of ‘irrational’ behavior: many coin holders have short time horizons and want someone else to help push up the price so they can eventually cash out.13

Chapter 1

On p. 3 they write:

In 2008, Bitcoin rose like a phoenix from the ashes of near Wall Street collapse.

This a little bit of revisionist history.14

The Bitcoin whitepaper came out on October 31, 2008 and Satoshi later said that he/she had spent the previous 18 months coding it first before writing it up in a paper.  The authors even discuss this later on page 7.  Worth removing in next edition.

On p. 3 they write:

Meanwhile, Bitcoin provided a system of decentralized trust for value transfer, relying not on the ethics of humankind but on the cold calculation of computers and laying the foundation potentially to obviate the need for much of Wall Street.

This is not quite true.  At most, Bitcoin as it was conceived and as it is today — is a relatively expensive payment network that doesn’t provide definitive settlement finality.15 Banks as a whole, do more than just handle payments — they manage many other services and products.  So the comparison isn’t really apples-to-apples.

Note: banks again as a whole spend more on IT-related systems than nearly any other vertical — so there is already lots of “cold calculation” taking place within each of these financial institutions.16

Now, maybe blockchain-related ideas replace or enhance some of these institutions, but it is unlikely that Bitcoin itself as it exists today, will do any of that.

On p. 5 they write:

What people didn’t realize, including Wall Street executives, was how deep and interrelated the risks CMOs posed were. Part of the problem was that CMOs were complex financial instruments supported by outdated financial architecture that blended and analog systems.

That may have been part of a bigger problem.17

There were a dozen plus factors for how and why the GFC arose and evolved, but “outdated financial infrastructure” isn’t typically at the top of the list of culprits.  Would blockchain-like systems have prevented the entire crisis?  There are lots of op-eds that have made the claim, but the authors do not really provide much evidence to support the specific “blended” argument here.  Perhaps worth articulating in its own section next time.

Speaking of which, also on p. 5 they write:

Whether as an individual or an entity, what’s now clear is that Satoshi was designing a technology that if existent would have likely ameliorated the toxic opacity of CMOs. Due of the distributed transparency and immutable audit log of a blockchain, each loan issued and packaged into different CMOs could have been documented on a single blockchain.

This seems to conflate two separate things: Bitcoin as Satoshi originally designed it in 2008 (for payments) and later what many early adopters have since promoted it as: blockchain as FMI.18

Bitcoin was (purposefully) not designed to do anything with regulated financial instruments, it doesn’t meet the PFMI requirements.  He was trying to build e-cash that didn’t require KYC and was difficult to censor… not ways to audit CMOs.  If that was the goal, architecturally Bitcoin would likely look a lot different than it did (for instance, no PoW).

And lastly on p. 5 they write:

This would have allowed any purchaser to view a coherent record of CMO ownership and the status of each mortgage within.  Unfortunately, in 2008 multiple disparate systems – which were expensive and therefore poorly reconciled – held the system together by digital strings.

Interestingly, this is the general pitch for “enterprise” blockchains: that with all of the disparate siloed systems within regulated financial institutions, couldn’t reconciliation be removed if these same systems could share the same record and facts on that ledger?  Hence the creation of more than a dozen enterprise-focused “DLT” platforms now being trialed and piloted by a slew of businesses.

This is briefly discussed later but the next edition could expand on it as the platforms do not need a cryptocurrency involved.19

On p. 7 they write:

By the time he released the paper, he had already coded the entire system.  In his own words, “I had to write all the code before I could convince myself that I could solve every problem, then I wrote the paper.” Based on historical estimates, Satoshi likely started formalizing the Bitcoin concept sometime in late 2006 and started coding around May 2007.

Worth pointing out that Hal Finney and Ray Dillinger — and likely several others – helped audit the code and paper before any of it was publicly released.

On p. 8 they write:

Many years later people would realize that one of the most powerful use cases of blockchain technology was to inscribe immutable and transparent information that could never be wiped from the face of digital history and that was free for all to see.

There appears to be a little hyperbole here.

Immutability has become a nebulous word that basically means many different things to everyone.  In practice, the only thing that is “immutable” on any blockchain is the digital signature — it is a one-way hash.   All something like proof-of-work or proof-of-stake does are decide who gets to vote to append the chain.

Also, as mentioned above, there are well over 1,000 dead coins so it is actually relatively common for ‘digital history’ to effectively be wiped out.

On p. 8 they write:

A dollar invested then would be worth over $1 million by the start of 2017, underscoring the viral growth that the innovation was poised to enjoy.

Hindsight is always 20-20 and the wording above seems to be a little unclear with dates.  As often as the authors say “this is not a book endorsing investments,” other passages seem do just the opposite: by saying how smart you would’ve been if you had bought at a relative low, during certain (cherry picked) dates.

Also, what viral growth?  What are the daily active and monthly active user numbers they think are occurring on these chains?  In later chapters, they do cite some on-chain activity but this version lacks specific DAU / MAU that would strengthen their arguments.20 Worth revisiting in the next edition.

On p. 8 they write:

Diving deeper into Satoshi’s writings around the time, it becomes more apparent that he was fixated on providing an alternative financial system, if not a replacement entirely.

This isn’t quite right.  The very first thing Satoshi tried to build was a marketplace to play poker which was supposed to be integrated with the original wallet itself.

A lot of the talk about “alternative financial system” is arguably revisionist propaganda from folks like Andreas Antonopoulos who have tried to rewrite the history of Bitcoin to conform with their political ideology.

Readers should also check out MojoNation and what that team tried to accomplish.

On p. 9 they write;

While Wall Street as we knew it was experiencing an expensive death, Bitcoin’s birth cost the world nothing.

There are at least two issues that can be modified for the future:

  1.  Wall Street hasn’t died, maybe parts of the financial system are replaced or removed or enhanced, but for better and worse almost 10 years since the collapse of Lehman, the collective financial industry is still around.
  2.  Bitcoin cost somebody something, there were opportunity costs in its creation.  And as we now know: the ongoing environmental impact is enormous.  Yet promoters typically handwave it away as a “cost of doing anarchy.”  Thus worth rewording or removing in the next edition.

On p. 9 they also wrote:

It was born as an open-source technology and quickly abandoned like a motherless babe in the world. Perhaps, if the global financial system had been healthier, there would have been less of a community to support Bitcoin, which ultimately allowed it to grow into the robust and cantankerous toddler that it currently is.

This prose sounds like something from Occupy Wall Street and not something found in literature to describe a computer program.

For example, there are lots of nominally open source blockchains, hundreds or maybe even thousands.21 That’s not very unique (it is kind of expected since there is a financial incentive to clone them).

And again, Satoshi worked on it for at least a couple years.  It’s not like he/she dropped it off at an orphanage after immediate gestation.  This flowery wording acts like a distraction and should be removed in the next edition.

Chapter 2

On p. 12 they write:

Three reputable institutions would not waste their time, nor jeopardize their reputations, on a nefarious currency with no growth potential.

There is a bit of an unnecessary attitude with this statement.  The message also seems to go against the criticism earlier in the book towards banks.  For instance, the first chapter was critical of the risks that banks took leading up to the GFC.  You can’t have it both ways.  In the next edition, should either remove this or explain what level or risk is appropriate.

Also, what is the “growth potential” here?  Do the authors mean the value of a coin as measured in real money?  Or actual usage of the network?

Lastly, the statement above equates the asset value growth (USD value increases) with a bank’s interest. Bank’s do not typically speculate on the price, they usually only care about volumes which make revenues. A cryptocurrency could go to $0.01 for all they care; and if people want to use it then they could consider servicing it provided the bank sees an ability to make money.  For example, UK banks did not abandon the GBP even though it lost 20% of its value in 2016 following the Brexit referendum.

On p. 12 they write:

Certainly, some of the earliest adopters of Bitcoin were criminals. But the same goes for most revolutionary technologies, as new technologies are often useful tools for those looking to outwit the law.

This is a “whataboutism” and is actually wrong.  Satoshi specifically says he/she has designed Bitcoin to route around intermediaries (like governments) and their ability to censor.  It doesn’t take too much of a stretch to get who would be initially interested in that specific set of payment “rails” especially if there is no legal recourse.22

On p. 12 they also write:

We’ll get into the specific risks associated with cryptoassets, including BItcoin, in a later chapter, but it’s clear that the story of bitcoin as a currency has evolved beyond being solely a means of payment for illegal goods and services. Over 100 media articles have jumped at the opportunity to declare bitcoin dead, and each time they have been proven wrong.

The last sentence has nothing to do with the preceding sentence, this is a non sequitur.

Later in the book they do talk about other use cases but the one that they don’t talk about much is how — according to analytics — the majority of network traffic in 2017 was users moving cryptocurrencies from one exchange to another exchange.

For example, about a month ago, Jonathan Levin from Chainalysis did an interview and mentioned that:

So we can identify, it is quite hard to know how many people. I would say that 80% of transactions that occur on these cryptocurrency ledgers have a counterparty that is a 3rd party service. More than 80%.

Maybe mention in the second edition: the unintended ironic evolution of Bitcoin has had… where it was originally designed to route around intermediaries and instead has evolved into an expensive permissioned-on-permissionless network.23

On p. 13 they write:

It operates in a peer-to-peer manner, the same movement that has driven Uber, Airbnb, and LendingClub to be multibillion-dollar companies in their own realms. Bitcoin lets anyone be their own bank, putting control in the hands of a grassroots movement and empowering the globally unbanked.

Not quite.  For starters: Uber, Airbnb, and LendingClub all act as intermediaries to every transaction, that’s how they became multibillion-dollar companies.

Next, Bitcoin doesn’t really let anyone be their own bank because banks offer a lot more products and services beyond just payments.  At most, Bitcoin provides a way of moving bitcoins you control to someone else’s bitcoin address (wallet).  That’s it.24

And there is not much evidence that Bitcoin or any cryptocurrency for that matter, has empowered many beyond relatively wealthy people in developed or developing countries.  There have been a few feel-good stories about marginalized folks in developing countries, but those are typically (unfortunately) one-off theatrics displaying people living in squalor in order to promote a financial product (coins).  It would be good to see more evidence in the next edition.

For more on this topic, recommend listening to LTB episode 133 with Richard Boase.

On p. 13 they write:

Decentralizing a currency, without a top-down authority, requires coordinated global acceptance of a shared means of payment and store of value.

Readers should check out “arewedecentralizedyet” which illustrates that nearly all cryptourrencies in practice have some type of centralized, top-down hierarchy as of July 2018.

On p. 13 they write:

Bitcoin’s blockchain is a distributed, cryptographic, and immutal database that uses proof-of-work to keep the ecosystem in sync.

Worth modifying because the network is not inherently immutable — only digital signatures have “immutability.”25 Also, proof-of-work doesn’t keep any “ecosystem” in sync.  All proof-of-work does is determine who can append the chain.  The “ecosystem” thing is completely unrelated.

On p. 15 they write:

There is no subjectivity as to whether a transaction is confirmed in Bitcoin’s blockchain: it’s just math.

This isn’t quite true.26 Empirically, mining pools have censored transactions for various reasons.  For example, Luke-Jr (who used to run Eligius pool) thinks that SatoshiDice misuses the network; he is also not a fan of what OP_RETURN was being used for by Counterparty.

Also, humans control pools and also manage the code repositories… blockchains don’t fix and run themselves.  So it’s not as simple as: “it’s just math.”

On p. 15 they write an entire paragraph on “immutability”:

The combination of globally distributed computers that can cryptographically verify transactions and the building of Bitcoin’s blockchain leads to an immutable database, meaning the computers building Bitcoin’s blockchain can only do so in an append only fashion. Append only means that information can only be added to Bitcoin’s blockchain over time and cannot be deleted – an audit trail etched in digital granite. Once information is confirmed in Bitcoin’s blockchain, it’s permanent and cannot be erased. Immutability is a rare feature in a digital world where things can easily be erased, and it will likely become an increasingly valuable attribute for Bitcoin over time.

This seems to have a few issues:

  1. As mentioned several times before in this review, “immutability” is only a characteristic of digital signatures, which are just one piece of a blockchain.  Recommend Gwern’s article entitled “Bitcoin-is-worse-is-better” for more details.
  2. Empirically lots of blockchains have had unexpected and expected block reorgs and hard forks, there is nothing fundamental to prevent this from happening to Bitcoin.  See this recent article discussing a spate of attacks on various PoW coins: Blockchain’s Once-Feared 51% Attack Is Now Becoming Regular
  3. The paragraph above ignores the reality that well over 1,000 blockchains are basically dead and Bitcoin itself had a centralized intervention on more than one occasion, such as the accidental hardfork in 2013 and the Bitcoin block size debate from 2015-2018.

On p. 15 they introduce us to the concept of proof-of-work but don’t really explain its own origin as a means of combating spam email in the 1990s.

For instance, while several Bitcoin evangelists frequently (mistakenly) point to Hashcash as the original PoW progenitor, that claim actually legitimately goes to a 1993 paper entitled Pricing via Processing or Combatting Junk Mail by Cynthia Dwork and Moni Naor.  There are others as well, perhaps worth adding in the next edition.27

On p. 16 they write:

Competition for a financial rewad is also what keeps Bitcoin’s blockchain secure.  If any ill-motivated actors wanted to change Bitcoin’s blockchain, they would need to compete with all the other miners distributed globally who have in total invested hundreds of millions of dollars into the machinery necessary to perform PoW.

This is only true for a Maginot Line attack (e.g., attack via hashrate).28 There are  cheaper and more effective out of band attacks, like hacking BGP or DNS.  Or hacking into intermediaries such as exchanges and hosted wallets.  Sure the attacker doesn’t directly change the blocks, but they do set in motion a series of actions that inevitably result in thefts that end up in blocks further down the chain, when the transactions otherwise wouldn’t have taken place.

On p. 17 they write:

The hardware runs an operating system (OS); in the case of Bitcoin, the operating system is the open-source software that facilitates everything described earlier.  This software is developed by a volunteer group of developers, just as Linux, the operating system that underlies much of the cloud, is maintained by a volunteer group of developers.

This isn’t quite right in at least two areas:

  1. Linux is not financial market infrastructure software; Bitcoin originally attempted to be at the very least, a payments network.  There are reasons why building and maintaining FMI is regulated whereas building an operating system typically isn’t.  It has to do with risk and accountability when accidents happen.  That’s why PFMI exists.
  2. At least in the case of Bitcoin (and typically in most other cryptocurrencies), only one group of developers calls the shots via gating the BIP / EIP process.  If you don’t submit your proposals and get it approved through this process, it won’t become part of Bitcoin Core.  For more on this, see: Bitcoin Is Now Just A Ticker Symbol and Stopped Being Permissionless Years Ago

On p. 17 they discuss “private versus public blockchains”:

The difference between public and private blockchains is similar to that between the Internet and intranets.  The internet is a public resource.  Anyone can tap into it; there’s not gate keepers.

This is wrong.  All ISPs gate their customers via KYC.  Not just anyone can set up an account with an ISP, in fact, customers can and do get kicked off for violating Terms of Service.

“The Internet” is just an amalgamation of thousands of ISPs, each of whom have their own Terms of Service.  About a year ago I published an in-depth article about why this analogy is bad and should not be use: Intranets and the Internet.

On p. 18 they write:

Public systems are ones like BItcoin, where anyone with the right hardware and software can connect to the network and access the information therein.  There is no bouncer checking IDs at the door.

This is not quite right.  The “permissionless” characteristic has to do with block making: who has the right to vote on creating/adding a new block… not who has the ability to download a copy of the blockchain.  Theoretically there is no gatekeeper for block making in Bitcoin. Although, there are explicit KYC checks on the edges (primarily at exchanges).

In practice, the capital and knowledge requirements to actually create a new mining pool and aggregate hashpower that is sufficiently capable of generating the right hash and “winning” the scratch-off lottery is very high, such that on a given month just 20 or so block makers are actually involved.29

While there is no strict permissioning of these participants (some come and go over the years), it is arguably a de facto oligopoly based on capital expenditures and not some type of feel-good meritocracy described in this book.30

On p. 18 they write:

Private systems, on the other hand, employ a bouncer at the door. Only entities that have the proper permissions can become part of the network. These private systems came about after Bitcoin did, when enterprises and businesses realized they liked the utility of Bitcoin’s blockchain, but weren’t comfortable or legally allowed to be as open with he information propagated among public entities.

This is not nuanced enough.  What precisely is permissioned on a “permissioned” blockchain is: who gets to do the validation.

While there are likely dozens of “permissioned” blockchain vendors — each of which may have different characteristics — the common one is that the validators are KYC’ed participants.  That way they can be held accountable if there is a problem (like a fork).

For example, many enterprises and businesses tried to use Bitcoin, Ethereum, and other cryptocurrencies but because these blockchains were not built with their use cases in mind, unsurprisingly found that they were not a good fit.

This is not an insult: the “comfort” refrain is tiring because there have been a couple hundred proofs-of-concept on Bitcoin – and variants thereof – to look into whether those chains were fit-for-purpose… and they weren’t.  This passage should be reworded in the second edition.

On p. 18 they write:

Within financial services, these private blockchains are largely solutions by incumbents in a fight to remain incumbents.

Maybe that is the motivation of some stakeholders, but I don’t think I’ve ever been in a meeting in which the participants (banks) specifically said that.  It would be good to have a citation added in the next edition.  Otherwise, as Hitchens said: what can be presented without evidence can be dismissed without evidence.

On p. 18 they write:

While there is merit to many of these solutions, some claim the greatest revolution has been getting large and secretive entities to work together, sharing information and best practices, which will ultimately lower the cost of services to the end consumer. We believe that over time the implementation of private blockchains will erode the position held by centralized powerhouses because of the tendency toward open networks. In other words, it’s a foot in the door for further decentralization and the use of public blockchains.

This is a “proletariat” narrative that is frequently used in many cryptocurrency books.  While there is a certain truth to an angle – collaboration of regulated entities that normally compete with one another – many of the vendors and platforms that they are piloting are actually “open.”

Which brings up the euphemism that some vocal public blockchain promoters like to stake a claim in… the ill-defined “open.”  For instance, coin lobbyists such as Coin Center and coin promoters such as Andreas Antonopoulos regularly advertise that they are experts and advocates of “open” chains but their language is typically filled with strawmen.

For instance, enterprise-specific platforms such as Fabric, Corda, and Quorum are all open sourced, anyone can download and run the code without the permission of the vendors that contribute code or support to the platforms.

Thus, it could be argued that these platforms are “open” too… which they are.

But it is highly unlikely that ideological advocates would ever defend or promote these platforms, because of their disdain and aversion to platforms built by financial organizations. 31

Lastly, this “foot in the door” comment comes in all shapes and sizes; sometimes coin promoters use “Trojan horse” as well.  Either way it misses the point: enterprises will use technology that solves problems for them and will not use technology that doesn’t solve their problem.

In practice, most cryptocurrencies were not designed – on purpose – to solve problems that regulated institutions have… so it is not a surprise they do not use coin-based platforms as FMI.  It has nothing to do with the way the coin platforms are marketed and everything to do with the problems the coins solve.

On p. 19 they write:

Throughout this book, we will focus on public blockchains and their native assets, or what we will define as cryptoassets, because we believe this is where the greatest opportunity awaits the innovative investor.

The authors use the term “innovative investor” a dozen or more times in the book.  It’s not a particularly useful term.32

Either way, later in the book they don’t really discuss the opportunity cost of capital: what are the tradeoffs of an accredited investor who puts their money long term into a coin versus buys equity in a company.  Though, to be fair, part of the problem is that most of the companies that actually have equity to buy, do not publish usage or valuation numbers because they are still private… so it is hard to accurately gauge that specific trade-off.33

On p. 19 they write about Bitcoin maximalism (without calling it that):

We disagree with that exclusive worldview, as there are many other interesting consensus mechanisms being developed, such as proof-of-stake, proof-of-existence, proof-of-elapsed time, and so on.

Proof-of-existence is not a consensus mechanism.  PoE simply verifies the existence of a file at a specific time based on a hash from a specific blockchain.  It does not provide consensus.  This should be reworded in the next edition.

Furthermore, neither proof-of-stake or proof-of-elapsed-time are actual consensus mechanisms either… they are vote ordering mechanisms — a mechanism to prevent or control sybil attacks. 34  See this excellent thread from Emin Gun Sirer.

Chapter 3

On p. 22 they write:

Launched in February 2011, the Silk Road provided a rules-free decentralized marketplace for any product one could imagine, and it used bitcoin as the means of payment.

This isn’t quite true.  Certain guns and explosives were considered off-limits and as a result “The Armory” was spun off.

On p. 22 they write:

Clearly, this was one way that Bitcoin developed its dark reputation, though it’s important to know that this was not endorsed by Bitcoin and its development team.

Isn’t Bitcoin — like all cryptocurrences — supposed to be decentralized?  So how can there be a singular “it” to not endorse something?35

On p. 22 they write:

The drivers behind this bitcoin demand were more opaque than the Gawker spike, though many point to the bailout of Cyprus and the associated losses that citizens took on their bank account balances as the core driver.

This is mostly hearsay as several independent researchers have tried to identify the actual flows coming into and going out of Cyprus that are directly tied to cryptocurrencies and so far, have been unable to.36

On p. 23 they write about Google Search Trends:

We recommend orienting with this tool even beyond cryptoassets, as it’s a fascinating window into the global mesh of minds.

Incidentally, despite the authors preference to the term “cryptoassets” —  according to Google Search Trends, that term isn’t frequently used in search’s yet.

Source: Google

On p. 24 they write:

This diversity has led to tension among players as some  of these cryptoassets compete, but this is nothing like the tension that exists between Bitcoin and the second movement.

Another frequent name typically used to call “the second movement” was Bitcoin 2.0.

For example, back in 2014 and 2015 I interviewed a number of project organizers and attempted to categorize them into buckets, including things like “commodities” and “assets.”  See for instance my guest presentation in 2014 at Plug and Play: (video) (slides).

This label isn’t frequently used as much anymore, but that’s a different topic entirely.

On p. 25 they write an entire section entitled: Blockchain, Not Bitcoin

The authors stated:

Articles like one from the Bank of England in the third quarter of 2014 argued, “The key innovation of digital currencies is the ‘distributed ledger,’ which allows a payment system to operate in an entirely decentralized way, without intermediaries such as banks. In emphasizing the technology and not the native asset, the Bank of England left an open question whether the native asset was needed

[…]

The term blockchain, independent of Bitcoin, began to be used more widely in North America in the fall of 2015 when two prominent financial magazines catalyzed awareness of the concept.

Let’s pull apart the problems here.

First, the “blockchain not bitcoin” mantra was actually something that VCs such as Adam Draper pushed in the fall of 2015.

For instance, in an interview with Coindesk in October 2015 he said:

“We use the word blockchain now. I say bitcoin, and they think that’s the worst thing ever. It just feels like they put up a guard. Then, I switch to blockchain and they’re very attentive and they’re very interested.”

Draper seems ambivalent to the change, though he said he was initially against using it, mostly because he believes it’s superficial. After all, companies that use the blockchain as a payments rail, the argument goes, still need to interface with its digital currency, which is the mechanism for transactions on the bitcoin blockchain.

“When we talk about blockchain, I mean bitcoin,” Draper clarifies. “Bitcoin and the blockchain are so interspersed together, the incentive structure of blockchain is bitcoin.”

Draper believes it’s mostly a “vernacular change”, noting the ecosystem has been through several such transitions before. He rifles off the list of terms that have come and gone including cryptocurrency, digital currency and altcoin.

“It’s moved from bitcoin to blockchain, which makes sense, it’s the underlying tech of all these things,” he added. “I think in a lot of ways blockchain is FinTech, so it will become FinTech.”

If you’re looking for more specific examples of companies that began using “blockchain” as a euphemism for “bitcoin” be sure to check out my post: “The Great Pivot.”

The authors also fail to identify that there were lots of early stage vendors and entrepreneurs working in the background on educating policy makers and institutions on what the vocabulary was and how the various moving pieces worked throughout 2015.

Want evidence?

Check out my own paper covering this topic and a handful of vendors in April 2015: Consensus-as-a-service.  This paper has been cited dozens of times by a slew of academics, banks, regulators, and so forth.  And contra Draper: you don’t necessarily need a coin or token to incentivize participants to operate a blockchain.37

On p. 26 they write:

A private blockchain is typically used to expedite and make existing processes more efficient, thereby rewarding the entities that have crafted the software and maintain the computers. In other words, the value creation is in the cost savings, and the entities that own the computers enjoy these savings. The entities don’t need to get paid in a native asset as reward for their work, as is the case with public blockchains.

First, not all private blockchains are alike or commoditized.

Two, this statement is mostly true.  At least those were the initially pitches to financial institutions.  Remember the frequently cited Oliver Wyman / Santander paper from 2015?  It was about cost savings.  Since then, the story has evolved to also include revenue generation.

For more up-to-date info on the “enterprise” blockchain world, recommend reading:

On p. 26 they write:

On the other hand, for Bitcoin to incentivize a self-selecting group of global volunteers, known as miners, to deploy capital into the mining machines that validate and secure bitcoin transactions, there needs to be a native asset that can be paid out to the miners for their work. The native asset builds out support for the service from the bottom up in a truly decentralized manner.

This may have been true in January 2009 but is not true in July 2018.  There are no “volunteers” in Bitcoin mining as running farms and pools have become professionalized and scaled in industrial-sized facilities.

Also, that last sentence is also false: virtually every vertical of involvement is dominated by centralized entities (e.g., exchanges, hosted wallets, mining manufacturing, etc.).

On p. 27 they write:

Beyond questioning the need for native cryptoassets – which would naturally infuriate communities that very much value their cryptoassets – tensions also exist because public blockchain advocates believe the private blockchain movement bastardizes the ethos of blockchain technology. For example, instead of aiming to decentralize and democratize aspects of the existing financial services, Masters’s Digital Asset Holdings aims to assist existing financial services companies in adopting this new technology, thereby helping the incumbents fight back the rebels who seek to disrupt the status quo.

Ironically, virtually all major cryptocurrency exchanges now have institutional investors and/or partnerships with regulated financial institutions.38 Like it or not, but the cryptocurrency world is deep in bed with the very establishment that it likes to rail at on social media.

Also, Bitcoin again is at most a payments network and does not actually solve problems for existing financial service providers on their many other lines of business.

On p. 27 they write:

General purpose technologies are pervasive, eventually affecting all consumers and companies. They improve over time in line with the deflationary progression of technology, and most important, they are a platform upon which future innovations are built. Some of the more famous examples include steam, electricity, internal combustion engines, and information technology. We would add blockchain technology to this list. While such a claim may appear grand to some, that is the scale of the innovation before us.

If you’re not familiar with hyperbole and technology, I recommend watching and reading the PR for the Segway when it first came out.  Promoters and enthusiasts repeatedly claimed it would change the way cities are built.  Instead, it is used as a toy vehicle to shuffle tourists around at national parks and patrol suburban malls.

Maybe something related to “blockchains” is integrated into various types of infrastructure (such as trade finance), but the next edition should provide proof of some actual user adoption.

For example, the authors in the following paragraph say that “public blockchains beyond Bitcoin that are growing like gangbusters.”

Which ones?  In the approximately 9 months since this book was published, most “traction” has been issuing ICOs on these public blockchains.  Currently the top 3 Dapps at the time of this writings, run decentralized exchanges… which trade ICO tokens.  Now maybe that changes, that is totally within the realm of possibility.39  But let’s take the hype down a few notches until consistent measurable user growth is observed.

On p. 28 they write:

The realm of public blockchains and their native assets is most relevant to the innovative investor, as private blockchains have not yielded an entirely new asset class that is investable to the public.

The wording and attitude should be changed for the next edition.  This makes it sound as if the only real innovation that exists are network-based coins that a group of issuers continually create and that you, the reader, should buy.

By downplaying opportunities being tackled by enterprise vendors, the statement glosses over the operating environment enterprise clients reside in and how they must conduct unsexy due diligence and mundane requirements gathering because they have to follow laws and regulations otherwise their customers won’t use their specific platforms.

These same vendors could end up “tokenizing” existing financial instruments, it just takes a lot longer because there are real legal consequences if something breaks or forks.40

On p. 28 and 29 they ask “where is blockchain technology in the hype cycle.”

This section could be strengthened by revisiting and reflecting on the huge expectations that these coin projects have raised and were raising at the time the book was first being written.  How were expectations eventually managed?

Specifically, on p. 29 they write:

While it’s hard to predict where blockchain technology currently falls on Gartner’s Hype Cycle (these things are always easier in retrospect), we would posit that Bitcoin is emerging from the Trough of Disillusionment. At the same time, blockchain technology stripped of native assets (private blockchain) is descending from the Peak of Inflated Expectations, which it reached in the summer of 2016 just before The DAO hack occurred (which we will discuss in detail in Chapter 5).

The first part is probably wrong if measured by actual usage and interest (as shown by the Google Search image a few sections above).41

The second part of the paragraph is probably right, though the timing was probably a little later: likely in the last quarter of 2016 when the first set of pilots turned out to require substantially larger budgets.  That is to say, in order to be put platforms into production most small vendors with short runways realized they needed more capital and time to integrate solutions into legacy systems.  In some cases, that was too much work and a few vendors pivoted out of enterprise and created a coin or two instead.42

Chapter 4

On p. 31 they write:

Yes, the numbers have changed a lot since.  Crypto moves fast.

This isn’t a hill I want to die on, but historically “crypto” means cryptography.  Calling cryptocurrencies “crypto” is basically slang, but maybe that’s the way it evolves towards.

On p. 32 they write:

Historically, crypotassets have most commonly been referred to as cryptocurrencies, which we think confuses new users and constrains the conversation on the future of these assets. We would not classify the majority of cryptoassets as currencies, but rather most are either digital commodities (cryptocommodities), provisioning raw digital resources, or digital tokens (cryptotokens), provisioning finished digital goods and services.

They have a point but a literature review could have been helpful at showing this categorization is neither new nor novel.

For instance, the title of my last book was: The Anatomy of a Money-like Informational Commodity.  A bit long-winded?

Where did I come up with that odd title?

In 2014, an academic paper was published that attempted to categorize Bitcoin from an ontological perspective. Based on the thought process presented in that paper, the Dutch authors concluded that Bitcoin is a money-like informational commodity.  It isn’t money and isn’t a currency (e.g., isn’t actually used).434445

On p. 32 they write:

In an increasingly digital world, it only makes sense that we have digital commodities, such as computer power, storage capacity, and network bandwidth.

This book only superficially explains each of these and doesn’t drill down into why these “digital commodities” can’t be priced in good old fashioned money or why an internet coin is needed.  If this is a good use case, is it just a matter of time before Blizzard and Steam get on board?  Maybe worth looking at what entertainment companies do for the next edition.

On p. 33 they write about “why crypto” as shorthand for “cryptoassets” instead of “cryptography.”

For historical purposes, Matt Blaze, the most recent owner of crypto.com, provides a good explanation that could be included or cited next edition: Exhaustive Search Has Moved.

On p. 35 they write:

Except for Karma, the problem with all these attempts at digital money was that they weren’t purely decentralized — one way or another they relied on a centralized entity, and that presented the opportunity for corruption and weak points for attack.

This seems to be conflating two separate things: anonymity with electronic cash.  You can have one without the other and do.46

Also, the BIP process is arguably a weak point for attack.47

On p. 35 they write:

One of the most miraculous aspects of bitcoin is how it bootstrapped support in a decentralized manner.

The fundamental problem with this statement is that it is inaccurate.48 Large amounts of centralization continues to exist: mining, exchanges, BIP vetting, etc.

On p. 35 they write:

Together, the combination of current use cases and investors buying bitcoin based on the expectation for even greater future use cases creates market demand for bitcoin.

Is that a Freudian slip?

Speculators buy bitcoin because they think can sell bitcoins at a higher price because a new buyer will come in at a later date and acquire the coins from them.49

For example, last month Hyun Song Shin, the BIS’s economic adviser and head of research, said:

“If people pay to hold the tokens for financial gain, then arguably they should be treated as a security and come under the same rigorous documentation requirements and regulation as other securities offered to investors for a return.”

In the United States, recall that one condition for what a security is under the Howey framework is an expectation of profit.

Whether Bitcoin is a security or not is a topic for a different post.50

On p. 36 they write:

For the first four years of Bitcoin’s life, a coinbase transaction would issue 50 bitcoin to the lucky miner.

[…]

On November 28, 2012, the first halving of the block reward from 50 bitcoin to 25 bitcoin happened, and the second halving from 25 bitcoin to 12.5 bitcoin occurred on July 9, 2016.  The thrid will happen four years from that date, in July 2020. Thus far, this has made bitcoin’s supply schedule look somewhat linear, as shown in Figure 4.1.

Technically incorrect because of the inhomogeneous Poisson process and the relatively large amounts of hashrate that came online, the first “4 year epoch” was actually less than 4 years.

Whereas the genesis block was released in January 2009, the first halving should have occurred in January 2013, but instead it took place in November 2012.  Similarly, the second halving should have — if rigidly followed — taken place in November 2016, but actually occurred in July 2016 because even more hashrate had effectively accelerated block creation a bit faster than expected.

On p. 36 they write:

Based on our evolutionary past, a key driver for humans to recognize something as valuable is its scarcity. Satoshi knew that he couldn’t issue bitcoin at a rate of 2.6 million per year forever, because it would end up with no scarcity value.

This is a non sequitur.51

Maybe Satoshi did or did not think this way, but irrespective of his or her view, having a finite amount of something means there is some amount of scarcity… even if it is a relatively large amount.  Now this discussion obviously leads down the ideological road of maximalism which we don’t have time to go into today.52  Suffice to say that bitcoin is fundamentally not scarce due to its inability to prevent forks that could increase or decrease the money supply.

On p. 37 they write:

Long term, the thinking is that bitcoin will become so entrenched within the global economy that new bitcoin will not need to be issued to continue to gain support. At that point, miners will be compesnated for processing transaction and securing the network through fees on high transaction volumes.

This might happen but hasn’t yet.

For instance, Kerem Kaskaloglu (see p. 71) created a cartoon model to show what this should look like.

But the actual curves do not exist (yet).

Recommended reading: Analysing Costs & Benefits of Public Blockchains (with Data!) by Colin Platt.

Notice how reality doesn’t stack up to the idealized version (yet)?

On p. 39 they write about BitDNS, Namecoin, and NameID:

Namecoin acts as its own DNS service, and provides users with more control and privacy.

In the next edition they should mention how Namecoin ended up having one mining pool that consistently had over 51% of the network hashrate and as a result, projects like Onename moved over to Bitcoin and then eventually its own separate network altogether (Blockstack).

On p. 41 they write:

This is an important lesson, because all cryptocurrencies differ in their supply schedules, and thus the direct price of each cryptoasset should not be compared if trying to ascertain the appreciation potential of the asset.

One way to strengthen this section is to provide a consistent model or methodology to systemically value a coin that doesn’t necessarily involve future demand from new investors.  Maybe in the second edition they could provide a way to compare or at least say that no valuation model works yet, but here is a possible alternative?

On p. 42 they write:

A word to the wise for the innovative investor: with a new cryptocurrency, it’s always important to understand how it’s being distributed and to whom (we’ll discuss further in Chapter 12). If the core community feels the distribution is unfair, that may forever plague the growth of the cryptocurrency.

Two things:

  1. If a cryptocurrency or “cryptoasset” is supposed to be decentralized, how can it have a singular “core” community too?
  2. In practice, most retail buyers of coins don’t seem to care about centralization or even coin distribution.  Later in the book they mention Dash and its rapid coin creation done in the first month.  Few investors seem to care. 53

On p. 42 they write:

Ripple has since pivoted away from being a transaction mechanism for the common person and instead now “enables banks to send real-time international payments across network.” This focus plays to Ripple’s strengths, as it aims to be a speedy payment system that rethinks correspondent banking but still requires some trust, for which banks are well suited.

If readers have time, I recommend looking through the marketing material of OpenCoin, Ripple Labs, and Ripple from 2013-2018 because it has changed several times.54 Currently there are a couple of different products including xRapid and xCurrent which are aimed at different types of users and as a result, the passage above should be updated.

On p. 43 they write:

Markus used Litecoin’s code to derive Dogecoin, thereby making it one more degree of separation removed from Bitcoin.

This is incorrect.  Dogecoin was first based off of Luckycoin and Luckycoin was based on a fork of Litecoin.  The key difference involved the erratic, random block reward sizes.

On p. 45 they write about Auroracoin.

Auroracoin is a cautionary tale for both investors and developers. What began as a seemingly powerful and compelling use case for a cryptoasset suffered from its inability to provide value to the audience it sought to impact. Incelanders were given a cryptocurrency with little education and means to use it. Unsurprisingly, the value of the asset collapsed and most considered it dead. Nevertheless, cryptocurrencies rarely die entirely, and Auroracoin may have interesting times ahead if its developer team can figure out a way forward.

A few problems:

  1. Auroracoin is still basically dead
  2. Over 1,000 other coins have died, so “rarely” should be changed in the next edition
  3. Why does a decentralized cryptocurrency have a singular development team, isn’t that centralization?

On p. 46 they write:

Meanwhile, Zcash uses some of the most bleeding-edge cryptography in the world, but it is one of the youngest cryptoassets in the book and suitable only for the most experienced cryptoasset investors.

In the next edition it would be helpful to specifically detail what makes someone an experienced “cryptoasset” investor.

On p. 46 they write:

Adam Back is considered the inspiration for Satoshi’s proof-of-work algorithm and is president of Blockstream, one of the most important companies in the Bitcoin space.

While Hashcash was cited in the original Satoshi whitepaper, recall above, that the original idea can be directly linked to a 1993 paper entitled Pricing via Processing or Combatting Junk Mail by Cynthia Dwork and Moni Naor.  Also, it is debatable whether or not Blockstream is an important company, but that’s a different discussion altogether.

On p. 46 they write:

Bitcoin and the permissionless blockchain movement was founded on principles of egalitarian transparency, so premines are widely frowned upon.

What are the founding principles?  Where can we find them?   Maybe it exists, but at least provide a footnote.55

On p. 47 they write:

While many are suspicious of such privacy, it should be noted that it has tremendous benefits for fungibility.  Fungibility refers to the fact that any unit of currency is as valuable as another unit of equal denomination.

Cryptocurrencies such as Bitcoin are not fungible.  Be sure to listen to this interview with Jonathan Levin from May.  See also: Bitcoin’s lien problem and also nemo dat.

On p. 48 they write:

Monero’s supply schedule is a hybrid of Litecoin and Dogecoin. For monero, a new block is appended to its blockchain every 2 minutes, similar to Litecoin’s 2.5 minutes.

In the next edition I’d tighten the language a little because a new monero block is added roughly or approximately every 2 minutes, not exactly 2 minutes.

On p. 48 they write:

By the end of 2016, Monero had the fifth largest network value of any cryptocurrency and was the top performing digital currency in 2016, with a price increase over the year of 2,760 percent. This clearly demonstrates the level of interest in privacy protecting cryptocurrency. Some of that interest, no doubt, comes from less than savory sources.

That is a non sequitur.

Where are the surveys of actual Monero purchasers during this time frame and their opinions for why they bought it? 56

For instance, in looking at the two-year chart above, how much on-chain activity in 2016 was due to speculators interest in “privacy” versus coin flipping?  It is impossible to tell.  Even with analytics all you will be able to is link specific users with purchases.  Intent and motivation would require  surveys and subpoenas; worth adding if available in the next edition.

On p. 48 they write:

Another cryptocurrency targeting privacy and fungiblity is Dash.

Is Dash really fungible though?  That isn’t explored in this section.  Plus Dash has a CEO… how is that decentralized?

On p. 49 they write:

In fact, Duffield easily could have relaunched Dash, especially considering the network was only days old when the instamine began to be widely talked about, but he chose not to.  It would have been unusual to relaunch, given that other cyrptocurrencies have done so via the forking of original code. The creators of Monero, for example, specifically chose not to continue building off Bytecoin because the premine distribution had been perceived as unfair.

How is this not problematic: for a “decentralized” cryptocurrency to be controlled and run by one person who can unilaterally stop and restart a chain?

It actually is common, that’s the confusing part.  Why have regulators such as FinCEN and the SEC not provided specific guidance (or enforcement) on the fact that one or a handful of individuals actually are unlicensed / non-exempted administrators of financial networks?

On p. 49 they write:

The Bitcoin and blockchain community has always been excited by new developments in anonymity and privacy, but Zcash took that excitement to a new level, which upon issuance drove the price through the roof.

Putting aside the irrational exuberance for Zcash itself, why do the authors think so many folks are vocal about privacy and anonymity?

Could it be that a significant portion of the coins are held by thieves of exchanges and hosted wallets who want to launder them?  Here are a few recent examples:

On p. 49 they write:

Through his time at DigiCash and longstanding involvement in cryptography and cryptoassets, Zooko has become one of the most respected members in the community.

Let’s put aside Zooko and Zcash.  The phrase, “the community” frequently appears in this book and similar books.  It is an opaque, ill-defined (and cliquish) term that is frequently used by coin promoters to shun certain people that do not promote specific policies (and coins).57  It’s a term that should be clearly defined in the next edition.

On p. 50 they write:

While it is still early days for Zcash, we are of the belief that the ethics and technology chops of Zooko and his team are top-tier, implying that good things lie in wait for this budding cryptocurrency.

The statement above seems like an endorsement.  Did either of the authors own Zcash just as the book came out?  And what are the specific ethics they speak of?  And why do the authors call it a cryptocurrency instead of a “cryptoasset”?

Chapter 5

On p. 51 they write:

For example, the largest cryptocommodity, Ethereum, is a decentralized world computer upon which globally accessible and uncensored applications can be built.

How is it a commodity?  Maybe it is and while they use a lot of words in this chapter, they never really precisely why it is in a way that makes much sense.  Recommend modifying the first few pages of this chapter.

On p. 52 they write about “smart contracts” and mention Nick Szabo.

For a future edition I recommend diving deeper into the different uses and definitions of smart contracts.  Also could be worth following Tony Arcieri suggestion:

I really like “authorization programs” but people really seem married to the “smart contract” terminology. Never mind Martin Abadi’s work on authorization languages (e.g. Binder) predates Nick Szabo’s “smart contracts” by half a decade…

For instance, there has been a lot of work done via the Accord Project with Clause.io and others such as IBM and R3.  Also worth looking into Barclay’s and UCL’s effort with the Smart Contract Templates.  A second edition that aims to be up-to-date should look at these developments and how they have evolved from what Abadi and Szabo first proposed.

On p. 53 they mentioned that Counterparty “was launched in January 2014.”  Technically that is not true.  The fundraising (“proof-of-burn”) took place in January and it was the following month that it “launched.”

On p. 54 they write:

The reason Bitcoin developers haven’t added extra functionality and flexibility directly into its software is that they have prioritized security over complexity. The more complex transactions become, the more vectors there are to exploit and attack these transactions, which can affect the network as a whole. With a focus on being a decentralized currency, Bitcoin developers have decided bitcoin transactions don’t need all the bells and whistles.

This is kind of true but also misses a little history.

