This past week I gave a new presentation at the 2nd annual Soranomics event (last year I presented on a related topic: pegged coins aka “stablecoins”). It includes a number of illustrations to discuss product market fit and infrastructure market fit.
Below is a copy of the deck as well as the A/V. Note: there are citations and references in the speaker notes. Note: I am to publish a long-form version based on this content.
[Note: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]
As we have discussed before, “Web3” is a nebulous term that has been used to market a slew of products and services, often via “chainwashing.”
What is “Web3?”
This past week 25 guys and one gal signed and published a 741-word letter to senior U.S. legislators calling for “Support of Responsible Fintech Policy.” And while many “Web3” promoters do deserve a good chastising, this letter has many technical shortcomings and is a disappointment to those who have been in the trenches for years… before being a “critic” was considered en vogue. Worst, it doesn’t define what “Web3” or even a “blockchain” is or is not.
But let’s start with a comment that I thought was pretty good, the intro:
“Today, we write to you urging you to take a critical, skeptical approach toward industry claims that crypto-assets (sometimes called cryptocurrencies, crypto tokens, or web3) are an innovative technology that is unreservedly good. We urge you to resist pressure from digital asset industry financiers, lobbyists, and boosters to create a regulatory safe haven for these risky, flawed, and unproven digital financial instruments and to instead take an approach that protects the public interest and ensures technology is deployed in genuine service to the needs of ordinary citizens.”
I – along with a number of other independent researchers such as Angela Walch (who they referenced) – have publicly made similar requests in the past. For instance, the original conclusion in my 2018 WSJ op-ed expanded upon the lack of transparency and surveillance sharing for why the SEC has not approved a bitcoin-denominated ETF by stating, “…the retail public wants seductive narratives and fantastical returns. The supply of fraud will therefore grow to meet that demand.”
To reuse a cliché analogy, throughout most of 2021 you could probably throw a baseball at a collection of dapps and hit one that at the very least, played fast and loose with marketing high APR yields.
This was followed with a quizzical take:
“Not all innovation is unqualifiedly good; not everything that we can build should be built. The history of technology is full of dead ends, false starts, and wrong turns. Append-only digital ledgers are not a new innovation. They have been known and used since 1980 for rather limited functions.”
The first sentence probably has a lot of supporters, including myself, as it relates to non-proliferation of weapons of mass destruction. The somber and horrific legacies of the atomic and hydrogen bombs are certainly an example of something that should not have been built.
But the shade thrown at “append-only digital ledgers” is pretty farcical. Why do these authors get to determine what is or is not useful in the spring of 2022?
For instance, if we look at the core moving pieces of the Bitcoin blockchain, all of the main elements (“prerequisites“) had been around for years. And it was by assembling them together that we have arguably the first blockchain.1 The authors are taking a page from the lazy Maximalist playbook, one that does not withstand empirical scrutiny.
In looking at the “tech stack” of Big Tech, Google maintains a project called “Certificate Transparency” (implemented as “Trillian“).2 Certificate Transparency is not a blockchain, but it is a Merkle tree of things which are interconnected and signed and in production today.
From the Trillian team:
The ideas underpinning Certificate Transparency, Revocation Transparency and related efforts are not specific to certificates, but can in fact be used to make almost anything transparent. These technologies are strongly related to the much-hyped blockchain. The reality, of course, is that there isn’t a “the” blockchain, and that decentralisation is not always the answer. We are not making “the” blockchain, and we do not claim to support decentralisation.
As mentioned in a previous post, the problem with the a priori position that anti-coiners (and many maximalists) have is that over time they continually get backed up into a corner. Why? Because over the past decade we continue to see – empirically – how blockchains and blockchain-like elements are incorporated by a spectrum of organizations from Big Tech and Big Finance all the way down to small startups.
As Matthew Green (a cryptographer) explains in a thread on this topic, the granular fine points around “blockchain technology” is mostly bad:
Unfortunately the authors – while seemingly well intentioned – do not clearly state what parts of a blockchain they dislike, what parts of “distributed ledger technology” that they explicitly think is bad.
Furthermore, the idea of a neutrally owned, shared ledger is not a new concept. Several initiatives in the financial industry — such as a Joint Back Office (JBO) — pre-date the euphoria around blockchains but languished in concept mode.3 What is the lure for maintaining a shared ledger between (competing) organizations? Resiliency and reduction of reconciliation often come up as two of the main reasons but the list is long and deserves its own post. Suffice to say, claiming that “append-only digital ledgers” are a plaything of the ’80s is not even wrong.
Another broad sweeping set of statements that lack precision:
As software engineers and technologists with deep expertise in our fields, we dispute the claims made in recent years about the novelty and potential of blockchain technology. Blockchain technology cannot, and will not, have transaction reversal mechanisms because they are antithetical to its base design.
As Green and Byrne (among other responders) have pointed out, there is a missing nuance by the authors in that there are different types of blockchains. For instance, depending on the implementation some permissioned blockchains allow – in theory – certain participants to freeze transactions.4
Likewise on public chains, administrators of USDC, USDT, and other collateral-backed pegged coins, regularly blacklist and freeze transactions. In fact, any chain with smart contract functionality can provide some form of reversibility (or at the very least, freezing of state). We also see this empirically during and after exploits, with developer teams freezing tokens.
This is a strange miss because one of the signatories is Stephen Diehl, who as far back as July 2017 (when I spoke to him in an official meeting) was/is the CTO and director at Adjoint, which is a British private blockchain firm that has previously announced payment-related partnerships.