For instance, Zerocoin was first proposed as an enhancement directly built into Bitcoin but key, influential Bitcoin developers who maintained the repository, pushed back on that for various technological and philosophical reasons.  As a result, the main authors of that proposal went on to form and launch Zcash.58

On p. 56 they write:

Buterin understood that building a system from the ground up required a significant amount of work, and his announcement in January 2014 involved the collaboration of a community of more than 15 developers and dozens of community members that had already bought into the idea.

I assume the authors mean, following the Bitcoin Miami announcement in January 2014, but they don’t really say.  I’m not sure how they arrive at the specific headcount numbers they did above, would be good to add a footnote in the future.

On p. 56 they write:

The ensuing development of the Bitcoin software before launch mostly involved just two people, Satoshi and Hal Finney.

This assumes that Satoshi is not Hal Finney, maybe he was.  But it should also include the contributions of Ray Dillinger and others.

On p. 56 they write:

Buterin also knew that while Ethereum could run on ether, the people who designed it couldn’t, and Ethereum was still over a year away from being ready for release. So he found funding through the prestigious Thiel Fellowship.

This is inaccurate.

After reading this, I reached out to Vitalik Buterin and he said:59

That’s totally incorrect. Like the $100k made very little difference.

So that should be corrected in the next version.

On p. 57 they write:

Ethereum democratized that process beyond VCs. For perspective on the price of ether in this crowdsale, consider that at the start of April 2017, ether was worth $50 per unit, implying returns over 160x in under three years. Just over 9,000 people bought ether during the presale, placing the average initial investment at $2,000, which has since grown to over $320,000.

There are a few issues with this:

  1. Ethereum did a small private and a larger public sale.  We do have the Terms and Conditions of the public sale but we do not know how many participated in the private sale and under what terms (perhaps the T&Cs were identical).
  2. Over the past 12 months there has been a trend for the “top shelf” ICOs to eschew a public sale (like Ethereum did) and instead, conduct private placement offerings with a few dozen participants at most… typically VCs and HNWIs.
  3. There are lots of dead ICOs.  One recent study found that, “56% of crypto startups that raise money through token sales die within four months of their initial coin offerings.”  Ethereum is definitely an exception to that and should be highlighted as such.

On p. 57 they write:

The extra allocation of 12 million ether for the early contributors and Ethereum Foundation has proved problematic for Ethereum over time, as some feel it represented double dipping. In our view, with 15 talented developers involved prior to the public sale, 6 million ether translated to just  north of $100,000 per developer at the presale rate, which is reasonable given the market rate of such software developers.

Who are these 15 developers, why is that the number the authors have identified?

Also, how much should FOSS developers be compensated and/or the business model around that is a topic that isn’t really addressed at all in this book, yet it is a glaring omission since virtually all of the projects they talk about are set up around funding and maintaining a FOSS team(s).  Maybe some findings will be available for the next version.

On p. 57 they write:

That said, the allocation of capital into founders’ pockets is an important aspect of crowdsales. Called a “founder’s reward,” the key distinction between understandable and a red flag is that founders should be focused on building and growing the network, not fattening their pockets at the expense of investors.

Because coins do not typically provide coin holders any type of voting rights, it is legally dubious how you can hold issuers and “founders” accountable.60

That is why, as mentioned above, there has been an evolution of terms and conditions such that early investors in a private placement for coins may have certain rights and that the founders have certain duties that are all legally enforceable (in theory).

Because no one is publishing these T&Cs, it is hard to comment on what are globally accepted practices… aside from allowing early investors liquidity on secondary markets where they can quickly dump coins.61

Without the ability to legally hold “founders” accountable for enriching themselves at the expense of the project(s), the an interim solution has been to get on social media and yell alot… which is really unprofessional and hit or miss.  Another solution is class action lawsuits, but that’s a different topic.

Also, I put the “founders” into quotes because these seem to be administrators of a network, maybe in the next edition they will be described as such?

On p. 58 they write:

Everyone trusts the system because it runs in the open and is automated by code.

There is lots of different types of open source code that runs on systems that are automated.  For instance, the entire Linux, Apache, and Mozilla worlds predate Bitcoin.  That isn’t new here.62

Also, as mentioned in the previous chapter: Researchers: Last Year’s ICOs Had Five Security Vulnerabilities on Average.  As a result, this has led to the loss of nearly $400 million in ICO funds.

Readers and investors shouldn’t just trust code because someone created a GitHub repo and said their blockchain is open and automated.63

On p. 59 they write:

Most cryptotokens are not supported by their own blockchain.

This is actually true and problematic because it creates centralization risks and the ability for one party to unilaterally censor transactions and/or act as administrators.

For instance, a few days ago, Bancor had a bug that was exploited and about $13.5 million in ETH were stolen… and Bancor was able to freeze the BNT.  That’s because BNT is effectively a centrally administered ERC20 token on top of Ethereum.

Ignoring for the moment whether or not BNT is or is not a security, this is not the first time such issuance and centralization has occurred.  See the colored coin mania from 2014-2015.

On p. 60 they write about The DAO:

Over time, investors in these projects would be rewarded through dividends or appreciation of the service provided.

They mention regulators briefly later on – about SEC views – but most of the content surrounding crowdsales was non-critical and borderline promotional.64  Might be worth adding more meat around this in the next edition.

On p. 61 they write about The DAO:

The hack had nothing to do with an exchange, as had been the case with Mt. Gox and other widely publicized Bitcoin-related hacks. Insted, the flaw existed in the software of The DAO.

Is it really possible to call it a “flaw” or “hack” and not a feature?  See also: “Code is not law” as well as “Cracking MtGox.”

On p. 61 they write:

However, a hard fork would run counter to what many in the Bitcoin and Ethereum communities felt was the power of a decentralized ledger.  Forcefully removing funds from an account violated the concept of immutability.

Just a few pages earlier the authors were saying that the lead developer behind Dash should have restarted the network because that was common and now they’re saying that doing a block reorg is no bueno.  Which is it?

Why should the reader care what a nebulously defined “community” says, if it is is not defined?

The reason we have codes of conduct, terms of service, and EULAs is to specifically answer these types of problems when they arise.

Since public blockchains are supposed to be anarchic, the lack of formal governance is supposed to be a feature, right?   That’s a whole other topic but suffice to say that these two sentences should be reworded in the next edition to incorporate the wisdom found in the Lexicon paper.

On p. 62 they write:

Many complained of moral hazard, and that this would set a precdent for the U.S. government or other powerful entities to come in someday and demand the same of Ethereum for their own interests. It was a tough decision for all involved, including Buterin, who while not directly on The DAO developer team, was an admistrator.

This is the first and only time they point out that key participants collectively making governance decisions are administrators… a point I have been highlighting throughout this review.

I don’t think it is fair to label Vitalik Buterin as a singular administrator, because if he was, he wouldn’t have had to ask exchanges to stop trading ether and/or The DAO token.  Perhaps he was collectively involved in that process, but mining pool operators and exchange managers are arguably just as important if not more so.  See also: Sufficiently Decentralized Howeycoins

On p. 62 they write:

While hard fork are often used to upgrade a blockchain architecture, they are typically employed in situations where the community agrees entirely on the beneficial updates to the architecture. Ethereum’s situation was different, as many in the community opposed a hard fork. Contentious hard forks are dangerous, because when new software updates are released for a blockchain in the form of a hard fork, there are then two different operating systems.

A few things:

  1. Notice the continued use of an ill-defined “the community”
  2. How is agreement or disagreement measured?  During the Bitcoin block size debate, folks tried to use various means to express interest, most of which resulted in sybil attacks such as retweets and upvotes on social media by an army of bots.
  3. Is any fork non-contentious.  Surely if we looked hard enough, we could always find more than a handful of coin owners and/or developers that disagreed with the proposal.  Does that mean you should ignore them?  Whose opinion matters?  These types of questions were never really formally answered either in the case of the Bitcoin Segwit / Bitcoin Cash fork… or in the Ethereum / Ethereum Classic / The DAO fork.  Governance is pretty much an off-chain popularity contest, just like voting for politicians.65

On p. 63 they write:

The site for Ethereum Classic defines the cryptoasset as “a continuation of the original Ethereum blockchain–the classic version preserving untampered history; free from external interference and subjecitve tampering of transactions.”

This could be revised since Ethereum Classic itself has now had multiple forks.

As mentioned in a previous post last year:

Ethereum Classic: this small community has held public events to discuss how they plan to change the money supply; they video taped this coordination and their real legal names are used; only one large company (DCG) is active in its leadership; they sponsor events; they run various social media accounts

There has been lots of external interference, that’s been the lifeblood of public blockchains… because they don’t run themselves, people run and administer them.

Continuing on p. 63 they write:

While many merchants understably complain about credit card fees of 2 to 3 percent, the “platform fees” of Airbnb, Uber, and similar platform services are borderline egregious.

Maybe they are, maybe they are not.66 What is the right fee they should be?  Miners take a cut, exchanges take a cut, developers take a cut via “founder’s funds.”

The next edition should give a step-by-step comparison to show why fee structures are egregious (maybe they are, it just is not clear in this book).

On p. 64 they wrote about Augur.  Incidentally, Augur finally launched in early July while writing this review.  I have an origin story but will keep that for later.

On p. 65 they wrote about Filecoin:

For example, a dApp may use a decentralized cloud storage system like Filecoin to store large amounts of data, and another cryptocommodity for anonymized bandwidth, in addition to using Ethereum to process certain operations.

A couple thoughts:

  1. That’s the theory, though Filecoin hasn’t launched yet — why do they get the benefit of the doubt yet other projects don’t?
  2. There is no price or use comparison in this chapter or elsewhere… the book could be strengthened if it provided more evidence of adoption because we have seen that running decentralized services such as Tor or Freenet have been less than spectacular.

On p. 65 they write:

Returning to the fundamentals of investment theory will allow innovative investors to properly position their overarching portfolio to take advantage of the growth of cryptoassets responsibly.

It is still unclear what an “innovative investor” is — at least the way these authors describe it.67

Chapter 6

On p. 69 Tatar writes:

Not only did I decide to inveset in bitcoin, I decided to place the entirety of that year’s allocation for my Simplified Employee Pension (SEP) plan into bitcoin. When I announced what I had done in my article “Do Bitcoin Belong in your Retirement Portfolio?,” it created a stir online and in the financial planning community.

This was one of just a couple places where the authors actually disclose that they own specific coins, next edition they should put it up front.

On p. 70 Tatar writes:

Was I chasing a similar crash-and-burn scenario with bitcoin? Even my technologically and investment savvy son, Eric, initially criticized me about bitcoin. “They have these things called dollar bills, Dad. Stick to using those.”

Eric is probably right: that the authors of this book accepted traditional money for their book (Amazon doesn’t currently accept cryptocurrencies).

Based on their views presented in this book, the authors probably don’t spend (many) coins they may have in the portfolio, instead holding on to them with the belief that other investors will bid up the price (measured in actual money).

On p. 77 they write about the GFC prior to 2008:

Becoming a hedge fund manager became all the rage for business-minded students when it was revealed that the top 25 hedge fund managers earned a total of $22.3 billion in 2007 and $11.6 billion in 2008.

Coincidentally a similar “rage” for running cryptocurrency-related funds has occured in the past 18 months, especially for ICOs.

More than two hundred “funds” quickly popped up in order to gobble up coins during coin mania.  At least 9 have closed down through April and many more were down double digits due to a bear market (and not hedging).

Chapter 7

On p. 83 they write:

Bitcoin is the most exciting alternative asset in the twenty-first century, and it has paved the way for its digital siblings to enjoy similar success.

It is their opinion that this is the case, but the authors don’t really provide a lot of data to reinforce it yet, other than the fact that there have been some bull runs due to exuberance.68 Worth rewording in the next edition.

On p. 83 they write:

Because bitcoin can claim the title of being the oldest cryptoasset…

Historically it is not.  It may be the oldest coin listed on a liquid secondary market, but there were cryptocurrencies before bitcoin.

On p. 85 Berniske writes:

Similarly, I (Chris) didn’t even consider investing in bitcoin when I first heard about it in 2012. By the time I began considering bitcoin for my portfolio in late 2014, the price was in the mid $300s, having increased 460,000-fold from the initial exchange rate.

I believe this is the only time in the book that Burniske discloses any coin holdings.

On p. 85 they make some ridiculous comparison with the S&P 500, DJIA, NASDAQ 100… and Bitcoin.

The former three are indices of multiple regulated securities.  The latter is just one coin that is easily influenced and manipulated by external unaccountable parties.  How is that an apples to apples comparison?

On p. 87 they continue by comparing Bitcoin with Facebook, Google, Amazon, and Netflix.

Again, these are regulated securities that reflect cash flows and the financial health of multinational companies… Bitcoin has no cash flows and isn’t (yet) setup to be a company… and isn’t regulated (no KYC/AML at the mining farm or mining pool level).

Bitcoin was originally built to be an e-cash transmission network, a decentralized MSB.69 How is comparing it with non-MSBs a useful comparison?

On p. 88 they write:

Remember that, as of January 2017, bitcoin’s network value was 1/20, 1/22, 1/3, and 1/33 that of the FANG stocks respectively. Therefore, if bitcoin is to grow to a similar size much opportunity remains.

This whole section should be probably be modified because these aren’t apples-to-apples comparisons.  FANG stocks represent companies that have to build and ship multiple products in order to generate continuous revenue.

With Bitcoin, it is bitcoin that is the product, nothing else is being shipped nor is revenue being generated70

Maybe the price of a bitcoin — as measured with actual money — does reach a 1:1 or even surpass the stocks above.  But a new version of this book could be strengthened with an outline on how it could do so sustainably.

Also, the whole “market cap” topic should be removed from next edition as well.  About 20% of all bitcoins have been lost or destroyed and this is never reflected in those exuberant “market cap” stories.  See: Nearly 4 Million Bitcoins Lost Forever, New Study Says

On p. 92 they write about volatility:

Upon launch, cryptoassest tend to be extremely volatile because they are thinly traded markets.

Actually, basically all cryptocurrencies including the ones that the authors endorse throughout the book — are still very volatile.

Below is one illustration:

Source: JP Koning

The authors do have a couple narrow, daily volatility charts in the book, but none that provide a similar wideview comparison with something that is remotely comparable (Bitcoin versus Twitter doesn’t make any sense).

On p. 101 they write:

Cryptoassets have near-zero correlation to other captial market assets.

That’s loosey goosey at best.71

For instance, as pointed out in multiple articles this year: Bitcoin and other cryptocurrencies tend to be locked together – and that’s a big problem

On p. 102 they write:

In contrast, the past few years have been more nuanced: bitcoin’s volatily has calmed, yet it retains a low correlation with other assets.

That first part is untrue, as shown by the chart above from JP Koning.  The second part is relative.72

Chapter 8

On p. 107 they write:

The Securities and Exchange Commission has thus far steered clear of applying a specific label to all cryptoassets, though in late July 2017 it did release a report detailing how some cryptoassets can be classified as securities, with the most notable example being The DAO.

That’s pretty much the extent of the authors analysis of the issue.  Granted they aren’t lawyers but this is a pretty big deal, maybe in the next edition beef this up?

On p. 107 they write:

While it’s a great validation of cryptoassets that regulators are working to provide clarity on how to classify at least some of them, most of the existing laws set forth suffer from the same flaw: agencies are interpereting cryptoassets through the lens of the past.

From this wording it seems that the authors want laws changed or modified to protect their interests and the financial interests of their LPs.  This isn’t the first or last time that someone with a vested interest lobbies to get carve outs, exceptions, or entire moratoriums.

Maybe that it is deserved, but it’s not well-articulated in this chapter other than to basically call regulators “old-fashioned” and out of touch with technology.73 Could be worth rethinking the wording here.

On p. 107 they write:

Just as there is diversity in equities, with analsts segmenting companies depending on their market capitalization, sector, or geography, so too is there diversity in cryptoassets. Bitcoin, litecoin, monero, dash, and zcash fulfill the three definitions of a currency: serving as a means of exchange, store of value and unit of account.

This is empirically incorrect.  None of these coins functions as a unit of account, they all depend on and are priced in… actual money.74

There are lots of reasons for why this is case but that is beyond the scope of this review. 7576

On p. 110 they write about ETFs:

It should be noted that when we talk about asset classes we are not doing so in the context of the investment vehicle that may “house” the underlying asset, whether that vehicle is a mutual fund, ETF, or separately managed account.

They don’t really discuss it in the book, but just so readers are aware, there have been about 10 Bitcoin-only ETFs proposed in the US, all of which have been rejected by the SEC (or applications were voluntarily removed).

Curious to know why?  See the March 10, 2017 explanation from the SEC.

Note: this hasn’t stopped sponsors from re-applying.  In the process of writing this review, the CBOE filed for a Bitcoin ETF.

On p. 111 they write:

Much of the thinking in this chapter grew out of a collaboration between ARK Invest and Coinbase through late 2015 and into 2016 when the two firms first made the claims that bitcoin was ringing the bell for a new asset class.

Just to be clear: the joint paper they published in that time frame was a bit superficial as it lacked actual user data from Coinbase exchanges (both GDAX and the consumer wallet).  I pointed that out back then and this book is basically an expanded form of that paper: where is specific usage data on Coinbase?  The only way we have learned any real user numbers about Coinbase is from an IRS lawsuit.

For instance, a future edition should try to differentiate on-chain activity that is say, gambling winnings or miners payouts from exchange arbitrage or even coin shuffling.  Their analysis should be redone once they remove the noise from the signal (e.g., not all transactional activity is the same).

This is a real challenge and not a new issue.  For instance, see: Slicing data.

On p. 112 they write:

Cryptoassets adhere to a twenty-first century model of governance unique from all other asset classes and largely inspired by the open source software movement. The procurers of the asset and associated use cases are three pronged. First, a group of talented software developers decide to create the blockchain protocol or distributed application that utilizes a native asset. These developers adhere to an open contributor model, which means that over time any new developer can earn his or her way onto the development team through merit.

There is no new governance model.

In practice, changes are done via social media popularity contests.  We saw that with the Bitcoin blocksize debate and Ethereum hard fork.  And in some ways, strong vocal personalities (and cults of personality) is how other FOSS projects (like Python) are managed and administered.

The fluffy meritocracy feel-goodism is often not the order of the day and we see this in many projects such as Bitcoin where the commit access and BIP approval process is limited to a small insular clique.

Source: Jake Smith (section 3)

The 4 point plan above is a much more accurate break down of how most coin projects are setup.

On p. 112 they write:

However, the developers are not the only ones in charge of procuring a cryptoasset; they only provide the code. The people who own and maintain the computers that run the code–the-miners–also have a say in the development of the code because they have to download new software updates. The developers can’t force miners to update software. Instead, they must convince them that it makes sense for the health of the overall blockchain, and the economic health of the miner, to do so.

But in many projects: developers and miners are one in the same.  This is why it is so confusing to not have seen additional clarity or guidance from FinCEN because of how centralized most projects are in practice.

Be sure to look at “arewedecentralizedyet.”77

On p. 113 they write:

These companies often employ some of the core developers, but even if they don’t, they can assert significant influence over the system if they are a large force behind user adoption.

Maybe that is the case for some cryptocurrencies.78  Should “core” developers be licensed like professional engineers are?

Also, isn’t their statement above evidence that most projects are fairly centralized because the division of labor results in specialization?

On p. 113 they write:

These users are constantly providing feedback to the developers, miners, and companies, in whose interest it is to listen, because if users stop using the cryptoasset, then demand will go down and so too will the price.  Therefore, the procurers are constantly held accountable by the users.

Except this isn’t what happens in practice.

Relatively little activity takes place at all on most of these coin platforms and most of what does occur involves arbitrage trading and/or illicit activity.

This activity seems to have little direct connection to the price of the coin because the price of the coin is still largely determined by the whims of speculative demand.

For instance, above is a two-year transactional volume chart for bitcoin.  The price of bitcoin in the summer of 2016 was in the $600-$700 range whereas it is 10x that today.  Yet daily transaction volume is actually lower than it was back then.  Which means: the two are separate phenomenon.

Also, arguably the only direct way coin owners can — in practice —  hold maintainers accountable is via antics on social media.  That is why control of a specific reddit, Telegram, or Twitter account is very important and why hackers target those channels in order to influence prices.

On p. 113 they write about supply schedules:

For example, with oil, there’s the famous Organization of the Petroleum Exporting Countries (OPEC), which has had considerable control over the supply levels of oil.

Inadvertently they actually described how basically all proof-of-work coins operate: via a small clique of known miners and mining pools.  A cartel?

Source: Jameson Lopp

While these miners have not yet increased or decreased the supply of bitcoins, mining is a specialized task that requires certain capital and connections in order to be successful at.  These participants could easily collude to change the money supply, censor transactions, etc. and there would be no immediate legal recourse.

On p. 115 they write:

Cryptoassets, like gold, are often constructed to be scarce in their supply. Many will be even more scarce than gold and other precious metals. The supply schedule of cryptoassets typically is metered mathematically and set in code at the genesis of the underlying protocol or distributed application.

How to measure scarcity here?

Despite what alchemists tried for centuries to do: aside from particle accelators, on Earth the only way of increasing the supply of gold and silver is via digging it out of the ground.  For cryptocurrencies, it is relatively easy to fork and clone both code and chains.  Digital scarcity for most — if not all — public chains, seems to be is a myth.

In the next edition, maybe remove the “backed by maths” trope?  None of these chains run themselves, they all depend on humans to run the equipment and maintain the code.

On p. 115 they write:

As discussed earlier, Satoshi crafted the system this way because he needed initially to bootstrap support for Bitcoin which he did by issuing large amounts of the coin for the earliest contributors.  As Bitcoin matured, the value of its native asset appreciated, which means less Bitcoin is over eight years old, it provides strong utility to the world beyond as an investment, which drive demand.

Satoshi likely mined around 1 million bitcoins for himself/herself.  Because of how centralized and small the network originally was in 2009, he/she probably could have unilaterally stopped the network and relaunched it and effectively removed that insta-mine. 79

In addition, there was almost no risk to either be a developer or a miner… the entry/exit costs were very low… so why did he issue large amounts of coins for these contributors?80

Also, how does it provide strong demand beyond investment?  How many people do the authors know regularly use Bitcoin itself for retail payments?81

Also, through Bitcoin’s evolution, arguably some of its utility was removed by going down a specific block size path.  The counterargument is that payments will be done via some other networks (such as Lightning) attached to Bitcoin, but as of this writing, that hasn’t panned out.

One last comment about this passage, FOSS is historically charity work and difficult to build a sustainable operation. A couple notable exceptions are Red Hat and SUSE (which was just acquired by EQT).

On p. 115 they write:

The Ethereum team is currently rethinking that issuance strategy due to an intended change in its consensus mechanism.

In the second edition is it possible to be consistent on this one point: how is an “official” or “centralized” development team congruent with the idea of having a “decentralized ecosystem”?

Also, the administrators of Ethereum Classic modified the money supply last year and most folks were blasé.  Where is the relevant FinCEN guidance?

On p. 115 they write:

Steemit’s team pursued a far more complicated monetary policy with its platform, composed of steem (STEEM), steem power (SP), and steem dollars (SMD).

[…]

They have also chosen to modify their monetary policy post-inception.

The authors of this book need to be consistent in their wording because in other places they criticize centralized financial institutions but do not criticize centralized monetary supply decision of coin makers.  Also, again, why or how does a decentralized project have a singular team?

On p. 116 they write:

Crypotassets can be likened to silicon. They have come upon the scene due to the rise of technology, and their use cases will grow and change as technology evolves.  Currently, bitcoin is the most straightforward, with its use case being that of a decentralized global currency. Ether is more flexible, as developers use it for computational gas within a decentralized world computer.

This isn’t a good analogy.  Silicon exists as a naturally occurring element… whereas cryptocurrencies do not naturally arise — humans create them.

In addition, bitcoin is arguably not the most straightforward due to a long divorce and schism process the past three years.  One distinct group of promoters calls it “digital gold” and another distinct group calls it a “payment system” — the two groups are almost violently opposed to one another’s existence.

On p. 116 they write:

Then there are the trading markets, which trade 24/7, 365 days a year. These global and eternally open markets also differentiate cryptoassets from other assets discussed herein.

The FX markets are open globally almost 24/6 for most of the year, so that’s not really a braggable claim.82 There are legal, regulatory, and practical reasons why most capital markets operate in the time windows they do… it is not because of some technological limitation.  Worth rewording in the next edition.

On p. 116 they write:

In short, the use cases for cryptoassets are more dynamic than any preexisting asset class. Furthermore, since they’re brought into the world and then controlled by open-source software, the ability for cryptoassets to evolve is unbounded.

In the next edition, maybe remove the pomp and circumstance unless there is actual data to back up the platitudes.  We can all easily conjure up lots of potential use cases for just about any type of technology, but unless they are built and used, the hype should be turned down a few notches.

Also, there are many other open source software projects that have actually shipped frequently used productivity tools and no one is yelling from the mountain tops about how they have unbounded potential.  How are internet coins any different?

On p. 117 they write:

Cryptoassets have two drivers of their basis of value: utility and speculative.

In theory, perhaps.  But in practice, most coins just have potential utility because with few exceptions, most buyers typically hold with the expectation the coin will appreciate.  Maybe that change in the future.

On p. 117 the write:

For example, Bitcoin’s blockchain is used to transact bitcoin and therefore much of the value is driven by demand to use bitcoin as a means of exchange.

Perhaps, though in the next edition recommend modifying the wording to include: “… as a means of exchange or investment…”  Currently, we know a large portion of activity is likely movement (arbitrage) between exchanges.8384

But even ignoring this data (from analytics companies) this scenario has been diced-up elsewhere:

On p. 117 they write:

Speculative value is driven by people trying to predict how widely used a particular cryptoasset will be in the future.

If there are systematic surveys of actual buyers and sellers perhaps add those in the second edition.85

On p. 118 they write:

With cryptoassets, much of the speculative value can be derived from the development team. People will have more faith that a cryptoasset will be widely adopted if it is crafted by a talented and focused development team. Furthermore, if the development team has a grand vision for the widespread use of the cryptoasset, then that can increase the speculative value of the asset.

This is false.

For starters, the value of a new coin is almost entirely a function of the marketing effort from the coin issuers: that’s why nearly all ICOs carve out a portion of their funding pie to market, promote, and advertise… spreading the sexy gospel of the new coin.

This is a big bucks opaque industry, with all sorts of shenanigans that take place just to get listed on secondary markets… with coin issuers paying more than $1 million to get listed.

While $1 million or even $3 million may sound like a lot to get listed, the issuers know it is worth it because the retail speculators on the other end will at least temporarily pump the coin price up often long enough for the original insiders and investors to cash out.

Now the coin issuers may talk a big game and at eloquent length about how their grand vision: that their coin will end world hunger and save the environment, but they often have no ability to execute and build the product(s) they claimed in their whitepaper.

As mentioned above, one recent study found that, “56% of crypto startups that raise money through token sales die within four months of their initial coin offerings.”

Also, how does a decentralized cryptocurrency have an official singular development team?

On p. 118 they write:

As each cryptoasset matures, it will converge on its utility value. Right now, bitcoin is the furthest along the transition from speculative price support to uility price support because it has been around the longest and people are using it regularly for its intended utility use case.

And what is its intended use case?  The maximalist vision (digital gold) or the originalist payments vision?

On p. 118 they write:

For example, in 2016, $100,000 of bitcoin was transacted every minute, which creates real demand for the utility of the asset beyond its trading demand. A great illustration of bitcoin’s price support increasingly being tied to utility came from Pantera Capital, a well-respected investment firm solely focused on cryptoassets and technology. in Figure 8.2 we can see that in November 2013 bitcoin’s speculative value skyrocketed beyond its utility value, which is represented here by transactions per day using Bitcoin’s blockchain (CAGR is the compound annual growth rate).

But this didn’t happen.

Pantera has a habit of cherry picking dates and using different types of graphs (such as log versus linear) in order to talk its book.

For instance, they conjured up and pushed the “bitcoin absorbs the value of gold” narrative back in late 2014.  Then a year later, they became part of the “great pivot” by rebranding everything “blockchain” instead of bitcoin.

Putting those aside, the transactional part of the graph (Figure 8.2) from Pantera was published in early 2017 and has not held up to further scrutiny by mid-2018.

Source: Pantera

Compare that with the actual transactional volume for the past two years, including the most recent bull run:

Perhaps for some unknown reason the up-and-to-the-right hockey stick graph that Pantera tried to create with its dotted lines will germinate.  But for now, as of this writing, their transactional / utility thesis is incorrect.

Why?  Because the assumptions were the same as the authors of this book: they assume retail or institutional users will flock to using bitcoin for non-speculative reasons, but that has not occurred yet.

On p. 119 they write:

Speculative value diminishes as a cryptoasset matures because there is less speculation regarding the future markets the cryptoasset will penetrate. This means people will understand more clearly that demand for the asset will look like going forward. The younger the cryptoasset is, the more its value will be driven by speculative vlaue, as shown in Figure 8.3. While we expect cryptoassets to ossify into their primary use cases over time, especially as they become large system that supports significant amounts of value, their open-source nature leaves open the possiblity that they will be tweaked to pursue new tangential use cases, which could once again add speculative value to the asset.

Their wording in this and other passages has definitive certainty without any hedging.

This is unfounded.  Recall, what can be presented without evidence can be dismissed without evidence.  This also makes a circular argument that the next edition needs to provide evidence for (or just remove it).

Chapter 9

On p. 122 the write:

For example, currently the bond markets are undergoing significant changes, as a surprising amount of bond trading is still a “voice and paper market,” where trades are made by institutions calling one another and tangible paper is processed. This makes the bond market much more illiquid and opaque than the stock market, where most transactions are done almost entirely electronically: With the growing wave of digitalization, the bond markets are becoming increasingly liquid and transparent. The same can be said of markets for commodities, art, fine wine, and so on.

In re-reading this I can’t tell if the authors recognize that the bond market, as well as all of the other markets listed, started out in pre-electronic and even pre-industrial times.

That’s not to defend the status quo, only that if modern day trading platforms and automation existed a couple hundreds years ago, it is likely that bonds trading would have migrated much earlier than 2018… maybe even on a blockchain!

On p. 122 they write:

Cryptoassets have an inherent advantage in their liquidity and trading volume profile, because they are digital natives. As digital natives, cryptoassets have no physical form, and can be moved as quickly as the Internet can move the 1s and 0s that convey ownership.

This is conflating digitization/digitalization with blockchains.  You can have one without the other and in fact, do.

For instance, with US equities, beginning in the ’60s through the ’70s, stocks were dematerialized then immobilized in CSDs and ownership is now transferred electronically.86

Perhaps there is something to be said about this market infrastructure further evolving in time with a blockchain of some kind.

For example in the US, the DTCC (a large CSD) has:

Virtually every major CSD, stock exchange, and clearing house has likewise publicly opined or participated in some blockchain-related initiatives.  But that is a separate topic maybe worth looking into for the next edition.

On p. 123 they write:

Even though they are growing at an incredible clip, separation between cryptoasset markets and traditional investor capital pools still largely remains the case.

How much real money has actually entered the cryptocurrency market?

There have been several attempts to quantify it and it is still rather small, maybe up to $10 billion came in during 2017.

On p. 125 they write:

For example, in 2016, Monero experienced a sizeable increase in notoriety–largely because its privacy features began to be utilized by a well-known dark market–which sent its average trading volume skyrocketing. In December 2015, daily volume for the asset was $27,300, but by December 2016 it was $3.25M, well over a hunderfold increase. The price of the asset had appreciated more than 20-fold in the same period, so some of the increase in trading volume was due to price appreciation, but clearly a large amount was due to increased interest and trading activity in the asset.

But how do the authors know this “clearly” was the case?  Did they do some random sample surveys?  The next edition they need to prove their assumption, not just make them.  After all, it is hard — perhaps impossible — to externally ascertain what is going on at an exchange simply by looking at self-published volumes.

Also, the exchanges that these coins trade on are still typically unregulated, with little optics into how often manipulation occurs.  That is why a number of them have been subpoenaed by various governmental bodies; in the US this includes the SEC, CFTC, IRS, FBI, and even separate states acting in coordination.

On p. 129 they write:

From these trends, we can infer that this declining volatility is a result of increased market maturity. Certainly, the trend is not a straight line, and there are significant bumps in the road, depending on particular events. For example, monero had a spike in volatility in late 2016 because it experienced a significant price rise. This shows volatility is not only associated with a tanking price but also a skyrocketing price. The general trend, nonetheless, is of dampening volatility […].

This is not true either.  Maybe there are cherry picked dates in which there is relatively lower volatility than normal, but this year alone prices as measured in real money, declined between 60-100% for basically all crypotocurrencies and this involved a roller coaster to achieve.

In fact, in the process of writing this review, there were multiple days in which prices increased 5-10% for most coins and then a few days later, saw the same size of loses.  Erratic volatility has not disappeared.

On p. 133 they write:

Despite the many PBOC interventions, Chinese citizens used bitcoin to protect themselves against the erosion in value of their national currency.

Who in China did this?

I have spent an enormous amount of time visiting China the past several years on business trips and not once did someone say they had shifted their wealth from RMB into bitcoin because of RMB depreciation.  There are many speculators and miners, but to my knowledge there has not been a formal survey of buyers and their motivations… and the result being because of RMB depreciation.

The next edition should either remove this statement or add a citation.

On p. 134 they write:

As bitcoin rose and fell, so too did these assets. This reinforces the need for the innovative investor to become knowledgeable about these assets’ specific characteristics and recognize where correlations may or may not occur.

Recommend removing “innovative investor” in this location.87

Chapter 10

On p. 137 they write:

On its path to maturity, bitcoin’s price has experienced euphoric rise and harrowing drops, as have many cryptoassets. One of the most common complaints among bitcoin and cryptoasset naysayers is that these fluctuations are driven by the Wild West nature of the markets, implying that cryptoassets are a strange new breed that can’t be trusted. While each cryptoasset and its associated markets are at varying levels of maturity, associating Wild West behavior as unique to cryptoasset markets is misleading at best.

No it isn’t.  The authors do not even define or provide some kind of way to measure “maturity.”  This paragraph creates a strawman.

The burden-of-proof rests on the party making the positive claim.  In this case, the party claiming that a coin is becoming mature must provide objective evidence this is taking place.  Should reword in the next edition.

On p. 138 they write:

Broadly, we categorize five main patterns that lead to markets destabilizing: the speculation of crowds, “This time is different,” Ponzi schemes, Misleading information from asset issuers, Cornering.

Those are valid patterns, in full agreement here.  But this edition does not help in dispelling these problems and arguably even contributes to some of the speculative frenzy.

On p. 138 they write:

Sometimes they do this to capitalize on short-term information they believe will move the market, other times they do it because they expect to ride the momentum of the market, regardless of its fundamentals. In short, they try to profit within the roller-coaster ride.

What are the fundamentals of any coin described in this book?  Next edition, clearly write out 5-10 if possible.

On p. 139 they write:

As America was struggling through the Great Depression, which many pinned on the stock market crash of 1929, there was strong resentment against speculators. Every crisis loves a scapegoat.

And in Bitcoinland there is no difference.  Bitcoiners love to blame: bankers, the Illuminati, naysayers, concern trolls, academics, the government, Jamie Dimon, big blockers, small blockers, weak hands, statists, other coins, China, George Soros, Warren Buffett, Mike Hearn… virtually every month there is a new boogeyman to blame something on.  I’ve even been blamed many times and I’m not involved at all in the market.

On p. 143 they write:

Cheap credit often fuels asset bubbles, as seen with the housing bubble that led to the financial crisis of 2008. Similarly, cryptoasset bubbles can be created using extreme margin on some exchanges, where investors are effectively gambling with money they don’t have.

Fully agree, good point.

On p. 144 they write:

The best way to avoid getting burned in this manner is to do proper due diligence and have an investment plan that is adhered to.

Fully agree, good point.

On p. 145 they write:

The key to understanding bitcoin’s value is recognizing it has utility as “Money-over-Internet-Protocol”( MoIP)–allowing it to move large amounts of value to anyone anywhere in the world in a matter of minutes–which drives demand for it beyond mere speculation.

This might be partially true but is has the same feel-good narrative that folks like Andreas Antonopoulos have been getting paid handsomly to regurgitate.  Bitcoin (the network) does not move anything beyond bitcoins (the coin).  Users still have to convert bitcoins into actual money at end points.

Converting a large amount — greater than $10,000 — will likely require KYC and AML and maybe even sanctions checks.  This adds time and money which is one of the reason why the remittance use-case didn’t really get much traction after the hype in 2014 – 2015 and why companies such as Abra had to pivot a few times.

With that said, their metapoint is valid on the edges: despite the frictions that may exist, some participants are willing to go through this experience in order to gain more anonymity for uses they might not otherwise be able to do using traditional methods.88

Over the past three years there has also been an expansion of country- and region-based payment schemes worldwide to achieve near-real-time transfers, with Europe being one of the most significant accomplishments.89

In parallel, there are on-going experimentation and scaling of private blockchain-based ‘rails’ like Swift gpi or Alipay with GCash which have a potential to surpass volumes of the Bitcoin network.90

On p. 145 they write:

When Mt. Gox was established, bitcoin finally became accessible to the mainstream.

One nitpick:

Up until recently it was difficult for even diehard users to get onboarded onto most exchanges.  And specifically in 2010 with the launch of Mt. Gox, Jed McCaleb used Paypal to help facilitate the transfer of money… until Paypal dropped Mt. Gox because of too many chargebacks.  To get money into and out of Mt. Gox often was a frictionfull task, unless you lived in Japan.

On p. 149 they write:

As shown in Figure 10.4, steem’s price in bitcoin terms would fall from its mid-July peak by 94 percent three months later, and by 97 percent at the end of the year. This doesn’t mean the platform is bad. Rather, it shows the speculation and excitement about its prospects fueled a sharp rise and fall in price.

In hindsight, everything is 20-20.  The same truism in their last sentence can be said just about with every coin that sees the meteoric rise that Steemit did in 2016.91

On p. 150 they write:

While zcash has since stabilized and continues to hold great promise as a cryptoasset, its rocky start was caused by mass speculation.

Two comments:

  • Do the authors own any Zcash (or other cryptocurrencies mentioned in this book besides bitcoin)?
  • In late 2016 there were oodles of “thought leaders” talking about how Zcash was — for a moment — valued at a trillion dollars because of the very thin supply that was trading on exchanges.  It was a headscratching meme that illustrates a shortcoming to the common “market cap” valuation mehtod.92

On p. 152 they write:

The idea of valuation, which we will tackle in the next chapters, is a particularly challenging one for cryptoassets. Since they are a new asset class, they cannot be valued as companies are, and while valuing them based on supply and demand characteristics like that of commodiites has some validity, it doesn’t quite suffice.

Then why spend an entire chapter (Chapter 7) comparing coins such as bitcoin, to companies and their stock?

You can’t have it both ways.  Either heavily modify Chapter 7 in the next edition, or remove this comment.

Chapter 11

On p. 155 they write:

Given the emerging nature of the cryptoasset markets, it’s important to recognize that there is less regulation (some would say none) in this arena, and therefore bad behavior can persist for longer than it may in more mature markets.

And there are now full-time lobbyists and trade associations — sponsored by donors whom have benefited from this unregulated / underregulated market — that actively push back against sensible regulations being applied.  But that’s a different conversation beyond this post.

On p. 155 they write:

As activity grows in bitcoin and crypotasset markets, investors must look beyond the madness of the crowd and recognize that there are bad actors who seek easy prey in these young markets.

Even for a book published in late 2017, this is pretty much lip service.  Volumes of books can be written about the shenanigans within nearly every public ICO and high-profile coin project.  The authors should either modify the statement above or ideally expand it to detail specific egregious examples besides just OneCoin.

For instance, a new study found that: More Than Three-Quarters of ICOs Were Scams.  And these were ICOs done in 2017.

On p. 158 they write:

While a truly innovative crypotasset and its associated architecture requires a heroic coding effort from talented developers, because the software is open source, it can be downloaded and duplicated. From there, a new cryptoasset can be issued wrapped in slick marketing. If the innovative investors doesn’t do proper due diligence on the underlying code of read other trusted sources who have, then it’s possible to fall victim to a Ponzi scheme.

Enough with the “heroic” adjectives, let’s not put anyone on a pedestal, especially if the platform is not being used by anyone besides speculators and illicit actors.

Secondly, a minor grammar question: other uses of “open-source” in this book have a dash and the one above does not.

Lastly, recommend readers look into “Nakomoto Schemes” described in this article: The Problem with Calling Bitcoin a “Ponzi Scheme”

On p. 158 they write:

Millions of dollars poured into OneCoin, whose technology ran counter to the values of the cryptoasset community: its software was not open source (perhaps out of fear that developers would see the holes in its design), and it was not based on a public ledger, so no transactions could be tracked.

First, what are the “values” that the “community” has?  Are these explicity written somewhere?  Who decided those?

Second, those actually don’t sound too uncommon.

For instance, one recent study found: “Security researchers have found, on average, five security flaws in each cryptocurrency ICO (Initial Coin Offering) held last year. Only one ICO held in 2017 did not contain any critical flaws.”

And remember, these projects are “open source” yet most buyers and investors didn’t bother looking at the code.  OneCoin is par for the course.

On p. 159 they write:

The swift action revealed the strength of a self-policing, open-source community in pursuit of the truth.

In my most popular post last year, I went through in detail explaining how self-policing is an oxymoron in the cryptocurrency world.

For example, “the community” actively listed OneCoin on secondary markets and profited from its trading.  Did exchange operators return those gains to victims?  In addition, “the community” has thus far, not set up any self-regulating organization (SRO) that has any ability or teeth to enforce a code-of-conduct.

In fact, it was agencies from Sweden, the UK, and other governments that acted and cracked down on OneCoin… not a collective effort from exchanges or VCs or twitter personalities.

On p. 159 they explain googling for code on GitHub:

If nothing pops up with signs of the code on GitHub, then the cryptoasset is likely not open source, which is an immediate red flag that a cryptoasset and investment should be avoided.

Sure, but it doesn’t include the fact(s) that even in 2017 we knew that many coin projects had bugs in it… because there is no incentive to independently audit this code or to publish it in an objective manner.

For example, often when someone tries to help highlight problems, they are demonized as a “concern troll” as the coin tribes brigade their Twitter and reddit threads.  There are a couple of sites like ConcourseQ that now do help highlight problems, but most “crypto thought leaders” on social media spend their time rallying retail investors to buy coins instead of busting or calling out the legitimate coin scams.

On p. 161 they write about John Law:

Fortunately, today it’s quite easy to find information on just about anyone through Google searches.

Yes and no.  And that still doesn’t act as a shield against fraud.  The founders of Centra had shady, criminal pasts but were still able to raise more than $30 million in an ICO.  Their misdeeds only became widely known after a New York Times article explored it… this was not a story that was investigated by any of the “coin media” who collectively have a vested interested not to “self-police” the market they cover.

Furthermore, prior to getting busted and sued, Centra became a dues paying member of: Hyperledger, the Enterprise Ethereum Alliance, and the Chamber of Digital Commerce.  What are the filtering mechanisms in place at these types of organizations?  How do they determine who can join and if a coin is a security?

On p. 165 they write:

As with most panics, the contagion spread from the Gold Exchange.  Because of Gould’s cornering of the market, stock prices dropped 20 percent, a variety of agricultural exports fell 50 percent in value, and the national economy was disrupted for several months. Gould exited with a cool $11 million profit from the debacle, and scot-free from legal charges. It is all too common that character like Gould escape unscathed by the havoc they create, which then allows them to carry on with their machinations in other markets.

These kinds of panics and manipulation are part and parcel to retail traders on cryptocurrency exchanges.  Scapegoats and the blame game consist of a myriad of boogeymen — but typically the culprits are never found.93

On p. 167 they write:

In addition to miners, in Dash there are entities called masternodes, which are also controlled by people or groups of people. Masternodes play an integral role in performing near instant and anonymous transaction with Dash.

Putting aside whether Dash is or is not anonymous… the fact that the authors state that humans play a direct role in running the infrastructure raises a bunch of questions that I have repeated in this review.

How are these participants held accountable?  How is governance managed?  Have these participants registered with FinCEN?  Why or why not?

On p. 168 they write about the Bitcoin Rich List:

Another 116 addresses hold a total of 2.87 million bitcoin, or 19 percent of the total outstanding, which is sizeable. Unlike dash, however, these holders aren’t necessarily receiving half the newly minted bitcoin, and so their ability to push the price upward is less.

Should there be a thorough investigation of how any one party or set of parties can artificially move prices around based on control of the money supply?  In our current real-world framework, there are frequent public hearings and audits done.  When will minters of cryptocurrencies be publicly audited?

Chapter 12

On p. 171 they write:

Each cryptoasset is different, as are the goals, objectives, and risk profiles of each investor. Therefore, while this chapter will provide a starting point, it is by no means comprehensive. It’s also not investment advice.

Throughout the book the authors have repeatedly endorsed or not-endorsed specific coins.  The second edition needs to be a lot more consistent.

On p. 172 they write:

Currently, there is no such thing as sell-side research for cryptoassets, and this will require innovative investors to scour through the details on their own or rely on recognized thought leaders in the space.

This is a sad truth: it is nearly impossible to get neutral, objective research on any coin that has been created.

Why?  Because all coin holders basically have an incentive to promote and advertise the coins they own and talk down other coins they perceive as competition.  Paying “researchers” has happened and will continue to do so.

Also, here’s another appearance of “innovative investor” — can that be removed altogether?

And lastly, how to know who the “recognized thought leaders” are?  Based on the amount of twitter followers they have?  That has been gamed.  Based on how popular their Youtube account is?  That has been gamed.

For example, these two article explain some of this payola world:

Another instance, a couple weeks ago a government department in China (CCID) released its second ranking table of coins: China’s Crypto Ratings Index Puts EOS in Top Slot, Drops Bitcoin

It’s unclear if this is due to lobbying efforts or maybe the researchers owned a bunch of EOS coins.  At this time, the EOS block producing and arbitrator framework are both broken.  Block producers paused the network a few weeks ago and the arbitrators / constitutions will probably be scrapped.

How can this rating system be trusted?

On p. 173 they write about white papers:

Any cryptoasset worth its mustard has an origination white paper. A white paper is a document that’s often used in business to outline a proposal, typically written by a thought leader or someone knowledgeable on a topic. As it relates to cryptoassets, a white paper is the stake in the ground, outlining the problem the asset addresses, where the asset stands in the competitive landscape, and what the technical details are.

During the Consensus event this past May, someone accidentally dropped a napkin on the floor and someone loudly said: watch out, that’s the latest multimillion dollar white paper.

And that’s the situation where we are in now.  Readers: the passage above was not at all critical of the real mess we are in today.  For instance, Tron literally plagiarized in its whitepaper, raised a ton of money in its ICO and recently bought BitTorrent.

There is no direct connection between a “good” or “bad” whitepaper and the performance of the coin.  Retail investors do not typically care and haven’t done much research.  Yet another reason agencies such as the SEC will be overwhelmed in the coming years due to rampant fraud and deceit.  Worth looking into the next edition.

On p. 173 they write:

Some of these white papers can be highly technical, though at the very least perusing the introduction and conclusion is valuable.

This seems like an incongruent statement compared to other advice in the book about doing deep research.  Recommend revising.

On p. 174 they write:

A number of cryptoasset-based projects focus on social networks, such as Steemit and Yours, the latter of which uses litecoin. While we admire these projects, we also ask: Will these networks and their associated assets gain traction with competitors like Reddit and Facebook? Similarly, a cryptoasset service called Swarm City (formerly Arcade City) aims to decentralize Uber, which is already a highly efficient service. What edge will the decentralized Swarm City have over the centralized Uber?

And that in a nutshell is why the second edition of the book arguably needs to be slimmed down by 25%+.  Virtually all of the use cases in this book are simply potential use cases and have shown little or even no traction in reality.  For example, if the authors were as critical to Bitcoin and Zcash as they were to Swarm City then the second edition might be perceived as more balanced.

Specifically, in their promotion of Bitcoin as a payments platform, they have not done a deep dive into other existing payment networks, such as Visa or an RTGS from a central bank.94 They should do that in the next edition otherwise these come across as one-sided arguments.

Also, Yours switched from Litecoin over to Bitcoin Cash last year (around the time the book was published) and Swarm City is still not very active at the time this review was written.

On p. 175 they write about The Lindy Effect

The same applies to cryptoassets. The longest-lived cryptoasset, bitcoin, now has an entire ecosystem of hardware, software developers, companies, and users built around it. Essentially, it has created its own economy, and while a superior cryptocurrency could slowly gain share, it would have an uphill battle given the foothold bitcoin has gained.

This is untrue in theory and practice.

While maximalists would vocally claim that there can only be one-chain-to-rule-them-all, there is no real moat that Bitcoin has to prevent users from exiting or switching to other platforms (see discussion on substitute goods).

In practice, effectively all proof-of-work cryptocurrencies depend on external capital to stay afloat, often in the form of venture capital. ((See Robert Sams on rehypothecation, deflation, inelastic money supply and altcoins)) Part of the reason is that miners need to pay their bills in traditional currency and therefore must liquidate some or all of their coins to do so.  Another issue is that because many participants think or believe that coin prices as measured in real money will increase in the future, they hold.  Yet the expenses of service providers (exchanges, wallets, etc.) typically need to be paid with traditional money.

As a result, this creates sell-side pressure.  And unlike the traditional FX market which has “natural” buyers in the form of international merchants and multinational corporations: there still is no “natural” buyers of cryptocurrencies outside of illicit activity (e.g., darknet market participants).

To compound this situation is that there is still no real circular flow of income, no real economy for any of these cryptocurrencies.95  And with the exception of a few cases each year, miners typically do not directly invest their coin holdings into companies, so crypotcurrency-related startups are dependent on foreign currency.

On p. 175 they write:

The demise of The DAO significantly impacted Ethereum (which The DAO was built on), but through leadership and community involvement, the major issues were addressed, and as of April 2017 Ethereum stands solidly as the second largest cryptoasset in terms of network value.

In the second edition, could the authors explicitly lay out how they define “leadership” in this context as well as what the “community” is?  If it is singular and centralized, how is that fitting for an entity that is supposed to be decentralized?

Also, for readers interested in The DAO, here’s a short fiery thread on that topic.

On p. 176 they discuss “utility value and speculative value”

For bitcoin, its utility is that it can safely, quickly, and efficiently transfer value to anyone, anywhere in the world.

That may have been the original vision expressed in the whitepaper but it is not what the maximalists now claim Bitcoin is.  Who’s promotion around utility is something we should take into consideration?

Also, considering how easy and common it is to hack cryptocurrency intermediaries such as exchanges, I think it is debatable that Bitcoin is “safe” for unsophisticated retail users, but that’s a separate topic.

On p. 176 they write:

The merchants wants to use bitcoin because it will allow her to transfer that money within an hour as opposed to waiting a week or more. Therefore, the Brazilian merchant buys US$100,000 worth of bitcoin and sends it ot the Chinese manufacture.

They explain a little more but the difficulties with this example starts here.  The authors only focus on the bitcoins themselves, they don’t explore the actual full lifecycle that international merchants and manufacturers have to go through in order to exchange bitcoins into real money that they can use to pay bills.

That is to say: the Brazilian merchant and Chinese manufacture do not hold onto coins, so it is not just a matter of how fast they can send or receive the coins.  What ultimately matters to them is how quickly they can receive the real money from a bank.

So the next edition needs to include the full roundtrip costs and frictions including the on-ramps and off-ramps into the traditional financial system.  This is why many Bitcoin remittance companies struggled and ultimately had to pivot out of that cross-border use case (such as Abra).  For the next edition, a side-by-side cost comparison would be helpful.96

On p. 177 they write:

That means on average each of these addresses is holding US$5.5 million worth of bitcoin, and it’s fair to assume that these balances are not those of merchants waiting for their transactions to complete. Instead, these are likely balances of bitcoin that entities are holding for the long term based on what they think bitcoin’s future utility value will be. Future utility value can be thought of as speculative value, and for this speculative value investors are keeping 5.5 million bitcoin out of the supply.

This seems like euphemisms.  We understand that time preferences and discounted utility come into dramatic effect here.  Maybe worth rewording?

For example, a large portion of those coins could be permanently destroyed (e.g., someone deleted the private key or threw away the hard drive).  Though a significant portion could also be maximalists holding onto their coins with the hope that other investors create sufficient demand to move the price — as measured in real money — upward and upward.  So they can then cash out.

If daily and weekly anecdotes on twitter and reddit are any indication, that’s arguably the real utility value of most coins, not just bitcoin.  And there is some analytics to back up that argument too.

On p. 177 they write:

At the start of April 2017, there were just over 16 million bitcoin outstanding. Between international merchants needing 10 million bitcoin, and 5.5 million bitcoin held by the top 1,000 investors, there are only roughly 500,000 bitcoin free for people to use.

Citation needed. If the authors have any specific information that can share with the audience about any of these numbers, that’d be very helpful.  Especially regarding the merchants needing 10 million bitcoin.  If anything, there may be fewer merchants actively accepting bitcoin today than there were a couple years ago.

On p. 177 they write:

If demand continues to go up for bitcoin, then with a disinflationary supply schedule, so too will its price (or velocity).

Couple of things:

  • Bitcoin’s current supply schedule is perfectly inelastic (whereas say gold, is elastic).
  • It would be good to see what the authors think the velocity of bitcoin is.  I’ve tried to track down and write about it in the past.  See all of Chapter 9.

On p. 177 they write:

In other words, those investors no longer feel bitcoin has any speculative value left, and instead its price is only supported by current utility value.

As mentioned above, it would be helpful in the next edition if the authors included specific definitions and characteristics in a chart for what utility versus speculative value are.

Also, I don’t endorse the post in its entirety, but about five years ago Rick Falkvinge wrote an interesting note about the transactional value from illicit activity as it relates to Bitcoin.  That has some actual data in it (though very old now).

On p. 178 they write:

For bitcoin, instead of looking at the “domestically produced goods and services” it will purchase in a period, the innovative investor must look at the internationally produced goods and services it will prucahse. The global remittances market–currently dominated by companies that provide the ability for people to send money to one another internationally–is an easy graspable example of service within which bitcoin could be used.

This whole section should probably be culled because this isn’t really a viable, scalable use case that bitcoin itself can solve.

For example, between 2014-2016, tens of millions of dollars were invested in more than a dozen “rebittance” companies (Bitcoin-focused remittance) and most either failed or pivoted.

Those that still exist had to build additional services and bitcoin were a means to an end.  In all cases, these companies had to build their own cryptocurrency exchange and/or partner with several cryptocurrency exchanges in order to liquidate the coins — they need to hedge and limit their exposure to volatility.  Bitcoin also doesn’t solve for the last-mile problem at all… but that is a separate topic.97

On p. 179 they write:

If each bitcoin needs to be worth $952 to service 20 percent of the remittance market and $11,430 to service the demand for it as digital gold, then in total it needs to be worth $12,382. There is no limit to the number of use cases that can be added in this process, but what is extremely tricky is figuring out the percent share of the market that bitcoin will ultimately fulfill and what the velocity of bitcoin will be in each use case.

This is highly debatable.  And it is exactly what Pantera stated four years ago.  Sources should be cited in the next edition; and also provide a velocity estimate for the potential use cases.

On p. 180 they write:

Taking the concepts of supply and demand, velocity, and discounting, we can figure out what bitcoin’s value should be today, assuming it is to serve certain utility purposes 10 years from now. However, this is much easier said than done, as it involves figuring out the sizes of those markets in the future, the percent share that bitcoin will take, what bitcoin’s velocity will be, and what an appropriate discount rate is.

An actual asset would certainly need these blanks filled, but Bitcoin doesn’t behave like a normal asset.  For instance, it goes through enormous speculative bubbles and busts.  It reached just under $20,000 per coin in mid-December last year not for any utility reason but pure speculation… yet many of the “thought leaders” at the time said it was because new buyers were going to use it for its utility.

On p. 180 they write:

Already there have been reports, such as those from Spence Bogart at Needham & Company, as well as Gil Luria at Webush, that look at the fundamental value of bitcoin.

I’ve read most of their reports, they’re nearly all based on edge-case assumptions or one-off anecdotes that never saw much traction (such as remittances).  In addition, arguably both of their analysis may have been colored by their coin investments at the time they published their work.  That’s not to say their material is discredited but I would discount some of their cryptocurrency-related reports.98

On p. 180 they write:

The valuations these analysts produce can be useful guides for the innovative investor, but they should not be considered absolute dictations of the truth. Remember, “Garbage in, garbage out.” We suspect that as opposed to these reports remaining proprietary, as is currently the case with much of the research of equities and bonds, many of these reports will become open-source and widely accessible to all levels of investors in line with the ethos of cryptoassets.

This has not happened.  If anything, the market has been flooded with junk marketing material that masquerades as “research.”  Universities are now getting funded by coin issuers and asked to co-publish papers.  Even if there are no explicit shenanigans going on, there is now a shadow of doubt that hangs over these organizations.

Also, the next edition needs to define what “the ethos of cryptoassets” is somewhere up front.  And dispense with “innovative investor”?99

On p. 182 they write about getting to know “the community and the developers”:

In getting to know the community better, consider a few key points. How committed is the developer team, and what is their background? Have they worked on a previous cryptoasset and in that processrefined their ideas so that they now want to alunch another?

[…]

If information cannot be found on the developers, or the developers are overtly anonymous, then this is a red flag because there is no accountability if things go wrong.

Satoshi clearly wouldn’t have been able to pass this test.  Nor BitDNS originally (which later became Namecoin).

It is a double-standard to want accountability here yet promote an ill-defined “decentralization” throughout this book.  You really can’t have it both ways.

Remember, the reason why administrators and operators of financial market infrastructure are heavily regulated is to hold participants legally responsible and accountable for when mistakes and accidents occur.

Cryptocurrencies were designed to be anarchic and purposefully were designed to not make a single participant accountabile.  Trying to merge those two worlds creates the worst of both: permissioned-on-permissionless.

On p. 183 they write:

If Ethereum gets big enough, there may eventually be those who call themselves Ethereum Maximalists!

Yes, they exist and largely self-selected themselves into the Ethereum Classic world… you can see that by their antics on social media.

On p. 183 they write about issuance models:

Next, consider if the distribution is fair. Remember that a premine (where the assets are mined before the network is made widely available, as was the case with bytecoin) or an instamine (where many of the assets are mined at the start, as was the case with dash) are both bad signs because assets and power will accrue to a few, as opposed to being widely distributed in line with the egalitarian ethos.

Let’s tone down the talk on egalitarianism in a market fueled by greed and a perpetually high Gini coefficient.

In practice as of July 2018, many ICOs are pre-mined or pre-allocated, most as ERC20 tokens that are controlled by a singular entity (usually an off-shore foundation).100

Is this a “bad sign”?  It would be helpful to see what the explicit criteria around token distribution should be in the next edition.101

On p. 183 they write:

For example, Ethereum started with one planned issuance model, but is deciding to go with another a couple years into launch. Such changes in the issuance model may occur for other assets, or impact those assets that are significatnly tied to the Ethereum network.

Those decision are made by individuals.  Perhaps by the next edition we will know what FinCEN and other regulatory positions on individuals creating monetary policy and running financial market infrastructure.

On p. 184 they write:

With Dogecoin we saw that it needed lots of units outstanding for it to function as a tipping service, which justifies it currently having over 100 billion units outstanding, a significantly larger amount than Bitcoin. With many people turning to bitcoin as gold 2.0, an issuance model like Dogecoin’s would be a terrible idea.

What?  Why?  This passage conflates many different things.

  1. As Jackson Palmer has repeatedly said: Dogecoin was set up as a joke, based on a meme.  The authors seem to be taking its existence a little too seriously.
  2. Dogecoin was originally based on Luckycoin which had a random money supply, so its original hashrate charts were all over the map, bipolar.
  3. Its money supply was changed in part because it ran into an exitential crisis that it later (mostly) solved by merge mining with Litecoin in 2014

How does any of this have to do with maximalist narrative of “gold 2.0”?

On p. 186 they write:

The only way attackers can process invald transactions is if they own over half of the computer power of the network, so it’s critical that no single entity ever exceeds 50 percent ownership.

Technically this is not quite right.

The actual figure to sucessfully censor and/or reorg the chain may be as low as 33% and perhaps even 25% (dubbed “selfish mining“).102  More than 50% would mean the participants could do so repeatedly until their hashrate declines and/or a permanent fork occurs.

Aside from pressure on social media, there is nothing to prevent such “ownership” from taking place.  And there is no legal recourse or accountability in the event it happens.  And such “attacks” have occured on many different cryptocurrencies.103

On p. 186 they write:

In other words, miners are purley economically rational individuals–mercenaries of computer power–and their profit is largely driven by the value of the crypotasset as well as by transaction fees.

This should be reworded from the next edition because it is not true.  Miners and mining pools are operated by people and they have various incentives, including to attack networks or abandon them altogether.

On p. 186 they write:

A clearly positively reinforcing cycle sets in that ensures that the larger the asset grows, the more secure it becomes–as it should be.

This is not true for proof-of-work coins.

If anything, mining and development have both trended towards centralization.  For instance, it is estimated that Bitmain-manufactured hashing equipment currently generates 60-80% of the network hashrate and Bitmain-affiliated mining pools comprise about 50%+ of the current Bitcoin network.  Maybe that is just momentary but singular entities on the mining side dominate many other cryptocurrencies as well.  Perhaps that changes later in the year so it is worth revisiting in the next edition.

Recommended reading:

On p. 187 they write:

At the risk of being repetitive, more hash rate signifies more computers are being added to support the network, which signifies greater security.

This is a non sequitur.  A new hashing machine capable of generating 10 times the amount of hashes as the previous machine could — ceteris paribus — result in other machines being turned off.  In practice, you often have the Red Queen Effect take place (see Chapter 3).

Either way, depending on the costs of more efficient ASIC design, there could actually be fewer (or more) hashing machines added to a network depending on the expected price of the coin minus operating costs.

And in some cases, the network may become more centralized and therefore arguably less secure.  Worth revising in next edition.

On p. 188 they write:

While hash rate often follows price, sometimes price can follow hash rate. This happens in situations where miners expect good things of the asset in the future, and therefore proactively connect machines to help secure the network. This instills confidence, and perhaps the expected good news has also traveled to the market, so the price start going up.

This passage has entered Rube Goldberg territory, where a series of specific events turn into a virtuous cycle in which prices go up and up but not down?  How can we ever know what caused certain price increases or decreases with this type of asymmetric information occurring in the background?  Suggest scrapping it in the next edition.

On p. 188 they write:

Ethereum’s mining network, on the other hand, is less built out because it’s a younger ecosystem that stores less value. As of March 2017, a 230 megahash per second (MH/s) mining machine could be purchased for $4,195, and it would take 70,000 of these machines to recreate Ethereum’s hash rate, totaling $294 million in value. Also, because Ethereum is supported by GPUs and not ASICs, the machines can more easily be constructed piecemeal by a hobbyist on a budget.

There are a few issues with this:

  1. How do the authors measure or quantify “less built out”?  Is there a line that is crossed in which Ethereum or other coins are “more built out” or the right size?
  2. About a year ago a coin reporter asked me to detail the hypothetical lower bound costs for recreating the hashrate of the Bitcoin network.  I provided those numbers based on Bitmain’s latest device… but the article instead ignored any of that and instead quoted some random conspiracy theory from a Twitter personality.  Rather than rehashing the full story here, keep in mind that the geographic distribution and control of mining equipment is arguably as important as the aggregate network hashrate.
  3. Their last sentence does not make much sense.  How to define a hobbyist?  If a hobbyist is defined as an individual who can afford to spend $4,195… then they can probably also buy ASIC equipment as well for other cryptocurrencies, including Ethereum today.

On p. 188 they write:

This range is a good baseline for the innovative investor to use for other cryptoassets to ensure they are secured with a similar level of cpaital spend as Bitcoin and Ethereum, which are the two best secured assets in the blockchain ecosystem.

There is another appearance of the “innovative investor,” remove in next edition?

Also, if security is solely measured by hashrate then yes, Bitcoin (BTC) and Ethereum (ETH) might be the “best secured.”  But that assumes a purely Maginot Line attack and not a BGP or wrench attack.

On p. 189 they write:

Overall, hash rate is important, but so too is decentralization. After all, if the hash rate is extremely high but 75 percent of it is controlled by a single entity, then that is not a decentralized system. It is actually a highly centralized system and therefore vulnerable to the whims of that one entity.

This probably should come at the beginning of the chapter, not in this location.  Also recommend adding some citations to the Onename and BGP posts.

On p. 189 they write:

It’s apparent that Litecoin is the most centralized, while Bitcoin is the most decentralized. A way to quanitfy the decentralization is the Herfindahl Hirschman Index (HHI), which is a metric to measure competition and market concentration.

HHI is used with known, legally identifiable parties.  With cryptocurrencies such as Bitcoin, Litecoin, and Ethereum — the mining entities were not originally supposed to be known at all — over time they self-doxxed themselves.104

Should the Department of Justice and similar organizations coordinate and carry out HHI analysis on mining pools to prevent monopolization, oligopolization, and/or coordination?   What happens if participants refuse to comply?

On p. 191 they write:

Blockchain networks should never classify as a highly concentrated marketplace, and ideally, should always fall into the competitive market place category.

Okay, but what if they don’t and no one cares?  Who should enforce this?

Recommend reading a relevant paper published this past winter: Decentralization in Bitcoin and Ethereum Networks

On p. 193 they write:

At times, Bitcoin has been a moderately concentrated marketplace, just as Litecoin mining is currently a moderately concentrated marketplace. Litecoin recognizes the impact that large mining pools can have on the health of its ecosystem and the quality of its coin. To that point, Litecoin developers have instituted an awareness campaign called “Spread the Hashes” for those mining litecoin to consider spreading out their mining activies. The campaign recommends that litecoin computers mine with a variety of mining pools rather than concentraing solely in one.

The anthropomorphism needs to be removed in the second edition.  “Litecoin” does not recognize anything because Litecoin is not a singular autonomous entity.

There are individual people, developers who work on a certain implementation of Litecoin that may promote something — and if they coordinate (which they do) then perhaps they could be classified as administrators.

Either way, this “Spread the Hashes” campaign didn’t seem to work:

Source: Litecoinpool.org visited on July 11, 2018

As the pie chart above illustrates, just 5 entities currently account for about 90% of the network hashrate.  And the largest 3 effectively could coordinate to control the network if they wanted to.

Worth noting that similar marketing campaigns to “spread the hashes” have been done on other networks.  Back in 2014 when GHash.io reached the 50% mark, reddit was filled with discussions imploring miners to switch to P2Pool.

Why don’t miners move to smaller pools?  Two words: reliable revenue.  Recommended reading: The Gambler’s Guide To Bitcoin Mining

On p. 194 they write:

Not all nodes are made equal. A single node could have a large number of mining computers behind it, hence capturing a large percentage of the overall network’s hash rate, while another node could have mining computer supporting it, amounting to a tiny fraction of Bitcoin’s hash rate.

Sort of.  There are two different nodes: nodes that fully validate and attempt to append the blockchain by submitting a proof-of-work that meets the necessary difficulty threshold… and nodes that don’t.  In practice, today we call the former “mining pools” and the latter, just nodes.

For instance, in Bitcoinland there was a vicious war of words from 2015-2017 waged by several parties who did not operate mining pools, or nodes that generated proofs-of-work.105  One subset of these parties used various means and channels to insist that miners did not ultimately matter, that it was “users” who truly controlled the network and they labeled themselves “UASF.”  And some of the most vocal members of this “populism wing” insisted that the nodes run by mining pools were no more important than the nodes run by some hobbyist in an apartment.

The views were irreconcilable and the ultimate result is that one group involved in that battle, forked off and created a new chain called Bitcoin Cash (BCH), whereas many of the other parties coalesced with what is called Bitcoin (BTC).  There is a lot more to the story, a messy emotional divorce that still continues today.

Technically the decision to fork or not fork is made by mining pools and the nodes they each manage, but there are more nuances and politics involved that go beyond the scope of this review.

On p. 194 they write:

William Mougayar, author of The Business Blockchain, has written extensively about how to identify and evaluate new blockchain ventures and sums up the importance of developers succinctly: “Before users can trust the protocol, they need to trust the people who created it.” As we touched upon in the prior chapter, investigate the prior qualifications of lead developers for a protocol as much as possible.

Two problems with this:

  1. I wrote a lengthy book review of Mougayar’s book and found it disappointing and do not recommend because of statements like the one above.
  2. What were Satoshi’s qualifications?  No one knows, but no one really cares either.  Similarly, what were Vitalik Buterin’s qualifications?  He was 19 when he announced Ethereum at Bitcoin Miami and had recently dropped out of college.  Similarly, Gavin Wood was a 34 year-old developer building music-related apps prior to co-founding Ethereum.  Would these two key guys been deemed qualified?  What are the qualifications necessary to be a blockchain wizard?

On p. 194 they write:

Developers have their own network effect: the more smart developers there are working on a project, the more useful and intriguing that project becomes to other developers. These developers are then drawn to the project, and a positively reinforcing flywheel is created. On the other hand, if developers are exiting a project, then it quickly becomes less and less interesting to other developers, ultimately leaving no one to captain the software ship.

A couple of thoughts:

  1. This is a nice sounding theory, but that’s not really what happens with most of these projects.  Generally developers are attracted due to the compensation they can receive… they do a risk-reward analysis.  I’ve met and spoken to dozens, perhaps north of 100 cryptocurrency-related teams in the past 12 months across the globe.  Attracting talented developers is not nearly as easy and clear cut as the authors make it sound above.
  2. Also, having a single “captain of the ship” seems like a single point of failure and a centralization risk.  Is that part of the undefined ethos?

On p. 195 they write:

Recall that this is how Litecoin, Dash, and Zcash were created from Bitcoin: developers forked Bitcoin’s code, modified it, and then re-released the software with different functionality. Subscribers refer to people wanting to stay actively involved with the code. In short, the more code repository points, the more developer activity has occured around the cryptoasset’s code.

That’s not necessarily true, and in fact, has been gamed by coin issuers who want to make it look like there is a lot of independent activity and traction with developers… by creating spam accounts and very small changes to simple documents (like grammar).

It can be a helpful metric but you need someone technically inclined to dive into the code that is being added/removed/modified.  See: Increased Github Scrutiny Means Lazy ICO Developers Have No Place to Hide

Readers may also be interested in CoinGecko to see how this acitivity is weighted.

On p. 198 they write:

A different approach is to monitor the number of companies supporting a cryptoasset, which can be done by tracking venture capital investments. CoinDesk provides some of this information as seen in Figure 13.13. Though as we will address in Chapter 16 on ICOs, the trend in this space is moving away from venture funding and toward crowdfunding.

Actually, as mentioned a couple time earlier, there has been a noticeable divergence the past 12 months: coin sales that are done as private placements versus coin sales that have a public facing sale.

In general, most of the coins that have raised capital through private placement deals typically have less than 100 investors, many of which are the aforementioned “crypto hedge funds” and coin-focused venture funds such as Andreessen Horowitz and Union Square Ventures.

The public facing sales are generally eschewed by venture funds.  If venture funds are involved in a coin that does a public sale, they typically are involved in what is called a “pre-sale” where they receive preferential terms and conditions, such as discounted coins.

Upon the conclusion of the “pre-sale” the actual public sale begins with heavy marketing on social media towards retail investors.  Sometimes these sales have hundreds or even thousands of individual participants.  That could be called a “crowdsale” and these participants typically get worse terms than those who participated in the pre-sale.

On p. 199 they write:

Another good proxy for the increased acceptance of a cryptoasset and its growing offering by highly regulated exchanges is the amount of fiat currency used to purchase it.

Maybe consider revising because we have all been told that cryptocurrencies would not only displace “fiat currency” but also topple and replace the existing financial system… how does measuring these new internet coins with old money help achieve that?

For instance, at the time of this writing none of the US-based retail exchanges with domestic bank accounts have recently listed an ICO (with the exception of ETH and ETC).  This includes: itBit, Bitflyer, Coinbase, and Gemini.106  Kraken’s retail exchange uses payment processors and banking partners outside of the US.107

On p. 199 they write:

in the one-year period from March 2016 to March 2017, ether went from being traded 12 percent of the time with fiat currency to 50 percent of the time. This is a good sign of the maturation of an asset, and shows it is gaining wider recognition and acceptance.

Why is that specific ratio or percentage deemed good?  The next edition should include a table explaining this in further because it is unclear why it is good, neutral, or bad.

On p. 201 they write about wallets from Blockchain.info:

Clearly, having more users that can hold a cryptoasset is good for that asset: more users, more usage, more acceptance. While the chart shows an exponential trend, there are a few drawbacks for this metric. For one, it only shows the growth of Blockchain.info’s wallet users, but many other wallet providers exist. For example, as of March 2017, Coinbase had 14.2 million wallets, on par with Blockchain.info. Second, an individual can have more than one wallet, so some of these numbers could be due to users creating many wallets, a flaw which extends to other wallet providers and their metrics as well.

In the past I have written extensively on how these headline wallet numbers are basically gimmicks and don’t accurately measure users or user activity.

Why?  Because it costs nothing to open one.  And often there is no KYC or AML involved in creating one as well.  As a result, bots can be used to create many each day to inflate the metric.

Coinbase has actually removed usage data in the past and they still don’t define what the difference between a user or wallet is.  Nor do either company provide traditional DAU / MAU metrics.  It’s not hard to do and it is unclear why they don’t.  The only way we have some semblance of an idea of what Coinbase user numbers were between 2013-2015 is because of the IRS lawsuit mentioned above.

On p. 201 they write about a search trend, “BTC USD,” first described by Willy Woo:

If we assume this to be true, then Woo’s analysis indicating a doubling in bitcoin users every year and an order of magnitude growth every 3.375 years. He calls this Woo’s Law in honor of Moore’s Law […] It will be interesting to see how Woo’s Law holds up over time.

How has it done?  “Woo’s Law” has thus far not held up.

For instance, below is a 5 year trend chart of the same search term promoted by Woo and others last year:

As we can see above, this term has some correlation between interest in coins specifically during price bubbles.  But this has not translated into large quantities of new daily users.108

The next edition of this book should remove this faux eponym because it has not withstood the test of time and doesn’t measure actual users.

On p. 202 they write:

Figure 13.17 shows the hyper growth of Ethereum’s unique address count. With Ethereum, an address can either store a balance of either, like Bitcoin, or it can store a smart contract. Either denotes an increase in use.

Below is a screenshot of a recent address count:

Source: Etherscan

The next edition should include a caveat because it is unclear from this chart alone what kind of use is taking place.  Is it coin shuffling, miner payouts, gambling payouts, Crypokitty activity, etc.?  Maybe it is just someone spamming the network?

For instance, according to DappRadar which tracks 650 ethereum Dapps, over the past 24 hours there have only been 9,926 users sending 43,652 transactions.  That may sound intriguing but… nearly about 2/3rd of all these users are using decentralized exchanges (DEX).  If trading and arbitraging are the “killer apps” of cryptocurrencies, then the next edition of this book could be a lot slimmer than it is now.

As described in “Slicing data,” not all transactions are the same and a deep dive needs to be done to fully describe the behavior taking place.

On p. 204 they cite a “Dollar Value of Transactions” chart:

Source: Blockchain.info

But this is just an estimate from Blockchain.info and is likely widely exaggerated because Blockchain.info — like most wallet providers — probably has no idea what the intent behind those transactions are.  We need data from all of the exchanges, payment processors, and merchants that accept coins in order to conclusively know what activity was commercial versus non-commercial in nature.

For instance, a large portion of those transactions could simply be “change address.”

Not to get too technical, but with Bitcoin, in order to manually send X amount of bitcoin on-chain, users typically must enter a “change address” unless the whole amount of UTXO is consumed.  It’s kind of like a bank teller moving money from one till to another between shifts.  No new economic activity is actually taking place in the bank or in the real economy, but in this specific chart above, there is no way to differentiate “change address” activity with real commercial activity and so it all gets mixed and muddied.

On p. 204 they write:

If the network value has outpaced the transactional volume of that asset, then this ratio will grow larger, which could imply the price of the asset has outpaced its utility. We call this the crypto “PE ratio,” taking inspiration from the common ratio used for equities.

Except, without a thorough deep dive from an analytics provider who has mapped out activity into all of the exchanges, payment processors, and merchants — it is very difficult to actually differentiate the noise from the actual transactional utility.109

Here the authors take all on-chain transaction volume at face value.  The next edition should scrap this section unless they get access to a thorough deep dive.

On p. 204 they write:

One would assume that an efficient price for an asset would indicate a steadiness of network value to the transaction volume of the asset. Increasing transactional volume of an asset should be met by a similar increase in the value of that asset. Upside swings in pricing without similar swings in transaction volume could indicate an overheating of the market and thus, overvaluation of an asset.

That is a popular model but could be incorrect.

I recommend readers check-out this excellent recent thread started by Nathaniel Popper as well as Debunking Bitcoin’s Remittance Valuation. Featuring a Lead Pipe by Anshuman Mehta.

On p. 207 they write about technical analysis:

In Figure 13.22 the top line is called the resistance line, indicating a price that bitcoin is having trouble breaking through. Often these lines can be numbers of psychological weight, in this case the $300 mark.

I looked it up and couldn’t find a definition for what “psychological weight” is, so this should either be defined in the book or removed in the next edition.110

On p. 209 they write:

You’ll find many instances of newer cryptoassets experiencing wild price swings after their creation, but over time these younger assets begin to follow the rules of technical analysis. This is a sign that these assets are maturing, and as such, are being followed by a broader group of traders. This indicates they can be more fully analyzed and evaluated using technical analysis, allowing the innovative investor to better time the market and identify buy and sell opportunities.

Technical analysis may have its uses but by itself it is basically cargo cult science.

Recommend rephrasing it and maybe inserting this great reference: The Vomiting Camel has escaped from Bitcoin zoo

Chapter 14

On p. 211 they write:

Since cryptoassets are digital bearer instruments, they are unlike many other investments that are held by a centralized custodian. For example, regardless of which platform an investor uses to buy stocks, there is a centralized custodian who is “housing” the assets and keeping track of the investor’s balance. With cryptoassets, the innovative investor can opt for a similar situation or can have full autonomy and control in storage. The avenue chosen depends on what the innovative investor most values, and as with much of life there are always trade-offs.

This is true: there are many choice.  But in practice, as noted above by Jonathan Levin, a significant majority of transactions typically involves a 3rd party intermediary.

Why?  Because Securing a bearer instrument can be a major hassle, as a result companies like Coinbase and Xapo offer custodial services.  While re-introducing an intermediary helps with coin management that kind of defeats the purpose of having a pseudonymous bearer asset in the first place.111 But that’s a different discussion.112

On p. 212 they write:

Anyone with a computer can connect to Bitcoin’s network, download past blocks, keep track of new transactions, and crunch the necessary data in pursuit of the gold hash. Such open architecture is one of Bitcoin’s strongest points.

It may sound like a irrelevant nitpick but this is not unique to Bitcoin.  Nearly every cryptocurrency listed on Coinmarketcap has the same set of “features.”  Similarly, many enterprise vendors also are open source and anyone could set up their own network with the software.  Future editions should include a more nuanced definition of “open.”

On p. 213 they write:

The first computer – or mining rig – with ASIC chips that were specifically manufactured for the process was connected in January 2013.

The citation the authors included was for Avalon.  This is true insomuch as these systems were available for purchase to the general retail public.  But the first known ASIC-mining system was launched in late 2012: ASICMiner privately run out of Hong Kong (from BitQuan and BitFountain). 113

On p. 214 they write:

For perspective, the combined compute power of Bitcoin’s network is over 100,000 times faster than the top 500 supercomputers in the world combined.

This type of stat is frequently repeated throughout the Bitcoin world but it is not an apples-to-apples comparison and should be removed in the next edition.  The supercomputers are largely comprised of CPUs and GPUs which — as their names suggest — are flexible and capable of handling many different types of general purpose tasks.

ASICs on the other hand, are focused and specialized: capable of doing just one set of tasks over and over.  ASICs found in a Bitcoin mining farm are not even capable of creating blocks to propagate on the network: they simply generate hashes.  That is how limited they are in functionality.

On p. 214 they write:

Conceptually, mining networks are a perfect competition, and thus as margins increase, new participants will flood in until economic equilibrium is once again achieved. Thus the greater the value of the asset, the more money miners make, which draws new miners into the ecosystem, thereby increasing the security of the network. It’s a virtuous cycle that ensures the bigger the network value of a cryptoasset, the more security there is to support it.

I think this could be rewritten in the next edition to be closer with what happens in practice.114

For instance, as coin prices decrease, margins are squeezed and “marginal” operators exit, leaving fewer overall miners.  In the past this has led to bankruptcies, such as KnC and HashFast.

Does this lead to a less secure network?

Maybe, maybe not.  Depends on how we define secure and insecure.  Pure hashrate is just one attribute… geographical location, amount of participants, and diversity of participants could be others as well.  For example, see the discussion earlier on selfish-mining.

On p. 215 they write:

Before investing in a cloud-based mining pool, conduct research on the potential investment. If it sounds too good to be true, it probably is.

This is good advice.

Also worth mentioning that “cloud-based mining” kind of the defeats the purpose of pseudonymous mining.  If you have to trust the infrastructure provider to manage and operate the hashing equipment, why not just buy the coins?  Why take that risk and also have to divulge your identity?

Incidentally, NiceHash is one of the most well-known cloud mining services available today.  It partly cemented its notoriety (this is not an endorsement) as its mining units have been rented and used to attack several different cryptocurrencies.  A site called Crypto51.app categorizes the costs of doing a brute force attack on dozens of coins and even lists the amount of hashrate NiceHash has in order to perform a hypothetical attack.

On p. 216 they write:

However, Ethereum will potentially switch to proof-of-stake early in 2018, as it is more efficient from an energy perspective, and therefore many claim is more scalable.

Quick note: this transition has been delayed again until at least the end of 2018 and more likely sometime in 2019 (although it has been moved many times before as well).

On p. 217 they write:

To this end, today numerous quality exchange are available to investors looking to gain and transact the more than 800 cryptoassets that currently exist.

In the next edition it is worth clarifying and defining what “quality” means because just about every retail / consumer-facing exchange has had its share of problems, including hacks and thefts.115 This is one of the reasons the SEC has denied ETF proposals.

With that said, there are a number of OTC trading desks run by reputable financial organizations that enable investors to trade, however, typically the minimum order size (buy/sell) is $100,000.116

On p. 218 they write:

Cryptoasset transactions are irreversible; therefore chargebacks are impossible. While an irreversible transaction may sound scary, it actually benefits the efficiency of the overall system. With credit card chargebacks, everyone has to bear the cost, whereas with cryptoassets only those who are careless bear the cost.

Two comments worth considering for the next edition:

  1. Transactions in cryptocurrencies are possible through block reversals, which can and do happen.  Often times they are relatively expensive to do, but during a “51% attack” it can occur, thus it is not impossible.  In fact, as part of the Nano class action lawsuit, one of the suggested remedies is a roll-back.
  2. As far as credit card chargebacks: this is largely borne by the merchant (not everybody).  In fact, charge backs are largely a consumer-friendly feature, a type of insurance.117

On p. 221 they discuss insurance at exchanges.

At this time, no retail cryptocurrency exchange actually insures a users coin deposit.  As a result, most custodians and intermediaries have had to self-insure (e.g., create their own insurance entity).  There are institutional products (vaults) which are attempting to get 3rd party insurance.

For example, see: Insurers gingerly test bitcoin business with heist policies

On p. 224 they write:

Prior to the hack, Bitfinex had settled with the CFTC for $75,000 primarily because its cold storage of bitcoin ran afoul of CFTC regulations. The move to place all clients’ assets into hot wallets is cited by many as due to the fine and CFTC regulations. Either way, this hack proved that no matter the security protocols put in place, hot wallets are always more insecure than properly executed cold storage because the hot wallet can be accesssed from afar by anyone with an Internet connection.

This passage should be revised in the next edition for a few reasons:

First, as mentioned earlier, Bitcoiners like to find a good boogeyman and in this hacking incident, they blamed the CFTC.

For example, Andreas Antonopoulos tweeted:

Source: Twitter

Several people told him he got the facts wrong.

For instance, I reached out to Zane Tackett who — at the time — was head of communications for Bitfinex.

According to Tackett: “We migrated to the bitgo setup before any discussions or anything with the CFTC happened”

I then publicly pointed out, to Antonopoulos and others, that the CFTC blame game was false.  But instead of deleting that tweet and focusing on who actually hacked Bitfinex, the ideological wing of the Bitcoin tribe continues to push this false narrative.

Tackett even explicitly answered this question in detail on reddit that same day.

So either Tackett is lying or Antonopoulos is wrong.  In this case, it is likely the latter.

The second point worth adding to the passage above in the book is that after nearly two years we still haven’t been told exactly what happened with the hack and theft.  This, despite the fact that Bitfinex has said on more than one occasion that it would provide an audit and public explanation.

Incidentally, this hack and the response, set in motion a series of events that included socialized loses, a lost correspondent banking relationship, and even a heightened reliance on Tether.118 For more, see: How newer regtech could be used to help audit cryptocurrency organizations

Chapter 15

On p. 231 they write:

Founded by Barry Silbert, a serial entrepreneur and influential figure in the Bitcoin community, some would say that DCG is in the early stages of becoming the Berkshire Hathaway of Bitcoin.

Perhaps DCG achieves that, however it hasn’t been done in a classy manner.  For example, see: Ex-banker cheerleads his way to cryptocurrency riches and Barry Silbert and the Cost of Bitcoin’s Malfeasance Culture

On p. 235 they write

An ETF is arguably the best investment vehicle to house bitcoin.