This statement starts out good:
Similarly, most public blockchain-based financial products are a disaster for financial privacy; the exceptions are a handful of emerging privacy-focused blockchain finance alternatives, and these are a gift to money-launderers. Financial technologies that serve the public must always have mechanisms for fraud mitigation and allow a human-in-the-loop to reverse transactions; blockchain permits neither.
Green (and suzuha) points out that the authors are trying to have their cake and eat it too:
For example, as far back as 2015, banks involved in R3 presented use-cases that required – by law – protection of PII. At the time, any company or organization wanting to engage with regulated financial institutions quickly learned how PII was an unmovable touchstone (see this related presentation). And so from those functional requirements arose different solutions ranging from hardware-based solutions (like SGX) to software-based solutions (like ZK-Snarks). The public chain world was often where these ideas either first originated or at the very least, first tested.5
Over the years I have regularly pointed out how privacy and confidentiality-features could be used for a sundry of illicit activities. But just because it could be used by those types of actors, does not mean it regularly is.
On that point, in 2016 I helped edit a paper on this very topic. It was co-authored by Danny Yang (founder of Blockseer), Zooko Wilcox-O’Hearn, and Jack Gavigan. Wilcox-O’Hearn and Gavigan are executives at the Electric Coin Company, a for-profit company leading the development of Zcash. Worth pointing out that one of the signatories on the letter above amplified false information about myself two months ago, claiming I was not an advisor at Blockseer. Not only is this false, but I still own the equity in DMG Blockchain (which acquired Blockseer four years ago). This calls into question the credibility of the individuals amplifying information they did not fact check. What other false information are they claiming about blockchains?
Scare quotes is not the only thing that harms this section:
By its very design, blockchain technology, specifically so-called “public blockchains”, are poorly suited for just about every purpose currently touted as a present or potential source of public benefit. From its inception, this technology has been a solution in search of a problem and has now latched onto concepts such as financial inclusion and data transparency to justify its existence, despite far better solutions already in use.
The paragraph preceding this one also mentions “public blockchains” but doesn’t use quotes around it. And neither defines or provides nuance to explain the differences between “permissioned” (or private) blockchains compared with “public” (or anarchic) blockchains.
Either way, the authors make a good argument about how pulling on the heart strings of financial inclusion is mostly bupkis and I agree, and others have pointed that this rings hollow too.6 To strengthen this, the authors should have provided a citation or at least an example of “far better solutions already in use.” For example, Raúl Carrillo (who is not one of the listed authors) has pointed to Postal Banking as a possible avenue for (re)banking not just marginalized persons. Blockchains aren’t need for that or arguably for other retail activity.7
The next part of the paragraph is painfully arbitrary:
After more than thirteen years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions.
First of all, the first web browser (appropriately called the “WorldWideWeb“) was launched in 1990. It wasn’t until 2004 that Google revealed Ajax-based Gmail followed by Google Maps. If the authors are trying to make the claim that anything (everything?) useful should have been invented in 13 years then they should hold other tech initiatives to the same standard.
The lack of nuance in this letter is striking because not every blockchain is based on the purposefully limited architecture of Bitcoin. Between 2009-2015, a typical on-chain user could only access Bitcoin or a Bitcoin-based fork or clone (like Litecoin). Ethereum and other chains with a virtual machine, did not launch until the summer of 2015.8 That is part of the reason why regulated financial institutions (Big Banks) and large technology companies (Big Tech) began deploying resources in this sector in 2015: first with consortia and later setting up their own internal teams of subject matter experts. What a user could do with a blockchain changed over time thus a priori declaring “almost all applications” dead is incredulous.
And again, the authors provide no examples of what “existing non-blockchain solutions” they are referring to. For example, every single major vendor that provides core banking software for banks — such as FIS, Fiserve, and Jack Henry — have integrated tools that enable the software to interact with or hook into a blockchain. Every major Big Cloud vendor provides both tools for blockchain node operators as well as dedicated “Web3” development teams to compete with Alchemy and Infura. Several CSDs and CCPs have invested in a blockchain-focused company (like Digital Asset or Axoni) and have announced blockchain-based pilots. Pretending that this digitization and tokenization trend is not occurring beyond niche NFT art collections is intellectually dishonest.
I agree with most of this statement but it needs nuance:
Finally, blockchain technologies facilitate few, if any, real-economy uses. On the other hand, the underlying crypto-assets have been the vehicle for unsound and highly volatile speculative investment schemes that are being actively promoted to retail investors who may be unable to understand their nature and risk. Other significant externalities include threats to national security through money laundering and ransomware attacks, financial stability risks from high price volatility, speculation and susceptibility to run risk, massive climate emissions from the proof-of-work technology utilized by some of the most widely traded crypto-assets, and investor risk from large scale scams and other criminal financial activity.
The nuance these authors need to include is defining what “blockchain technology” is and is not. Trillian is not a blockchain but shares several common elements. Thus throwing the baby with the bath water flies in the face of the empirical reality.9 As far as criticisms around the negative externalities created by proof-of-work-based blockchains: I 100% agree. I have written on this topic roughly every 18 months. What would strengthen their statement is to provide actual statistics and data regarding each of their points (the data exists from companies like Chainalysis or previously, Blockseer).
Their polemical statement meanders on a bit more but this statement is worth assessing:
The catastrophes and externalities related to blockchain technologies and crypto-asset investments are neither isolated nor are they growing pains of a nascent technology. They are the inevitable outcomes of a technology that is not built for purpose and will remain forever unsuitable as a foundation for large-scale economic activity.
The second sentence falls under Hitchens razor: that which is presented without evidence can be dismissed without evidence. In fact, we do know why Bitcoin was built, Satoshi explained it at length on mailing lists and in the white paper. And Bitcoin was just the first “blockchain,” other chains have arisen later that fulfill other requirements. Onyx from JP Morgan is now being used for trading intraday repos. Maybe Onyx is just a flash in the pan, but it serves as a narrative violation — and there are more than a dozen other examples that the authors are likely unaware of, just read Ledger Insights each week.10
Lastly, in the Financial Times, one of the authors was quoted saying:
“The computational power is equivalent to what you could do in a centralised way with a $100 computer,” said de Icaza. “We’re essentially wasting millions of dollars’ worth of equipment because we’ve decided that we don’t trust the banking system.”
This is true with respect to proof-of-work-based blockchains but not at all relevant to alternate Sybil resistant models like proof-of-stake (P-o-S). Conflating the two is not accurate. Also, de Icaza and others needlessly defend the status quo, both with comments like this as well as the letter itself. Fortunately for retail, “the banking system” is not completely static and changes over time (it is also not a single monolithic entity). Also, not a single author listed works for a financial institution yet opines on it; there are plenty of blockchain “skeptics” within the financial industry why not find one?
Which brings us to the next section.
(Un)intentionally defending the status quo
The only reason to publicly identify themselves is to give weight or credibility to the matters discussed in the letter. Even though this letter was directed at U.S. congressmen and women, more than half of the signees are neither US residents or citizens. Even though more than a handful work at public tech companies or large organizations that rely on donations, let us give them the benefit of the doubt that they were not explicitly defending the status quo.
Yet without offering specifics beyond vague “non-blockchain solutions,” the authors are implicitly defending both systemically important financial institutions (SIFIs) and systemically important cloud providers. Both are bad for society and we should not defend their existence.
It is worth pointing out apart from two or three, most of these authors were not actively critical during the very public 2017-2018 ICO boom.11 What has motivated them to self-deputize and attempt to police what can and cannot be done with a blockchain in 2022 and ignore those who have been pathfinders in prior years? Perhaps there is a good reason, busy solving other worldly problems. I am certainly a fan of more introspection by disinterested parties!
I have written about it before but if the aim is to (1) influence policy makers and work with (2) regulators, there are at least two ways to achieve their goals:
Set up a not-for-profit lobbying organization modeled after Coin Center… the Anti-Coin Center. Hire former regulators and policy makers and re-use the lobbyist blueprint to engage with decision makers. A couple of years ago I wrote out a general overview to a couple L1 creators, it’s not complicated. You don’t even need a blockchain. But it does require some capital to hire for various roles, so it is not completely lean (e.g., would probably need to hire an actual blockchain engineer instead of relying on IT administrators). Oh and someone who posts frivolous memes all day is a must.
About four months ago, I asked one of the authors to submit their concerns directly with various agencies, such as the SEC and CFTC. This can be done formally through a whistle blower process (I’ve done it!). An ad hoc Hail Mary… is to informally do so through letter writing campaigns coordinated on social media. And as they haven’t stated otherwise, instead of submitting paperwork, some of these authors spend all day engagement farming on social media. If the outcome is “to get regulators to do something” this seems suboptimal because U.S. regulators typically need a paper trail to get the bureaucracy moving.
The blockchain world needs critics and criticism but it also needs criticism that is technically valid. And this letter is not only imprecise but sounds like something incumbent technology firms would write to defend their turf (which probably isn’t how it originated).
Over the past 18 months, the most recent coin bull market brought in a slew of new commentators a few of whom have attempted to co-opt the term “critic.” Clearly no one owns this term, there is no monopoly on it. Heck, I’ve even been labeled a “crypto” or “bitcoin” critic on more than one occasion. Yet we are seeing a cottage industry of professional “skeptics” who have a priori made up their mind irrespective of the evidence presented.
In addition to writing the most widely cited paper on “permissioned” blockchains, I wrote the first long form discussion on potential systemic important cryptocurrency networks in 2018 and think it is a bit absurd that some anti-coin commentary claims that cyber coins currently threaten the entire financial system. Feel free to disagree, but the onus is on the party making the positive claim. The counterfactual occurred the past five months: more than half of the aggregate coin marketcap evaporated. As collateral-backed pegged coins unwound, they did not lead to massive treasury liquidations crushing the traditional financial market.12
This is not defending the way centralized, commercial-bank backed pegged coins arose or currently operate.13 Rather it is a statement of fact: today the cyber coin world is not “too big to fail” and hopefully it never will be. Contagion can be real and should be simulated and stress tested!14 There are plenty of good criticisms to be lobbed at the “Web3” world, none of which requires making up fanciful conspiracies or playing fast and loose with technical verbiage.
If we are going to (rightly) criticize startups, investors, and other interested parties for mis-marketing “Web3” we should provide specific reasons as well as definitions. And while we are at it, let us bring a fine comb and scrutinize other hyped tech verticals that dramatically impact the well being of individuals such as: A.I. and workplace discrimination, privacy rights over data (including identity).15
Crusades can be big tent and incorporate more than just a small echo chamber of folks who (rightly) point out that a lot of cryptocurrency buzz is likely a financial grift with little real utility. Yet it is not a coincidence that perhaps the best critics are actual practioners, engineers, and architects who saw the limitations or drawbacks in certain blockchain designs and decided to build a different way. If there is a second version of this letter, it is highly recommended that input from outsiders be solicited. Including the world’s richest man, Colin Platt!