This is debatable.  Last year Jack Bogle – founder of Vanguard, a firm that popularized broad market index ETFs – implored the public to avoid bitcoin like the plague for several reasons.  Critics say he is out of touch, but even if that were true that doesn’t mean his expert views on structuring ETFs should be dismissed.

On p. 238 they write:

Regardless of what people expected going into the SEC decision most everyone was taken aback by the rigidity of the SEC’s rejection. Notably the SEC didn’t spend much time on the specifics of the Winklevoss ETF but focused more on the overarching nature of the bitcoin markets. Saying that these markets were unregulated was an extra slap to the Winklevosses, who had spent significant time and money on setting up the stringently regulated Gemini exchange. In focusing on the bitcoin markets at large, the rejection implied that an ETF will not happen in the United States for some time.

For the next edition, this paragraph should probably be removed.

The facts of the Bitcoin markets today are as follows:

  1. Mining is the process of minting new coins as well as processing transactions and… is largely unregulated in any jurisdiction.
  2. Many exchanges, in particular those outside the US, comply with a hodge podge of regulations, often without the same strict KYC / AML / sanctions checks required for US exchanges.

Gemini and the Winklevoss have no ability to police these unregulated trading venues and unregulated coin minters.  That probably won’t change in the near future.

Perhaps the SEC will eventually approve an ETF, but they arguably were not being rigid — they were being practical.  In their view: why allow an unregulated asset whose underlying genesis and trading market is still very opaque and frequently is used for illicit activity?

Lastly the next edition should include a citation for who “most everyone” includes, because in my own anecdotal experience, the majority of traders at US exchanges I interact with did not think it would be allowed at that time.  Note: my deep dive on the COIN ETF and its ever changing history, can be found here.

On p. 238 they write:

On Monday, naysarers were faced with the reality that bitcoin was once again back over $1,200, and the network for all cryptoassets had increased $4 billion since the SEC decision. Yes, $4 billion in three days.

A couple of thoughts:

  1. Typo: naysarers should be naysayers
  2. Recommend removing this sentence in the next edition because the attitude comes off as a little smug and has an ad hominem.  People are allowed to have different views on the adoption of technology which is separate from what the price of a coin will be.  And justifying a trading position based on price movements which are based on the mood of retail investors should probably not be the takeaway message for a mainstream book.

On p. 240 they write:

By purchasing XBT Provider, GABI strengthened the reliability of the counterparty to the bitcoin ETNs and added a nice asset to its growing bitcoin investing platform for institutions.

For the next edition, recommend removing “nice” because that is a subjective word.  There are other ways to describe this acquisition.

On p. 242 they write:

It also created an independent advisory committee, including bitcoin evangelist Andreas Antonopoulos to oversee its pricing model, which utilized prices from various exchanges throughout the world.

Why is this specific person considered an expert on futures?  There are a lot of articulate developers involved in promoting cryptocurrencies, but their expertise is typically not in finance.  If anything, this specific person has a vocal disdain for regulators, financial institutions, and regulated instruments… just see his tweet above in Chapter 14.119

Maybe in the next edition discuss the controversy of having a futures contract that is not physically deliverable.  Could also include how the CFTC has subpoenaed the four partner exchanges working with the CME: Coinbase, Kraken, itBit, and Bitstamp.  These four exchanges create the price used in bitcoin futures by the CME.

Chapter 16

On p. 249 they write:

For first-time founders who want to approach venture capitalists for an investment, often they must know someone-who-knows-someone. Having such a connection allows for a warm introduction as opposed to being among the hundreds of cold calls that venture capitalists inevitably receive. To know someone-who-knows-someone requires already being in the know, which creates a catch-22.

This is a very good point.  However, it would be worth adding in the next version how most ICOs and coin sales now require knowing someone because most private sales involve roughly the same insular, exclusive set of funds and investors as the “old method” did.

On p. 252 they write:

Before we dive into the specifics of how a cryptoasset offering is carried out, the innovative investor needs to understand that the model of crowdfunding cryptoassets is doubly disruptive. By leveraging crowdfunding, cryptoasset offering are creating room for the average investor to stand alongside venture capitalists, and the crowdfunding structure is potentially obviating the need for venture capitalists and the capital markets entirely.

In the next edition, worth mentioning that this was the general pitch for ICOs starting with Mastercoin (2013) all the way up through 2016.  But over the past two years and certainly in the past 12 months it has dramatically shifted back towards the traditional venture route.

One of the reasons why is because of the filtering and diligence process.  Those that don’t get selected and/or those ICOs that don’t meet the requirements of this small group of funds often decide to do a public sale.  And many of these ideas were half-baked and sometimes fraudulent, according to one recent report: More Than Three-Quarters of ICOs Were Scams

On p. 253 they write:

Monegro’s thesis is as follows: The Web is supported by protocols like the transmission control protocol/Internet protocol (TCP/IP), the hypertext transfer protocol (HTTP), and simple mail transfer protocol (SMTP), all of which have become standards for routing information around the internet. However, these protocols are commotidized, in that while they form the backbone of our internet, they are poorly monetized.

It could be argued that Monegro’s thesis has failed to live up to its hype thus far.  And counterfactually, if “tcpipcoin” existed, it may have actually stunted the growth of the internet as Vinton Cerf and Bob Kahn would have allocated more time promoting the coin rather than the technology.    We can disagree about this alternative scenario, but I have mentioned it before in Section 8.

For example, we frequently see that dozens of nonsensical conferences and meetups conducted on a weekly basis globally try to promote a shiny new protocol coin of some kind.  Trying to monetize a public good with a coin thus far has not removed the traditional incentive and sustainability issues around a public good.  That would also be worth discussing in the next edition.120

On p. 253 they write:

All the applications like Coinbase, OpenBazaar, and Purse.io rely on Bitcoin, which drives up the value of bitcoin.

Worth updating this because Purse.io added support to Bitcoin Cash.  And OpenBazaar switched over to Bitcoin Cash altogether.

Also, Coinbase has become less maximalist over time and now provides trading support for four different coins.121  Though it probably wouldn’t be technically correct to call Coinbase or Purse a Bitcoin application.  In the case of Coinbase, users use an off-chain database to interact and Coinbase controls the private key as a custodian / deposit-taking institution.

On p. 254 they write:

Interestingly, once these blockchain protocols are released, they take on lives of their own. While some are supported by foundations, like the Ethereum Foundation or Zcash Foundation, the protocols themselves are not companies. They don’t have income statements, cash flows, or shareholders they report to. The creation of these foundations is intended to help the protocol by providing some level structure and organization, but the protocol’s value does not depend on the foundation.

This is another reason to heavily modify chapter 7 in future versions because it is not an apples-to-apples comparison: coins and coin foundations are not the same thing as for-profit companies that issue regulated instruments (stocks, bonds, etc.).

Also, the very last sentence is highly debatable because of how often foundation and foundation staff are integral to the longevity of a coin.

Recall that blockchains do not maintain or market themselves, people do.  And is often the case: staff and contractors of these foundations frequently use social media to promote potential upgrades as well as publicize the coins attributes to a wider audience.  In many cases it could be the case that the protocol’s value does depend on the work and efforts of others including specifically those at a coin foundation.122

On p. 254 they write:

Furthermore, as open-source software projects, anyone with the proper merits can join the protocol development team. These protocols have not need for the capital markets because they create self-reinforcing economic ecosystems. The more people use the protocol, the more valuable the native assets within it become, drawing more people to use the protocol, creating a self-reinforcing positive feedback loop. Often, core protocol developers will also work for a company that provides application(s) that use the protocol, and that is a way for the protocol developers to get paid over the long term. They can also benefit from holding the native asset since inception.

There are several points here that should be modified or removed in the next edition:

For instance, with Bitcoin, due to a variety of political fights and personality conflicts, multiple “core” developers have had their access rights removed including: Jeff Garzik, Mike Hearn, Gavin Andresen, and Alex Waters.  Thus it is not true that anyone can join a team.  It is also unclear what those merits may be as most of the projects don’t explicitly provide those in written format yet.

In addition, internet coins are often traded on secondary markets in order to provide liquidity to coin holders such as developers.  They all need access to capital markets to stay afloat.  No project is self-sustainable at this time because no coin is being used as a unit of account — miners and developers must liquidate coins in order to pay their bills which are denominated in foreign currency.

Lastly, in practice, there are many coins that have died or lost any developer support yet initially they may have had a small army of programmers and media attention.  According to Coinopsy, more than 1,000 coins are dead.  Thus in the next edition the “self-reinforcing” loop should probably be removed too.

On p. 256 they write:

ICOs have a fixed start and end date, and often there is a bonus structure involved with investing earlier. For instance, investing at an early stage may get an investor 10 to 20 percent more of a cryptoasset. The bonus structure is meant to incentivize people to buy in early, which helps to assure that the ICO will hit its target offering. There’s nothing like bonuses followed by scarcity to drive people to buy.

This should definitely be removed.  In May, the SEC released a parody website called “HoweyCoins” which explicitly points to this precise FOMO behavior as a big no-no for both issuers and investors alike.

Also recommend the inclusion of the Munchee Order in this chapter as it would help illustrate what regulators such as the SEC perceive as improper fundraising techniques.  Specifically, include this in the “announcing the ICO” section.

On p. 258 and 259 they discuss the Howey Test.  It is strongly recommended that these two pages be reworded and modified based on the enforcement actions and guidance from the SEC and other securities regulators.

For instance, they write:

A joint effort by Coinbase, Coin Center, ConsenSys, and Union Square Ventures with the legal assistance of Debevoise & Plimpton LLP, produced a document called, “A Securities Law Framework for Blockchain Tokens.” It is especially important for the team behind an ICO to utilize this document in conjunction with a lawyer to determine if a cryptoasset sale falls under SEC jurisdiction. The SEC made it clear in July 2017 that some cryptoassets can be considered securities.

The first sentence should probably be moved into a footnote and the second sentence removed altogether because this document did not age well.

In fact, the current version of the document – as it exists on Coinbase – informs readers in bright red that:

Please note that since this document was originally published on December 7, 2016, the regulatory landscape has changed. The information contained in this document, including the Framework may no longer be accurate. You should not rely on this document as legal advice and you should seek advice from your own counsel, who is familiar with the particular facts and circumstances of what you intend and can give you tailored advice. This Framework is provided “as is” with no representations, warranties or obligations to update, although we reserve the right to modify or change this Framework from time to time. No attorney-client relationship or privilege is created, nor is this intended to be attorney advertising in any jurisdiction.

On p. 259 they write:

Does the token sale tout itself as an investment? It should instead be promoted for its functionality and use case and include appropriate disclaimers that identify it as a product, not an investment.

This is arguably not good advice and should be removed.  Why?  Courts in the US will likely see through this euphemism.  For other things not to do, recommend reading the ICO Whitepaper Whitepaper from Stephen Palley.

On p. 260 they write:

One of the oldest groups of angel investors in the blockchain and bitcoin space is called BitAngels. Michael Terpin of BitAngels has been active in angel investing in blockchain companies for as long as the opportunities have existed. Terpin’s annual conference, CoinAgenda, is one of the best opportunities for investors to see and hear management from blockchain startups present their ideas and business models.

For the next edition, I’d reconsider including this type of endorsement.123 There are some interesting stories that involving these specific entities worthy of a different post.

Chapter 17

On p. 263 they write:

For instance, if Bitcoin influences how remittances are handled, what impact may that have on stocks like Western Union, a remittances kingpin? If Ethereum takes off as a decentralized world computer, will that have any effect on companies with cloud computing offerings, such as Amazon, Microsoft, and Google? If companies can get paid more quickly with lower transaction fees using the latest cryptocurrency, will that have an impact on credit card providers like Visa and American Express.

For the next edition, this paragraph — or at least argument — should come earlier, perhaps even in Chapter 7 (since there is a discussion of specific publicly traded companies).

Another thing that should have been added to this section is actual stock prices for say, the past five years of the companies mentioned: Western Union, Visa, and American Express.

I have included those three below:

If the narrative is that Bitcoin or the “latest cryptocurrency” will erode the margins and even business models of existing payment providers, then at some point that should be reflected in their share prices.

As shown above, that does not seem to be the case (yet).

Perhaps that will change in the future, but consider this: all three of the companies above have either directly invested in and/or are collaborating in blockchain-related platforms — most of which do not involve any coin.  Perhaps these firms never use a blockchain.  In fact, maybe they find blockchains to be unhelpful as infrastructure altogether.

That is possible, hence the need to update this chapter to reflect the actual realities.

In addition, the other three companies listed by the authors have publicly discussed various blockchain-related efforts beyond just pilot offerings.

For instance, both Amazon and Microsoft have supported blockchain-as-a-service (BaaS) offerings in production for over a year.  Google has been a laggard but has internal projects attempting to leverage some of these ideas as well.

On p. 266 they write:

In 2016, the father-son team of Don and Alex Tapscott published the book Blockchain Revolution: How the Technology behind Bitcoin Is Changing Money, Business, and the World, and William Mougayar published the book, The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology.

I wrote lengthy reviews of both.  The short summary is that both were fairly superficial in their dive into use cases and vendors.  The Mougayar book felt like it could use a lot more detailed meat.  The Tapscott book was riddled with errors and unproven assertions.  Would reconsider citing them in the next edition (unless they each dramatically update their content).

On p. 266 they write:

For companies pursuing a DLT strategy, they will utilize many of the innovations put forth by the developers of public blockchains, but they don’t have to associate themselves with those groups or share their networks. They pick and choose the parts of the software they want to use and run it on their own hardware in their own networks, similar to intranets (earlier referred to as private, permissioned blockchains).

These are pretty broad sweeping comments that should be modified in the next edition.  Not every vendor or platform provider uses the same type of chain or ledger.  These are not commoditized (yet).

There are many nuances and trade-offs for each platform.  For the next edition, it would be helpful worth doing a comparison of: Fabric, Pantheon, Quorum, Corda, and other enterprise-focused platforms.  In some cases, they may have an on-premise requirement and in others, nodes can run in a public cloud.

But the language of “intranets and the internet” should not be used in the next edition as it is a misleading analogy.

On p. 267 they write:

We see many DLT solutions as band-aids to the coming disruption. While DLT will help streamline existing processes–which will help profit margins in the short term–for the most part these solutions operate within what will become increasingly outdated business models.

Perhaps that it is true, but again, this language is very broad sweeping and definitive.  It needs citations and references in the next edition.

On p. 267 they write:

The incumbents protect themselves by dismissing cryptoassets, a popular example being JPMorgan’s Jamie Dimon, who famously claimed bitcoin was “going to be stopped.” Mr. Dimon and other financial incumbents who dismiss cryptoassets are playing exactly to the precarious mold that Christensen outlines:

[…]

Disruptive technologies like cryptoassets initially gain traction because they’re “cheaper, simpler, smaller.” This early traction occurs on the fringe, not in the mainstream, which allows incumbents like Mr. Dimon to dismiss them. But cheaper, simpler, smaller things rarely stay on the fringe, and the shift to mainstream can be swift, catching the incumbents off guard.

For the next edition it would be good to remove the misconceptions repeated in the statement above.  Jamie Dimon was specifically dismissing the exuberance of coin mania, not the idea of enhancing IT operations with something like a blockchain.

Worth adding to future versions: JPMorgan has financial sponsored Quorum, an open-source fork of Ethereum modified for enterprise-related uses.  The bank has also invested in Digital Asset.  It is also a member of three industry organizations: EEA, Hyperledger, and IC3.  In addition, JP Morgan has filed blockchain-related patents, has launched a blockchain-based payment network with several banking partners, and also partnered with the parent company of Zcash to integrate ZSL into Quorum.

While Jamie Dimon may not share the same bullish views about coins as the authors do, the firm he is the CEO seems to be taking “blockchains” seriously.

On p. 267 they write:

One area long discussed as ripe for disruption is the personal remittances market, where individuals who work outside of their home countries send money back home to provide for their families.

This specific use case is a bit repetitive as it has been mentioned 5-6 times before in other chapters.  Should probably remove this in future editions unless there is something different to add that wasn’t already explained before.

On p. 268 they write:

It’s no stretch then to recognize that bitcoin, with its low cost, high speed, and a network that operates 24/7, could be the preferred currency for these types of international transactions. Of course, there are requirements to make this happen. The recipient needs to have a bitcoin wallet, or a business needs to serve as an intermediary, to ultimately get the funds to the recipient. While the latter option creates a new-age middleman–which potentially has its own set of problems–thus far these middlemen have provided to be much less costly than Western Union. The middleman can be a pawnshop owner with a cell phone, who receives the bitcoin and pays out local currency to the intended recipient.

This should be modified in the next versions because it is a stretch to make those claims.  That is the reason why multiple Bitcoin-focused remittance companies have pivoted or branched out because “moving” bitcoins across borders is the only easy part of the entire process.  For instance, the KYC / AML checks during the on- and off-ramps are costly and are required in most countries.  This should be included in any analysis.

Also, there are no citations in this paragraph.  And the last sentence is describing the pawnshop owner as a money transmitter / money service business which is a regulated operation.  Maybe the laws change, which is possible.  But for the next version, the authors should include specific corridors and the costs and margins for MSBs operating in those corridors.

Lastly, any future analysis on this topic should also include the online and app-based product offerings from traditional remittance players such as Western Union.  In nearly all cases, these products and services are faster and cheaper in the same corridors relative to traditional in-person visits.

Recommended reading:

On p. 268 they write:

The impact of this major disruption in teh remittance market should be recognized by the innovative investor not only because of the threat it creates to a publicly traded company like Western Union (WU) but for the opportunities it provides as well.

It is strange to hear this repeated multiple times without providing quantifiable specifics on how to measure this threat.

As mentioned a few pages earlier, if competitors (including, hypothetically cryptocurrencies) were to erode the margins of publicly traded companies, we should be able to see that eventually reflected in the share price.  But Western Union has been doing more or less the same as it has the past couple of years.

What about others?

Above is the five year performance of Moneygram, another remittance service provider.

What happened the past two years?  Did Bitcoin or another cryptocurrency pound its share value into the ground?  Nope.

What happened is that one of Alibaba’s affiliates – Ant Financial – attempted to acquire Moneygram.  First announced in early January 2017, Ant Financial wanted to acquire it for $880 million.  Despite approval from the Moneygram board, the deal faced scrutiny from US regulators.  Then in January 2018, the deal was axed as the US government blocked the transaction on national security grounds.

This hasn’t stopped Alibaba and its affiliates with finding other areas to grow.  For instance, last month Alipay (part of Ant Financial) announced it had partnered with G Cash to in the Hong Kong – Philippines corridor, using a blockchain platform for remittances.  No coin was needed in this process so far.

There may be some success stories of new and old MSBs that utilize cryptocurrencies in ways that make them more competitive, those should be included in the next edition along with more metrics readers can compare.124

On p. 270 they write:

For the long term investor, careful analysis should be undertaken to understand if insurance companies are pursing DLT use cases that will provide a lasting and meaningful solution. Lastly, some of the major consulting firms may be so entrenched in incumbent ideology that they too may be blind to the coming distruption.

A few comments that should be finnesed in the next version:

  1. What is the definition of “incumbent ideology”?
  2. Virtually every major insurance and reinsurance company is hands-on involved with some kind of blockchain-related consortium and/or enterprise-focused platform.  This includes both B3i and RiskBlock as well as Asia-based reinsurers.  Recommended reading: RiskBlock’s blockchain targets entire insurance industry
  3. Similarly, every major consulting company and systems integrator has a team or two dedicated to helping clients build and integrate applications with specific enterprise-related “blockchain” platforms.  Many of them have joined related consortia too.  There are too many to even list here so it is unlikely they will get collectively blind-sighted as alluded to in the passage above.

On pgs. 272 and 273 they write about consortia:

Another consortium, The Hyperledger Project, offers more open membership than R3. Remember, one of the strengths and defining aspects of an effective blockchain project is its open source ethos.

[…]

While the [EEA] consoritum will work on software outside of Ethereum’s public blockchain, the intent is for all software to remain interoperable in case companies want to utilize Ethereum’s open network in the future.

Based on the passages above the next edition should incorporate a few changes.

The Hyperledger Project (HLP) is a non-profit group that does not itself aim to commercialize or deploy or operate any technology.125 The membership dues are largely used to maintain code repositories and sponsor events which educate attendees on projects incubated within HLP.  It currently has around 200 members, including R3 which was a founding member.  There are more than 5 codebases that are officially incubated, the most well-known is Fabric.  However, HLP seeks to maintain a neutral position on which platform its members should use.  Other notable platforms incubated within HLP include Iroha and Sawtooth (Lake).

In contrast, R3 is a for-profit company that set up a consortium in order to commercialize and deploy technology within the regulated financial industry.126 Its membership model has changed over time and it is the main sponsor for Corda, an open source platform.  The consortium composition initially started with 42 banks and now includes about 200 entities including insurance companies, central banks, financial market infrastructure operators, and others.

The third most known consortium is the Enterprise Ethereum Alliance (EEA).  It is kind of like the combination of the two above.  It is a non-profit organization and itself does not aim to commercialize or deploy or operate any technology.  It seeks to be a neutral entity within the greater Ethereum ecosystem and has many different working groups that span topics similar as the other two consortia above.  It has hundreds of members and the main efforts have been around formalizing an enterprise-focused specification (EEA 1.0) that other vendors can create implementations of (such as Pantheon).

Like the members of the other two consortia above, nothing prevents an EEA member from using any other platform.  Thus the authors usage of “open network” is superfluous because all of the codebases in each of these three consortia is open, anyone can download and use.  The key differences are: what are the trade-offs with using each platform versus what are the benefits of membership for joining the consortia.  These are two separate points that could be discussed further in the next edition.

On p. 276 they write:

The CFTC Director of Enforcement, Aitan Goelman, tried to clarify his opinion with this satement, “While there is a lot of excitement surrounding bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets.” It is clearly confusing that the Direct of Enforcement of the agency that ruled bitcoin a commodity also called it a “virtual currency.”

For the next edition the authors should remove the unnecessary attitude in the last sentence.

Up through 2017, most US and even foreign regulators used the term “virtual currency” — not as a slight against Bitcoin or cryptocurrencies, but because that was the catchall term of art used for many years.

For instance, in March 2013, FinCEN released its guidance and it was entitled: “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies”

Throughout the guidance, the term “virtual currency” is used more than 30 times.

And one relevant passage – especially for this book review – involves the definition of an administrator.  According to FinCEN’s guidance:

“An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.”

As it relates to the CFTC, earlier this year a federal judge in New York ruled that: “virtual currencies can be regulated by CFTC as a commodity.”

The ruling (pdf) specifically uses the phrase “virtual currency” not as a slight, but as a term of art.  Perhaps other terms are used over time.  For instance, in its new customer advisory issued this week, the CFTC mentioned potential scams that describe themselves as “utility coins” or “consumption coins.”  Worth revisiting in the next edition.

Chapter 18

On p. 280 they write:

Here’s another Burniske-Tatar Rule: Don’t invest in bitcoin, ether, or any other cryptoasset just because it’s doubled or tripled in the last week. Before investing, be able to explain the basics of the asset to a friend and ascertain if it fits well given the risk profile and goals of your investment portfolio.

This is good advice.  And while the eponymous rule was coined several chapters ago,  future editions should probably drop the name of that rule… because similar advice with slightly different wording has existed for decades (e.g., don’t invest more than you can afford to lose, do your own research, etc.).

On p. 282 they write:

Are millenials turning to bitcoin and cryptoassets for their investment? Is a Vanguard fund or a small investment in Apple any better?  Whereas the Vanguard fund has a minimum investment amount and buying an equity will require commission, millennials see cryptoasset markets as a way to begin investing with a modest amount of money and in small increments, which is is often not possible with stocks or funds.

They also include a footnote that reads:

Each bitcoin can be divided into 100 million units, making it easy to buy 1/2, 1/10, 1/100 or 1/1000 of a bitcoin

Would recommend removing this passage altogether because there really aren’t many good surveys that indicate who actually bought coins versus who was just interested in them.

For instance, a flawed Finder.com survey that is still being cited, says that 8% of Americans have invested in cryptocurrencies.127  While it says the majority of investors are “millenials,” the survey doesn’t ask the most important question: does the investor control the private key.  If you do not control the private key then you do not control the coin, someone else does.

In addition, there are online brokerages that do allow investors to invest with modest amounts, the most notable being Robinhood (which coincidentally also allows users to purchase several different cryptocurrencies).  There are also a variety of spare change investment apps and robo-advisor products that allow users to have some exposure to regulated capital market too.

Lastly, regarding the footnote they provide: due to the fees required by Bitcoin miners, in practice over the past several months 1/1000 of a bitcoin is typically the minimum transaction fee.  This is one reason why many investors simply leave coins on cryptocurrency exchanges: so they don’t have to pay fees to move them to other wallets.128

On p. 282 they write:

The important point is that at least they’re doing something to invest their funds and build the groundwork for a healthy financial future. We have seen firsthand millenials who have learned about investing from buying cryptoassets and have implemented investing approaches, such as taking profits at certain price points, seeking diversification into multiple assets, and so on.

This should probably be removed too because the same thing can be said to a new cohort of investors twenty years ago, such as the ones that invested in dotcom-related companies.  Who remembers Beenz?

Conclusion

I fully expect some reaction towards this review along the lines that it was too picky or too pedantic.  Perhaps this a little true but consider: what is the right size for a thorough book review in the age of so-so fact-checking?129 Also, most of my previous reviews were about the same length, or at least used the same page-by-page model.

There is obvious room for disagreement in areas involving opinions, but there are many technical and non-technical mistakes that the authors made, not just a small handful.  By highlighting these, not only could the next edition be significantly improved but it helps readers new to this space get a better understanding of what the prevalent themes versus realities are.

The goal of this review was not to be overbearing but to be dispassionate about supposed common wisdom promoted in the cryptocurrency world.

For example, just the other day I noticed in a chatroom the following statement from a maximalist:

HODLer = DAU.  Bitcoin has the most DAUs on any protocol.

HODLing is bitcoinspeak for “hoarding.”

Several people in the room agreed with those this statement and they are not alone.  If the reader is interested in learning about the sociology and subculture of many Bitcoin enthusiasts, its worth skimming reddit and twitter occasionally to see how passionate coin investors think.130

But for businesspeople who are not part of the inner sanctum of Bitcoinland, the statement above from the chatroom may make you shrug.

After all, HODLing a dollar doesn’t make you a dollar user.  HODLing a barrel of oil doesn’t make you a oil user.  HODLing a brick of gold doesn’t make you a gold user.  HODLing a digitized Pokemon card doesn’t make you a Pokemon user.  HODLing a Stradivarius violin doesn’t make you a violin player.  HODLing an Olympic medal doesn’t make you an Olympic athlete.  And so forth.  The valuation of an auction house isn’t measured by the amount of rare collectibles it sells in a day, why should internet coins and their platforms be an exception to that rule?131

Inactivity isn’t how activity is measured.  Or to look at this argument from another angle: HODLing is not ‘active’ anything.  If all an investor did was buy bitcoin and then lose their keys, they would accomplish the same thing described in the chatroom.132

Sure it is possible to redefine what Bitcoin or cryptocurrencies are supposed to do, but that’s after the fact.  For example, if Satoshi had wanted to explicitly build “digital gold” he/she would likely have mentioned it in the original paper at least once and even architected Bitcoin to be something different than what it looked like in 2009.133  As mentioned above, the first app he looked at building was for poker.

This is definitely a topic worth including in the next edition, but I digress.134

Other general areas for improvement:

  • Add a glossary.
  • Add financial disclosures of coins owned by each author.
  • Provide specific definitions for vague terms like “the community,” “administrator,” and the attributes of a target investor; ditch the “innovative” investor nomenclature.
  • Chapter 7 probably should be removed until more accurate comparisons can be found and Chapter 17 seemed a bit unfocused and covered a wide array of topics instead of just one or two… even dropping in thoughts about regulators. Future versions likely need an entire set of chapters focused on regulations, not just mentioned in passing.
  • Based on the incorrect view of financing mentioned in Chapter 5, interview Vitalik Buterin and other co-founders regarding how Ethereum was bootstrapped.
  • In one of the future regulatory chapters, would be good to have a discussion around PFMI, CBDCs, and settlement finality.
  • Provide a lot more references and citations regarding cryptocurrency-focused use cases, especially remittance providers.  This seemed to be the most repeated use case but nary a mention of a specific Bitcoin remittance company, its valuation, or volume corresponding to the use case.

Have a book or paper you’d like me to look at?  Feel free to send it across.  Also, it just came out but this one sounds like a doozy already.  See my other book reviews.

End notes

  1. To be fair, Burniske is not the only analyst-turned-VC who has not publicly disclosed his trading positions of coins, but that’s a separate topic. []
  2. One reviewer mentioned: “Likely it was partially intentional to release in late 2008 / early 2009, but did in fact coincide mainly with internal constraints. We could also argue that the GFC commenced in mid-2007 when BNP Paribas froze two mortgage-backed security funds which became the catalyst of the summer 2007 credit crunch, but that is neither here nor there. I also debate the argument that it was ‘intended’ as anything other than a solution to the double-spend problem, be it a payments system or an investment.” []
  3. As an aside, Brian Kelly, frequently promotes various coins on CNBC.  Unclear what his trading positions are on each coin at the time of recording.  While that may not be illegal, it’s arguably not classy. []
  4. One reviewer mentioned: “This was literally the ethos that led to the GFC. Securitization and Mark-to-model were heralded as “innovation” and championed for their ability to move faster than the academic foundation and until 2007 seen as a way to ‘completely engineer risk out of from the system.'” []
  5. See: Robert Sams on rehypothecation, deflation, inelastic money supply and altcoins []
  6. See tcpipcoin in Section 8 []
  7. See: Digitalization or Automation – Is There a Difference? from Gartner []
  8. One reviewer mentioned: “The authors also miss that “value” is still a function of ‘the market’, i.e. supply and demand. Simply by fixing supply does not equalize demand. I also take massive issue with the governance in “a [de]centralized and democratic manner.” Are the authors able to write C++ or GOLang protocol code for Bitcoin Core or GETH? Likely not. So if anything this walks us towards a new form of governance, except where we elect leaders in the US who ultimately appoint Fed governors in cryptocurrencies there are generally no elections. Long story short, in all cases, it ain’t democratic and it probably remained at least partially centralised at a given point in time.” []
  9. See Central bank digital currencies from the BIS.  I know, I’ll get spammed by all the “sound money” promoters out there who insist that Bitcoin will replace central banks — it’s a religious zeal to many. []
  10. For example, about a month ago, Jonathan Levin from Chainalysis did an interview and mentioned that: “So we can identify, it is quite hard to know how many people. I would say that 80% of transactions that occur on these cryptocurrency ledgers have a counterparty that is a 3rd party service. More than 80%.” []
  11. For instance, on p. xxvi they list “the top 50” coins at the end of 2016 and don’t disclose if they own any specific ones at all, but talk about many of them in positive ways.  Adding a disclosure would be helpful. []
  12. Bitcoin has ‘no intrinsic value,’ Brookfield CEO says: ‘It’s not for us’ from Financial Post []
  13. The Economist wrote a nice short article on this behavior — the greater fool – last year. []
  14. For example, on p. 9 they write: “Shortly thereafter, Satoshi vanished.  Some speculate it was for the good of Bitcoin. After all, being the creator of a technology that has the potential to replace much of the current financial system is bound to eventually invoke the wrath of powerful government and private sector forces.”  This seems like a strawman.  Bitcoin was designed for just one simple thing: payments.  The financial system is an interwoven network of hundreds of regulated and unregulated goods and services, not just payments.  Also, this paragraph, like a few others later, has elements of conspiratorial boogeymanism.  Just around the corner, the government is preparing to shut down Bitcoin!  Nothing like that has happened in the past 9+ years.  In fact, the opposite has been true as most jurisdictions have been pretty accommodating, arguably even too lenient on the issuance and usage of cryptocurrencies, but that is a topic for a different post. []
  15. See Layer 2 and settlement []
  16. See Breakthrough IT Banking from McKinsey and Bank IT spending to hit $241bn across four major global regions from ComputerWeekly []
  17. One reviewer mentioned: “Are the authors aware that CMOs first appeared in 1983, and that in many countries where they were heavily utilised including in the late 2000s they worked as advertised? In fact many CMOs in the US performed as modelled. The issue was, and is, always liquidity, over-leverage and most of all deteriorating lending standards. Cryptocurrencies will most likely be looked at as catalysts of these risks should their notional rise substantially, not their saviour.” []
  18. One reviewer commented: “Are they arguing that people would have been more able to pay their mortgages or that home values wouldn’t have fallen if CMOs were on a blockchain?” []
  19. One reviewer explained: “When someone claims that blockchain would have prevented the mortgage crisis, they are revealing their ignorance of their ignorance.  I worked with some of that CMO data. One former colleague works for one of the large consulting firms ‘blockchain’ practices. He posted something about how blockchain would address the problems with mortgage servicing . When I privately asked him how it would do so,and that the problems with mortgage servicing that I was aware of were either failure to do certain required activities or their failure to record that they did them, as opposed to someone changing the record after it was entered, he did not respond.” []
  20. See also: The Problem with Calling Bitcoin a “Ponzi Scheme” by Preston Byrne []
  21. For example, at the time of this writing, Coinmarketcap tracks 1641 different types of coins and tokens.  Many of these are likely ERC20 tokens and thus rely on Ethereum itself and are not independent blockchains. []
  22. Worth re-reading the recent DoJ indictment of GRU officers as the DoJ provides a reason for why Bitcoin was used versus other transmission methods. []
  23. Someone should create a website that tracks all of the gigantic bullish claims from Bitcoin promoters on how it will topple banks and destroy governments.  There are at least more than 100 such public predictions each month. []
  24. But “be your own payment processor” isn’t a catchy phrase. []
  25. Readers should check out: “The Path of the Blockchain Lexicon (and the Law)” by Angela Walch. []
  26. It ignores how mining pools can unilaterally determine what transactions to include and how much a fee a transaction should include in order to be included in a block. []
  27. For example, KARMA : A Secure Economic Framework for Peer-to-Peer Resource Sharing by Vivek Vishnumurthy, Sangeeth Chandrakumar and Emin Gun Sirer []
  28. Recommended reading: The Economic Limits of Bitcoin and the Blockchain by Eric Budish []
  29. Some literature describes the proof-of-work process used in Bitcoin as a “scratch-off puzzle.” []
  30. One reviewer mentioned: “A model that I like to describe this with is how the main professional soccer leagues are selected in Europe and other regions. For example, France specifically has an annual selection of the “League 1” after the Coupe de French. Basically any team can enter, but practically there is minimal turnover because a team from a town of 5,000 people is unlikely to reasonably beat a team like Paris or Lyon which has multi-million euro budgets. There are few upsets, but these can generally be modeled by statistical chance.” []
  31. For example, Coin Center circulated a borderline defamatory note to ESMA with regards to Corda – even before the Corda introductory whitepaper was released – likely because its author was unfamiliar with how the platform actually worked. []
  32. It seems to be a euphemism and code word for “someone with money who should buy coins.” []
  33. Based on public information, over the past four years pretty much the only cryptocurrency-related companies that probably were profitable equity investments were: exchanges and handful of mining companies operating outside of the US (e.g., some service providers have also generated steady income including several law firms and conference organizers). []
  34. In both cases, consensus is achieved by the longest chain rule. []
  35. May not be a Freudian slip here, but keep in mind all blockchains have operators and maintainers.  See “arewedecentralizedyet” for more. []
  36. It arguably could have been a self-fulfilling prophecy: investors outside of Cyprus hear news about the Cyprus bailout and bitcoin… thereby marketing bitcoin to new retail investors who then go out and buy bitcoins to try it out. []
  37. See also the background of R3 / DLG as well. []
  38. It is common to see Bitcoin promoters regularly demonize these companies who are trying to improve and automate infrastructure, vilified as a bourgeoisie activity that must be shunned.  Worth revisiting to see if this changes over time. []
  39. One of the few exceptions is the Brave browser. []
  40. Creating and marketing coins to retail investors is relatively easy… building infrastructure that customers actually regularly use for commerce is another level altogether. []
  41. If measured by price, there was a large bubble that popped in December 2017, but that was something that happened after publication. []
  42. I have given several public presentations in the past year explaining the “trough of disillusionment” phenomenon in this context, including in Seoul and Tokyo during July 2017. []
  43. See also: Tokens: Investment Vehicle or Medium of Exchange (Not Both) by Cathy Barrera and MV=P…Que? Love and Circularity in the Time of Crypto by Anshuman Mehta and Brian Koralewski []
  44. Furthermore, in September 2014 I gave a presentation (video) (slides) that similarly tried to bucket different types of proposed coins as “commodities” and the like.  And I know I wasn’t the first to try and do so.  Recommend readers do a bit more digging on this topic if they’d like to see a more thorough origin story. []
  45. One reviewer mentioned: “The native tokens / coins / assets inside a ledger are “cryptocurrencies”, they are currency in the single sense that they the only form of compensation accepted by the miner / staker in a network. This cryptoasset business really only makes sense in the context of units which are not used to pay for the security of a blockchain.” []
  46. But that doesn’t necessarily excite speculators and coin holders. []
  47. See: Bitcoin Is Now Just A Ticker Symbol and Stopped Being Permissionless Years Ago []
  48. There are few religious undertones here that could be removed in the next edition. []
  49. As mentioned above, The Economist wrote a nice short article on this behavior — the greater fool – last year. []
  50. The authors of this book are likely unintentionally promoting coin buying with a security-like mentality, the wording could be modified in the next edition. []
  51. One reviewer mentioned: “Unless the authors explain how ETH is worth precisely zero based on the same logic then their statement seems disingenuous. Not that I believe that is the case, but I am not the one stating that scarcity in the future is the reason for the value.” []
  52. See Saifedean Ammous: The Bitcoin Standard — making the Austrian School case for Bitcoin by David Gerard, The Bitcoin Standard – a critical review by Frances Coppola, and The Politics of Bitcoin by David Golumbia []
  53. Why?  Most probably are unaware and the typical retail investors seems to just want the USD number to go up so they can sell the coin to someone else. []
  54. Also worth reviewing Consensus-as-a-service and The Blockchain Threat Has Drastically Sped Up Cross-Border Payments []
  55. Since the authors are making this claim, would they be willing to disclose or be transparent about their own coin holdings for the date when they published this book? []
  56. The most likely answer is: speculators bought these coins because they knew others would buy it too thus driving the price higher. []
  57. Or conversely, you are considered “one of us” if you promote the policies and antics of said coin promoters. []
  58. Note: it should be apparent at this stage that “Bitcoin developers” should be in quotes because it is certain key individuals — and centralized organizations such as “Core” — who have the power to sway decisions such as BIP approval.  These are arguably administrators of financial market infrastructure.  See also: In Code(rs) We Trust: Software Developers as Fiduciaries in Public Blockchains []
  59. Personal correspondence on June 5, 2018 []
  60. This is mentioned in the new CFTC warning: CFTC Issues Customer Advisory on Digital Tokens []
  61. It is these types of passages that make a reader scratch their head as to whether or not the lessons for why equity ownership — and the rights afforded to equity holders — evolved to where they have in developed countries. []
  62. This narrative needs to be buried but probably won’t. []
  63. This is a common refrain that needs to stop being repeated. []
  64. A few months before Cryptoassets was published, the SEC published a report that said they found The DAO to have all the hallmarks of a security but they never enforced any specific legal action on its creators. []
  65. See Appendix A: Internal governance []
  66. On p. 63 they write: “For example, a fully functional decentralized insurance company, Airbnb, or Uber all hold great promise, and developer teams are working on similar use cases.”  Why do these hold great promise?  Because everyone else says that on stage? []
  67. One takeaway is that other speculators may buy your coins at a later date when the prices go up, so you should get in before they do. []
  68. One of the biggest flaws in Chapter 7 is that all of the pricing information for the coins are based on markets that are opaque and unregulated… some of whom may be considered bucket shops of yesteryear.  Lack of transparency is one of the reasons why all of the Bitcoin-related ETFs have been (so far) axed by the SEC.  See: Comments on the COIN ETF. []
  69. Are Public Blockchain Systems Unlicensed Money Services Businesses in Disguise? by Ciaran Murray []
  70. With the exception from maybe transaction fees to miners, but those could arguably also be classified as donations.  See p. 65 in The Anatomy []
  71. See: Spurious correlations []
  72. For example, later on p. 104 they write: “More surprisingly, the portfolio with bitcoin would have had lower volatility.” Because of the time period?  We could probably find other things with the same or lower volatility.  That seems like cherry picking. []
  73. Maybe they are both, but that still doesn’t mean that the coins, say that Placeholder Capital invested in, shouldn’t be classified as securities. []
  74. See also: Tokens: Investment Vehicle or Medium of Exchange (Not Both) by Cathy Barrera and MV=P…Que? Love and Circularity in the Time of Crypto by Anshuman Mehta and Brian Koralewski []
  75. Also, these are all arguably poor stores of value because of their relatively high volatility.  For instance, “number goes up” or rapid price increases is not the definition for a store of value.  Claiming bitcoin is a good store of value because it sees swift increases in price appreciation as measured by actual money is a contortionist view which ignores the empirical reality of how money is used. []
  76. For example, later on p. 110 they write: “While many cryptoassets are priced by the dynamics of supply and demand in markets, similar to more traditional C/T assets, for some holder of bitcoin — like holder of gold bars — it is solely a store of value. Other investors use cryptoassets beyond bitcoin in a similar way, holding the asset in the hope that it appreciated over time.” Spoiler alert: everyone that owns internet coins hope they appreciate over time. []
  77. And there are specific projects — such as Bitcoin — in which one clique of developers waged an effective propaganda campaign against miners.  For more on this, look into the actors and organizations behind the Segwit / Segwit2x / UASF online debates. []
  78. Not to rekindle the flames of the Bitcoin blocksize debate but in retrospect, several Blockstream employees and contractors were arguably more effective at swaying public opinion than Coinbase was, even though the latter generates significantly more revenue and has actual customers whereas the former is largely just a R&D dev shop. This discussion deserves its own post but neither company is very forthcoming about client or partnerbase… although Coinbase has published a bit more information over the years relative to Blockstream. []
  79. See also: The Problem with Calling Bitcoin a “Ponzi Scheme” by Preston Byrne []
  80. A large portion of blocks between 2009-2010 also included relatively few transactions, yet miners were being rewarded the same revenue irrespective of the volume or labor involved. []
  81. This is a topic I’ve written extensively about in the past, see (1) A pre-post-mortem on BitPay and (2) Looking at public information for quarterly usage []
  82. There is a small window between when FX markets in San Francisco close on a Friday afternoon and when FX markets open in New Zealand on Monday morning. []
  83. See Bitcoin’s $30 billion sell-off from Chainalysis []
  84. Does trading between exchanges represent 90+% of the total volume on- and off-exchanges?  Without full optics into all major intermediaries, that would be a tough claim to definitively prove. []
  85. In informal surveys most speculators of coins have the same mentality of speculators of other things that are traded on secondary markets: they think the number will go up. []
  86. See When Paper Paralyzed Wall Street: Remembering the 1960s Paperwork Crisis from Finra and The Remaking of Wall Street, 1967 to 1971 from HBS and Dole Food Had Too Many Shares from Matt Levine []
  87. Also recommend Spurious correlations []
  88. The book downplays illicit activity as if it is not a valid, reliable use case when it is.  For instance, the GRU allegedly used bitcoin to finance some of its operations focused on the 2016 US elections and they did so to obfuscate their tracks. []
  89. See The new TARGET instant payment settlement (TIPS) service from the ECB []
  90. For more on this, see: (1) Debunking Bitcoin’s Remittance Valuation. Featuring a Lead Pipe by Anshuman Mehta and (2) Does Bitcoin/Blockchain make sense for international money transfers? from SaveOnSend []
  91. A fundamental problem with this book is that it wants to have it both ways, with no clear goal posts for what a good or bad platform is and how to measure it.  How can an investor know if a coin is any good?  A table of attributes is recommended for the next edition. []
  92. Simply multiplying the amount of mined / pre-mined / pre-allocated coins by the market price to arrive at a “market cap” is a disservice to how market capitalization is actually determined.  See Section 6. []
  93. As an aside, even though there is no law preventing consumers and merchants from using or accepting gold (or silver) as a means of payment in the US, basically no one does because they’d rather hold it with the expectation of future price appreciation. I am sure lots of angry trolls will point out that legal tender laws in the US do not currently include precious metals and neither are cryptocurrencies.  Yet there are other economic reasons why people would rather hold onto an internet coin or a gold bar versus use it as money, and simply blaming legal tender laws is missing those. []
  94. Recommended reading: Distributed ledger technology in payments, clearing, and settlement by the Federal Reserve and Central bank digital currencies from the BIS []
  95. See several articles: The myth of a cheaper Bitcoin network: a note about transaction processing, currency conversion and BitcoinlandWhat is the “real” price of bitcoin?, and What impact have various investment pools had on Bitcoinland? []
  96. Also, as a pre-emption: one of the main reasons why these merchants and manufacturers do not hold on to these coins is because of… volatility.  As shown earlier in this review, that still hasn’t disappeared despite years of promotion that it has.  See also: (1) Debunking Bitcoin’s Remittance Valuation. Featuring a Lead Pipe by Anshuman Mehta and (2) Does Bitcoin/Blockchain make sense for international money transfers? from SaveOnSend []
  97. And as mentioned in the section above, both Zelle and Swift (gpi) will likely make a lot of inroads in the same national and international areas that cryptocurrency advocates were touting… but without needing a coin.  The struggle is real. []
  98. Note: both have since left those jobs.  Bogart became a partner at Blockchain Capital (a venture fund focused on coins) and Luria joined D.A. Davidson []
  99. In the next edition if possible, try to include Placeholder’s research so we can have an idea of the firm’s internal thinking on these issues. []
  100. Recommended: Digital Tulips? Returns to Investors in Initial Coin Offerings by Hugo Benedetti and Leonard Kostovetsky []
  101. Does Placeholder Capital invest in such ICOs? []
  102. Note that selfish mining has some odd game theoretic properties which may not hold up in the real world. But if the selfish mining pool manages to stay a block ahead on average, they can reveal a longer chain whenever they see transactions they want to censor.  It comes with the caveats that it’s not completely reliable in that they aren’t guaranteed to be a block ahead of the rest of the network 100% of the time (due to the inhomogenous Poisson process mentioned earlier). However, if they manage to effect a cohort of self-interested selfish miniers, they could… and that’s the equivalent of a “51% attack.” []
  103. Recommended reading: The Economic Limits of Bitcoin and the Blockchain by Eric Budish []
  104. Recommended: Analysing Costs & Benefits of Public Blockchains (with Data!) by Colin Platt. []
  105. Based on hash rate, the vast majority of mining pools supported Segwit2x and did not support UASF. []
  106. Coincidentally, these have all obtained a Bitlicense from NYS DFS. []
  107. Kraken uses Silvergate for its OTC trading. []
  108. A user can be defined as a person who controls their private keys without relying on a 3rd party intermediary. []
  109. Several analytics providers include: Chainalysis, Blockseer, Elliptic, Scorechain, and CipherTrace. []
  110. This is reminiscent of the BearWhale nonsense a few years ago. []
  111. Recall that historically, humanity went from only having to bearer assets up through the 19th century.  And that for a variety of reasons these became registered and immobilized and then later dematerialized altogether.  Cryptocurrencies recreates a financial order that had already existed. []
  112. See Learning from the past to build an improved future of fintech and Distributed Oversight: Custodians and Intermediaries []
  113. Butterfly Labs began accepting pre-orders in the summer of 2012 but delivered them late in 2013… and got sued by the FTC. []
  114. Regarding ‘perfect competition,’ four years ago Jonathan Levin opined that: “Another simple thing about this is that it is unsurprising that the bitcoin network got into this mess as it is economically rational to join the biggest pool. Minimises variance and ceteris paribus reduce orphans increasing expected return per hash. The other point is that there is still hardware bottlenecks so designing the theoretically most robust system may fail due to market imperfections. Implicitly in many arguments I hear about mining people assume perfect competition. Do we need to remind people what are the necessary conditions for perfect competition? Perfect information, equal access to markets, zero transportation costs, many players ……. this is clearly not going to be a perfectly competitive decentralised market but it certainly should not favour inherently the big players.”  See p. 114 of The Anatomy []
  115. Some of these are detailed in: Comments on the COIN ETF []
  116. For illustrative purposes, this includes: Circle, JUMP Trading, and Cumberland (DRW). []
  117. See also: New Visa chargeback system aims to speed dispute resolution by John Egan []
  118. See U.S. Regulators Subpoena Crypto Exchange Bitfinex, Tether from Bloomberg []
  119. In his public speaking events and social media accounts, Andreas Antonopoulos is quite candid about his dislike of the establishment. []
  120. See Chapter 2 in The Anatomy []
  121. See Brian Armstrong’s tweet in Section 5 []
  122. This raises questions that related to FinCEN and SEC purview but neither has opined at this time on this specific point. []
  123. CoinAgenda Singapore, which took place in June 2018, only had 168 attendees — with ticket prices up to $3,000 apiece. []
  124. Coins.ph and Luno come to mind as examples. []
  125. See What is the difference between Hyperledger and Hyperledger? []
  126. See A brief history of R3 – the Distributed Ledger Group []
  127. Needs a larger sample size conducted in a public venue, and/or with the help of an experienced sampling organization. []
  128. This then leads to incentives to attack and hack exchanges, because they end up acting as deposit-taking institutions, aka banks. []
  129. There were probably 50% more hand-written notes or comments that I could have added that I skipped over. []
  130. The HODLing “digital gold” meme which was only passingly mentioned in this book ultimately degenerates into goldbugism but that’s a topic for a different post. HODLing arguably became a thing once the ideologues realized Bitcoin itself wasn’t a competitive payment system.  An enormous amount of revisionism has taken place since 2014 regarding what Bitcoin was and is and should be. []
  131. Debunking Bitcoin’s Remittance Valuation. Featuring a Lead Pipe by Anshuman Mehta []
  132. One reviewer mentioned: “By hoarding then actively purchasing more coins to hoard, they might temporarily create an effect whereby each marginal contribution to Bitcoin through mining rewards in expanding the effective monetary base is partially neutralized.  In addition to marketing campaigns, this can lead to higher USD values and may incentivize additional mining power, which in turn creates higher hashrate.  However, you cannot make the same argument for gold because simply driving the price of gold up doesn’t make gold harder to find or more secure, and in fact we see the opposite.” []
  133. For instance, the supply of gold is actually elastic whereas many cryptocurrencies including Bitcoin have an inelastic money supply.  Where in the whitepaper does it talk about a store of value?  If that was the goal, surely it would’ve been mentioned in the whitepaper or the first few emails upon Bitcoin’s initial release. []
  134. Recommended reading: The Economic Limits of Bitcoin and the Blockchain by Eric Budish []
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Book Review: The Business Blockchain