Or maybe we’ll just have to settle for a Kimberley process for Web3 claims, for both promoters and pundits alike.
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Depending on how it is defined, a candidate for the “original blockchain” was the Haber and Stornetta timestamping system published in 1990 (and thrice cited in the Bitcoin whitepaper). Therefore archaic blockchains had a useful niche before Bitcoin but were not capable of moving assets without a third party. Note: as they failed to provide a definition of a “blockchain” in their letter, the authors overly broad usage of “not useful” could encompass e-signature providers such as DocuSign and HelloSign. [↩]
One of the authors, Kelsey Hightower, works at Google, and a couple others work for large tech companies partly reliant on adtech revenue [e.g., monetizing personal information and data.] [↩]
At one point Accenture proposed an “edit” feature that does not appear to have been adopted by any chain. Stellar has implemented a feature that allows developers to “burn an asset.” [↩]
The experiments in the “dangerous” public chain space are funding and battle testing some of the new privacy and tech stacks that ‘Big Banks’ were not incentivized to build. Two examples in the U.S.: the FTX clearing proposal might be a better “exchange stack” than existing traditional finance operations and the Silvergate banking API (SEN) quickly confirms transactions based on on-chain data. Both services might not have been built even in the private blockchain world; at least they have not thus far. [↩]
To be fair, a number of financial incumbents and non-blockchain-related fintechs market their products and services as “financial inclusion.” They all attend many of the same events and sit on the same panels too. [↩]
See also the proposed E-Cash Act co-authored by Rohan Grey. [↩]
Technically Mastercoin, Counterparty, and several colored coin projects launched before Ethereum did, but they did not include a virtual machine that can run arbitrary code. [↩]
For balance, traditional financial markets also facilitate the transfer of illicit funds (money laundering) and ill-gotten gains from scams and fraud. The authors would have a stronger argument if they provided actual stats, e.g., what percentage of on-chain transactions involved illicit activities. [↩]
For instance, this coming October, a tokenized pound (‘synthetic CBDC’) on a blockchain platform operated by Fnality International will go-live in the U.K. Uptake may be slow in part because of issues around composability and because initial participants are banks that need to change the way they make payments. AntChain from Alibaba is a production chain used to settle e-commerce payments (connecting their banks to their merchants). Another example would be “perpetuals” which were conceived by Robert Shiller in 1992 and first implemented in 2016 by Bitmex, and now widespread on many major CEXs and a few DEXs. [↩]
The Federal Reserve Board annually conducts stress tests of the U.S. financial system. Similar tests occur in other countries. Researchers at the IMF recently released a paper describing the underlying framework of GST. [↩]
U.S. legislators at the national level have failed at providing a comprehensive digital rights and privacy framework, as well as A.I. auditing guidance. These issues are arguably just as important and impactful as cryptocurrency-related topics. [↩]
We (the ‘royal we’) have previously discussed various flavors of pegged coins, “stablecoins,” as well as CBDC proposals. This short, non-comprehensive post will look into the rise and rapid fall of the Luna and UST, two cryptocurrencies native to the Terra blockchain.1
What are the separate categories that the “stablecoin” idea can be bucketed into?
Above is a helpful taxonomy created by Klages-Mundt et al. and adapted by Robert Sams.2 One of the commonalities among all of these efforts above is that they are intended to administer an elastic money supply (as opposed to fixed, deterministic, or inelastic supplies used in many cryptocurrencies such as bitcoin).
Most analysis on this topic lacks the important nuances separating custodial and non-custodial “stablecoins” as well as those that depend on exogenous collateral versus endogenous collateral.
We are not going to dive into each one of the projects above. Furthermore, the usage of a name or logo is not an endorsement of a particular company or project.
So what happened to Luna and the UST this past week?
To answer that we need to quickly explain what the Terra blockchain is and how and why there are more than one layer 1 token such as Luna, UST, KRT (Korean Won) and SDT (an SDR token). 3
Launched just over two years ago – in April 2019 – the Terra blockchain incorporated elements of the “Seigniorage Shares” idea with a couple of twists. Whereas several other projects attempted to collateralize (back stop) a single stabilized asset through a mint/burn mechanism, Terra enabled arbitrageurs to burn Luna (the volatile, staking token) and mint one of several different pegged coins, the most prominent of which is UST. UST was marketed as being stable relative to the USD. That is to say, through an automated on-chain program, a trader could burn $1 worth of Luna (at Luna’s prevailing market price) and receive 1 unit of UST (irrespective of the prevailing market price of UST), and vice versa: a trader could exchange 1 unit of UST and receive $1 worth of Luna.4 In theory.
You might be asking yourself, what guarantees that traders will be able to redeem $1 of either at any point in time? Terraform Labs (TFL) is the main developer behind the the Terra blockchain. One of the ways TFL attempted to architect guaranteed redemption and simultaneously mitigate a “death spiral” (an existential crisis that multiple “algo stablecoins” have crashed into), was by capping the daily minting of UST.5 The exact amount has changed over time but the goal was to help throttle the unbounded risk of an oversupply of UST (or some other pegged coin).
Why is this important?
Because as mentioned above: UST (and the other pegged coins that can be minted) were explicitly uncollateralized — although there has been an implicit acknowledgement that the aggregate UST (and other minted currencies) needs to remain below the marketcap of Luna which is the key conduit for redemptions. An imbalance, or “flippening,” could (and did) result in a crisis of confidence and collapse.
The chart (above) shows the aggregate market caps of both UST and Luna over the past 12 months. At their height last month, they together represented almost $60 billion in (paper) value. Today that has dropped to just over $1 billion.6
Why did things go wrong?
Before we answer that, let us look at when “the flippening” occurred.
What is another way to visualize this?
What does this mean? Due to the “macro” bear market in cryptocurrencies (the aggregate coin market is more than 50% off its all-time high from last year), Luna’s market cap saw a rapid decline that quickly became a vicious cycle due to the Why.
While there are a bunch of mostly cliché conspiracy theories as to which traders took advantage of the knowledge and conditions to short Luna (and UST), the conditions that led to UST’s rapid ascent (relative to Luna) seen in Figure 2, are pretty pedestrian.
What was the key reason for this ascent starting in November? The popular Anchor dapp on the Terra blockchain. What is Anchor?
Launched in March 2021, Anchor is an all-in-one asset management dapp that allowed traders to deposit their Luna as collateral and borrow UST against it. Often traders would go to an exchange and convert the UST into Luna, depositing the Luna into Anchor and lever up several more times. Its ease of use led to rapid growth, with total-value-locked (TVL) growing from zero to $6 billion within six months. The loan-to-value (LTV) ratio shifted over time but was northward of 70% when UST overtook Luna this past week.
Why did TVL grow so fast on Anchor?
The main reason was the dapp subsidized both lenders and borrowers through the emission of a governance token called ANC. For over 6 months, Anchor marketed itself as being able to provide 19.5% APY on all UST deposits via a blended combination of Luna staking emission and reoccurring ANC airdrops.7 Both sophisticated and unsophisticated investors, believing that $1 UST was redeemable at par with $1 USD, deposited large quantities of $UST (which others could then borrow as well). Anecdotally we have heard of startups at incubators and seasoned fintechs in emerging markets offering retail users access to this high yield product. The yield was unsustainable and developers knew it so various interest groups (including several high profile investors) proposed ways to reduce the ANC yield each month depending on economic indicators.
But by the time the downward adjustment was implemented it was too late. This relatively high yield had turned UST into a “hodl asset,” a “store of value” — something that the uncollateralized system was not properly designed to absorb.8
Prior to the collapse of Luna and UST, the development teams behind Terra and Anchor recognized this shortcoming and this past February announced the Luna Foundation Guard (LFG) and organization that would accumulate exogenous collateral to defend the $1 USD peg.
Recall that at the very top in Figure 1, Terra was categorized as using endogenous collateral, that is capital native to the protocol itself (e.g., Luna, UST). As part of the initial LFG announcement, the organization aspired to accumulate large quantities of exogenous coins starting with bitcoin and later others (such as AVAX, and even both USDC and USDT). At its height, LFG’s reserves tallied over $3.5 billion and as of this writing it has shrunk to around $80 million (sans some squirrelly BTC).
Even without Anchor the fundamental problem is that the underlying collateral is volatile, so what is over-collateralized can become under-collateralized very quickly (whether it is endogenous or exogenous).9
Those who argue that the solution for decentralized stablecoins is to be “fully backed” are still kind of missing the point. If these protocols are all using the same 3-5 major coins as collateral, you can get the same ‘death spiral’ scenario materializing if the stablecoin supply grows large vis-à-vis the collateral marketcap. After all, even LFG’s liquidation of $1.6 billion BTC moved the largest coin cap.
So who is the buyer-of-last resort? If it is actually decentralized, it can only be the parties who can liquidate or redeem the collateral. CDP systems like Maker have the incentives for this behavior, but suffer from the coin supply side being driven by lending and no mechanism to equilibrate that supply to the demand side (the mechanism is the stability fee and savings rate, but that is set by governance, not the market)
The root problem for UST and Luna, (as Kevin Zhou, Matt Levine, and others have mentioned), was that neither had any source of value independent of the other. If the market decided to sell both, there was nothing to give you confidence that they would recover. UST was built on Luna and for the past 6 months Luna was built on essentially Anchor yield savings. Even a large “stabilization fund” – with a transparent and automated mechanism for how it would be deployed – would not prevent the Luna/UST market cap from growing to dwarf the LFG backstop, thus a sequence like this past week was always a risk.
We could spend pages describing alternate plans and paths the development teams, users, traders, and other interest groups could have taken to stymie the collapse. Instead we wanted to highlight one final chart that we found interesting.
The chart (above) shows the intraday prices each day over the course of a week between Luna (in dark pink) and bLuna (in blue).
What is bLuna? bLuna is a liquid staking mechanism managed by Lido in a partnership with Anchor.10 Liquid staking is actually an interesting concept. Most readers are probably vaguely familiar with staking on a proof-of-stake network: users deposit their coins to an address on-chain and receive some form of remuneration (emission) for helping to secure the network (and process transactions, if they are a validator).
But the coins used in staking are effectively frozen and cannot be easily used elsewhere as collateral. Enter liquid staking. As the name suggests, liquid staking is a concept that has been implemented in two different ways: at the dapp layer (via Lido, Marinade, and a few others) or at the native L1 layer (Osmosis in the Cosmos ecosystem is about to be the first to do so).
Liquid staking is neat because it allows all of the locked up (“frozen”) capital to be used as collateral for lending. An imperfect example: Bob purchases $200,000 of Apple stock. He wants to buy a new home and instead of selling the stock he finds a bank willing to use his Apple stock as collateral for the down payment on the house. Similarly, liquid staking is not rehypothecation as no new asset is created.11
The reason a lot of brain cycles have been spent on creating liquid staking dapps (like Lido) is that the vast majority (>95%) of all staked assets on proof-of-stake networks is illiquid. If they can become liquid that would enable more capital to be used for endogenous lending — instead of having to rely on exogenous capital like wrapped assets (WETH, WBTC) or real world assets (USDC, USDT).