[Disclaimer: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

William Mougayar is an angel investor who has been investigating the cryptocurrency and broader distributed ledger ecosystem over the past several years.

He recently published a book entitled The Business Blockchain that attempts to look at how enterprises and organizations should view distributed ledgers and specifically, blockchains.

While it is slightly better than “Blockchain Revolution” from the Tapscott’s, it still has multiple errors and unproven conjectures that prevent me from recommending it.  For instance, it does not really distinguish one blockchain from another, or the key differences between a distributed ledger and a blockchain.

Note: all transcription errors below are my own.  See my other book reviews.

Introduction

On p. xxii he writes:

“These are necessary but not sufficient conditions or properties; blockchains are also greater than the sum of their parts.”

I agree with this and wrote something very similar two years ago in Chapter 2:

While the underlying mathematics and cryptographic concepts took decades to develop and mature, the technical parts and mechanisms of the ledger (or blockchain) are greater than the sum of the ledger’s parts.

On p. xxiv he writes:

“Just like we cannot double spend digital money anymore (thanks to Satoshi Nakamoto’s invention), we will not be able to double copy or forge official certificates once they are certified on a blockchain.”

There are two problems with this:

  1. Double-spending can and does still occur, each month someone posts on social media how they managed to beat a retailer/merchant that accepted zero-confirmation transactions
  2. Double-spending can and is prevented in centralized architectures today, you don’t need a blockchain to prevent double-spending if you are willing to trust a party

Chapter 1

[Note: recommend that future editions should include labeled diagrams/tables/figures]

On p. 11 he writes:

“Solving that problem consists in mitigating any attempts by a small number of unethical Generals who would otherwise become traitors, and lie about coordinating their attack to guarantee victory.”

It could probably be written slightly different: how do you coordinate geographically dispersed actors to solve a problem in which one or more actor could be malicious and attempt to change the plan?  See also Lamport et al. explanation.

On p.13 he writes compares a database with a blockchain which he calls a “ledger.”

I don’t think this is an accurate comparison.

For instance, a ledger, as Robert Sams has noted, assumes ties to legal infrastructure.  Some blockchains, such as Bitcoin, were intentionally designed not to interface with legal infrastructure, thus they may not necessarily be an actual ledger.

To quote Sams:

I think the confusion comes from thinking of cryptocurrency chains as ledgers at all. A cryptocurrency blockchain is (an attempt at) a decentralised solution to the double spending problem for a digital, extra-legal bearer asset. That’s not a ledger, that’s a log.

That was the point I was trying to make all along when I introduced the permissioned/permissionless terminology!  Notice, I never used the phrase “permissionless ledger” — Permissionless’ness is a property of the consensus mechanism.

With a bearer asset, possession of some instrument (a private key in the cryptocurrency world) means ownership of the asset. With a registered asset, ownership is determined by valid entry in a registry mapping an off-chain identity to the asset. The bitcoin blockchain is a public log of proofs of instrument possession by anonymous parties. Calling this a ledger is the same as calling it “bearer asset ledger”, which is an oxymoron, like calling someone a “married bachelor”, because bearer assets by definition do not record their owners in a registry!

This taxonomy that includes the cryptocurrency stuff in our space (“a public blockchain is a permissionless distributed ledger of cryptocurrency”) causes so much pointless discussion.

I should also mention that the DLT space should really should be using the phrase “registry” instead of “ledger”. The latter is about accounts, and it is one ambition too far at the moment to speak of unifying everyone’s accounts on a distributed ledger.

Is this pedantic?  Maybe not, as the authors of The Law of Bitcoin also wrestle with the buckets an anarchic cryptocurrency fall under.

On p. 14 he writes about bank accounts:

“In reality, they provided you the illusion of access and activity visibility on it.  Every time you want to move money, pay someone or deposit money, the bank is giving you explicit access because you gave them implicit trust over your affairs.  But that “access” is also another illusion.  It is really an access to a database record that says you have such amount of money.  Again, they fooled you by giving you the illusion that you “own” that money.”

This is needless inflammatory.  Commercial law and bankruptcy proceedings will determine who owns what and what tranche/seniority your claims fall under.  It is unclear what the illusion is.

On p. 14 he writes:

“A user can send money to another, via a special wallet, and the blockchain network does the authentication, validation and transfer, typically within 10 minutes, with or without a cryptocurrency exchange in the middle.”

Which blockchain is he talking about?  If it is not digital fiat, how does the cash-in/cash-out work?  To my knowledge, no bank has implemented an end-to-end production system with other banks as described above.  Perhaps that will change in the future.

On p. 18 he writes:

“Sometimes it is represented by a token, which is another form of related representation of an underlying cryptocurrency.”

This isn’t very well-defined.  The reason I went to great lengths in November to explain what a “token” is and isn’t is because of the confusion caused by the initial usage of a cryptographic token, a hardware device from companies like RSA.  This is not what a “token” in cryptocurrency usage means. (Note: later on p. 91 he adds a very brief explanation)

On p. 18 he cites Robert Sams who is quoting Nick Szabo, but didn’t provide a source.  It is found in Seigniorage Shares.

On p. 18 he also writes:

“As cryptocurrency gains more acceptance and understanding, its future will be less uncertain, resulting in a more stable and gradual adoption curve.”

This is empirically not true and actually misses the crux of Sams’ argument related to expectations.

On p. 20 he writes:

“As of 2016, the Bitcoin blockchain was far from these numbers, hovering at 5-7 TPS, but with prospects of largely exceeding it due to advances in sidechain technology and expected increases in the Bitcoin block size.”

This isn’t quite correct.  On a given day over the past year, the average TPS is around 2 TPS and Tradeblock estimates by the end of 2016 that with the current block size it will hover around just over 3 TPS.

What is a sidechain?  It is left undefined in that immediate section.  One potential definition is that it is a sofa.

On p. 20 he writes:

“Private blockchains are even faster because they have less security requirements, and we are seeing 1,000-10,000 TPS in 2016, going up to 2,000-15,000 TPS in 2017, and potentially an unlimited ceiling beyond 2019.”

This is untrue.  “Private blockchains” do not have “less” security requirements, they have different security requirements since they involve known, trusted participants.  I am also unaware of any production distributed ledger system that hits 10,000 TPS.  Lastly, it is unclear where the “unlimited ceiling” prediction comes from.

On p. 20 he writes:

“In 2014, I made the strong assertion that the blockchain is the new database, and warned developers to get ready to rewrite everything.”

Where did you warn people?  Link?

On p. 21 he writes:

“For developers, a blockchain is first and foremost a set of software technologies.”

I would argue that it is first and foremost a network.

On p. 22 he writes:

“The fact that blockchain software is open source is a powerful feature. The more open the core of a blockchain is, the stronger the ecosystem around it will become.”

Some, but not all companies building blockchain-related technology, open source the libraries and tools.  Also, this conflates the difference between code and who can validate transactions on the network.  A “private blockchain” can be open sourced and secure, but only permit certain entities to validate transactions.

On p. 24 he writes:

“State machines are a good fit for implementing distributed systems that have to be fault-tolerant.”

Why?

On p. 25 he writes:

“Bitcoin initiated the Proof-of-Work (POW) consensus method, and it can be regarded as the granddaddy of these algorithms. POW rests on the popular Practical Byzantine Fault Tolerant algorithm that allows transactions to be safely committed according to a given state.”

There are at least two problems with this statement:

  • The proof-of-work mechanism used in Bitcoin is apocryphally linked to Hashcash from Adam Back; however this does not quite jive with Mougayar’s statement above. Historically, this type of proof-of-work predates Back’s contribution, all the way to 1992.  See Pricing via Processing or Combatting Junk Mail by Dwork and Naor
  • Practical Byzantine Fault Tolerance is the name of a specific algorithm published in 1999 by Castro and Liskov; it is unrelated to Bitcoin.

On p. 26 he writes:

“One of the drawbacks of the Proof-of-Work algorithm is that it is not environmentally friendly, because it requires large amounts of processing power from specialized machines that generate excessive energy.”

This is a design feature: to make it economically costly to change history.  It wasn’t that Satoshi conjured up a consensus method to be environmentally friendly, rather it is the hashrate war and attempt to seek rents on seigniorage that incentivizes the expenditure of capital, in this case energy.  If the market price of a cryptocurrency such as bitcoin declined, so too would the amount of energy used to secure it.

Chapter 2

On p. 29 he writes:

“Reaching consensus is at the heart of a blockchain’s operations.  But the blockchain does it in a decentralized way that breaks the old paradigm of centralized consensus, when one central database used to rule transaction validity.”

Which blockchain is he talking about?  They are not a commodity, there are several different unique types.  Furthermore, distributed consensus is an academic research field that has existed for more than two decades.

On p. 29 he writes:

“A decentralized scheme (which the blockchain is based on) transfers authority and trust to a decentralized network and enables its nodes to continuously and sequentially record their transactions on a public “block,” creating a unique” chain” – the blockchain.”

Mougayar describes the etymology of the word “blockchain” specific to Bitcoin itself.

Note: a block actually is more akin to a “batch” or “bucket” in the sense that transactions are bundled together into a bucket and then propagated.  His definition of what a blockchain is is not inclusive enough in this chapter though because it is unclear what decentralization can mean (1 node, 100 nodes, 10,000 nodes?).  Also, it is important to note that not all distributed ledgers are blockchains.

On p. 31 he writes:

“Credit card companies charge us 23% in interest, even when the prime rate is only at 1%”

Which credit card companies are charging 23%?  Who is being charged this?  Also, even if this were the case, how does a blockchain of some kind change that?

On p. 32 he writes:

“Blockchains offer truth and transparency as a base layer. But most trusted institutions do not offer transparency or truth. It will be an interesting encounter.”

This is just a broad sweeping generalization.  What does truth and transparency mean here?  Which blockchains?  Which institutions?  Cannot existing institutions build or use some kind of distributed ledger to provide the “truth” and “transparency” that he advocates?

On p. 33 he writes:

“The blockchain challenges the roles of some existing trust players and reassigns some of their responsibilities, sometimes weakening their authority.”

Typo: should be “trusted” not “trust.”

On p. 34 he writes:

“There is a lesson from Airbnb, which has mastered the art of allowing strangers to sleep in your house without fear.”

This is not true, there are many examples of Airbnb houses that have been trashed and vandalized.

On p. 34, just as the Tapscott’s did in their book, Mougayar talks about how Airbnb could use a blockchain for identity and reputation.  Sure, but what are the advantages of doing that versus a database or other existing technology?

On p. 37 he writes:

“Enterprises are the ones asking, because the benefits are not necessarily obvious to them.  For large companies, the blockchain presented itself as a headache initially. It was something they had not planned for.”

First off, which blockchain?  And which enterprises had a headache from it?

On p. 39 he writes: “Prior to the Bitcoin invention…”

He should probably flip that to read “the invention of Bitcoin”

On p. 40 he writes:

“… it did not make sense to have money as a digital asset, because the double-spend (or double-send) problem was not solved yet, which meant that fraud could have dominated.”

This is empirically untrue.  Centralized systems prevent double-spending each and every day.  There is a double-spending problem when you are using a pseudonymous, decentralized network and it is partially resolved (but not permanently solved) in Bitcoin by making it expensive, but not impossible, to double-spend.

On p. 41 he writes:

“They will be no less revolutionary than the invention of the HTML markup language that allowed information o be openly published and linked on the Web.”

This is a little redundant and should probably be rewritten as “the invention of the hypertext markup language (HTML).”

On p. 43 he writes:

“Smart contracts are ideal for interacting with real-world assets, smart property, Internet of Things (IoT) and financial services instruments.”

Why are smart contracts ideal for that?

On p. 46 he writes: “Time-stamping” and in other areas he writes it without a dash.

On p. 46 he writes:

“And blockchains are typically censorship resistant, due to the decentralized nature of data storage, encryption, and peer controls at the edge of the network.”

Which blockchains?  Not all blockchains in the market are censorship resistant.  Why and why not?

On p. 48 he mentions “BitIID” – this is a typo for “BitID”

On p. 51 he writes:

“Enter the blockchain and decentralized applications based on it. Their advent brings potential solutions to data security because cryptographically-secured encryption becomes a standard part of blockchain applications, especially pertaining to the data parts. By default, everything is encrypted.”

This is untrue.  Bitcoin does not encrypt anything nor does Ethereum.  A user could encrypt data first, take a hash of it and then send that hash to a mining pool to be added to a block, but the network itself provides no encryption ability.

On p. 52 he writes:

“Consensus in public blockchains is done publicly, and is theoretically subject to the proverbial Sybil attacks (although it has not happened yet).”

Actually, it has on altcoins.  One notable occurrence impacted Feathercoin during June 2013.

On p. 54 he writes:

“The blockchain can help, because too many Web companies centralized and hijacked what could have been a more decentralized set of services.”

This is the same meme in the Tapscott book.  There are many reasons for why specific companies and organizations have large users bases but it is hard to see how they hijacked anyone; but that is a different conversation altogether.

On p. 54 he writes:

“We can also think of blockchains as shared infrastructure that is like a utility. If you think about how the current Internet infrastructure is being paid for, we subsidize it by paying monthly fees to Internet service providers.  As public blockchains proliferate and we start running millions of smart contacts and verification services on them, we might be also subsidizing their operation, by paying via micro transactions, in the form of transaction fees, smart contract tolls, donation buttons, or pay-per-use schemes.”

This is a very liberal use of the word subsidize.  What Mougayar is describing above is actually more of a tax than a charitable donation.

The design behind Bitcoin was intended to make it such that there was a Nash equilibrium model between various actors.  That miners would not need to rely on charity to continue to secure the network because as block rewards decline, the fees themselves would in the long run provide enough compensation to pay for their security services.

It could be argued that this will not happen, that fees will not increase to offset the decline in block rewards but that is for a different article.

As an aside, Mougayar’s statement above then intersects with public policy: which blockchains should receive that subsidy or donation?  All altcoins too?  And who should pay this?

Continuing:

“Blockchains are like a virtual computer somewhere in a distributed cloud that is virtual and does not require server setups. Whoever opens a blockchain node runs the server, but not users or developers.”

This is untrue.  The ~6,400 nodes on the Bitcoin network are all servers that require setup and maintenance to run.  The same for Ethereum and any other blockchain.

On p. 58 he writes:

“It is almost unimaginable to think that when Satoshi Nakamoto released the code for the first Bitcoin blockchain in 2009, it consisted of just two computers and a token.”

A couple issues:

  1. There is a typo – “first” should be removed (unless there was another Bitcoin network before Bitcoin?)
  2. Timo Hanke and Sergio Lerner have hypothesized that Satoshi probably used multiple computers, perhaps more than a dozen.

On p. 58 he writes:

“One of the primary differences between a public and private blockchain is that public blockchains typically have a generic purpose and are generally cheaper to use, whereas private blockchains have a more specific usage, and they are more expensive to set up because the cost is born by fewer owners.”

This is not true.  From a capital and operation expenditure perspective, public blockchains are several orders of magnitude more expensive to own and maintain than a private blockchain.  Why?  Because there is no proof-of-work involved and therefore private blockchain operators do not need to spend $400 million a year, which is roughly the cost of maintaining the Bitcoin network today.

In contrast, depending on how a private blockchain (or distributed ledger) is set up, it could simply be run by a handful of nodes on several different cloud providers – a marginal cost.

Chapter 3

On p. 68 he writes:

“Taken as an extreme case, just about any software application could be rewritten with some blockchain and decentralization flavor into it, but that does not mean it’s a good idea to do so.”

Yes, fully agreed!

On p. 68 he writes:

“By mid-2016, there were approximately 5,000 developers dedicated to writing software for cryptocurrency, Bitcoin or blockchains in general. Perhaps another 20,000 had dabbled with some of that technology, or written front-end applications that connect to a blockchain, one way or the other.”

Mougayar cites his survey of the landscape for this.

I would dispute this though, it’s probably an order of magnitude less.

The only way this number is 5,000 is if you liberally count attendees at meetups or all the various altcoins people have touched over the year, and so forth.  Even the headcount of all the VC funded “bitcoin and blockchain” companies is probably not even 5,000 as of May 2016.

On p. 71 he writes:

“Scaling blockchains will not be different than the way we have continued to scale the Internet, conceptually speaking.  There are plenty of smart engineers, scientists, researchers, and designers who are up to the challenge and will tackle it.”

This is a little too hand-wavy.  One of the top topics that invariably any conversation dovetails into at technical working groups continues to be “how to scale” while keeping privacy requirements and non-functional requirements intact.  Perhaps this will be resolved, but it cannot be assumed that it will be.

On p. 72 he writes:

“Large organizations, especially banks, have not been particularly interested in adopting public blockchains for their internal needs, citing potential security issues. The technical argument against the full security of public blockchains can easily be made the minute you introduce a shadow of a doubt on a potential scenario that might wreak havoc with the finality of a transaction.  That alone is enough fear to form a deterring factor for staying away from public blockchain, although the argument could be made in favor of their security.”

This is a confusing passage.  The bottom line is that public blockchains were not designed with the specific requirements that regulated financial institutions have.  If they did, perhaps they would be used.  But in order to modify a public blockchain to provide those features and characteristics, it would be akin to turning an aircraft carrier into a submarine.  Sure it might be possible, but it would just be easier and safer to build a submarine instead.

Also, why would an organization use a public blockchain for their internal needs?  What does that mean?

On p. 78 he writes:

“Targeting Bitcoin primarily, several governments did not feel comfortable with a currency that was not backed by a sovereign country’s institutions.”

Actually, what made law enforcement and regulators uncomfortable was a lack of compliance for existing AML/KYC regulations.  The headlines and hearings in 2011-2013 revolved around illicit activities that could be accomplished as there were no tools or ability to link on-chain activity with real world identities.

Chapter 4

On p. 87 he writes:

“The reality is that customers are not going to the branch as often (or at all), and they are not licking as many stamps to pay their bills.  Meanwhile, FinTech growth is happening: it was a total response to banks’ lack of radical innovation.”

There are a couple issues going on here.

Banks have had to cut back on all spending due to cost cutting efforts as a whole and because their spending has had to go towards building reporting and compliance systems, neither of which has been categorized as “radical innovation.”

Also, to be balanced, manyh of the promises around “fintech” innovation still has yet to germinate due to the fact that many of the startups involved eventually need to incorporate and create the same cost structures that banks previously had to have.  See for instance, financial controls in marketplace lending – specifically Lending Club.

On p. 88 he writes:

“If you talk to any banker in the world, they will admit that ApplePay and PayPal are vexing examples of competition that simply eats into their margins, and they could not prevent their onslaught.”

Any banker will say that?  While a couple of business lines may change, which banks are being displaced by either of those two services right now?

On p. 89 he writes:

“Blockchains will not signal the end of banks, but innovation must permeate faster than the Internet did in 1995-2000.”

Why?  Why must it permeate faster?  What does that even mean?

On p. 89 he writes:

“This is a tricky question, because Bitcoin’s philosophy is about decentralization, whereas a bank is everything about centrally managed relationships.”

What does this mean?  If anything, the Bitcoin economy is even more concentrated than the global banking world, with only about a dozen exchanges globally that handle virtually all of the trading volume of all cryptocurrencies.

On p. 89 he writes:

“A local cryptocurrency wallet skirts some of the legalities that existing banks and bank look-alikes (cryptocurrency exchanges) need to adhere to, but without breaking any laws. You take “your bank” with you wherever you travel, and as long as that wallet has local onramps and bridges into the non-cryptocurrency terrestrial world, then you have a version of a global bank in your pocket.”

This is untrue.  There are many local and international laws that have been and continue to be broken involving money transmission, AML/KYC compliance and taxes.  Ignoring those though, fundamentally there are probably more claims on bitcoins – due to encumbrances – than bitcoins themselves.  This is a big problem that still hasn’t been dealt with as of May 2016.

On p. 95 he writes:

“The decentralization of banking is here. It just has not been evenly distributed yet.”

This is probably inspired by William Gibson who said: ‘The future is already here — it’s just not very evenly distributed.’

On p. 95 he writes:

“The default state and starting position for innovation is to be permissionless. Consequently, permissioned and private blockchain implementations will have a muted innovation potential.  At least in the true sense of the word, not for technical reasons, but for regulatory ones, because these two aspect are tie together.”

This is not a priori true, how can he claim this?  Empirically we know that permissioned blockchains are designed for different environments than something like Bitcoin.  How can he measure the amount of potential “innovation” either one has?

On p. 95 he writes:

“We are seeing the first such case unfold within the financial services sector, that seems to be embracing the blockchain fully; but they are embracing it according to their own interpretation of it, which is to make it live within the regulatory constraints they have to live with. What they are really talking about is “applying innovation,” and not creating it. So, the end-result will be a dialed down version of innovation.”

This is effectively an ad hominem attack on those working with regulated institutions who do not have the luxury of being able to ignore laws and regulations in multiple jurisdictions.  There are large fines and even jail time for ignoring or failing to comply with certain regulations.

On p. 95 he writes:

“That is a fact, and I am calling this situation the “Being Regulated Dilemma,” a pun on the innovator’s dilemma. Like the innovator’s dilemma, regulated companies have a tough time extricating themselves from the current regulations they have to operate within.  So, when they see technology, all they can do is to implement it within the satisfaction zones of regulators. Despite the blockchain’s revolutionary prognosis, the banks cannot outdo themselves, so they risk only guiding the blockchain to live within their constrained, regulated world.”

“It is a lot easier to start innovating outside the regulatory boxes, both figuratively and explicitly. Few banks will do this because it is more difficult.”

“Simon Taylor, head of the blockchain innovation group at Barclays, sums it up: “I do not disagree the best use cases will be outside regulated financial services. Much like the best users of cloud and big data are not the incumbent blue chip organizations.  Still their curioisity is valuable for funding and driving forward the entire space.” I strongly agree; there is hope some banks will contribute to the innovation potential of the blockchain in significant ways as they mature their understanding and experiences with this next technology.

An ending note to banks is that radical innovation can be a competitive advantage, but only if it is seen that way. Otherwise innovation will be dialed down to fit their own reality, which is typically painted in restrictive colors.

It would be useful to see banks succeed with the blockchain, but they need to push themselves further in terms of understanding what the blockchain can do. They need to figure out how they will serve their customers better, and not just how they will serve themselves better. Banks should innovate more by dreaming up use cases that we have not though about yet, preferably in the non-obvious category.

The fundamental problem with his statement is this: banks are heavily regulated, they cannot simply ignore the regulations because someone says they should.  If they fail to maintain compliance, they can be fined.

But that doesn’t mean they cannot still be innovative, or that the technology they are investigating now isn’t useful or helpful to their business lines.

In effect, this statement is divorced from the reality that regulated financial institutions operate in.  [Note: some of his content such as the diagram originated from his blog post]

On p. 102 he writes:

“Banks will be required to apply rigorous thinking to flush out their plans and positions vis-à-vis each one of these major blockchain parameters. They cannot ignore what happens when their core is being threatened.”

While this could be true, it is an over generalization: what type of business lines at banks are being threatened?  What part of “their” core is under attack?

On p. 103 he writes:

“More than 200 regulatory bodies exist in 150 countries, and many of them have been eyeing the blockchain and pondering regulatory updates pertaining to it.”

Surely that is a typo, there are probably 200 regulatory bodies alone in the US itself.

On p. 105 he writes:

“Banks will need to decide if they see the blockchain as a series of Band-Aids, or if they are willing to find the new patches of opportunity.  That is why I have been advocating that they should embrace (or buy) the new cryptocurrency exchanges, not because these enable Bitcoin trades, but because they are a new generation of financial networks that has figured out how to transfer assets, financial instruments, or digital assets swiftly and reliably, in essence circumventing the network towers and expense bridges that the current financial services industry relies upon.”

This is a confusing passage.

Nearly all of the popular cryptocurrency exchanges in developed countries require KYC/AML compliance in order for users to cash-in and out of their fiat holdings.  How do cryptocurrency exchanges provide any utility to banks who are already used to transferring and trading foreign exchange?

In terms of percentages, cryptocurrency exchanges are still very easy to compromise versus banks; what utility do banks obtain by acquiring exchanges with poor financial controls?

And, in order to fund their internal operations, cryptocurrency exchanges invariably end up with the same type of cost structures regulated financial institutions have; the advantage that they once had effectively involved non-compliance – that is where some of the cost savings was.  And banks cannot simply ignore regulations because people on social media want them to; these cryptocurrency sites require money to operate, hence the reason why many of them charge transaction fees on all withdrawals and some trades.

Chapter 5

On p. 115 he mentions La’Zooz and Maidsafe, neither of which – after several years of development, actually work.  Perhaps that changes in the future.

On p.118 he writes:

“There is another potential application of DIY Government 2.0. Suppose a country’s real government is failing, concerned citizens could create a shadow blockchain governance that is more fair, decentralized and accountable. There are at least 50 failed, fragile, or corrupt states that could benefit from an improve blockchain governance.”

Perhaps this is true, that there could be utility gain from some kind of blockchain.  But this misses a larger challenge: many of these same countries lack private property rights, the rule of law and speedy courts.

On p. 119 he writes about healthcare use cases:

“Carrying a secure wallet with our full electronic medical record in it, or our stored DNA, and allowing its access, in case of emergency.”

What advantage do customers gain from carrying this around in a secure wallet?  Perhaps they do, but it isn’t clear in this chapter.

On p. 126-127 he makes the case for organizations to have a “blockchain czar” but an alternative way to pitch this without all the pomp is simply to have someone be tasked with becoming a subject-matter expert on the topic.

On p. 131 he writes:

“Transactions are actually recorded in sequential data blocks (hence the word blockchain), so there is a historical, append-only log of these transaction that is continuously maintained and updated.  A fallacy is that the blockchain is a distributed ledger.”

It is not a fallacy.

Chapter 7

On p. 149 he writes: “What happened to the Web being a public good?”

Costs.  Websites have real costs.  Content on those websites have real costs.  And so forth.  Public goods are hard to sustain because no one wants to pay for them but everyone wants to use them.  Eventually commercial entities found a way to build and maintain websites that did not involve external subsidization.

On p. 150 he writes:

“Indeed, not only was the Web hijacked with too many central choke points, regulators supposedly continue to centralize controls in order to lower risk, whereas the opposite should be done.”

This conflicts with the “Internet is decentralized” meme that was discussed throughout the book.  So if aspects of the Internet are regulated, and Mougayar disagrees with those regulations, doesn’t this come down to disagreements over public policy?

On p. 153 he writes:

“Money is a form of value.  But not all value is money. We could argue that value has higher hierarchy than money. In the digital realm, a cryptocurrency is the perfect digital money.  The blockchain is a perfect exchange platform for digital value, and it rides on the Internet, the largest connected network on the planet.”

Why are cryptocurrencies perfect?  Perhaps they are, but it is not discussed here.

On p. 153 he also talks about the “programmability” of cryptocurrencies but doesn’t mention that if fiat currencies were digitally issued by central banks, they too could have the same programmable abilities.

On p. 160 he predicts:

“There will be dozens of commonly used, global virtual currencies that will be considered mainstream, and their total market value will exceed $5 trillion, and represent 5% of the world’s $100 trillion economy in 2025.”

Perhaps that occurs, but why?  And are virtual currencies now different than digital currencies?  Or are they the same?  None of these questions are really addressed.

Conclusion

This book is quick read but unfortunately is weighed down by many opinions that are not supported by evidence and consequently, very few practical applications for enterprises are explained in detail.

For regulated businesses such as financial institutions, there are several questions that need to be answered such as: what are the specific cost savings for using or integrating with some kind of blockchain?  What are the specific new business lines that could be created?  And unfortunately the first edition of this book did not answer these types of questions.  Let us look again at a future version.

See my other book reviews.

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Book review: Blockchain Revolution

[Disclaimer: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

A couple weeks ago I joked that while containment is impossible, it would be nice to know who patient-zero was for using the term “blockchain” without an article preceding it.  The mystery of who exactly removed the “a” before “blockchain” is probably residing on the same island that Yeti, Sasquatch, and the New England Patriot’s equipment team are now located.

Don and Alex Tapscott, a Canada-based father-son duo, co-authored a new book entitled Blockchain Revolution that not only suffers from this grammatical faux pas but has several dozen errors and unproven assertions which are detailed in this review.

Below is a chapter-by-chapter look into a book that should have baked in the oven for a bit more time.

Note: all transcription errors are my own.  See my other book reviews.

Chapter 1

On p. 5 the authors write:

“A decade later in 2009, the global financial industry crashed. Perhaps propitiously, a pseudonymous person or persons named Satoshi Nakamoto outlined a new protocol for a peer-to-peer electronic cash system using a cryptocurrency called bitcoin.”

Ignoring the current drama surrounding Craig Wright — the Australian who claims to be Satoshi — during the initial threads on Metzdowd, Satoshi mentioned he had been working on this project for 18 months prior; roughly mid-2007.  So it was more coincidental timing than intentional.

And much like other books on the same topic, the authors do not clarify that there are more than one type of blockchain in existence and that some are a type of distributed ledger.

For instance, on p. 6 they write:

“At its most basic, it is an open source code: anyone can download it for free, run it, and use it to develop new tools for managing transactions online.”

With the ‘it’ being a ‘blockchain.’  The problem with this grammatical issue is that we know empirically that there many different types of distributed ledgers and blockchains currently under development and not all of them are open sourced.  Nor does being open source automagically qualify something as a blockchain.

On p. 6 they write:

“However, the most important and far-reaching blockchains are based on Satoshi’s bitcoin model.”

That’s an opinion that the authors really don’t back up with facts later on.

In addition, on the same page they make the “encryption” error that also plagues books in this space: the Bitcoin blockchain does not use encryption.

For example, on page 6 they write:

“And the blockchain is encrypted: it uses heavy-duty encryption involving public and private keys (rather like the two-key system to access a safety deposit box) to maintain virtual security.”

Incorrect.  Bitcoin employs a couple different cryptographic processes, but it doesn’t use encryption.  Furthermore, the example of a ‘two-key system’ actually illustrates multisig, not public-private key pairs.

On p. 8 they write:

“Bankers love the idea of secure, frictionless, and instant transactions, but some flinch at the idea of openness, decentralization and new forms of currency.  The financial services industry has already rebranded and privatized blockchain technology, referring to it as distributed ledger technology, in an attempt to reconcile the best of bitcoin — security, speed, and cost — with an entirely closed system that requires a bank or financial institution’s permission to use.”

There is a lot of assumptions in here:

(1) it is unclear which “bankers” they are speaking about, is it every person who works at a bank?

(2) the term ‘openness’ is not very well defined, does that mean that people at banks do not want to have cryptographically proven provenance?

In addition, in order for something to be privatized it must have been public at first.  Claiming that the “blockchain” toolkit of ideas and libraries was privatized away from Bitcoin is misleading.  The moving pieces of Bitcoin itself are comprised of no less than 6 discrete elements that previously existed in the cryptography and distributed systems communities.

The Bitcoin network itself is not being privatized by financial institutions.  In fact, if anything, empirically Bitcoin itself is being carved away by entities and efforts largely financed by venture capital — but that is a topic for another article.  Furthermore, research into distributed computing and distributed consensus techniques long predates Bitcoin itself, by more than a decade.

Lastly, and this is why it helps to clearly define words at the beginning of a book, it is important to note that some blockchains are a type of distributed ledger but not all distributed ledgers are blockchains.

On page 9 they write that:

“In 2014 and 2015 alone more than $1 billion of venture capital flooded into the emerging blockchain ecosystem, and the rate of investment is almost doubling annually.”

This is only true if you conflate cryptocurrency systems with non-cryptocurrency systems.  The two are separate and have completely different business models.  See my December presentation for more details about the divergence.

On p. 9 they write:

“A 2013 study showed that 937 people owned half of all bitcoin, although that is changing today.”

First off, this is a typo because the original article the authors cite, actually says the number is 927 not 937.  And the ‘study’ showed that about half of all bitcoins resided on addresses controlled by 937 on-chain entities.  Addresses does not mean individuals.  It is likely that some of these addresses (or rather, UTXOs) are controlled and operated by early adopters (like Roger Ver) as well as exchanges (like Bitstamp and Coinbase).

Furthermore, it is unclear from the rest of the book how that concentration of wealth is changing — where is that data?

On p. 18 they write about Airbnb, but with a blockchain.  It is unclear from their explanation what the technical advantage is of using a blockchain versus a database or other existing technology.

On p. 20 they write:

“Abra and other companies are building payment networks using the blockchain. Abra’s goal is to turn every one of its users into a teller. The whole process — from the funds leaving one country to their arriving in another — takes an hour rather than a week and costs 2 percent versus 7 percent or higher.  Abra wants its payment network to outnumber all physical ATMs in the world.  It took Western Union 150 years to get to 500,000 agents worldwide.  Abra will have that many tellers in its first years.”

There are at least 3 problems with this statement:

  1.  the authors conflate a blockchain with all blockchains; empirically there is no “the” blockchain
  2.  Abra’s sales pitch relies on the ability to convince regulators that the company itself just make software and doesn’t participate in money transmission or movement of financial products (which it does by hedging)
  3.  Abra was first publicly announced in March 2015 and then formally launched in the Philippines in October 2015.

Fast forward to May 2016 and according to the Google Play Store and Abra has only been downloaded about 5,000 times.

Perhaps it will eventually reach 500,000 and even displace Western Union, but the authors’ predictions that this will occur in one year is probably not going to happen at the current rate.

Furthermore, on p. 186 they write that “Abra takes a 25-basis-point fee on conversion.”

Will this require a payment processing license in each jurisdiction the conversion takes place?

On page 24 they write:

“Other critics point to the massive amount of energy consumed to reach consensus in just the bitcoin network: What happens when thousands or perhaps millions of interconnected blockchains are each processing billions of transactions a day?  Are the incentives great enough for people to participate and behave safely over time, and not try to overpower the network? Is blockchain technology the worst job killer ever?”

There are multiple problems with this statement:

  1.  on a proof-of-work blockchain, the amount of energy consumed is not connected with the amount of transactions being processed.  Miners consume energy to generate proofs-of-work irrespective of the number of transactions waiting in the memory pool.  Transaction processing itself is handled by a different entity entirely called a block maker or mining pool.
  2.  as of May 2016, it is unclear why there would be millions of interconnected proof-of-work blockchains.  There are perhaps a couple hundred altcoins, at least 100 of which are dead, but privately run blockchains do not need to use proof-of-work — thus the question surrounding incentives is a non sequitur.
  3.  while blockchains however defined may displace workers of some kind at some point, the authors never really zero in on what “job killing” blockchains actually do?

On p. 25 they write:

“The blockchain and cryptocurrencies, particularly bitcoin, already have massive momentum, but we’re not predicting whether or not all this will succeed, and if it does, how fast it will occur.”

Nowhere do the authors actually cite empirical data showing traction.  If there was indeed massive momentum, we should be able to see that from data somewhere, but so far that is not happening.  Perhaps that changes in the future.

The closing paragraph of Chapter 1 states that:

“Everyone should stop fighting it and take the right steps to get on board. Let’s harness this force not for the immediate benefit of the few but for the lasting benefit of the many.”

Who is fighting what?  They are presumably talking about a blockchain, but which one?  And why should people stop what they are doing to get on board with something that is ill-defined?