In theory, when an asset transforms from a staked asset into a liquid staked asset, the market prices of the two should be very similar. In some cases, such as stETH (ether deposited in Lido on Ethereum) or mSOL (sol deposited in Marinade on Solana), the liquid asset accrues the emission reward therefore becoming slightly more valuable over time (in proportion to the emission rate).
In the case above, bLuna and Luna were tightly coupled but clearly broke down between May 9th-11th due to the massive selling pressure and unstaking that took place (more than 95% of all Luna has been unstaked down considerably over the past month). This brings us to the final section.
Surprise! I have a couple ideas on how to evolve the “algo stabilization” world, including adding a (possible) new category to the four incumbents above: a demurrage-based settlement asset.
But first, let’s take a step back and ask the question what amount of UST could Luna have absorbed?
Even the most hardened maximalist or anti-coiner would concede that a single solitary 1 UST could probably be absorbed by Luna’s market cap.
So where is the limit? Where do the wheels fall off? When do things become unwieldy?
It was not the UST borrow side that was a priori the fundamental culprit. Amplifying the problem was goosing the UST demand side with 19.5% “risk free” returns on Anchor. For instance, if the arbitrage mechanism only allowed the creation of UST (or other pegged assets) based on a small single digit percentage of Luna’s marketcap, it is likely this collapse might not have happened in such a dramatic fashion.
Yet as mentioned above, this approach alone still would not have staved off simultaneous sell-offs of both UST and Luna and/or hyperlunaflation.
Future developers looking to enter this arena could construct an asset with a stabilized unit-of-account that maintains a diminutive aggregate relative to the staked asset being burned. E.g., depending on the use case, an aggregate the size of $100,000 could conceivably power a small on-chain economy much like in traditional markets rely on a high velocity of money to grease the economy (where money is circulates among participants like a hot potato).12
That is to say, a high velocity stabilized unit-of-account, one that is used as a medium-of-exchange and not as a store-of-value or hodl asset, probably has a lot more longevity so as long as its creation (or borrowing) is not heavily subsidized. Sprinkle in some demurrage – or negative interest rates – to further disincentivize hodling and focus on a handful of uses (n.b. “hodling” is not using).1314
It is pretty easy to dance on the grave of another dead / dying cryptocurrency, there have been a few dozen marathon’s worth of victory laps on social media this past week. Despite autopsies and red flags, it is likely that some folks will attempt to emulate the heavily subsidized borrowing model too.
Apart from designing a purposefully limited high velocity, stabilized unit-of-account, what can non-developers do?
Arguably, the most accurate commentator on this topic is a friend, Kevin Zhou (founder of Galois Capital), who publicly predicted what would occur months ago. But unlike the maximalists and anti-coiners who stridently label everything a scam and a fraud, Zhou actually modeled out several scenarios in detail. Give him a follow.
Future analysis could look into the on-chain contagion such as dapps that were impacted including Mirror protocol (did the yield at Anchor cannibalize the other use cases by acting as a liquidity gravity well?). As of this writing it is unclear what direction a “LunaV2” will take but worth pointing out that key stake holders in the ecosystem agreed to shut down the network twice and switched to PoA.
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There are oodlesofnewsarticles exploring how the “death spiral” took place, this is not really one of them. [↩]
Note: according to the Terra Token Cash Flow chart, Terra was actually generating more in KRW fees (primarily via Chai) than it was earning in UST fees. The KRT ecosystem had more velocity: KRT turning over ~500 per month versus UST at a mere 1.5 times with the caveat that the KRT ecosystem is very small. [↩]
The actual arbitrage opportunity would be if UST is trading for $1.10, a trader could exchange $1 of Luna for 1 UST, therein arbing a profit while increase UST supply and bring price down. Conversely, if UST is $.90, a trader could exchange 1 UST for $1 of Luna. [↩]
There are some similarities with the collapse of Titan / Iron bank last year, although part of that involved a discrepancy with the oracle feed. [↩]
A simple way to observe the troubling trend early on was the UST / Luna marketcap ratio (based on circulating supply). Below are specific numbers that appeared in a chatroom I was in:
April 17 7:30pm EST — 63% April 30 11:30am EST — 66% May 7 5:00pm EST — 78% May 7 6:30pm EST — 81% May 8 9:00am EST — 90% May 9 1pm EST — 95% May 9 3pm EST — 113% May 9 11pm EST –125% May 10 7:30am EST –149% May 10 3:45pm EST– 166% May 10 5:30pm EST — 207% May 10 6pm EST — 211% May 11 5:30am EST — 291%
In April, the ratio flirted with and fell below the 2/3rd mark. But due to the persistent bear market coupled by sell side pressure of both UST and Luna, by the morning of May 10th, ‘hyper hyperinflation’ was well underway with a massive expansion of Luna’s total supply. [↩]
As mentioned in the bLuna section: users can mint a bAsset called bLuna by depositing Luna into Anchor. Staked funds are effectively pooled together by a white list of validators (users collectively share emission rewards as well as slashing events). These staked funds are used as collateral for borrowers who are subsidized through what is now a money-market. Thus there are three different tokens active in the dapp and the “19.5%” headline figure largely consists of a recurring airdrop of the ANC governance token. E.g., if Bob deposited bLuna as collateral, he is paid out in ANC (and UST fees) in lieu of his regular staking rewards (or at least pre-crisis that was the case). And borrowers were subsidized in the form of ANC as well. Those who deposited UST (not Luna) received 19.5% APY up until this month (where it dropped to 18%). This came from ANC rewards as well as a reserve fund that TFL topped up on occasion. [↩]
Some analysts think that Anchor was not that big of a deal yet at a minimum it was important as a supply sink. It is not as important in terms of how the system got insolvent; that’s more because of the underlying mint / redeem mechanism. Or as Kevin Zhou concisely explained on Odd Lots: “And they [TFL] would also use that to keep basically topping up the Anchor protocol on their yield reserve. Because they were paying more interest to depositors than they were collecting from borrowers. And, you know, I think in the end stages of Luna in its final days, you could see that the, you know, the deposit amount was way, way higher than the borrowed amount. So, you know, they, they were bleeding.” […] “I think the system was way in the past, it was already insolvent, you know, it’s just that nobody realized because they had created such a strong supply sink in Anchor for this UST, you know, if that disappeared overnight, or even gradually, the entire system was insolvent.” [↩]
Several commentators have attempted to downplay Anchor as little more than a user acquisition strategy, stating “There was nothing wrong with Anchor, they just paid more yield than what was sustainable as a growth strategy. Tons of businesses operate at a loss as a customer acquisition growth strategy.” But we can clearly see, what works for tech platform business development does not apply generally. You probably cannot integrate a heavily subsidized GTM strategy into the incentive mechanisms of your dapp or L1 without contorting the financial system you are building. As one reviewer noted: “sustainable mechanism design needs to make pessimistic assumptions (where assumptions must be made) with respect to the behavior of actors. That means minimizing mercenary behavior (e.g., “I’ll come for the subsidy and immediately depart when the freebie is removed.”). [↩]
Lido is the largest and most popular liquid staking dapp for Ethereum, Terra, and several other blockchains. [↩]
A Luna holder can pledge their Luna as collateral and receive bLuna which pay out rewards in Terra-related tokens such as UST and ANC. [↩]
In this strawman example: a stabilized unit-of-account would not need expand much so as long as its usage is high velocity. “Velocity” is an economics term used to describe how quickly the average unit of money (e.g., dollars) turns over in a given year. If this stabilized unit-of-account is only used to top up loans or fulfill margin requirements, its aggregate size would be different than a synthetic store-of-value (which is what UST attempted to be). Thus $100,000 may be sufficient to help fulfill specific sets of on-chain uses (such as those around derivatives or prediction markets). [↩]
As a friend recently pointed out: “an ‘algo stablecoin’ like Luna / UST is a form of collateralized stablecoin just different from external collateral. In this case, TFL and others were making their own collateral and hoping it retains value. They seemed to believe the amount of Luna backing UST was relatively high enough it could absorb redemptions without going into a spiral because, say, people valued those Luna tokens independently from redemption sufficiently high enough due to its governance rights over the entire blockchain that had other important commercial applications. A small coin that had limited systemic impact could be used as some sort of collateral basis and potentially survive indefinitely.” [↩]
Ultimately all public chains need base layer transactional demand to survive post-block reward. “Hypothetically, an algorithmic stablecoin could survive in the long-run, if it were to have ongoing transaction-related demand (similar to a fiat currency)” from Global Markets Daily: The Economics of Algorithmic Stablecoins, by Rosenberg & Pandl at Goldman Sachs on May 16, 2022. [↩]
[Note: I neither own nor have any trading position on any cryptocurrency. I was not compensated by any party to write this. The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]
Summer has nearly arrived in the northern hemisphere and several friends have reached out to ask several unanswered questions and rumors.
Note that many of the questions below are about commercial and trade secrets where there is no obligation to make the information public.
For instance, we could openly ask how much Cargill (the largest private corporation in the US) spends to manufacture its wares but they are under no obligation to provide that to anyone beyond their managers, shareholders, and regulators.
Similarly, most of the companies (and individuals) below are under no obligation to provide answers. However since we think it is in the public interest to know who benefits from certain decision-making (such as who first knew about #NoBugFix last year), we are publishing them here with the aim of answering them over time.
This is a non-exhaustive list and arranged in no particular order:
(1) We were promised a public audit, so who hacked Bitfinex in August 2016? Was it an inside job? Compromised BitGo account? Who was moving the ‘stolen’ coins last month? Will the current NY AG lawsuit versus Bitfinex/Tether reveal these details?1
(2) Ripple’s co-founders gave (granted?) ~80 billion XRP to Ripple Inc. back in January 2013 when it was still called OpenCoin. How much XRP was/is given to early investors like a16z and/or future partners?
(3) When R3 sued and settled with Ripple in 2018, rumors circulated that R3 won the equivalent of ~$500m in XRP and were limited to selling just as Jed McCaleb is constrained by.2 How much was the settlement for and how much XRP has been sold? How much do XRP sales account for R3 and other organizations revenue? For instance, Ripple has sold at least $1.1 billion in XRP to finance its operations through mid-2019. What are the ramifications if XRP is deemed a security?
(4) Three years ago several Bitcoin Core developers were allegedly involved with an astroturfing campaign (such as Antbleed) via coordination in a “Dragon’s Den” Slack room. Was this real and if so, who are these people? Are they still active?