Chapter 2

On p. 30 they write that:

“Satoshi leveraged an existing distributed peer-to-peer network and a bit of clever cryptography to create a consensus mechanism that could solve the double-spend problem as well as, if not better than, a trusted third party.”

The word “trust” or variation thereof appears 11 times in the main body of the original Satoshi whitepaper.  Routing around trusted third parties was the aim of the project as this would then allow for pseudonymous interaction.  That was in October 2008.

What we empirically see in 2016 though is an increasingly doxxed environment in which it could be argued that ‘trusted’ parties could do the same job — movement of payments — in a less expensive manner.  But that is a topic for another article.

On p. 33 they write:

“So important are the processes of mining — assembling a block of transactions, spending some resource, solving the problem, reaching consensus, maintaining a copy of the full ledger — that some have called the bitcoin blockchain a public utility like the Internet, a utility that requires public support. Paul Brody of Ernst & Young thinks that all our appliances should donate their processing power to upkeep of a blockchain: “Your lawnmower or dishwasher is going to come with a CPU that is probably a thousand times more powerful than it actually needs, and so why not have it mine? Not for the purpose of making you money, but to maintain your share of the blockchain,” he said.  Regardless of the consensus mechanism, the blockchain ensures integrity through clever code rather than through human beings who choose to do the right thing.”

Let’s dissect this:

  1.  the process of mining, as we have looked at before, involves a division of labor between the entities that generate proofs-of-work – colloquially referred to as miners, and those that package transactions into blocks, called blockmakers.  Miners themselves do not actually maintain a copy of a blockchain, pools do.
  2.  while public blockchains like Bitcoin are a ‘public good,’ it doesn’t follow how or why anyone should be compelled to subsidize them, at least the reasons why are not revealed to readers.
  3.  the only reason proof-of-work was used for Bitcoin is because it was a way to prevent Sybil attacks on the network because participants were unknown and untrusted.  Why should a washing machine vendor integrate an expensive chip to do calculations that do not help in the washing process?  See Appendix B for why they shouldn’t.
  4.  because proof-of-work is used in a public blockchain and public blockchains are a public good, how does anyone actually have a “share” of a blockchain? What does that legally mean?

On p. 34 they write:

“The blockchain resides everywhere. Volunteers maintain it by keeping their copy of the blockchain up to date and lending their spare computer processing units for mining. No backdoor dealing.”

There are multiple problems with this:

  1.  to some degree entities that run a fully validating node could be seen as volunteering for a charity, but most do not lend spare computer cycles because they do not have the proper equipment to do so (ASIC hardware)
  2.  to my knowledge, none of the professional mining farms that exist have stated they are donating or lending their mining power; instead they calculate the costs to generate proofs-of-work versus what the market value of a bitcoin is worth and entering and exiting the market based on the result.
  3.  this is a contentious issue, but because of the concentration and centralization of both mining and development work, there have been multiple non-public events in which mining pools, mining farms and developers get together to discuss roadmaps and policy. Is that backdoor dealing?

On p. 35 they write:

“Nothing passes through a central third party; nothing is stored on a central server.”

This may have been true a few years ago, but only superficially true today.  Most mining pools connect to the Bitcoin Relay Network, a centralized network that allows miners to propagate blocks faster than they would if they used the decentralized network itself to do so (it lowers the amount of orphan blocks).

On p. 37 they write:

“The paradox of these consensus schemes is that by acting in one’s self-interest, one is serving the peer-to-peer (P2P) network, and that in turn affects one’s reputation as a member of the economic set.”

Regarding cryptocurrencies, there is currently no built-in mechanism for tracking or maintaining reputation on their internal P2P network.  There are projects like OpenBazaar which are trying to do this, but an on-chain Bitcoin user does not have a reputation because there is no linkage real world identity (on purpose).

On p. 38 they write:

“Trolls need not apply”

Counterfactually, there are many trolls in the overall blockchain-related world, especially on social media in part because there is no identity system that links pseudonymous entities to real world, legal identities.

On p. 39 the authors list a number of high profile data breaches and identity thefts that took place over the past year, but do not mention the amount of breaches and thefts that take place in the cryptocurrency world each year.

On p. 41 they write:

“Past schemes failed because they lacked incentive, and people never appreciated privacy as incentive enough to secure those systems,” Andreas Antonopoulos said. The bitcoin blockchain solves nearly all these problem by providing the incentive for wide adoption of PKI for all transaction of value, not only through the use of bitcoin but also in the shared bitcoin protocols.  We needn’t worry about weak firewalls, thieving employees, or insurance hackers. If we’re both using bitcoin, if we can store and exchange bitcoin securely, then we can store and exchange highly confidential information and digital assets securely on the blockchain.”

There are multiple problems with this statement:

  1.  it is overly broad and sweeping to say that every past PKI system has not only failed, but that they all failed because of incentives; neither is empirically true
  2.  Bitcoin does not solve for connecting real world legal identities that still will exist with our without the existence of Bitcoin
  3.  there are many other ways to securely transmit information and digital assets that does not involve the use of Bitcoin; and the Bitcoin ecosystem itself is still plagued by thieving employees and hackers

On p. 41 they write:

“Hill, who works with cryptographer Adam Back at Blockstream, expressed concern over cryptocurrencies that don’t use proof of work. “I don’t think proof of stake ultimately works. To me, it’s a system where the rich get richer, where people who have tokens get to decide what the consensus is, whereas proof of works ultimately is a system rooted in physics. I really like that because it’s very similar to the system for gold.”

There are multiple problems with this as well:

  1.  people that own bitcoins typically try to decide what the social consensus of Bitcoin is — by holding conferences and meetings in order to decide what the roadmap should or should not be and who should and should not be administrators
  2.  the debate over whether or not a gold-based economy is good or not is a topic that is probably settled, but either way, it is probably irrelevant to creating Sybil resistance.

On p. 42 they write:

“Satoshi installed no identity requirement for the network layer itself, meaning that no one had to provide a name, e-mail address, or any other personal data in order to download and use the bitcoin software. The blockchain doesn’t need to know who anybody is.”

The authors again conflate the Bitcoin blockchain with all blockchains in general:

  1.  there are projects underway that integrate a legal identity and KYC-layer into customized distributed ledgers including one literally called KYC-Chain (not an endorsement)
  2.  empirically public blockchains like Bitcoin have trended towards being able to trace and track asset movement back to legal entities; there are a decreasing amount of non-KYC’ed methods to enter and exit the network

On p. 43 they write:

“The blockchain offers a platform for doing some very flexible forms of selective and anonymous attestation. Austin Hill likened it to the Internet. “A TCP/IP address is not identified to a public ID. The network layer itself doesn’t know. Anyone can join the Internet, get an IP address, and start sending and receiving packets freely around the world. As a society, we’ve seen an incredible benefit allowing that level of pseudonymity… Bitcoin operates almost exactly like this. The network itself does not enforce identity. That’s a good thing for society and for proper network design.”

This is problematic in a few areas:

  1.  it is empirically untrue that anyone can just “join the Internet” because the Internet is just an amalgamation of intranets (ISPs) that connect to one another via peering agreements.  These ISPs can and do obtain KYC information and routinely kick people off for violating terms of service.  ISPs also work with law enforcement to link IP addresses with legal identities; in fact on the next page the authors note that as well.
  2.  in order to use the Bitcoin network a user must obtain bitcoins somehow, almost always — as of 2016 — through some KYC’ed manner.  Furthermore, there are multiple projects to integrate identity into distributed ledger networks today.  Perhaps they won’t be adopted, but regulated institutions are looking for ways to streamline the KYC/AML process and baking in identity is something many of them are looking at.

On p. 44 they write:

“So governments can subpoena ISPs and exchanges for this type of user data.  But they can’t subpoena the blockchain.”

That is not quite true.  There are about 10 companies that provide data analytics to law enforcement in order to track down illicit activity involving cryptocurrencies all the way to coin generation itself.

Furthermore, companies like Coinbase and Circle are routinely subpoenaed by law enforcement.  So while the network itself cannot be physically subpoenaed, there are many other entities in the ecosystem that can be.

On p. 46 they write:

“Combined with PKI, the blockchain not only prevents a double spend but also confirms ownership of every coin in circulation, and each transaction is immutable and irrevocable.”

The public-private key technology being used in Bitcoin does not confirm ownership, only control.  Ownership implies property rights and a legal system, neither of which currently exist in the anarchic world of Bitcoin.

Furthermore, while it is not currently possible to reverse the hashes (hence the immutability characteristic), blocks can and have been reorganized which makes the Bitcoin blockchain itself revocable.

On p. 47 they write:

“No central authority or third party can revoke it, no one can override the consensus of the network. That’s a new concept in both law and finance. The bitcoin system provides a very high degree of certainty as to the outcome of a contract.”

This is empirically untrue: CLS and national real-time gross settlement (RTGS) systems are typically non-reversible.  And the usage of the word contract here implies some legal standing, which does not exist in Bitcoin; there is currently no bridge between contracts issued on a public blockchain with that of real world.

On p. 50 they write:

“That was part of Satoshi’s vision. He understood that, for people in developing economies, the situation was worse.  When corrupt or incompetent bureaucrats in failed states need funding to run the government, their central banks and treasuries simply print more currency and then profit from the difference between the cost of manufacturing and the face value of the currency. That’s seigniorage. The increase in the money supply debases the currency.”

First off, they provide no evidence that Satoshi was actually concerned about developing countries and their residents.  In addition, they mix up the difference between seigniorage and inflation – they are not the same thing.

In fact, to illustrate with Bitcoin: seigniorage is the marginal value of a bitcoin versus the marginal cost of creating that bitcoin.  As a consequence, miners effectively bid up such that in the long run the cost equals the value; although some miners have larger margins than others.  In contrast, the increase in the money supply (inflation) for Bitcoin tapers off every four years.  The inflation or deflation rate is fully independent of the seigniorage.

Chapter 3

On p. 56 they quote Erik Vorhees who says:

“It is faster to mail an anvil to China than it is to send money through the banking system to China. That’s crazy!  Money is already digital, it’s not like they’re shipping palletes of cash when you do a wire.”

This is empirically untrue, according to SaveOnSend.com a user could send $1,000 from the US to China in 24 hours using TransFast. In addition:

  1.  today most money in developed countries is electronic, not digital; there is no central bank digital cash yet
  2.  if new distributed ledgers are built connecting financial institutions, not only could cross-border payments be done during the same day, but it could also involve actual digital cash

On p. 59 they write:

“Other blockchain networks are even faster, and new innovations such as the Bitcoin Lightning Network, aim to dramatically scale the capacity of the bitcoin blockchain while dropping settlement and clearing times to a fraction of a second.”

This is problematic in that it is never defined what clearing and settlement means.  And, the Bitcoin network can only — at most — provide some type of probabilistic settlement for bitcoins and no other asset.

On p. 67 they write:

“Private blockchains also prevent the network effects that enable a technology to scale rapidly. Intentionally limiting certain freedoms by creating new rules can inhibit neutrality. Finally, with no open value innovation, the technology is more likely to stagnate and become vulnerable.”

Not all private blockchains or distributed ledgers are the same, nor do they all have the same terms of service. The common theme has to do with knowing all the participants involved in a transaction (KYC/KYCC) and only certain known entities can validate a transaction.

Furthermore, the authors do not provide any supporting evidence for why this technology will stagnate or become vulnerable.

On p. 70 they write:

“The financial utility of the future could be a walled and well-groomed garden, harvested by a cabal of influential stakeholders, or it could be an organic and spacious ecosystem, where people’s economic fortunes grow wherever there is light.  The debate rages on, but if the experience of the first generation of the Internet has taught us anything, it’s that open systems scale more easily than closed ones.”

The authors do not really define what open and closed means here.  Fulfilling KYC requirements through terms of service at ISPs and governance structures like ICANN did not prevent the Internet from coming into existence.  It is possible to have vibrant innovation on top of platforms that require linkage to legal identification.

On p. 72 the authors quote Stephen Pair stating:

“Not only can you issue these assets on the blockchain, but you can create systems where I can have an instantaneous atomic transaction where I might have Apple stock in my wallet and I want to buy something or you.  But you want dollars.  With this platform I can enter a single atomic transaction (i.e., all or none) and use my Apple stock to send you dollars.”

This is currently not possible with Bitcoin without changing the legal system.  Furthermore:

  1.  this is probably not safe to do with Bitcoin due to how colored coin schemes distort the mining incentive scheme
  2.  from a technological point of view, there is nothing inherently unique about Bitcoin that would enable this type of atomic swapping that several other technology platforms could do as well

On p. 73 they write:

“Not so easy.  Banks, despite their enthusiasms for blockchain, have been wary of these companies, arguing blockchain businesses are “high-risk” merchants.”

Once again this shows how the authors conflate “blockchain” with “Bitcoin.”  The passage they spoke about Circle, a custodian of bitcoins that has tried to find banks to partner with for exchanging fiat to bitcoins and vice versa.  This is money transfer.  This type of activity is different than what a “blockchain” company does, most of whom aren’t exchanging cryptocurrencies.

On p. 74 they write:

“Third, new rules such as Sarbanes-Oxley have done little to curb accounting fraud. If anything, the growing complexity of companies, more multifaceted transactions, and the speed of modern commerce create new ways to hide wrongdoing.”

This may be true, but what are the stats or examples of people violating Sarbanes-Oxley, and how do “blockchains” help with this specifically?

On p. 78 they write:

“The blockchain returns power to shareholders. Imagine that a token representing a claim on an asset, a “bitshare,” could come with a vote or many votes, each colored to a particular corporate decision.  People could vote their proxies instantly from anywhere, thereby making the voting process for major corporate actions more response, more inclusive, and less subject to manipulation.”

First off, which blockchain?  And how does a specific blockchain provide that kind of power that couldn’t otherwise be done with existing non-blockchain technology?

On p. 80 they quote Marc Andreessen who says:

“PayPal can do a real-time credit score in milliseconds, based on your eBay purchase history — and it turns out that’s a better source of information than the stuff used to generate your FICO score.”

But what if you do not use eBay?  And why do you need a blockchain to track or generate a credit rating?

On p. 81:

“This model has proven to work.  BTCjam is a peer-to-peer lending platform that uses reputation as the basis for extending credit.”

BTCjam appears to have plateaued. They currently have a low churn rate on the available loans and they exited the US market 2 months ago.

On p. 83 they write:

“The blockchain IPO takes the concept further. Now, companies can raise funds “on the blockchain” by issuing tokens, or cryptosecurities, of some value in the company. They can represent equity, bonds, or, in the case of Augur, market-maker seats on the platform, granting owners the right to decide which prediction markets the company will open.”

From a technical perspective this may be possible, but from a legal and regulatory perspective, it may not be yet. Overstock has been given permission by the SEC to experiment with issuance.

On p. 86 they write:

“Bitcoin cannot have bail-ins, bank holidays, currency controls, balance freezes, withdrawal limits, banking hours,” said Andreas Antonopoulos.

That’s not quite true.  Miners can and will continue to meet at their own goals and they have the power to hard fork to change any of these policies including arbitrarily increasing or decreasing the issuance as well as changing fees for faster inclusion.  They also have the ability to censor transactions altogether and potentially — if the social value on the network increases — “hold up” transactions altogether.

Also, this doesn’t count the subsidies that miners receive from the utilities.

On p. 98 they write:

“To this last characteristic, Antonopoulos notes: “If there is enough financial incentive to preserve this blockchain into the future, the possibility of it existing for tens, hundreds, or even thousands of years cannot be discounted.”

It can arguably be discounted.  What evidence is presented to back up the claim that any infrastructure will last for hundreds of years?

On p. 100 they write:

“And just imagine how the Uniform Commercial Code might look on the blockchain.”

Does this mean actually embedding the code as text onto a blockchain?  Or does this mean modifying the UCC to incorporate the design characteristics of a specific blockchain?

On p. 102 they write:

“What interests Andreas about the blockchain is that we can execute this financial obligation in a decentralized technological environment with a built-in settlement system. “That’s really cool,” he said, “because I could actually pay you for the pen right now, you would see the money instantly, you would put the pen in the mail, and I could get a verification of that. It’s much more likely that we can do business.”

I assume that they are talking about the Bitcoin blockchain:

  1.  there is no on-chain settlement of fiat currencies, which is the actual money people are settling with on the edges of the network
  2.  since it is not fiat currency, it does not settle instantly.  In fact, users still have a counterparty risk involving delivery of the pen versus the payment.
  3.  if a central bank issued a digital currency, then there could be on-chain settlement of cash.

On p. 103 they write:

“If partners spends more time up front determining the terms of an agreement, the monitoring, enforcement, and settlement costs drop significantly, perhaps to zero.  Further, settlement can occur in real time, possibly in microseconds throughout the day depending on that deal.”

The DTCC published a white paper in January that explains they can already do near real-time settlement, but T+3 exists due to laws and other market structures.

On p. 105 they write that:

“Multisig authentication is growing in popularity. A start-up called Hedgy is using multisig technology to create futures contracts: parties agree on a price of bitcoin that will be traded in the future, only ever exchanging the price difference.”

As an aside, Hedgy is now dead.  Also, there are other ways to illustrate multisig utility as a financial control to prevent abuse.

On p. 106 they wrote that:

“The trouble is that, in recent business history, many hierarchies have not been effective, to the point of ridicule. Exhibit A is The Dilbert Principle, most likely one of the best-selling management books of all time, by Scott Adams. Here’s Dilbert on blockchain technology from a recent cartoon…”

The problem is that the cartoon they are citing (above) was actually a parody created by Ken Tindell last year.

The original Scott Adam’s cartoon was poking fun of databases and is from November 17, 1995.

On p. 115 they write:

“But the providers of rooms receive only part of the value they create. International payments go through Western Union, which takes $10 of every transaction and big foreign exchange off the top.”

Western Union does not have a monopoly on international payments, in fact, in many popular corridors they have less than 25% of market share.  In addition, Western Union does not take a flat $10 off every transaction.  You can test this out by going to their price estimator.  For instance, sending $1,000 from the US to a bank account in China will cost $8.

On p. 117 they write about a fictional blockchain-based Airbnb called bAirbnb:

“You and the owner have now saved most of the 15 percent Airbnb fee. Settlements are assured and instant.  There are no foreign exchange fees for international contracts.  You need not worry about stolen identity. Local governments in oppressive regimes cannot subpoena bAirbnb for all its rental history data. This is the real sharing-of-value economy; both customers and service providers are the winner.”

The problem with their statement is that cash settlements, unless it is digital fiat, is not settled instantly.  Identities can still be stolen on the edges (from exchanges).  And, governments can still issue subpoenas and work with data analytics companies to track provenance and history.

On p. 119 they write:

“Along comes blockchain technology.  Anyone can upload a program onto this platform and leave it to self-execute with a strong cryptoeconomical guarantee that the program will continue to perform securely as it was intended.”

While that may have been the case when these cryptocurrency systems first launched, in order to acquire ether (for Ethereum) or bitcoin, users must typically exchange fiat first.  And in doing so, they usually dox themselves through the KYC requirements at exchanges.

On p.123-124 they write about a ‘Weather decentralized application’ but do not discuss how its infrastructure is maintained let alone the Q-o-S.

On p.127 they write:

“Using tokens, companies such as ConsenSys have already issued shares in their firms, staging public offerings without regulatory oversight.”

The legality of this is not mentioned.

On p. 128 they write:

“Could there be a self-propagating criminal or terrorist organizations?  Andreas Antonopolous is not concerned.  He believes that the network will manages such dangers. “Make this technology available to seven and a half billion people, 7.499 billion of those will use it for good and that good can deliver enormous benefit to society.”

How does he know this?  Furthermore, the Bitcoin network itself is already available to hundreds of millions, but many have chosen not to use it.  Why is this not factored into the prediction?

On p.131 they write:

“What if Wikipedia went on the blockchain — call it Blockpedia.”

The total article text of English Wikipedia is currently around 12 gigabytes.  If it is a public blockchain, then how would this fit on the actual blockchain itself?  Why not upload the English version onto the current Bitcoin blockchain as an experiment?  What utility is gained?

From p. 129-144 they imagine seven ideas that are pitched as business ideas, but in most instances it is unclear what the value proposition that a blockchain provides over existing technology.

Chapter 6

On p. 148 they write that:

“The Internet of Things cannot function without blockchain payment networks, where bitcoin is the universal transactional language.”

What does that mean?  Does that mean that there are multiple blockchains and that somehow bitcoin transactions control other blockchains too?

On p. 152 they write:

“Last is the overarching challenge of centralized database technology — it can’t handle trillions of real-time transactions without tremendous costs.”

What are those costs?  And what specifically prevents databases from doing so?

On p. 153 they write:

“Other examples are a music service, or an autonomous vehicle,” noted Dino Mark Angaritis, founder of Smartwallet, “each second that the music is playing or the car is driving it’s taking a fraction of a penny out of my balance. I don’t have a large payment up front and pay only for what I use.  The provider runs no risk of nonpayment. You can’t do these things with a traditional payment networks because the fees are too high for sending fractions of a penny off your credit card.”

Depositing first and having a card-on-file are types of solutions that currently exist.  “Microtipping” doesn’t really work for a number of reasons including the fact that consumers do not like to nickel and dime themselves.  This is one of the reasons that ChangeTip had difficulties growing.

Furthermore, the tangential market of machine-to-machine payments may not need a cryptocurrency for two reasons:

  • M2M payments could utilize existing electronic payment systems via pre-paid and card-on-file solutions
  • The friction of moving into and out of fiat to enter into the cryptocurrency market is an unnecessary leg, especially if and when central bank digital currency is issued.

On pages 156-169 nearly all of the examples could use a database as a solution, it is unclear what value a blockchain could provide in most cases.  Furthermore, on p. 159 they discuss documentation and record keeping but don’t discuss how these records tie into current legal infrastructure.

Chapter 7

On p. 172 they write:

“We’re talking billions of new customers, entrepreneurs, and owners of assets, on the ground and ready to be deployed. Remember, blockchain transactions can be tiny, fractions of pennies, and cost very little complete.”

Maybe some transactions on some blockchains cost fractions of pennies, but currently not Bitcoin transactions.

On p.177 they write that “David Birch, a cryptographer and blockchain theorist, summed it up: “Identity is the new money.”

David Birch is not a cryptographer.

On p. 179 they write:

“Financing a company is easier as you can access equity and debt capital on a global scale, and if you’re using a common denominator — like bitcoin — you need not worry about exchange rates and conversation rates.”

Unless everyone is using one currency, this is untrue.

On p.185 they write:

“Sending one bitcoin takes about 500 bits, or roughly one one-thousandth the data consumption of one second of video Skype!”

But users still need to cash out on the other side which requires different infrastructure than Skype, namely money transmitter licenses and bank accounts.

On p. 192 they write that:

“Second, it can mean better protection of women and children. Through smart contracts, funds can be donated into escrow accounts, accessible only by women, say, for accessing food, feminine products, health care, and other essentials.”

How can a smart contract itself detect what gender the user is?

On p.194 they write:

“In jurisdictions like Honduras where trust is low in public institutions and property rights systems are weak, the bitcoin blockchain could help to restore confidence and rebuild reputation.”

How does Bitcoin do that?  What are the specific ways it can?

Chapter 8

On p. 202 they write:

“People can register their copyrights, organize their meetings, and exchange messages privately and anonymously on the blockchain.”

Which blockchain does this?  There are external services like Ascribe.io that purportedly let creators take a hash of a document (such as a patent) and store it into a blockchain.  But the blockchain itself doesn’t have that feature.

On p.214 they write:

“But surely a more collaborative model of democracy — perhaps one of that rewards participation such as the mining function — could encourage citizens’ engagement and learning about issues, while at the same time invigorating the public sector with the keen reasoning the nation can collectively offer.”

How?

Chapter 10

On p. 255 they mention that Greek citizens during 2015 would’ve bought more bitcoins if they had better access to ATMs and exchanges.  But this is not true, empirically people typically try to acquire USD because it is more universal and liquid.  Perhaps that changes in the future, but not at this time.

On p. 260 they write:

“The cost for having no central authority is the cost of that energy,” said Eric Jennings, CEO of Filament, an industrial wireless sensor network. That’s one side of the argument. The energy is what it is, and it’s comparable to the cost incurred in securing fiat currency.”

Where is the citation?  The reason the costs of securing the Bitcoin network are currently around $400 million a year is because that is roughly the amount of capital and energy expended by miners to secure a network in which validators are unknown and untrusted.  If you know who the participants are, the costs of securing a network drop by several orders of magnitude.

On p. 261 they write about the BitFury Group, a large mining company:

“Its founder and CEO, Valery Vavilov, argued the view that machines and mining operations overall will continue to get more energy efficient and environmentally friendly.”

Actually what happens is that while the ASIC chips themselves become more energy efficient, miners in practice will simply add more equipment and maintain roughly the same energy costs as a whole.  That is to say, if a new chip is 2x as efficient as before, miners typically just double the acquisition of equipment — maintaining the same amount of energy consumption, while doubling the hashrate.  There is no “environmental friendliness” in proof-of-work blockchains due to the Red Queen Effect.

On p. 274 they write:

“There will be many attempts to control the network,” said Keonne Rodriguez of Blockchain. “Big companies and governments will be devoted to breaking down privacy. The National Security Agency must be actively analyzing data coming through the blockchain even now.”

With thousands of copies being replicated around the world, it’s unclear who actually is storing it, perhaps intelligence agencies are.  We do know that at least 10 companies are assisting compliance teams and law enforcement in tracking the provenance of cryptocurrency movements.

On p. 282 they write:

“Indeed, Mike Hearn, a prominent bitcoin core developer, caused a quite a stir in January 2015 when he wrote a farewell letter to the industry foretelling bitcoin’s imminent demise.”

Wrong year, it was in January 2016.

On p. 291 they write that:

“Licensed exchanges, such as Gemini, have gained ground perhaps because their institutional clientele know they’re now as regulated as banks.”

Actually, Gemini hasn’t gained ground and remains relatively flat over the past ~5 months.  Even adding ether to their list of assets didn’t move the dial.

Conclusion

Overall the book was published a little too early as there hasn’t been much real traction in the entire ecosystem.

The content and perspective is currently skewed towards telling the cryptocurrency narrative and seemingly downplays the important role that institutions and enterprises have played over the past year in the wider distributed ledger ecosystem.

If you are looking for just one book to read on the topic, I would pass on this and wait for a future edition to rectify the issues detailed above.  See my other book reviews.

Send to Kindle

Book review: Digital Gold

Two days ago I had a chance to read through a new book called Digital Gold written by Nathaniel Popper, a journalist at The New York Times.

Popper’s approach to the topic matter is different than other books which cover cryptocurrencies (such as The Age of Cryptocurrency).

This is a character driven story, guided by about a dozen unintentional thespians — key individuals who helped develop and shape the Bitcoin world from its genesis up through at least last summer (when the book effectively tapers off).  Or in other words, it flowed more like a novel than an academic textbook exegesis on the tech.

Below are some of the highlights and comments that came to mind while reading it.

Note: all transcription errors are my own. See my other book reviews.

digital goldTerminology

I mentioned that in The Age of Cryptocurrency the authors preferred to use the term “digital currency” over “virtual currency.”  I lost count of the dozens of times they used the former, but the latter was only used ~12 times (plus or minus one or two).  I think from a legalese perspective it is more accurate to use the phrase “virtual currency” (see my review as to why).

While I tried to keep track of things more closely in Popper’s book, I may have missed one or two.  Interestingly the index in the back uses the term “virtual money” (not currency) and the “digital currency” section is related to specific types.  Below is my manual tabulation:

  • digital cash, p. 110
  • digital commodity (as categorized by the Chinese government), p. 274
  • digital code, p. 158
  • digital wallet, p. 159, 160, 179, 262 (likely many more during discussions of Lemon)
  • digital currency, p.67, 146 (Facebook credits), 260 (Q coin), 261 (Q coin),
  • digital money, p. 139, 339
  • blockchain, p. 164, 181, 186, 193, 194 (2x), 203, 235, 238 (2x), 250, 289, 295, 326 (2x), 327 (2x), 328 (14x), 336, 345
  • virtual currency (sometimes with a hyphen), p. 126, 139, 142, 144, 145, 146, 156, 174, 179, 180, 181, 186 (2x), 187 (2x), 196 (4x), 197, 198, 204 (2x), 209, 210, 216, 217, 219 (3x), 225, 234, 236,  250, 252 (2x), 256, 257, 259, 267, 268 (2x), 269 (2x), 273, 274, 280 (2x), 289, 295 (2x), 300 (3x), 302 (2x), 303 (2x). 325 (2x), 343, 349
  • tokens, p. 139
  • digital money p. 4, p. 252, 257
  • cryptocurrency, p. 36 (2x), 186, 251, 261, 286 (2x), 325, 334, 341

In the beginning

[Note: I manually typed the quotes from the book, all transcription errors are my own and should not reflect on the book itself.]

On page 38 he writes about pricing a bitcoin, “Given that no one had ever bought or sold one, NewLibertyStandard came up with his own method for determining its value — the rough cost of electricity needed to generate a coin, calculated using NewLibertyStandard’s own electricity bill.”

I have heard this story several times, NLS’s way of pricing a good/service is the 21st century continuation of the Labor Theory of Value.  And this is not a particularly effective pricing mechanism: art is not worth the sum of its inputs (oils, canvas, frame, brushes).  Rather the value of art, like bitcoins, is based on consumer (and speculative) demand.1

Thus when people at conferences or on reddit say that “bitcoin is valuable because the network is valuable” — this is backwards.  The Bitcoin network (and bitcoins) is not valuable because the energy used to create proofs, rather it is the aggregate demand from buyers that increases (or decreases) relative to the supply of bitcoin, which is reflected in prices and therefore miners adjust consumption of energy to chase the corresponding rents (seigniorage).

On page 42 he writes, “Laszlo’s CPU had been winning, at most, one block of 50 bitcoins each day, of the approximately 140 blocks that were released daily. Once Laszlo got his GPU card hooked in he began winning one or two blocks an hour, and occasionally more. On May 17 he won twenty-eight blocks; these wins gave him fourteen hundred new coins that day.”

That translates to roughly 20% of the network hashrate.

Having noted this, the author writes:

I don’t mean to sound like a socialist,” Satoshi wrote back. “I don’t care if wealth is concentrated, but for now, we get more growth by giving that money to 100% of the people than giving it to 20%.

As a result, Satoshi asked Laszlo to go easy with the “high-powered hashing,” the term coined to refer to the process of plugging an input into a hash function and seeing what it spit out.

It’s unclear how many bitcoins Laszlo generated altogether (he was also mentioned in The Age of Cryptocurrency), but he apparently did “stock pile” at least 70,000 bitcoins whereupon he offered 10,000 bitcoins at a time buy pizzas. (Update: this address allegedly belongs to Laszlo and received 81,432 bitcoins; see Popper’s new letter on reddit)

Thus, there was at least one GPU on the network in May 2010 (though it appears he turned it off at some point).  For comparison, on page 189, Popper states that “By the end of 2012 there was the equivalent of about 11,000 GPUs working away on the network.”

Later in the book, on page 191, Popper described the growth in hashrate in early 2013:

Over the next month and a half, as the rest of Avalon’s first batch of three hundred mining computers reached customers, the effect was evident on the charts that tracked the power of the entire Bitcoin network. It had taken all of 2012 for the power on the network to double, but that power doubled again in just one month after Yifu’s machines were shipped.

It’s worth re-reading the Motherboard feature on Yifu Guo, the young Chinese man who led the Avalon team’s effort on building the first commercially available ASIC.

What does this increase look like?

hash-predict

Source: Dave Hudson

Above is a chart published just over a year ago (April 28, 2014) from Dave Hudson.  It’s the only bonafide S-curve in all of Bitcoinland (so far).

In Hudson’s words, “The vertical axis is logarithmic and clearly shows how the hashing rate will slow down over the next two years. What’s somewhat interesting is that whether the BTC price remains the same, doubles or quadruples over that time the effect is still pronounced. The hashing rate continues to grow, but slows dramatically. What’s also important to reiterate is that these represent the highest hashing rates that can be achieved; when other overheads and profits are taken then the growth rate will be lower and flatter.”

Popper noted that this type of scaling also resulted in centralization:

Most of the new coins being released each day were collected by a few large mining syndicates. If this was the new world, it didn’t seem all that different from the old one — at least not yet. (page 336)

Moving on, on page 192, Popper writes:

The pools, though, generated concern about the creeping centralization of control in the network. It took the agreement of 5 percent of the computer power on the network to make changes to the blockchain and the Bitcoin protocol, making it hard for the one person to dictate what happened. But with the mining pools, the person running the pool generally had voting power for the entire pool — all the other computers were just worker bees. (page 192)

I think there is a typo here.  He probably meant 51% of the hashrate, not 5%.  Also, it may be more precise to say “actor” because in practice it is individuals at organizations that operate the farms and pools, not usually just one person.

On page 52 the author discussed the earliest days of Mt. Gox in 2010:

Mt. Gox was a significant departure from the exchange that already existed, primarily because Jed offered to take money from customers into his PayPal account and thereby risk violating the PayPal prohibition on buying and selling currencies.  This meant that Jed could receive funds from almost anywhere in the world.  What’s more, customers didn’t have to send Jed money each time they wanted to do a trade. Instead, they could hold money — both dollars and Bitcoin — in Jed’s account and then trade in either direction at any time as long as they had sufficient funds, much as in a traditional brokerage account.

Needless to say, Jed’s PayPal account eventually got shut down.

On page 65 the author briefly discusses the life of Mark Karpeles (the 2nd owner of Mt. Gox):

Since then, he’d had a peripatetic lifestyle, looking for a place where he could feel at home. He first tried Israel, thinking it might help him get closer to his Catholicism, but he soon felt as lonely as ever, and the servers he was running kept getting disrupted by rocket fire from Gaza.

Initially I thought Popper meant to write Judaism instead of Catholicism (Karpeles is a Jewish surname), but a DailyTech article states he is Catholic based on one of his blog posts.

On page 67 he writes:

But as the headaches continued to pile up, Jed got more antsy. In January, a Mt. Gox user named Baron managed to hack into Mt. Gox accounts and steal around $45,000 worth of Bitcoins and another type of digital currency that Jed had been using to transfer money around.

It’s not clear what the the other digital currency actually was — based on the timeline (January 2011) this is before Jed created XRP for OpenCoin (which later became Ripple Labs).

Also, I believe this is the first time in the book where the term “digital currency” is used.

On page 77 he writes about Roger Ver:

In the midst of his campaign for the assembly, federal agents arrested Roger for peddling Pest Control Report 2000 — a mix between a firecracker and a pest repellent — on eBay.  Roger had bought the product himself through the mail and he and his lawyer became convinced that the government was targeting Roger because of remarks he had made at a political rally, where had had called federal agents murderers.

This version of the story may or may not be true.

Either way, part of Ver’s 2002 case was unsealed last fall and someone sent me a copy of it (you can find the full version at PACER).  Below are a few quotes from the document (pdf) hosted at Lesperance & Associates between the prosecution (Mr. Frewing) and the judge presiding over the case.

“Mr. Ver’s conduct was serious.  I think one factor that the Court can take into consideration or at least should consider is there were some pipe bombs involved in this case as well that were not charged and are not incorporated in the conduct that’s before the Court except arguably as relevant conduct. The split sentence is — would result only in five months incarceration for what I think is a fairly serious offense.  It’s my recommendation to do the ten-month sentence in prison in total.”

[…]

Judge: “Well, I’ve given this case a lot of thought. I’m very troubled by it.  And when I say that I’m troubled by it I’m troubled by it in several ways.  Not only am I troubled by the underlying conduct, which is quite serious, but I don’t want to overreact either and I think that’s what makes it hard.I think if you have a case which strikes you as being particularly severe, in a way that’s kind of an easy thing to just say all right, we’ll throw the book at the defendant and that will satisfy that impulse.”

“But I don’t think judges ought to sentence anybody impulsively.  You have to look at the offense and you have to look at the person who committed it. There are elements in the probation report and in Dr. Missett’s report which concern me a great deal.  One has to be very careful.  Mr. Ver, you’re a young man and you’ve led a law-abiding life for the last two years and you’ve by all accounts performed well on pretrial release.  I did note in your letter that you accepted that your conduct was illegal, and I appreciate that. I also don’t in any way want to confuse your political beliefs, which you are absolutely entitled to have, with your criminal conduct.  There’s a long and honorable tradition of libertarian politics in our country and I don’t mean to in any way hold that against you.  It’s something that you’re entitled to have. The problem, though, is that the law is a representation of authority in a certain way.  People can disagree and they can disagree very vigorously and very reasonably about what ought to be legal and what ought not to be legal and how much the Government ought  to do or ought not to do.   But there is a point at which we start talking about public safety and I think even the most die hard libertarian would agree that one function of government, if there is to be a government, is to protect public safety.  So then it’s just a question of how you do it, how you do it in a way that’s least invasive of individual liberties.   Selling explosives over the Internet doesn’t cut it in any society that I can imagine and I think it’s — the conduct here is simply not tolerable conduct and it’s not — I don’t think one has to be a big government person or believe in government regulation of every aspect of human life to suggest that people should not be selling explosives over the Internet. The other thing that concerns me is that in looking at your social history it seems to me you’ve got some reasons for not trusting authority, and that’s.  I mean, those are feelings that are a product of your life experience.  Nonetheless, those feelings don’t give you the right to be above the same social constraints that bind all of us.”

“And I’m not saying this as well as I’d like to, but I think there’s a difference between saying I believe that the government which governs best governs least and saying that I’m above the law totally, that I’m so smart, I’m so able, I’m so perceptive that I don’t have to follow the rules that apply to other human beings.  There’s a difference between those two positions.  And while one of them is a very respectable position that I think any judge ought to uphold and support rather than punish, the other I think is why we have courts.  It’s when a person believes that he or she is so important and so intelligent and so much better than everybody else that they don’t have to follow even the most basic rules that keep us together in this society.”

“I think that these offenses are very serious.  They could have been a lot more serious.  The bombs could have gone off or people could have used them in destructive ways.  Selling bombs to juveniles is never okay.  I’d like to say that the five and five sentence that your attorney proposed is something that I’m comfortable with, but I just can’t.  And it’s not a desire to be overly punitive or to send you a message.  It’s simply saying that this conduct — when the law punishes behavior, criminal law is directed at conduct.  This conduct to me would have warranted a much stiffer sentence than ten months.  There’s a plea  agreement.  I’m bound by it.  I’m not going to upset it.  It was arrived at in good faith by the Government and by the defense and I will respect it, but I’m not going to dilute it.”

This will probably not be the last time the background and origin story of the characters in this journey are looked at.

Whales

bearwhale

Source: Billy Mabrey

On social media there is frequent talk of large “whales” and “bear whales” that are blamed for large up and down swings in prices.

Popper identified a few of them in the book.

For instance, on page 79 he writes about Roger Ver’s initial purchases:

In April 2011, after hearing about Bitcoin on Free Talk Live, he used his fortune to dive into Bitcoin with a savage ferocity. He sent a $25,000 wire to the Mt. Gox bank account in New York — one Jed had set up — to begin buying Bitcoins. Over the next three days, Roger’s purchases dominated the markets and helped push the price of a single coin up nearly 75 percent, from $1.89 to $3.30.

Another instance, on page 113:

But the people ignoring Jed’s advice ended up giving Bitcoin momentum at a time when it was otherwise lacking. Roger alone bought tens of thousands of coins in 2011, when the price was falling, single-handedly helping to keep the price above zero (and establishing the foundation for a future fortune).

Over the past year I have frequently been asked: why did the price begin increasing after the block reward halving at the end of November 2012?  Where did the price increase come from?

A number of people, particularly on reddit, conflate causation with correlation: that somehow the block halving caused a price increase.   As previously explored, this is incorrect.

So if it wasn’t the halvening, what then led to the price increase?

In January 2013, Popper looked at the Winklevoss twins:

The twins considered selling to Roger. But they also believed BitInstant was a good idea that could work under the right management. In January BitInstant had its best month ever, processing almost $5million in transactions. The price of a Bitcoin, meanwhile, had risen from $13 at the beginning of the month to around $18 at its end. Some of this was due to the twins themselves. They had asked Charlie to continue buying them coins with the goal of owning 1 percent of all Bitcoins in the world, or some $2 million worth at the time. This ambition underscored their commitment to sticking it out with Bitcoin. (page 175)

Simultaneously, another group of wealthy individuals, from Fortress Investment Group were purchasing bitcoins:

Pete assigned Tanona to the almost full-time job of exploring potential Bitcoin investments, and also drew in another top Fortress official, Mike Novogratz. All of them began buying coins in quantities that were small for them, but that represented significant upward pressure within the still immature Bitcoin ecosystem.

The purchases being made by Fortress — and by Mickey’s team at Ribbit — were supplemented by those being made by the Winklevoss twins, who were still trying to buy up 1 percent of all the outstanding Bitcoins. Together, these purchases helped maintain the sharp upward trajectory of Bitcoin’s price, which rose 70 percent in February after the 50 percent jump in January. On the evening of February 27 the price finally edged above the long-standing record of $32 that had been set in the hysterical days before the June 2011 crash at Mt. Gox. (p. 180)

Initially discussed introduction, Popper explains when Wences first met Pete Briger (p. 163, from Fortress Investment Group) during a January 2013 lodge in the Canadian Rockies.

A few pages later, in early March 2013, Wences is invited to a private retreat held at the Ritz Carlton in Tucson, Arizona hosted by Allen & Co.  There he met with and explained Bitcoin to: Dick Costolo, Reid Hoffman, James Murdoch, Marc Andreessen, Chris Dixon, David Marcus, John Donahoe, Henry Blodget, Michael Ovitz and Charlie Songhurst.

During this conference it appears several of these affluent individuals began buying bitcoins:

On Monday, the first full day of the conference, the price of Bitcoin jumped by more than two dollars, to $36, and on Tuesday it rose by more than four dollars — its sharpest rise in months — to over $40. On Wednesday, when everyone flew home, Blodget put up a glowing item on his heavily read website, Business Insider, mentioning what he’d witnessed (though not specifying where exactly he’d been, or whom he’d talked to)” (page 184)

The Henry Blodget article in question appeared on March 6: Suddenly, Everyone’s Talking About Bitcoin…

Why were they talking about it?

To prove how easy this all was, Wences asked Blodget to take out his phone and helped him create an empty Bitcoin wallet. Once it was up, and Wences had Blodget’s new Bitcoin address, Wences used the wallet on his own phone to send Blodget $250,000, or some 6,400 Bitcoins. The money was then passed to the phones of other people around the table once they had set up wallets. Anyone could have run off with Wence’s $250,000, but that wasn’t a risk with this particular crowd. Instead, as the money went around, Wences saw the guests’ laughter and wide-eyed amazement at what they were watching. (page 183)

It would be interesting to do some blockchain forensics (such as Total Output Volume and Bitcoin Days Destroyed) to see if we can identify a blob of 6,400 bitcoins moving around on March 3-5 maybe five to ten different times (it is unclear from the story how many people it was sent to).

And finally a little more whale action to round out the month:

The prices certainly suggested certainly suggested that someone with lots of money was buying. In California, Wences Casares knew that no small part of the new demand was coming from the millionaires whom he had gotten excited about Bitcoin earlier in the month and who were now getting their accounts opened and buying significant quantities of the virtual currency. They helped push the price to over $90 in the last week of March. At that price, the value of all existing coins, what was referred to as the market capitalization, was nearing $1 billion. (page 198)

The following month, in April,  during the run-up on Mt. Gox which later stalled and crashed under the strain of traffic:

The day after the crash, the Winklevoss twins finally went public in the New York Times with their now significant stake in Bitcoin — worth some $10 million. (page 211)

[…]

The twins didn’t want to buy coins while the price was still dropping, but when they saw it begin to stabilize, Cameron, who had done most fo the trading, began placing $100,000 orders on Bitstamp, the Slovenian Bitcoin exchange. Cameron compared the moment to a brief time warp that allowed them to go back and buy at a a lower price. They had almost $1 million in cash sitting with Bitstamp for exactly this sort of situation, and Cameron now intended to use it all.” (page 251)

Prices were around $110 – $130 each so they may have picked up an additional ~9,000 bitcoins or so.

Interestingly enough, Popper wrote the same New York Times article (cited above) that discussed the Winklevoss holdings.  In the same article he also noted another active large buyer during the same month:

A Maltese company, Exante, started a hedge fund that the company says has bought up about 82,000 bitcoins — or about $10 million as of Thursday — with money from wealthy investors. A founder of the fund, Anatoli Knyazev, said his main concern was hackers and government regulators, who have so far mostly left the currency alone.

The tl;dr of this information is that between January through March 2013, at least a dozen or so high-net-worth individuals collectively bought tens of millions of dollars worth of bitcoin.  The demand of which resulted in a rapid increase in market prices.  This had nothing to do with the block reward halving, just a coincidence.

Bigwigs

Interwoven amount the story line are examples illustrating the trials and tribulations of securing bearer assets with new financial institutions that lack clear (if any) financial controls including Bitomat (which lost 17,000 bitcoins) and MyBitcoin (at least 25,000 bitcoins were stolen from).

It also discussed some internal dialogue at both Google and Microsoft.

According to Popper, Google, WellsFargo, PayPal, Microsoft all had high level individuals and teams looking at Bitcoin in early 2013.  On page 101, Osama Abedier from Google, spoke with Mike Hearn and said, “I would never admit it outside this room, but this is how payments probably should work.”

Popper cites a paper that Charlie Songhurst, head of corporate strategy at Microsoft, wrote after the Ritz Carlton event, channeling Casares’s arguments:

“We foresee a real possibility that all currencies go digital, and competition eliminates all currencies from noneffective governments. The power of friction-free transactions over the Internet will unleash the typical forces of consolidation and globalization, and we will end up with six digital currencies: US Dollar, euro, Yen, Pound, Renminbi and Bitcoin.”

Some politics:

I didn’t keep track of the phrase “digital gold” but I believe it only appeared twice.  Unsurprisingly, this phrase came about via some of the ideological characters he looked at.

In Wences’ view:

 “Unlike gold, it could be easily and quickly transferred anywhere in the world, while still having the qualities of divisibility and verifiability that had made gold a successful currency for so many years.” (Page 109)

[…]

Unlike gold, which was universal but difficult to acquire and hold, Bitcoins could be bought, held, and transferred by anyone with an internet connection, with the click of a mouse.

“Bitcoin is the first time in five thousands years that we have something better than gold, ” he said. “And its not a little bit better, it’s significantly better. It’s much more scarce. More divisible, more durable. It’s much more transportable. It’s just simply better.”  (p. 165)

The specific trade-offs between precious metals and cryptocurrencies is not fully fleshed out, but that probably would have detracted from the overall narrative.  Of maybe not.

Meet and greet:

“The Bitcoin forum was full of people talking about their experiences visiting Zuccotti Park and other Occupy encampments around the country to advertise the role that a decentralized currency could play in bringing down the banks.” (p. 111)

Who isn’t meddling?

“Few things occupied the common ground of this new political territory better than Bitcoin, which put power in the hands of the people using the technology, potentially obviating overpaid executives and meddling bureaucrats.” (p. 112)

I thought that was a tad distracting, it’s never really discussed what “overpaid” or “meddling” are.  Perhaps if there is a second edition, in addition to clarifying those we can have a chance to look at some of the sock puppets that a variety of these characters may have been operating too.

Public goods problem:

Many libertarians and anarchists argued that the good in humans, or in the market, could do the job of regulators, ensuring that bad companies did not survive. But the Bitcoin experience suggested that the penalties meted out by the market are often imposed only after the bad deeds were done and do not serve as a deterrent. (p. 114)

That last quote reminded me of an interview with Bitcoin Magazine last year with Vinay Gupta: ‘Bitcoin is Teaching Realism to Libertarians’

About Argentina:

“You don’t have to battling all of the government’s problems, you aren’t going to buy bread with it, but it’ll save you if you have a stash of stable currency that tends to appreciate in value,” twenty-two-year-old Emmanuel Ortiz told the newspaper (page 241)

There is no real discussion between the trade-offs of rebasing a currency to maintain purchasing power and its unclear why Ortiz thinks that an asset that fluctuates 10% or more each month is considered stable.

Practicality

It’s unclear how many of the salacious stories were left on the cutting board, but there is always Brian Eha’s upcoming book.

In the meantime, avoiding the Product Trap:

It turned out that Charlie’s willingness to throw things at the wall, to see if they would stick, was not a bad thing at this point. The idealists who had been driving the Bitcoin world often got caught up in what they wanted the world to look like, rather than figuring out how to provide the world with something it would want. (page 129)

Hacking for fun and profit.  How secure is the code?  On page 154:

After quietly watching and playing with it for some time, Wences gave $100,000 of his own money to two high-level hackers he knew in eastern Europe and asked them to do their best to hack the Bitcoin protocol.  He was especially curious about whether they could counterfeit Bitcoins or spend the coins held in other people’s wallets — the most damaging possible flaw. At the end of the summer, the hackers asked Wences for more time and money. Wences ended up giving them $150,000 more, sent in Bitcoins. In October they concluded that the basic Bitcoin protocol was unbreakable, even if some of the big companies holding Bitcoins were not.

I’m sure we would all like to see more of the study, especially Tony Arcieri who wrote a lengthy essay a couple days ago on some potential issues with cryptographic curves/methods used in Bitcoin.

A little irony on page 162:

For Wences, Bitcoin seemed to address many of the problems that he’d long wanted to solve, providing a financial account that could be opened anywhere, by anyone, without requiring permission from any authority. He also saw an infant technology that he believed he could help grow to dimensions greater than anything he had previously achieved.

Permissionless systems seems to be everyone’s goal, yet everyone keeps making trusted third parties which inevitably need to VC funding to scale and with it, regulatory compliance which then creates a gated, permission-based process.

Altruism on the part of BTC Guild during the fork/non-fork issue in March 2013:

The developers on the chat channel thanks him, recognizing that he was sacrificing for the greater good. When he finally had everything moved about an hour later, Eleuthria took stock on his own costs  (page 195)

Trusted trustlessness?

 “The network had not had to rely on some central authority to wake up to the problem and come up with a solution. Everyone online had been able to respond in real time, as was supposed to happen with open source software, and the user had settled on a response after a debate that tapped the knowledge of all of them — even when it meant going against the recommendation of the lead developer, Gavin.” (page 195)

Origins of Xapo:

They started by putting all their private keys on a laptop, with no connection to the Internet, thus cutting off access for potential hackers. After David Marcus, Pete Briger, and Micky Malka put their private keys on the same offline laptop, the men paid for a safe-deposit box in a bank to store the computer more securely. In case the computer gave out, they also put a USB drive with all the private keys in the safe-deposit box. (page 201)

[…]

First, they encrypted all the information on the laptop so that if someone got hold of the laptop that person still wouldn’t be able to get the secret keys. They put the keys for decrypting the laptop in a bank near Feede in Buenos Aires. Then they moved the laptop from a safe-deposit box to a secure data center in Kansas City. By this time, the laptop was holding the coins of Wences, Fede, David Marcus, Pete Briger, and several other friends. The private keys on the laptop were worth tens of millions of dollars. (page 281)

I heard a similar story regarding the origins of BitGo, that Mike Belshe used to walk around with a USB drive on his key chain that had privkey’s to certain individual accounts.  This is before the large upsurge in market value.  When the prices began to rise he realized he needed a better solution.  Perhaps this story is more apocryphal than real, but I suspect there have been others whose operational security was not the equivalent of Fort Knox prior to 2013.

Alex Waters

An unnamed Alex Waters appears twice:

“The new lead developer called for the entire site to be taken down and rebuilt. But there wasn’t time as a new customers were pouring money into the site. The new staff members were jammed into every corner of the small offices Charlie and Erik had moved into the previous summer.” (page 202)

And again:

“But as problems became more evident, they talked with Charlie’s chief programmer about replacing Charlie as CEO. When Charlie learned about the potential palace coup he was furious and began showing up for work less and less.” (page 221)

For those unfamiliar with Alex, he was the CTO of BitInstant who went on to co-found CoinValidation and then currently, Coin.co & Coinapex.

Last week I had a chance to meet with him in NYC.

alex waters

Alex Waters (CEO Coin.co), Sarah Tyre (COO Coin.co), Isaac Bergman, myself

Yesterday I reached out to Alex about the two quotes above related to BitInstant and this is what he sent (quoted with permission):

“It was sad to see Bitinstant take such a drastic turn after the San Jose conference. It was as if we built a gold mine and couldn’t stop someone from taking dynamite into it. A lot of good people worked at Bitinstant (like 25 people) and the 2.0 product we wanted to launch was outstanding. It’s frustrating that some poor decisions early in the company’s history put pressure on such an important moment. A lot of us who worked there worked really hard with sleepless nights for months on a relaunch that never made it to the public. Those people didn’t list Bitinstant on their resume after the collapse as it was so clearly tainted. The quality of those people’s work was outstanding, and they had no part or knowledge of anything illegal. Our compliance standards were beyond reproach for the industry.”

Coinbase compliance

Just two months ago Coinbase was in the news due to some issues with their pitch deck (pdf) as it related to marketing Bitcoin as a method for bypassing country specific sanctions.

However two years ago they ran into a slightly different issue:

In order to stay on top of anti-money laundering laws, the bank had to review every single transaction, and these reviews cost the bank more money than Coinbase was brining in. The bank imposed more restrictions on Coinbase than on other customers because Bitcoin inherently made it easier to launder money. (page 203)

[…]

Coinbase had to repeatedly convince Silicon Valley Bank that it knew where the Bitcoins leaving Coinbase were going.  Even with all these steps, on several days in March Coinbase hit up against transaction limits set by Silicon Valley Bank and had to shut down until the next day. (page 204)

Not quite accurate

In looking at my notes in the margin I didn’t find many inaccuracies.  Two small ones that stood out:

In early December Roger used some of his Bitcoin holdings, which had gone up in value thousands of times, to make a $1 million donation to the Electronic Frontier Foundation, an organization that had been started by a former Cypherpunk to defend online privacy, among other things. (page 270)

Actually, Ver donated $1 million worth of bitcoins to FEE, the Foundation for Economic Education not EFF.

But over time the two Vals kept more and more of the computers for themselves and put them in data centers spread around the world, in places that offered cheap energy, including the Republic of Georgia and Iceland. These operations were literally minting money. Val Nebesny was so valuable that Bitfury did not disclose where he lived, though he was rumored to have moved from Ukraine to Spain. And Bitfury was so good that it soon threatened to represent more than 50 percent of the total mining power in the world; this would give it commanding power over the functioning of the network. The company managed to assuage concerns, somewhat, only when it promised never to go above 40 percent of the mining power online at any time. Bitfury, of course, had an interest in doing this because if people lost faith in the network, the Bitcoins being mind by the company would become worthless. (page 330)

While the two Val’s did create Bitfury, I am fairly certain the scenario that is described above is that of the GHash.io mining pool (managed by CEX.io) during the early summer of 2014.  At one point in mid-June 2014, the GHash pool was regularly winning 40% or more of the blocks on several days.  Subsequently the CIO attempted to assuage concerns by stating they will make sure their own pool doesn’t go above a self-imposed threshold of 40%.

Probably overhyped:

I spent some time discussing this use-case in the previous review:

On Patrcik Murck: “But he was able to cogently explain his vision of how the blockchain technology could make it easier for poor immigrants to transfer money back home and allow people with no access to a bank account or credit card to take part in the Internet economy.” (page 235)

I think Yakov Kofner’s piece last month outlines the difficult challenges facing “rebittance” companies many of whom are ignoring the long term customer acquisition and compliance costs (not to mention the cash-in/cash-out hurdles).2 That’s not to say they will not be overcome, but it is probably not the slam dunk that Bitprophets claim it is.

The notion that Bitcoin could provide a new payment network was not terribly new. This is what Charlie Shrem had been talking about back in 2012, and BitPay was already using the network to charge lower transaction fees than the credit card networks.” (page 272)

Temporarily.  The problem is, after all the glitzy free PR splash in 2014, there was almost no real uptake.  So the sales and business development teams at payment processors now have a difficult time showing actual traction to future clients so that they too will begin using the payment processors.  See for instance, BitPay’s numbers.

For example, on page 352 the author notes that:

It might have just been the exhaustion, but Wences was sourly dismissive of all the talk about Bitcoin’s potential as a new payment system. He was an investor in Bitpay but he said that fewer than one hundred thousand individuals had actually purchased anything using Bitpay.

“There is no payment volume, ” he scoffed. “It’s a sideshow.”

Payments again:

“But in interviews he emphasized the more practical reasons for any company to make the move: no more paying the credit card companies 2.5 percent for each transaction (the company helping Overstock take Bitcoin, Coinbase, charged Overstock 1 percent)…”

“This was attractive to merchants because BitPay charged around 1 percent for its service while credit card networks generally charged between 2 and 3 percent per transaction.” p. 134

While I have no inside knowledge of their specific arrangement, I believe the promotional pitch is 0% for the first $1 million processed and 1% thereafter.  Overstock processed about $3 million last year.  And the BitPay fee appears to be unsustainable (see my previous book review on The Age of Cryptocurrency as well as the BitPay number’s breakdown).

Probably not true:

The potential advantages of Bitcoin over the existing system were underscored in late December, when it was revealed that hackers had breached the payment systems of the retail giant Target and made off with the credit card information of some 70 million Americans, from every bank and credit card issuer in the country. This brought attention to an issue that Bitcoiners had long been talking about: the relative lack of privacy afforded by traditional payment systems. When Target customers swiped their credit cards at a register, they handed over their account number and expiration date. For online purchases Target also had to gather the addresses and ZIP codes of customers, to verify transactions. If the customers had been using Bitcoin, they could have sent along their payments without giving Target any personal information at all. (page 289)

In theory, yes, if users control their own privkey on their own devices.  In practice, since most users use trusted third parties like Coinbase, Xapo and Circe, a hacker could potentially retrieve the same personal information from them; furthermore, because some merchants collect and require KYC then they are also vulnerable to identity theft.

For instance,

What’s more, Coinbase customers didn’t have to download the somewhat complicated Bitcoin software and thew hole blockchain, with its history of all bitcoin transactions. This helped turn Coinbase into the go-to-company for Americans looking to acquire Bitcoins and helped expand the audience for the technology. (page 237)

That’s a silo-coin.  Useful and helpful to on-ramping people.  But effectively a bank in practice.  Why not just use a real bank instead?

The more you know:

  • I thought the short explanation of hashcash on page 18 was good.
  • Was a little surprised that Eric Hughes was mentioned, but not Tim May.
  • On page 296, Xapo raised $40 million at a $100 million valuation in less than a couple months and on page 306, was banked by Silicon Valley Bank (which Coinbase also uses).
  • The Dread Pirate Roberts / Silk Road storyline that Popper discusses is upstaged by recent events that did not have a chance to make it into the book.  This includes the arrest of a DEA agent and Secret Service agent who previously worked on the Silk Road case for their respective agencies.
  • In addition, ArsTechnica recently published an interesting op-ed on the whole trial: Silk Road film unintentionally shows what’s wrong with the “Free Ross” crowd.

On Roger Ver potentially selling his stake in Blockchain.info:

“Roger was constantly getting entreaties from venture capitalists who wanted to pay millions for some of his 80 percent stake in the company. “(p. 330)

In October 2014, after the book was completed, Blockchain.info announced that it had closed a $30.5 million round, half of which was raised in bitcoins.

Germane citation:

An academic study in 2013 had found that 45 percent of the Bitcoin exchanges that had taken money had gone under, several taking the money of their customers with them (page 317)

The citation comes from an interesting paper, Beware the Middleman: Empirical Analysis of Bitcoin-Exchange Risk by Tyler Moore and Nicolas Christin

Federated blockchain:

This JPMorgan group began secretly working with the other major banks in the country, all of which are part of an organization known as The Clearing House, on a bold experimental effort to create a new blockchain that would be jointly run by the computers of the largest banks and serve as the backbone for a new, instant payment system that might replace Visa, MasterCard, and wire transfers. Such a blockchain would not need to rely on the anonymous miners powering the Bitcoin blockchain. But it could ensure there would no longer be a single point of failure in the payment network. If Visa’s system came under attack, all the stores using Visa were screwed. But if one bank maintaining a blockchain came under attack, all the other banks could keep the blockchain going.

While the The Clearing House is not secretive, the project to create an experimental blockchain was; this is the first I had heard of it.

Concluding remarks:

I had a chance to meet Nathaniel Popper about 14 months ago during the final day of Coinsummit.  We chatted a bit about what was happening in China and potential angles for how and why the mainland mattered to the overall Bitcoin narrative.

There is only so much you can include in a book and if I had my druthers I would have liked to add perhaps some more on the immediate history pre-Bitcoin: projects such as the now-defunct Liberty Reserve (which BitInstant was allegedly laundering money for) and the various dark net markets and online poker sites that were shut down prior to the creation of Bitcoin yet whose customer base would go on to eventually adopt the cryptocurrency for payments and bets (making up some of the clientele for SatoshiDice and other Bitcoin casinos).

Similarly, I would have liked to have looked at a few of the early civil lawsuits in which some of the early adopters were part of.  For instance, the Bitcoinica lawsuit is believed to be the first Bitcoin-related lawsuit (filed in August 2012) and includes several names that appeared throughout the book: plaintiffs: Brian Cartmell, Jed McCaleb, Jesse Powell and Roger Ver; defendants: Donald Norman, Patrick Strateman and Amir Taaki.  The near collapse of the Bitcoin Foundation and many of its founders would make an interesting tale in a second edition, particularly Peter Vessenes (former chairman of the board) whose ill-fated Coinlab and now-bankrupt Alydian mining project are worth closer inspection.

Overall I think this was an easy, enjoyable read.  I learned a number of new things (especially related to the amount of large purchases in early 2013) and think its worth looking at irrespective of your interest in internet fun bux.

See my other book reviews.

End notes:

  1. See What is the “real” price of bitcoin? []
  2. See also: The Rise and Rise of Lipservice: Viral Western Union Ad Debunked []
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Book review: The Age of Cryptocurrency

On my trip to Singapore two weeks ago I read through a new book The Age of Cryptocurrency, written by Michael Casey and Paul Vigna — two journalists with The Wall Street Journal.

Let’s start with the good.  I think Chapter 2 is probably the best chapter in the book and the information mid-chapter is some of the best historical look on the topic of previous electronic currency initiatives.  I also think their writing style is quite good.  Sentences and ideas flow without any sharp disconnects.  They also have a number of endnotes in the back for in-depth reading on certain sub-topics.

In this review I look at each chapter and provide some counterpoints to a number of the claims made.

Note: I manually typed the quotes from the book, all transcription errors are my own and should not reflect on the book itself.  See my other book reviews.

age of cryptocurrencyIntroduction

The book starts by discussing a company now called bitLanders which pays content creators in bitcoin.  The authors introduce us to Francesco Rulli who pays his bloggers in bitcoin and tries to forbid them from cashing out in fiat, so that they create a circular flow of income.1 One blogger they focus on is Parisa Ahmadi, a young Afghani woman who lacks access to the payment channels and platforms that we take for granted.  It is a nice feel good story that hits all the high notes.

Unfortunately the experience that individuals like Ahmadi, are not fully reflective of what takes place in practice (and this is not the fault of bitLanders).

For instance, the authors state on p. 2 that:

“Bitcoins are stored in digital bank accounts or “wallets” that can be set up at home by anyone with Internet access.  There is no trip to the bank to set up an account, no need for documentation or proof that you’re a man.”

This is untrue in practice.  Nearly all venture capital (VC) funded hosted “wallets” and exchanges now require not only Know-Your-Customer (KYC) but in order for any type of fiat conversion, bank accounts.  Thus there is a paradox: how can unbanked individuals connect a bank account they do not have to a platform that requires it?  This question is never answered in the book yet it represents the single most difficult aspect to the on-boarding experience today.

Starting on page 3, the authors use the term “digital currency” to refer to bitcoins, a practice done throughout the remainder of the book.  This contrasts with the term “virtual currency” which they only use 12 times — 11 of which are quotes from regulators.  The sole time “virtual currency” is not used by a regulator to describe bitcoins is from David Larimer from Invictus (Bitshares).  It is unclear if this was an oversight.

Is there a difference between a “digital currency” and “virtual currency”?  Yes.  And I have made the same mistake before.

Cryptocurrencies such as bitcoin are not digital currencies.  Digital currencies are legal tender, as of this writing, bitcoins are not.  This may seem like splitting hairs but the reason regulators use the term “virtual currency” still in 2015 is because no jurisdiction recognizes bitcoins as legal tender.

In contrast, there are already dozens of digital currencies — nearly every dollar that is spent on any given day in the US is electronic and digital and has been for over a decade.  This issue also runs into the discussion on nemo dat described a couple weeks ago.

On page 4 the authors very briefly describe the origination of currency exchange which dates back to the Medici family during the Florentine Renaissance.  Yet not once in the book is the term “bearer asset” mentioned.  Cryptocurrencies such as bitcoin are virtual bearer instruments and as shown in practice, a mega pain to safely secure.

500 years ago bearer assets were also just as difficult to secure and consequently individuals outsourced the security of it to what we now call banks.  And this same behavior has once again occurred as large quantities — perhaps the majority — of bitcoins now are stored in trusted third party depositories such as Coinbase and Xapo.

Why is this important?

Again recall that the term “trusted third party” was used 11 times (in the body, 13 times altogether) in the original Nakamoto whitepaper; whoever created Bitcoin was laser focused on building a mechanism to route around trusted third parties due to the additional “mediation and transaction costs” (section 1) these create.  Note: that later on page 29 they briefly mentioned legal tender laws and coins (as it related to the Roman Empire).

On page 8 the authors describe the current world as “tyranny of centralized trust” and on page 10 that “Bitcoin promises to take at least some of that power away from governments and hand it to the people.”

While that may be a popular narrative on social media, not everyone involved with Bitcoin (or the umbrella “blockchain” world) holds the same view.  Nor do the authors describe some kind of blue print for how this is done.  Recall that in order to obtain bitcoins in the first place a user can do one of three things:

  1. mine bitcoins
  2. purchase bitcoins from some kind of exchange
  3. receive them for payments (e.g., merchant activity)

In practice mining is out of the hands of “the people” due to economies of scale which have trended towards warehouse mining – it is unlikely that embedded ASICs such as from 21 inc, will change that dynamic much, if any.  Why?  Because for every device added to the network a corresponding amount of difficulty is also added, diluting the revenue to below dust levels.

Remember how Tom Sawyer convinced kids to whitewash a fence and they did so eagerly without question?  What if he asked you to mine bitcoins for him for free?  A trojan botnet?  While none of the products have been announced and changes could occur, from the press release that seems to be the underlying assumption of the 21.co business model.

In terms of the second point, nearly all VC funded exchanges require KYC and bank accounts.  The ironic aspect is that “unbanked” and “underbanked” individuals often lack the necessary “valid” credentials that can be used by cheaper automated KYC technology (from Jumio) and thus expensive manual processing is done, costs that must be borne by someone.  These same credential-less individuals typically lack a bank account (hence the name “unbanked”).

Lastly with the third point, while there are any number of merchants that now accept bitcoin, in practice very few actually do receive bitcoins on any given day.  Several weeks ago I broke down the numbers that BitPay reported and the verdict is payment processing is stagnant for now.

Why is this last point important to what the authors refer to as “the people”?

Ten days after Ripple Labs was fined by FinCEN for not appropriately enforcing AML/KYC regulations, Xapo  — a VC funded hosted wallet startup — moved off-shore, uprooting itself from Palo Alto to Switzerland.  While the stated reason is “privacy” concerns, it is likely due to regulatory concerns of a different nature.

In his interview with CoinDesk last week, Wences Casares, the CEO and founder of Xapo noted that:

Still, Casares indicated that Xapo’s customers are most often using its accounts primarily for storage and security. He noted that many of its clientele have “never made a bitcoin payment”, meaning its holdings are primarily long-term bets of high net-worth customers and family offices.

“Ninety-six percent of the coins that we hold in custody are in the hands of people who are keeping those coins as an investment,” Casares continued.

96% of the coins held in custody by Xapo are inert.  According to a dated presentation, the same phenomenon takes place with Coinbase users too.

Perhaps this behavior will change in the future, though, if not it seems unclear how this particular “to the people” narrative can take place when few large holders of a static money supply are willing to part with their virtual collectibles.  But this dovetails into differences of opinion on rebasing money supplies and that is a topic for a different post.

On page 11 the authors describe five stages of psychologically accepting Bitcoin.  In stage one they note that:

Stage One: Disdain.  Not even denial, but disdain.  Here’s this thing, it’s supposed to be money, but it doesn’t have any of the characteristics of money with which we’re familiar.

I think this is unnecessarily biased.  While I cannot speak for other “skeptics,” I actually started out very enthusiastic — I even mined for over a year — and never went through this strange five step process.  Replace the word “Bitcoin” with any particular exciting technology or philosophy from the past 200 years and the five stage process seems half-baked at best.

On page 13 they state:

“Public anxiety over such risks could prompt an excessive response from regulators, strangling the project in its infancy.”

Similarly on page 118 regarding the proposed New York BitLicense:

“It seemed farm more draconian than expected and prompted an immediate backlash from a suddenly well-organized bitcoin community.”

This is a fairly alarmist statement.  It could be argued that due to its anarchic code-as-law coupled with its intended decentralized topology, that it could not be strangled.  If a certain amount of block creating processors (miners) was co-opted by organizations like a government, then a fork would likely occur and participants with differing politics would likely diverge.

A KYC chain versus an anarchic chain (which is what we see in practice with altchains such as Monero and Dash).  Similarly, since there are no real self-regulating organizations (SRO) or efforts to expunge the numerous bad actors in the ecosystem, what did the enthusiasts and authors expect would occur when regulators are faced with complaints?

With that said — and I am likely in a small minority here — I do not think the responses thus far from US regulators (among many others) has been anywhere near “excessive,” but that’s my subjective view.  Excessive to me would be explicitly outlawing usage, ownership and mining of cryptocurrencies.  Instead what has occurred is numerous fact finding missions, hearings and even appearances by regulators at events.

On page 13 the authors state that:

“Cryptocurrency’s rapid development is in some ways a quirk of history: launched in the throes of the 2008 financial crisis, bitcoin offered an alternative to a system — the existing financial system — that was blowing itself up and threatening to take a few billion people down with it.”

This is retcon.  Satoshi Nakamoto, if he is to be believed, stated that he began coding the project in mid-2007.  It is more of a coincidence than anything else that this project was completed around the same time that global stock indices were at their lowest in decades.

Chapter 1

On page 21 the authors state that:

“Bitcoin seeks to address this challenge by offering users a system of trust based not on human being but on the inviolable laws of mathematics.”

While the first part is true, it is a bit cliche to throw in the “maths” reason.  There are numerous projects in the financial world alone that are run by programs that use math.  In fact, all computer programs and networks use some type of math at their foundation, yet no one claims that the NYSE, pace-makers, traffic intersections or airplanes are run by “math-based logic” (or on page 66, “”inviolable-algorithm-based system”).

A more accurate description is that Bitcoin’s monetary system is rule-based, using a static perfectly inelastic supply in contrast to either the dynamic or discretionary world humans live in.  Whether this is desirable or not is a different topic.

On page 26 they describe the Chartalist school of thought, the view that money is political, that:

“looks past the thing of currency and focuses instead on the credit and trust relationships between the individual and society at large that currency embodies” […] “currency is merely the token or symbol around which this complex system is arranged.”

This is in contrast to the ‘metallist’ mindset of some others in the Bitcoin community, such as Wences Casares and Jon Matonis (perhaps there is a distinct third group for “barterists”?).

I thought this section was well-written and balanced (e.g., appropriate citation of David Graeber on page 28; and description of what “seigniorage” is on page 30 and again on page 133).

On page 27 the authors write:

Yet many other cryptocurrency believers, including a cross section of techies and businessmen who see a chance to disrupt the bank centric payments system are de facto charatalists.  They describe bitcoin not as a currency but as a payments protocol.

Perhaps this is true.  Yet from the original Nakamoto whitepaper, perhaps he too was a chartalist?

Stating in section 1:

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

A payments rail, a currency, perhaps both?

Fun fact: the word “payment” appears 12 times in the whole white paper, just one time less than the word “trust” appears.

On page 29 they cite the Code of Hammurabi.  I too think this is a good reference, having made a similar reference to the Code in Chapter 2 of my book last year.

On page 31 they write:

“Today, China grapples with competition to its sovereign currency, the yuan, due both to its citizens’ demand for foreign national currencies such as the dollar and to a fledgling but potentially important threat from private, digital currencies such as bitcoin.”

That is a bit of a stretch.  While Chinese policy makers do likely sweat over the creative ways residents breach and maneuver around capital controls, it is highly unlikely that bitcoin is even on the radar as a high level “threat.”  There is no bitcoin merchant economy in China.

The vast majority of activity continues to be related to mining and trading on exchanges, most of which is inflated by internal market making bots (e.g., the top three exchanges each run bots that dramatically inflate the volume via tape painting).  And due to how WeChat and other social media apps in China frictionlessly connect residents with their mainland bank accounts, it is unlikely that bitcoin will make inroads in the near future.

On page 36 they write:

“By 1973, once every country had taken its currency off the dollar peg, the pact was dead, a radical change.”

In point of fact, there are 23 countries that still peg their currency to the US dollar.  Post-1973 saw a number of flexible and managed exchange rate regimes as well as notable events such as the Plaza Accord and Asian Financial Crisis (that impacted the local pegs).

On page 39 they write:

“By that score, bitcoin has something to offer: a remarkable capacity to facilitate low-cost, near-instant transfer of value anywhere in the world.”

The point of contention here is the “low-cost” — something that the authors never really discuss the logistics of.  They are aware of “seigniorage” and inflationary “block rewards” yet they do not describe the actual costs of maintaining the network which in the long run, the marginal costs equal the marginal value (MC=MV).

This is an issue that I tried to bring up with them at the Google Author Talk last month (I asked them both questions during the Q&A):

The problem for Vigna’s view, (starting around 59m) is that if the value of a bitcoin fell to $30, not only would the network collectively “be cheaper” to maintain, but also to attack.

On paper, the cost to successfully attack the network today by obtaining more than 50% of the hashrate at this $30 price point would be $2,250 per hour (roughly 0.5 x MC) or roughly an order of magnitude less than it does at today’s market price (although in practice it is a lot less due to centralization).

Recall that the security of bitcoin was purposefully designed around proportionalism, that in the long run it costs a bitcoin to secure a bitcoin.  We will talk about fees later at the end of next chapter.

Chapter 2

On page 43, in the note at the bottom related to Ray Dillinger’s characterization that bitcoin is “highly inflationary” — Dillinger is correct in the short run.  The money supply will increase by 11% alone this year.  And while in the long run the network is deflationary (via block reward halving), the fact that the credentials to the bearer assets (bitcoins) are lost and destroyed each year results in a non-negligible amount of deflation.

For instance, in chapter 12 I noted some research: in terms of losing bitcoins, the chart below illustrates what the money supply looks like with an annual loss of 5% (blue), 1% (red) and 0.1% (green) of all mined bitcoins.

lost coins

Source: Kay Hamacher and Stefan Katzenbeisser

In December 2011, German researchers Kay Hamacher and Stefan Katzenbeisser presented research about the impact of losing the private key to a bitcoin. The chart above shows the asymptote of the money supply (Y-axis) over time (X-axis).

According to Hamacher:

So to get rid of inflation, they designed the protocol that over time, there is this creation of new bitcoins – that this goes up and saturates at some level which is 21 million bitcoins in the end.

But that is rather a naïve picture. Probably you have as bad luck I have, I have had several hard drive crashes in my lifetime, and what happens when your wallet where your bitcoins are stored and your private key vanish? Then your bitcoins are probably still in the system so to speak, so they are somewhat identifiable in all the transactions but they are not accessible so they are of no economic value anymore. You cannot exchange them because you cannot access them. Or think more in the future, someone dies but his family doesn’t know the password – no economic value in those bitcoins anymore. They cannot be used for any exchange anymore. And that is the amount of bitcoins when just a fraction per year vanish for different fractions. So the blue curve is 5% of all the bitcoins per year vanish by whatever means there could be other mechanisms.

It is unclear exactly how many bitcoins can be categorized in such a manner today or what the decay rate is.

On page 45 the authors write:

Some immediately homed in on a criticism of bitcoin that would become common: the energy it would take to harvest “bitbux” would cost more than they were worth, not to mention be environmentally disastrous.

While I am unaware of anyone who states that it would cost more than what they’re worth, as stated in Appendix B and in Chapter 3 (among many other places), the network was intentionally designed to be expensive, otherwise it would be “cheap to attack.”  And those costs scale in proportion to the token value.

As noted a few weeks ago:

For instance, last year O’Dwyer and Malone found that Bitcoin mining consumes roughly the same amount of energy as Ireland does annually.  It is likely that their estimate was too high and based on Dave Hudson’s calculations closer to 10% of Ireland’s energy consumption.23 Furthermore, it has likely declined since their study because, as previously explored in Appendix B, this scales in proportion with the value of the token which has declined over the past year.

The previous post looked at bitcoin payments processed by BitPay and found that as an aggregate the above-board activity on the Bitcoin network was likely around $350 million a year.  Ireland’s nominal GDP is expected to reach around $252 billion this year.  Thus, once Hudson’s estimates are integrated into it, above-board commercial bitcoin activity appears to be about two orders of magnitude less than what Ireland produces for the same amount of energy.

Or in other words, the original responses to Nakamoto six and a half years ago empirically was correct.  It is expensive and resource intensive to maintain and it was designed to be so, otherwise it would be easy to attack, censor and modify the history of votes.

Starting on page 56 they describe Mondex, Secure Electronic Transaction (SET), Electronic Monetary System, Citi’s e-cash model and a variety of other digital dollar systems that were developed during the 1990s.  Very interesting from a historical perspective and it would be curious to know what more of these developers now think of cryptocurrency systems.  My own view, is that the middle half of Chapter 2 is the best part of the book: very well researched and well distilled.

On page 64 they write:

[T]hat Nakamoto launched his project with a reminder that his new currency would require no government, no banks and no financial intermediaries, “no trusted third party.”

In theory this may be true, but in practice, the Bitcoin network does not natively provide any of the services banks do beyond a lock box.  There is a difference between money and the cornucopia of financial instruments that now exist and are natively unavailable to Bitcoin users without the use of intermediaries (such as lending).

On page 66 they write:

He knew that the ever-thinning supply of bitcoins would eventually require an alternative carrot to keep miners engaged, so he incorporated a system of modest transaction fees to compensate them for the resources they contributed.  These fees would kick in as time went on and as the payoff for miners decreased.

That’s the theory and the popular narrative.

However, what does it look like in practice?

Above is a chart visualizing fees to miners denominated in USD from January 2009 to May 17, 2015.  Perhaps the fees will indeed increase to replace block rewards, or conversely, maybe as VC funding declines in the coming years, the companies that are willing and able to pay fees for each transaction declines.

On page 67, the authors introduce us to Laszlo Hanyecz, a computer programmer in Florida who according to the brief history of Bitcoin lore, purchased two Papa John’s pizzas for 10,000 bitcoins on May 22, 2010 (almost five years ago to the day).

He is said to have sold 40,000 bitcoins in this manner and generated all of the bitcoins through mining.  He claims to be the first person to do GPU mining, ramping up to “over 800 times” of a CPU; and during this time “he was getting about half of all the bitcoins mined.”  According to him, he originally used a Nvidia 9800 GTX+ and later switched to 2 AMD Radeon 5970s.  It is unclear how long he mined or when he stopped.

In looking at the index of his server, there are indeed relevant OpenCL software files.  If this is true, then he beat ArtForz to GPU mining by at least two months.

solar pizza

Source: Laszlo Hanyecz personal server

On page 77 they write:

Anybody can go on the Web, download the code for no cost, and start running it as a miner.

While technically this is true, that you can indeed download the Satoshi Bitcoin core client for free, restated in 2015 it is not viable for hoi polloi.  In practice you will not generate any bitcoins solo-mining on a desktop machine unless you do pooled mining circa 2011.

Today, even pooled mining with the best Xeon processors will be unprofitable.  Instead, the only way to generate enough funds to cover both the capital expenditures and operating expenditures is through the purchase of single-use hardware known as an ASIC miner, which is a depreciating capital good.

Mining has been beyond the breakeven reach of most non-savvy home users for two years now, not to mention those who live in developing countries with poor electrical infrastructure or uncompetitive energy rates.  It is unlikely that embedded mining devices will change that equation due to the fact that every additional device increases the difficultly level whilst the device hashrate remains static.

This ties in with what the authors also wrote on page 77:

You don’t buy bitcoin’s software as you would other products, which means you’re not just a customer.  What’s more, there’s no owner of the software — unlike, say, PayPal, which is part of eBay.

This is a bit misleading.  In order to use the Bitcoin network, users must obtain bitcoins somehow.  And in practice that usually occurs through trusted third parties such as Coinbase or Xapo which need to identify you via KYC/AML processes.

So while in 2009 their quote could have been true, in practice today that is largely untrue for most new participants — someone probably owns the software and your personal data.  In fact, a germane quote on reddit last week stated, “Why don’t you try using Bitcoin instead of Coinbase.”

Furthermore, the lack of “ownership” of Bitcoin is dual-edged as there are a number of public goods problems with maintaining development that will be discussed later.

On page 87 they describe Blockchain.info as a “high-profile wallet and analytics firm.”

I will come back to “wallets” later.  Note: most of these “wallets” are likely throwaway, temp wallets used to move funds to obfuscate provenance through the use of Shared Coin (one of the ways Blockchain.info generates revenue is by operating a mixer).

Overall Chapter 3 was also fairly informative.  The one additional quibble I have is that Austin and Beccy Craig (the story at the end) were really only able to travel the globe and live off bitcoins for 101 days because they had a big cushion: they had held a fundraiser that raised $72,995 of additional capital.  That is enough money to feed and house a family in a big city for a whole year, let alone go globe trotting for a few months.

Chapter 4

On page 99 they describe seven different entities that have access to credit card information when you pay for a coffee at Starbucks manually.  Yet they do not describe the various entities that end up with the personal information when signing up for services such as Coinbase, ChangeTip, Circle and Xapo or what these depository institutions ultimately do with the data (see also Richard Brown’s description of the payment card system).

When describing cash back rewards that card issuers provide to customers, on page 100 they write:

Still it’s an illusion to think you are not paying for any of this.  The costs are folded into various bank charges: card issuance fees, ATM fees, checking fees, and, of course, the interest charged on the millions of customers who don’t pay their balances in full each month.

Again, to be even handed they should also point out all the fees that Coinbase charges, Bitcoin ATMs charge and so forth.  Do any of these companies provide interest-bearing accounts or cash-back rewards?

On page 100 they also stated that:

Add in the cost of fraud, and you can see how this “sand in the cogs” of the global payment system represents a hindrance to growth, efficiency, and progress.

That seems a bit biased here.  And my statement is not defending incumbents: global payment systems are decentralized yet many provide fraud protection and insurance — the very same services that Bitcoin companies are now trying to provide (such as FDIC insurance on fiat deposits) which are also not free.

On page 100 they also write:

We need these middlemen because the world economy still depends on a system in which it is impossible to digitally send money from one person to another without turning to an independent third party to verify the identity of the customer and confirm his or her right to call on the funds in the account.

Again, in practice, this is now true for Bitcoin too because of how most adoption continues to take place on the edges in trusted third parties such as Coinbase and Circle.

On page 101 they write:

In letting the existing system develop, we’ve allowed Visa and MasterCard to form a de facto duopoly, which gives them and their banking partners power to manipulate the market, says Gil Luria, an analyst covering payment systems at Wedbush Securities.  Those card-network firms “not only get to extract very significant fees for themselves but have also created a marketplace in which banks can charge their own excessive fees,” he says.

Why is it wrong to charge fees for a service?  What is excessive?  I am certainly not defending incumbents or regulatory favoritism but it is unclear how Bitcoin institutions in practice — not theory — actually are any different.

And, the cost per transaction for Bitcoin is actually quite high (see chart below) relative to these other systems due to the fact that Bitcoin also tries to be a seigniorage system, something that neither Visa or MasterCard do.

cost per transaction

Source: Markos05

On page 102 when talking about MasterCard they state:

But as we’ve seen, that cumbersome system, as it is currently designed, is tightly interwoven into the traditional banking system, which always demands a cut.

The whole page actually is a series of apples-and-oranges comparisons.  Aside from settlement, the Bitcoin network does not provide any of the services that they are comparing it to.  There is nothing in the current network that provides credit/lending services whereas the existing “cumbersome” system was not intentionally designed to be cumbersome, but rather is intertwined and evolved over decades so that customers can have access to a variety of otherwise siloed services.

Again, this is not to say the situation cannot be improved but as it currently exists, Bitcoin does not provide a solution to this “cumbersome” system because it doesn’t provide similar services.

On page 102 and 103 they write about payment processors such as BitPay and Coinbase:

These firms touted a new model to break the paradigm of merchants’ dependence on the bank-centric payment system described above.  These services charged monthly fees that amounted to significantly lower transaction costs for merchants than those charged in credit-card transactions and delivered swift, efficient payments online or on-site.

Except this is not really true.  The only reason that both BitPay and Coinbase are charging less than other payment processors is that VC funding is subsidizing it.  These companies still have to pay for customer service support and fraud protection because customer behavior in aggregate is the same.  And as we have seen with BitPay numbers, it is likely that BitPay’s business model is a losing proposition and unsustainable.

On page 103 they mention some adoption metrics:

The good news is found in the steady expansion in the adoption of digital wallets, the software needed to send and receive bitcoins, with Blockchain and Coinbase, the two biggest providers of those, on track to top 2 million unique users each at the time of the writing.

This is at least the third time they talk about wallets this way and is important because it is misleading, I will discuss in-depth later.

Continuing they write that:

Blockchain cofounder Peter Smith says that a surprisingly large majority of its accounts — “many more than you would think,” he says cryptically — are characterized as “active.”

This is just untrue and should have been pressed by the authors.  Spokesman from Blockchain.info continue to publish highly inflated numbers.  For instance in late February 2015, Blockchain.info claimed that “over $270 million in bitcoin transactions occurred via its wallets over the past seven days.”

This is factually untrue.  As I mentioned three months ago:

Organ of Corti pointed out that the 7 day average was indeed ~720,000 bitcoins in total output volume (thus making) the weekly volume would be about “5e06 btc for the network.”

Is it valid to multiply the total output volume by USD (or euros or yen)?  No.

Why not?  Because most of this activity is probably a combination of wallet shuffling, laundering and mixing of coins (e.g., use of SharedSend and burner wallets) or any number of superfluous activity.  It was not $270 million of economic trade.

Blockchain.info’s press release seems to be implying that economic trade is taking place, in which all transactions are (probably) transactions to new individuals when in reality it could simply be a lot of “change” address movement.  And more to the point, the actual internal volume looks roughly the same as has been the past few months (why issue a press release now?).

Continuing on page 103 they write:

“For the first eight months months of 2014, around $50 million per day was passing thought the bitcoin network (some of which was just “change” that bitcoin transactions create as an accounting measure)…”

There is a small typo above (in bold) but the important part is the estimate of volume.  There is no public research showing a detailed break down of average volume of economic activity.  Based on a working paper I published four months ago, it is fairly clear that this figure is probably in the low millions USD at most.  Perhaps this will change in the future.

On page 106 they write about Circle and Xapo:

For now, these firms make no charge to cover costs of insurance and security, betting that enough customers will be drawn to them and pay fees elsewhere — for buying and selling bitcoins, for example — or that their growing popularity will allow them to develop profitable merchant-payment services as well.  But over all, these undertaking must add costs back into the bitcoin economy, not to mention a certain dependence on “trusted third parties.”  It’s one of many areas of bitcoin development — another is regulation — where some businessmen are advocating a pragmatic approach to bolstering public confidence, one that would necessitate compromises on some of the philosophical principles behind a model of decentralization.  Naturally, this doesn’t sit well with bitcoin purists.

While Paul Vigna may not have written this, he did say something very similar at the Google Author Talk event (above in the video).

The problem with this view is that it is a red herring: this has nothing to do with purism or non-purism.

The problem is that Bitcoin’s designer attempted to create a ‘permissionless’ system to accommodate pseudonymous actors.  The entire cost structure and threat model are tied to this.  If actors are no longer pseudonymous, then there is no need to have this cost structure, or to use proof-of-work at all.  In fact, I would argue that if KYC/KYM (Know Your Miner) are required then a user might just as well use a database or permissioned system.  And that is okay, there are businesses that will be built around that.

This again has nothing to do with purism and everything to do with the costs of creating a reliable record of truth on a public network involving unknown, untrusted actors.  If any of those variables changes — such as adding real-world identity, then from a cost perspective it makes little sense to continue using the modified network due to the intentionally expensive proof-of-work.

On page 107 they talk about bitcoin price volatility discussing the movements of gasoline.  The problem with this analogy is that no one is trying to use gasoline as money.  In practice consumers prefer purchasing power stability and there is no mechanism within the Bitcoin network that can provide this.

For instance:

volatility 1volatility 2volatility 3The three slides above are from a recent presentation from Robert Sams.  Sams previously wrote a short paper on “Seigniorage Shares” — an endogenous way to rebase for purchasing power stability within a cryptocurrency.

Bitcoin’s money supply is perfectly inelastic therefore the only way to reflect changes in demand is through changes in price.  And anytime there are future expectations of increased or decreased utility, this is reflected in prices via volatility.

Oddly however, on page 110, they write:

A case can be made that bitcoin’s volatility is unavoidable for the time being.

Yet they do not provide any evidence — aside from feel good “Honey Badger” statements — for how bitcoin will somehow stabilize.  This is something the journalists should have drilled down on, talking to commodity traders or some experts on fuel hedging strategies (which is something airline companies spend a great deal of time and resources with).

Instead they cite Bobby Lee, CEO of BTC China and Gil Luria once again.  Lee states that “Once its prices has risen far enough and bitcoin has proven itself as a store of value, then people will start to use it as a currency.”

This is a collective action problem.  Because all participants each have different time preferences and horizons — and are decentralized — this type of activity is actually impossible to coordinate, just ask Josh Garza and the $20 Paycoin floor.  This also reminds me of one of my favorite comments on reddit: “Bitcoin will stabilize in price then go to the moon.”

The writers then note that, “Gil Luria, the Wedbush analyst, even argues that volatility is a good thing, on the grounds that it draws profit-seeking traders into the marketplace.”

But just because you have profit-seeking traders in the market place does not mean volatility disappears.

trading view

Credit: George Samman

For instance, in the chart above we can see how bitcoin trades relative to commodities over the past year:

  • Yellow is DBC
  • Red is OIL
  • Bars are DXY which is a dollar index
  • And candlesticks are BTCUSD
DBC is a commodities index and the top 10 Holdings (85.39% of Total Assets):
  • Brent Crude Futr May12 N/A 13.83
  • Gasoline Rbob Fut Dec12 N/A 13.71
  • Wti Crude Future Jul12 N/A 13.56
  • Heating Oil Futr Jun12 N/A 13.20
  • Gold 100 Oz Futr Dec 12 N/A 7.49
  • Sugar #11(World) Jul12 N/A 5.50
  • Corn Future Dec12 N/A 5.01
  • Lme Copper Future Mar13 N/A 4.55
  • Soybean Future Nov12 N/A 4.38
  • Lme Zinc Future Jul12

It bears mentioning that Ferdinando Ametrano has also described this issue in depth most recently in a presentation starting on slide 15.

Continuing on page 111, the writers note that:

Over time, the expansion of these desks, and the development of more and more sophisticated trading tools, delivered so much liquidity that exchange rates became relatively stable.  Luria is imagining a similar trajectory for bitcoin.  He says bitcoiners should be “embracing volatility,” since it will help “create the payment network infrastructure and monetary base” that bitcoin will need in the future.

There are two problems with Luria’s argument:

1) As noted above, this does not happen with any other commodity and historically nothing with a perfectly inelastic supply

2) Empirically, as described by Wences Casares above, nearly all the bitcoins held at Xapo (and likely other “hosted wallets”) are being held as investments.  This reduces liquidity which translates into volatility due to once again the inability to slowly adjust the supply relative to the shifts in demand.  This ties into a number of issues discussed in, What is the “real price” of bitcoin? that are worth revisiting.

Also on page 111, they write that “the exchange rate itself doesn’t matter.”

Actually it does.  It directly impacts two things:

1) outside perception on the health of Bitcoin and therefore investor interest (just talk to Buttercoin);

2) on a ten-minute basis it impacts the bottom line of miners.  If prices decline, so to is the incentive to generate proof-of-work.  Bankruptcy, as CoinTerra faces, is a real phenomenon and if prices decline very quickly then the security of the network can also be reduced due to less proof-of-work being generated

Continuing on page 111:

It’s expected that the mirror version of this will in time be set up for consumers to convert their dollars into bitcoins, which will then immediately be sent to the merchant.  Eventually, we could all be blind to these bitcoin conversions happening in the middle of all our transactions.

It’s unfortunate that they do not explain how this will be done without a trusted third party, or why this process is needed.  What is the advantage of going from USD-> paying a conversion fee -> BTC -> conversion fee -> back into USD?  Why not just spend USD and cut out the Bitcoin middleman?

Lastly on page 111:

Still, someone will have to absorb the exchange-rate risk, if not the payment processors, then the investors with which they trade.

The problem with this is that its generally not in the mandate or scope of most VC firms to purchase commodities or currencies directly.  In fact, they may even need some kind of license to do so depending on the jurisdiction (because it is a foreign exchange play).  Yet expecting the payment processors to shoulder the volatility is probably a losing proposition: in the event of a protracted bear market how many bitcoins at BitPay — underwater or not — will need to be liquidated to pay for operating costs?4

On page 112 they write:

‘Bitcoin has features from all of them, but none in entirety.  So, while it might seem unsatisfying, our best answer to the question of whether cryptocurrency can challenge the Visa and MasterCard duopoly is, “maybe, maybe not.”

On the face of it, it is a safe answer.  But upon deeper inspection we can probably say, maybe not.  Why?  Because for Bitcoin, once again, there is no native method for issuing credit (which is what Visa/MasterCard do with what are essentially micro-loans).

For example, in order to natively add some kind of lending facility within the Bitcoin network a new “identity” system would need to be built and integrated (to enable credit checks) — yet by including real-world “identity” it would remove the pseudonymity of Bitcoin while simultaneously maintaining the same costly proof-of-work Sybil protection.  This is again, an unnecessary cost structure entirely and positions Bitcoin as a jack-of-all-trades-but-master-of-none.  Why?  Again recall that the cost structure is built around Dynamic Membership Multi-Party Signature (DMMS); if the signing validators are static and known you might as well use a database or permissioned ledgers.

Or as Robert Sams recently explained, if censorship resistance is co-opted then the reason for proof-of-work falls to the wayside:

Now, I am sure that the advocates of putting property titles on the bitcoin blockchain will object at this point. They will say that through meta protocols and multi-key signatures, third party authentication of transaction parties can be built-in, and we can create a registered asset system on top of bitcoin. This is true. But what’s the point of doing it that way? In one fell swoop a setup like that completely nullifies the censorship resistance offered by the bitcoin protocol, which is the whole raison d’etre of proof-of-work in the first place! These designs create a centralised transaction censoring system that imports the enormous costs of a decentralised one built for censorship-resistance, the worst of both worlds.

If you are prepared to use trusted third parties for authentication of the counterparts to a transaction, I can see no compelling reason for not also requiring identity authentication of the transaction validators as well. By doing that, you can ditch the gross inefficiencies of proof-of-work and use a consensus algorithm of the one-node-one-vote variety instead that is not only thousands of times more efficient, but also places a governance structure over the validators that is far more resistant to attackers than proof-of-work can ever be.

On page 113, they write:

“the government might be able to take money out of your local bank account, but it couldn’t touch your bitcoin.  The Cyprus crisis sparked a stampede of money into bitcoin, which was now seen as a safe haven from the generalized threat of government confiscation everywhere.”

In theory this may be true, but in practice, it is likely that a significant minority — if not majority — of bitcoins are now held in custody at depository institutions such as Xapo, Coinbase and Circle.  And these are not off-limits to social engineering.  For instance, last week an international joint-task force confiscated $80,000 in bitcoins from dark web operators.  The largest known seizure in history were 144,000 bitcoins from Ross Ulbricht (Dread Pirate Roberts) laptop.

Similarly, while it probably is beyond the scope of their book, it would have been interesting to see a survey from Casey and Vigna covering the speculators during this early 2013 time frame.  Were the majority of people buying bitcoins during the “Cyprus event” actually worried about confiscation or is this just something that is assumed?  Fun fact: the largest transaction to BitPay of all time was on March 25, 2013 during the Cyprus event, amounting to 28,790 bitcoins.

On page 114, the writers for the first time (unless I missed it elsewhere), use the term “virtual currency.”  Actually, they quote FinCEN director Jennifer Calvery who says that FincCEN, “recognizes the innovation virtual currencies provide , and the benefits they might offer society.”

Again recall that most fiat currencies today are already digitized in some format — and they are legal tender.  In contrast, cryptocurrencies such as bitcoin are not legal tender and are thus more accurately classified as virtual currencies.  Perhaps that will change in the future.

On page 118 they note that, “More and more people opened wallets (more than 5 million as of this writing).”

I will get to this later.  Note that on p. 123 they say Coupa Cafe has a “digital wallet” a term used throughout the entire book.

Chapter 5

On page 124:

“Bitcoins exist only insofar as they assign value to a bitcoin address, a mini, one-off account with which people and firms send and receive the currency to and from other people’s firms’ addresses.”

This is actually a pretty concise description of best-practices.  In reality however, many individuals and organizations (such as exchanges and payment processors) reuse addresses.

Continuing on page 124:

“This is an important distinction because it means there’s no actual currency file or document that can be copied or lost.”

This is untrue.  In terms of security, the hardest and most expensive part in practice is securing the credentials — the private key that controls the UTXOs.  As Stefan Thomas, Jason Whelan (p. 139) and countless other people on /r/sorryforyourloss have discovered, this can be permanently lost.  Bearer assets are a pain to secure, hence the re-sprouting of trusted third parties in Bitcoinland.

One small nitpick in the note at the bottom of page 125, “Sometimes the structure of the bitcoin address network is such that the wallet often can’t send the right amount in one go…” — note that this ‘change‘ is intentional (and very inconvenient to the average user).

Another nitpick on page 128:

Each mining node or computer gathers this information and reduces it into an encrypted alphanumeric string of characters known as a hash.

There is actually no encryption used in Bitcoin, rather there are some cryptographic primitives that are used such as key signing but this is not technically called encryption (the two are different).

On page 130, I thought it was good that they explained where the term nonce was first used — from Lewis Carroll who created the word “frabjous” and described it as a nonce word.

On page 132, in describing proof-of-work:

While that seems like a mammoth task, these are high-powered computers; it’s not nearly as taxing as the nonce-creating game and can be done relatively quickly and easily.

They are correct in that something as simple as a Pi computer can and is used as the actual transaction validating machine.  Yet, at one point in 2009, this bifurcation did not exist: a full-node was both a miner and a hasher.  Today that is not the case and we technically have about a dozen or so actual miners on the network, the rest of the machines in “farms” just hash midstates.

On page 132, regarding payment processors accepting zero-confirmation transactions:

They do this because non-confirmations — or the double-spending actions that lead to them — are very rare.

True they are very rare today in part because there are very few incentives to actually try and double-spend.  Perhaps that will change in the future with new incentives to say, double-spend watermarked coins from NASDAQ.

And if payment processors are accepting zero confirmations, why bother using proof-of-work and confirmations at all?  Just because a UTXO is broadcast does not mean it will not be double-spent let alone confirmed and packaged into a block.  See also replace-by-fee proposal.

Small note on page 132:

“the bitcoin protocol won’t let it use those bitcoins in a payment until a total of ninety-nine additional blocks have been built on top its block.”

Sometimes it depends on the client and may be up to 120 blocks altogether, not just 100.

On page 133 they write:

“Anyone can become a miner and is free to use whatever computing equipment he or she can come up with to participate.”

This may have been the case in 2009 but not true today.  In order to reduce payout variance, the means of production as it were, have gravitated towards large pools of capital in the form of hashing farms.  See also: The Gambler’s Guide to Bitcoin Mining.

On page 135 they write:

“Some cryptocurrency designers have created nonprofit foundations and charged them with distributing the coins based on certain criteria — to eligible charities, for example. But that requires the involvement of an identifiable and trusted founder to create the foundation.”

The FinCEN enforcement action and fine on Ripple Labs could put a kibosh on this in the future.  Why?  If organizations that hand out or sell coins are deemed under the purview of the Bank Secrecy Act (BSA) it is clear that most, if not all, crowdfunding or initial coin offerings (ICO) are violating this by not implementing KYC/AML requirements on participants or filing SARs.

On page 136 they write:

“Both seigniorage and transaction fees represent a transfer of value to those running the network. Still, in the grand scheme of things, these costs are far lower than anything found in the old system.”

This is untrue and an inaccurate comparison.  We know that at the current bitcoin price of $240 it costs roughly $315 million to operate the network for the entire year.  If bitcoin-based consumer spending patterns hold up and reflect last years trends seen by BitPay, then roughly $350 million will be spent through payment processors, nearly half of which includes mining payouts.

Or in other words, for roughly every dollar spent on commerce another dollar is spent securing it.  This is massive oversecurity relative to the commerce involve.  Neither Saudi Arabia or even North Korea spend half of, let alone 100% of their GDP on military expenditures (yet).

Chapter 6

Small nitpick on page 140, Butterfly Labs is based in Leawood, Kansas not Missouri (Leawood is on the west side of the dividing line).

I think the story of Jason Whelan is illuminating and could help serve as a warning guide to anyone wanting to splurge on mining hardware.

For instance on page 141:

“And right from the start Whelan face the mathematical reality that his static hashrate was shrinking as a proportion of the ever-expanding network, whose computing power was by then almost doubling every month.”

Not only was this well-written but it does summarize the problem most new miners have when they plan out their capital expenditures.  It is impossible to know what the network difficulty will be in 3 months yet what is known is that even if you are willing to tweak the hardware and risk burning out some part of your board, your hashrate could be diluted by faster more efficient machines.  And Whelan found out the hard way that he might as well bought and held onto bitcoins than mine.  In fact, Whelan did just about everything the wrong way, including buying hashing contracts with cloud miners from “PBCMining.com” (a non-functioning url).

On page 144 the authors discussed the mining farms managed by now-defunct CoinTerra:

With three in-built high-powered fans running at top speed to cool the rig while its internal chi races through calculations, each unit consumes two kilowatts per hour, enough power to run an ordinary laptop for a month. That makes for 20 kWh per tower, about ten times the electricity used for the same space by the neighboring server of more orthodox e-commerce firms.

As noted in Chapter 2 above, this electricity has to be “wasted.”  Bitcoin was designed to be “inefficient” otherwise it would be easy to attack and censor.  And in the future, it cannot become more “efficient” — there is no free lunch when it comes to protecting it.  It also bears mentioning that CoinTerra was sued by its utility company in part for the $12,000 a day in electrical costs that were not being paid for.

On page 145 they wrote that as of June 2014:

“By that time, the network, which was then producing 88,000 trillion hashes every second, had a computing power six thousand times the combined power of the world’s top five hundred supercomputers.”

This is not a fair comparison.  ASIC miners can do one sole function, they are unable to do anything aside from reorganize a few fields (such as date and nonce) with the aim of generating a new number below a target number.  They cannot run MS Office, Mozilla Firefox and more sobering: they cannot even run a Bitcoin client (the Pi computer run by the pool runs the client).

In contrast, in order to be recognized as a Top 500 computer, only general purpose machines capable of running LINXPACK are considered eligible.  The entire comparison is apples-to-oranges.

On page 147 the authors described a study from Guy Lane who used inaccurate energy consumption data from Blockchain.info.

And then they noted that:

“So although the total consumption is significantly higher than the seven-thousand-home estimate, we’re a long way from bitcoin’s adding an entire country’s worth of power consumption to the world.”

This is not quite true.  As noted above in the notes of Chapter 2 above, based on Dave Hudson’s calculations the current Bitcoin network consumes the equivalent of about 10% of Ireland’s annual energy usage yet produces two orders of magnitude less economic activity.  If the price of bitcoin increases so to does the amount of energy miners are willing to expend to chase after the seigniorage.  See also Appendix B.

On page 148 they write that:

For one, power consumption must be measured against the value of validating transactions in a payment system, a social service that gold mining has never provided.  Second, the costs must be weighed against the high energy costs of the alternative, traditional payment system, with its bank branches, armored cars, and security systems. And finally, there’s the overriding incentive for efficiency that the profit motive delivers to innovators, which is why we’ve seen such giant reductions in power consumption for the new mining machines. If power costs make mining unprofitable, it will stop.

First of all, validation is cheap and easy, as noted above it is typically done with something like a Pi computer.  Second, they could have looked into how much real commerce is taking place on the chain relative to the costs of securing it so the “social service” argument probably falls flat at this time.

Thirdly, the above “armored cars and security systems” is not an apples-to-apples comparison.  Bitcoin does not provide any banking service beyond a lock box, it does not provide for home mortgages, small business loans or mezzanine financing.  The costs for maintaining those services in the traditional world do not equate to MC=MV as described at the end of Chapter 1 notes.

Fourthly, they ignore the Red Queen effect.  If a new hashing machine is invented and consumes half as much energy as before then the farm owner will just double the amount of machines and the net effect is the same as before.  This happens in practice, not just in theory, hence the reason why electrical consumption has gone up in aggregate and not down.

On page 149 they write:

“But the genius of the consensus-building in the bitcoin system means such forks shouldn’t be allowed to go on for long. That’s because the mining community works on the assumption that the longest chain is the one that constitutes consensus.”

That’s not quite accurate.  Each miner has different incentives.  And, as shown empirically with other altcoins, forks can reoccur frequently without incentives that align.  For now, some incentives apparently do.  But that does not mean that in the future, if say watermarked coins become more common place, that there will not be more frequent forks as certain miners attempt to double-spend or censor such metacoins.

Ironically on page 151 the authors describe the fork situation of March 2013 and describe the fix in which a few core developers convince Mark Karpeles (who ran Mt. Gox) to unilaterally adopt one specific fork.  This is not trustless.

On page 151 they write:

“That’s come to be known as a 51 percent attack.  Nakamoto’s original paper stated that the bitcoin mining network could be guaranteed to treat everyone’s transactions fairly and honestly so long as no single miner or mining group owned more than 50 percent of the hashing power.”

And continuing on page 153:

“So, the open-source development community is now looking for added protections against selfish mining and 51 percent attacks.”

While they do a good job explaining the issue, they don’t really discuss how it is resolved.  And it cannot be without gatekeepers or trusted hardware.

For instance, three weeks ago there was a good reddit thread discussing one of the problems of Andreas Antonopolous’  slippery slope view that you could just kick the attackers off the network.  First, there is no quick method for doing so; second, by blacklisting them you introduce a new problem of having the ability to censor miners which would be self-defeating for such a network as it introduces a form of trust into an expensive cost structure of trust minimization.

On page 152 they cite a Coinometrics number:

“in the summer of 2014 the cost of the mining equipment and electricity required for a 51 percent attack stood at $913 million.”

This is a measurement of maximum costs based on hashrate brute force — a Maginot Line attack.  In practice it is cheaper to do via out of band attacks (e.g., rubber hose cryptanalysis).  There are many other, cheaper ways, to attack the P2P network itself (such as Eclipse attacks).

On page 154 when discussing wealth disparity in Bitcoin they write:

“First, some perspective.  As a wealth-gap measure, this is a lousy one.  For one, addresses are not wallets.  The total number of wallets cannot be known, but they are by definition considerably fewer than the address tally, even though many people hold more than one.”

Finally.  So the past several chapters I have mentioned I will discuss wallets at some length.  Again, the authors for some reason uncritically cite the “wallet numbers” from Blockchain.info, Coinbase and others as actual digital wallets.

Yet here they explain that these metrics are bupkis.  And they are.  It costs nothing to generate a wallet and there are scripts you can run to auto generate them.  In fact, Zipzap and many others used to give every new user a Blockchain.info wallet por gratis.

And this is problematic because press releases from Xapo and Blockchain.info continually cite a number that is wholly inaccurate and distorting.

For instance Wences Casares said in a presentation a couple months ago that there were 7 million users.  Where did that number come from?  Are these on-chain privkey holders?  Why are journalists not questioning these claims?  See also: A brief history of Bitcoin “wallet” growth.

On page 154 they write:

“These elites have an outsize impact on the bitcoin economy. They have a great interest in seeing the currency succeed and are both willing and able to make payments that others might not, simply to encourage adoption.”

Perhaps this is true, but until there is a systematic study of the conspicuous consumption that takes place, it could also be the case that some of these same individuals just have an interest in seeing the price of bitcoin rise and not necessarily be widely adopted.  The two are not mutually exclusive.

On page 155 and 156 they describe the bitsat project, to launch a full node into space which is aimed “at making the mining network less concentrated.”

Unfortunately these types of full nodes are not block makers.  Thus they do not actually make the network less concentrated, but only add more propagating nodes.  The two are not the same.

On page 156 they describe some of the altcoin projects:

“They claim to take the good aspects of bitcoin’s decentralized structure but to get ride of its negative elements, such as the hashing-power arms race, the excessive use of electricity, and the concentration of industrialized mining power.”

I am well aware of the dozens various coin projects out there due to work with a digital asset exchange over the past year.  Yet fundamentally all of the proof-of-work based coins end up along the same trend line, if they become popular and reach a certain level of “market cap” (an inaccurate term) specialized chips are designed to hash it.

And the term “excessive” energy related to proof-of-work is a bit of a non-starter.  Ignoring proof-of-stake systems, if it becomes less energy intensive to hash via POW, then it also becomes cheaper to attack.  Either miners will add more equipment or the price has dropped for the asset and it is therefore cheaper to attack.

On page 157 regarding Litecoin they write that:

“Miners still have an incentive to chase coin rewards, but the arms race and the electricity usage aren’t as intense.”

That’s untrue.  Scrypt (which is used instead of Hashcash) is just as energy intensive.  Miners will deploy and utilize energy in the same patterns, directly in proportion to the token price.  The difference is memory usage (Litecoin was designed to be more memory intensive) but that is unrelated to electrical consumption.

Continuing:

“Litecoin’s main weakness is the corollary of its strength: because it’s cheaper to mine litecoins and because scrypt-based rigs can be used to mine other scrypt-based altcoins such as dogecoin, miners are less heavily invested in permanently working its blockchain.”

This is untrue.  Again, Litecoin miners will in general only mine up to the point where it costs a litecoin to make a litecoin.  Obviously there are exceptions to it, but in percentage terms the energy usage is the same.

Continuing:

“Some also worry that scrypt-based mining is more insecure, with a less rigorous proof of work, in theory allowing false transactions to get through with incorrect confirmations.”

This is not true.  The two difference in security are the difficulty rating and block intervals.  The higher the difficulty rating, the more energy is being used to bury blocks and in theory, the more secure the blocks are from reversal.

The question is then, is 2.5 minutes of proof-of-work as secure as burying blocks every 10 minutes?  Jonathan Levin, among others, has written about this before.

cthuluSmall nitpick on page 157, fairly certain that nextcoin should be referred to as NXT.

On page 158 they write:

If bitcoin is to scale up, it must be upgraded sot hat nodes, currently limited to one megabyte of data per ten-minute block, are free to process a much larger set of information.  That’s not technically difficult; but it would require miners to hash much larger blocks of transactions without big improvements in their compensation.  Developers are currently exploring a transaction-fee model that would provide fairer compensation for miners if the amount of data becomes excessive.

This is not quite right.  There is a difference between block makers (pools) and hashers (mining farms).  The costs for larger blocks would impact block makers not hashers, as they would need to upgrade their network facilities and local hard drive.  This may seem trivial and unimportant, but Jonathan Levin’s research, as well as others suggest that block sizes does in fact impact orphan rates.5

It also impacts the amount of decentralization within the network as larger blocks become more expensive to propagate you will likely have fewer nodes.  This has been the topic of immense debate over the past several weeks on social media.

Also on page 158 they write:

The laboratory used by cryptocurrency developers, by contrast, is potentially as big as the world itself, the breadth of humanity that their projects seek to encompass. No company rulebook or top-down set of managerial instructions keeps people’s choice in line with a common corporate objective. Guiding people to optimal behavior in cryptocurrencies is entirely up to how the software is designed to affect human thinking, how effectively its incentive systems encourage that desired behavior

This is wishful thinking and probably unrealistic considering that Bitcoin development permanently suffers from the tragedy of the commons.  There is no CEO which is both good and bad.

For example, directions for where development goes is largely based on two things:

  1. how many upvotes your comment has on reddit (or how many retweets it gets on Twitter)
  2. your status is largely a function of how many times Satoshi Nakamoto responded to you in email or on the Bitcointalk forum creating a permanent clique of “early adopters” whose opinions are the only valid ones (see False narratives)

This is no way to build a financial product.  Yet this type of lobbying is effectively how the community believes it will usurp well-capitalized private entities in the payments space.

Several months ago a user, BitttBurger, made a similar observation:

I’ve said it before and I will say it again. There is a reason why Developers should not be in control of product development priorities, naming, feature lists, or planning for a product. That is the job of the sales, marketing, and product development teams who actually interface with the customer. They are the ones who do the research and know what’s needed for a product. They are the ones who are supposed to decide what things are called, what features come next, and how quickly shit gets out the door.

Bitcoin has none of that. You’ve got a Financial product, being created for a financial market, by a bunch of developers with no experience in finance, and (more importantly) absolutely no way for the market to have any input or control over what gets done, or what it’s called. That is crazy to me.

Luke is a perfect example of why you don’t give developers control over anything other than the structure of the code.

They are not supposed to be making product development decisions. They are not supposed to be naming anything. And they definitely are not supposed to be deciding “what comes next” or how quickly things get done. In any other company, this process would be considered suicide.

Yet for some reason this is considered to be a feature rather than a bug (e.g., “what is your Web of Trust (WoT) number?”).

On page 159 they write:

“The vital thing to remember is that the collective brainpower applied to all the challenges facing bitcoin and other cryptocurrencies is enormous.  Under the open-source, decentralized model, these technologies are not hindered by the same constraints that bureaucracies and stodgy corporations face.”

So, what is the Terms of Service for Bitcoin?  What is the customer support line?  There isn’t one.  Caveat emptor is pretty much the marketing slogan and that is perfectly fine for some participants yet expecting global adoption without a “stodgy” “bureaucracy” that helps coordinate customer service seems a bit of a stretch.

And just because there is some avid interest from a number of skilled programmers around the world does not mean public goods problems surrounding development will be resolved.

For reference: there were over 5000 co-authors on a recent physics paper but that doesn’t mean their collective brain power will quickly resolve all the open questions and unsolved problems in physics.

Chapter 7:

Small nitpick on page 160:

“Bitcoin was born out of a crypto-anarchist vision of a decentralized government-free society, a sort of encrypted, networked utopia.”

As noted above, there is actually no encryption used in Bitcoin.

On page 162 they write:

“Before we get too carried away, understand this is still early days.”

That may be the case.  Perhaps decentralized cryptocurrencies like Bitcoin are not actually the internet in the early 1990s like many investors claim but rather the internet in the 1980s when there were almost no real use-cases and it is difficult to use.  Or 1970s.  The problem is no one can actually know the answer ahead of time.

And when you try to get put some milestone down on the ground, the most ardent of enthusiasts move the goal posts — no comparisons with existing tech companies are allowed unless it is to the benefit of Bitcoin somehow.  I saw this a lot last summer when I discussed the traction that M-Pesa and Venmo had.

A more recent example is “rebittance” (a portmanteau of “bitcoin” and “remittance”).  A couple weeks ago Yakov Kofner, founder of Save On Send, published a really good piece comparing money transmitter operators with bitcoin-related companies noting that there currently is not much meat to the hype.  The reaction on reddit was unsurprisingly fist-shaking Bitcoin rules, everyone else drools.

yakov breakfast

With Yakov Kofner (CEO Save On Send)

When I was in NYC last week I had a chance to meet with him twice.  It turns out that he is actually quite interested in Bitcoin and even scoped out a project with a VC-funded Bitcoin company last year for a consumer remittances product.

But they decided not to build and release it for a few reasons:

  1.  in practice, many consumers are not sensitive enough to a few percentage savings because of brand trust/loyalty/habit;
  2.  lacking smartphones and reliable internet infrastructure, the cash-in, cash-out aspect is still the main friction facing most remittance corridors in developing countries, bitcoin does not solve that;
  3.  it boils down to an execution race and it will be hard to compete against incumbents let alone well-funded MTO startups (like TransferWise).

That’s not to say these rebittance products are not good and will not find success in niches.

For instance, I also spoke with Marwan Forzley (below), CEO of Align Commerce last week.  Based on our conversation, in terms of volume his B2B product appears to have more traction than BitPay and it’s less than a year old.

What is one of the reasons why?  Because the cryptocurrency aspect is fully abstracted away from customers.

marwan p2p

Raja Ramachandran (R3CEV), Dan O’Prey (Hyperledger), Daniel Feichtinger (Hyperledger), Marwan Forzley (Align Commerce)

In addition, both BitX and Coins.ph — based on my conversations in Singapore two weeks ago with their teams — seem to be gaining traction in a couple corridors in part because they are focusing on solving actual problems (automating the cash-in/cash-out process) and abstracting away the tech so that the average user is oblivious of what is going on behind the scenes.

singapore ron

Markus Gnirck (StartupBootCamp), Antony Lewis (itBit) and Ron Hose (Coins.ph) at the DBS Hackathon event

On page 162 and 163 the authors write about the Bay Area including 20Mission and Digital Tangible.

There is a joke in this space that every year in cryptoland is accelerated like dog years.  While 20Mission, the communal housing venue, still exists, the co-working space shut down late last year.  Similarly, Digital Tangible has rebranded as Serica and broadened from just precious metals and into securities.  In addition, Dan Held (page 164) left Blockchain.info and is now at ChangeTip.

On page 164 they write:

“But people attending would go on to become big names in the bitcoin world: Among them were Brian Armstrong and Fred Ehrsam, the founders of Coinbase, which is second only to Blockchain as a leader in digital-wallet services and one of the biggest processors of bitcoin payments for businesses.”

10 pages before this they said how useless digital wallet metrics are.  It would have been nice to press both Armstrong and Ehrsam to find out what their actual KYC’ed active users to see if the numbers are any different than the dated presentation.

On page 165 they write:

“It’s a very specific type of brain that’s obsessed with bitcoin,” says Adam Draper, the fourth-generation venture capitalist…”

I hear this often but what does that mean?  Is investing genetic?  If so, surely there are more studies on it?

For instance, later on page 176 they write:

“The youngest Draper, who tells visitors to his personal web site that his life’s ambition is to assist int he creation of an iron-man suit, has clearly inherited his family’s entrepreneurial drive.”

Perhaps Adam Draper is indeed both a bonafide investor and entrepreneur, but it does not seem to be the case that either can be or is necessarily inheritable.

On page 167:

“The only option was to “turn into a fractional-reserve bank,” he said jokingly, referring tot he bank model that allows banks to lend out deposits while holding a fraction of those funds in reserve.  “They call it a Ponzi scheme unless you have a banking license.”

Why is this statement not challenged?  I am not defending rehypothecation or the current banking model, but fractional reserve banking as it is employed in the US is not a Ponzi scheme.

Also on page 167 they write:

“First, he had trouble with his payments processor, Dwolla which he later sued for $2 million over what Tradehill claimed were undue chargebacks.”

A snarky thing would be to say he should have used bitcoin, no chargebacks.  But the issue here, one that the authors should have pressed is that Tradehill, like Coinbase and Xapo, are effectively behaving like banks.  It’s unclear why this irony is not discussed once in the book.

For instance, several pages later on page 170 they once again talk about wallets:

The word wallet is thrown around a lot in bitcoin circles, and it’s an evocative description, but it’s just a user application that allows you to send and receive bitcoins over the bitcoin network. You can download software to create your own wallet — if you really want to be your own bank — but most people go through a wallet provider such as Coinbase or Blockchain, which melded them into user-friendly Web sites and smart phone apps.

I am not sure if it is intentional but the authors clearly understand that holding a private key is the equivalent of being a bank.  But rather than say Coinbase is a bank (because they too control private keys), they call them a wallet provider.  I have no inside track into how regulators view this but the euphemism of “wallet provider” is thin gruel.

On the other hand Blockchain.info does not hold custody of keys but instead provide a user interface — at no point do they touch a privkey (though that does not mean they could not via a man-in-the-middle-attack or scripting errors like the one last December).

On page 171 they talk about Nathan Lands:

The thirty-year-old high school dropout is the cofounder of QuickCoin, the maker of a wallet that’s aimed directly at finding the fastest easiest route to mass adoption.  The idea, which he dreamed up with fellow bitcoiner Marshall Hayner one night over a dinner at Ramen Underground, is to give nontechnical bitcoin newcomers access to an easy-to-use mobile wallet viat familiar tools of social media.

Unfortunately this is not how it happened.  More in a moment.

Continuing the authors write:

“His successes allowed Lands to raise $10 million for one company, Gamestreamer.”

Actually it was Gamify he raised money for (part of the confusion may be due to how it is phrased on his LinkedIn profile).

Next the authors state:

“He started buying coins online, where her ran into his eventual business partner, Hayner (with whom he later had a falling-out, and whose stake he bought).”

One of the biggest problems I had with this book is that the authors take claims at face value.  To be fair, I probably did a bit too much myself with GCON.

On this point, I checked with Marshall Hayner who noted that this narrative was untrue:  “Nathan never bought my stake, nor was I notified of any such exchange.”

While the co-founder dispute deserves its own article or two, the rough timeline is that in late 2013 Hayner created QuickCoin and then several months later on brought Lands on to be the CEO.  After a soft launch in May 2014 (which my wife and I attended, see below) Lands maneuvered and got the other employees to first reduce the equity that Hayner had and then fired him so they could open up the cap table to other investors.

quickcoin

QuickCoin launch party with Marshall Hayner, Jackson Palmer (Dogecoin), and my wife

With Hayner out, QuickCoin quickly faded due to the fact that the team had no ties to the local cryptocurrency community.  Hayner went on to join Stellar and is now the co-founder of Trees.  QuickCoin folded by the end of the year and Lands started Blockai.

On page 174 they discuss VCs involved in funding Bitcoin-related startups:

Jerry Yang, who created the first successful search engine, Yahoo, put money from his AME Ventures into a $30 million funding round for processor BitPay and into one of two $20 million rounds raised by depository and wallet provider Xapo, which offers insurance to depositors and call itself a “bitcoin vault.”

While they likely couldn’t have put it in this section, I think it would have been good for the authors to discuss the debate surrounding what hosted wallets actually are because regulators and courts may not agree with the marketing-speak of these startups.6

On page 177 they write about Boost VC which is run by Adam Draper:

“He’d moved first and emerged as the leader in the filed, which meant his start-ups could draw in money from the bigger guys when it came time for larger funding rounds.”

It would be interesting to see the clusters of what VCs do and do not co-invest with others.  Perhaps in a few years we can look back and see that indeed, Boost VC did lead the pack.

However while there are numerous incubated startups that went on to close seed rounds (Blockcypher, Align Commerce, Hedgy, Bitpagos) as of this writing there is only one incubated company in Boost that has closed a Series A round and that is Mirror (Coinbase, which did receive funding from Adam Draper, was not in Boost).  Maybe this is not a good measure for success, perhaps this will change in the future and maybe more have done so privately.

On page 179-180 the discussion as to what Plug and Play Tech Center does and its history was well written.

On page 184 they write:

With every facet of our economy now dependent on the kinds of software developed and funded in the Bay Area, and with the Valley’s well-heeled communities becoming a vital fishing ground for political donations and patronage, we’re witnessing a migration of the political and economic power base away from Wall Street to this region.

I have heard variations of this for the past couple of years.  Most recently I heard a VC claim that Andreessen Horrowitz (a16z) was the White House of the West Coast and that bankers in New York do not understand this tech.  Perhaps it is and perhaps bankers do not understand what a blockchain is.

Either way we should be able to see the consequences to this empirically at some point.  Where is the evidence presented by the authors?

incumbents

Source: finviz

Fast forwarding several chapters, on page 287 they write:

“Visa, MasterCard, and Western Union combined – to name just three players whose businesses could be significantly reformed — had twenty-seven thousand employees in 2013.”

Perhaps these figures will dramatically change soon, however, the above image are the market caps over the past 5 years of four incumbents: JP Morgan (the largest bank in the US), MasterCard and Visa (the largest card payment providers) and Western Union, the world’s largest money transfer operator.

Will their labor force dramatically change because of cryptocurrencies?  That is an open question.  Although it is unclear why the labor force at these companies would necessarily shrink because of the existence of Bitcoin rather than expand in the event that these companies integrated parts of the tech (e.g., a distributed ledger) thereby reducing costs and increasing new types of services.

On page 185 they write:

“Those unimaginable possibilities exist with bitcoin, Dixon says, because “extensible software platforms that allow anyone to build on top of them are incredibly powerful and have all these unexpected uses. The stuff about fixing the existing payment system is interesting, but what’s superexciting is that you have this new platform on which you can move money and property and potentially build new areas of businesses.”

Maybe this is true.  It is unclear from these statements as to what Chris Dixon views as broken about the current payment system.  Perhaps it is “broken” in that not everyone on the planet has access to secure, near-instant methods of global value transer.  However it is worth noting that cryptocurrencies are not the only competitors in the payments space.

According to AngelList as of this writing:

Chapter 8

This chapter discussed “The Unbanked” and how Bitcoin supposedly can be a solution to banking these individuals.

On page 188 they discuss a startup called 37coins:

“It uses people in the region lucky enough to afford Android smartphones as “gateways” to transmit the messages.  In return, these gateways receive a small fee, which provides the corollary benefit of giving locals the opportunity to create a little business for themselves moving traffic.”

This is a pretty neat idea, both HelloBit and Abra are doing something a little similar.  The question however is, why bitcoin?  Why do users need to go out of fiat, into bitcoin and back out to fiat?  If the end goal is to provide users in developing countries a method to transmit value, why is this extra friction part of the game plan?

Last month I heard of another supposed cryptocurrency “killer app”: smart metering prepaid via bitcoin and how it is supposed to be amazing for the unbanked.  The unbanked, they are going to pay for smart metering with money they don’t have for cars they don’t own.

There seems to be a disconnect when it comes to financial inclusion as it is sometimes superficially treated in the cryptocurrency world.  Many Bitleaders and enthusiasts seem to want to pat themselves on the back for a job that has not been accomplished.  How can the cryptocurrency community bring the potential back down to real world situations without overinflating, overhyping or over promising?

If Mercedes or Yamaha held a press conference to talk about the “under-cared” or “under-motorcycled” they would likely face a backlash on social media.  Bitcoin the bearer instrument, is treated like a luxury good and expecting under-electrified, under-plumbed, under-interneted people living in subsistence to buy and use it today without the ability to secure the privkey without a trusted third party, seems far fetched (“the under bitcoined!”).  Is there a blue print to help all individuals globally move up Maslow’s Hierarchy of Financial Wants & Needs?

On page 189 they write:

“But in the developing world, where the costs of an ineffectual financial system and the burdens of transferring funds are all too clear, cryptocurrencies have a much more compelling pitch to make.”

The problem is actually at the institutional level, institutions which do not disappear because of the Bitcoin blockchain.  Nor does Bitcoin solve the identity issue: users still need real-world identity for credit ratings so they can take out loans and obtain investment to build companies.

For instance on page 190 the authors mention the costs of transferring funds to and from Argentina, the Philippines, India and Pakistan.  One of the reasons for the high costs is due to institutional problems which is not solved by Bitcoin.

In fact, the authors write:

“Banks won’t service these people for various reasons. It’s partly because the poor don’t offer as fat profits as the rich, and it’s partly because they live in places where there isn’t the infrastructure and security needed for banks to build physical branches. But mostly it’s because of weak legal institutions and underdeveloped titling laws.”

This is true, but Bitcoin does not solve this.  If local courts or governments do not recognize the land titles that are hashed on the blockchain it does the local residents no good to use Proof of Existence or BlockSign.

They do not clarify this problem through the rest of the chapter.  In fact the opposite takes place, as they double down on the reddit narrative:

“Bitcoin, as we know, doesn’t care who you are. It doesn’t care how much money you are willing to save, send, or spend. You, your identity and your credit history are irrelevant. […] If you are living on $50 a week, the $5 you will save will matter a great deal.”