(5) A couple years ago, Jackson Palmer and Angela Walch separately asked who were the people that had merge access in the Bitcoin Core repo. They were rebuffed and told this is a necessary secret to maintain. Is this a secret? If so, why the lack of transparency and who made this decision? How common is this secrecy in other coin projects?
(6) As Bitfinex is an investor in Blockstream, what’s the formal relationship between the two organizations today, specifically with respect to Tether?3 Do either organizations operate OTC trading desks? If so, where and how are those licensed or legally structured?
(7) It is alleged in a lawsuit that EOS organizers recycled its year-long ICO proceeds back into its own sale thereby inflating its raise and generating hype. How much actual coin money from retail investors was sent into this generally solicited ICO?
(6) In April 2017 Bitfinex (briefly) sued Wells Fargo regarding the cutting off of correspondence banking… and a week later withdrew the suit. What were the names of the Taiwanese banks that were supposedly at the center of this (non) compliance controversy? Did these banks eventually reopen accounts on behalf of Bitfinex or Tether?
(7) Based on an interview with George Fogg, a 2015 FT article pointed out that Bitcoin (and likely other coins) has a lien problem: that due to rampant thefts and DNM activity there were probably more claims on specific bitcoins than there were bitcoins.4 What percentage of bitcoin (or other coins) are encumbered today?
(8) A rumor since 2014 is that a US-based coin exchange signed a deferred adjudication agreement with the federal government due to money laundering issues. If true, will it be revealed if/when an IPO is filed?
(9) Since SAFTs are largely considered cadavers in the US, what (if anything) will happen to its creators and early promoters? Enriched and sauntering off into the sunset? Or disbarred and disgorged?
(10) Will deposit-taking coin intermediaries ever be required to comply with federal laws as banks do in the US? Will they simply end up lobbying and moving shell entities into the state of Wyoming for an SPDI?
(11) FinCEN carved out a loophole for proof-of-work miners in 2013. Yet in practice, mining pool operators can and do select or censor transactions.5 Will they be held liable as an MTO or PSP as more value is moved through their machines and regulators catch-on?
(12) It is alleged that Craig Wright has plagiarized and used ghost writers for publishing papers. Who are they and how much were they paid?
(13) Last year, a former senior executive at a US-based coin exchange is alleged to have undue influence on listing coins based on his bags. What, if any, are the internal controls erected to prevent this type of behavior in coin exchanges? Several coin creators and issuers have joined and/or created coin exchanges in the past.6 Have any of them used their position to profit off of the asymmetric knowledge on listing their coins (or others)? If so, how to prevent this in the future?
(14) Lightning Network was frequently marketed as being ‘just around the corner’ yet it appears to have stagnated in activity over the past 18 months. Who(m) is responsible for this continued delay? Will it reach its marketed potential in the next year or too much of a Rube Goldberg machine? When will LN hubs need to become compliant with the Travel Rule?
(15) Who acquired the @Bitcoin user on Twitter last year? Did the acquisition or transfer violate the Terms of Service?
(16) Regarding the revolving door: how many former regulators now work at coin intermediaries? And vice-versa: how many former coin employees work with regulators? With the push for additional stablecoins and potential CBDCs, will there be transparent interactions between regulators (and politicians) and vendors? If a single vendor oversees a proprietary codebase, how will this not result in a Hold-Up problem?
(17) At least one Chinese exchange, pre-2017, went out of its way to support scams like MMM. How many exchanges knowingly profited from allowing MMM or BitConnect-like actors to operate? Are regulated stablecoin issues such as Paxos aware of this?
(18) bitFlyer was accused of knowingly laundering money for the Yakuza. How many other exchanges have done so as well? In a given year, what percentage of exchange revenue comes from laundering the proceeds of organized crime?
(19) A conspiracy theory (joke?) is that whenever a coin exchange operator in South Korea gets a tax bill, they hack themselves in order to reduce the tax liability. Is this true and if so, how much has been pilfered?
(20) Jackson Palmer, Gwern Branwen, and others have poked into the original source code of Bitcoin and found the seeds of a marketplace and poker lobby.7 Was the original goal to also include a coin exchange or DNM?
(21) Why is Coinlab stilldragging its feet during the never ending Mt. Gox bankruptcy proceedings? 8
(22) Was that really Gerald Cotten’s body or is he just mostly dead? Did Cotten act alone as the narrative leads us to believe or did Michael “identity theft” Patryn have a roll in the missing funds? As it was during their honeymoon, is Jennifer Robertson aware of anything odd about the circumstances surrounding Cotten’s death?
(23) Late last year, one of the allegations against Virgil Griffith included somehow helping move a computer system to act as a mining rig across the border to North Korea. We have heard rumors of used, second-hand mining hardware making its way across the same border in the past. Hardware manufacturers have said it is difficult to police because even if they KYC the original buyer, they have no control of where used hardware is sold over time. How much hashrate for Bitcoin or Ethereum and other PoW coins are generated out of North Korea?
(24) Common conversations at events imply that virtually every coin exchange has been hacked yet most simply eat the losses without publicly disclosing it. How many major hacks of coin exchanges in the US have still not been disclosed?9
(25) Several podcasters have openly bragged about not paying taxes on their coin dealings. For instance, the co-creator of a coin launched in 2014 from an organization based in California, now avoids California due to not having paid the state’s capital gains tax. How many others are virtue (vice) signaling? Or are they still counting on lax enforcement?
(26) Ethereum Classic (ETC) is technically the original Ethereum chain. During the debates over the ETH-ETC hard fork in late July 2016, a small handful of investors including Barry Silbert were vocally claiming on social media to support ETC.10 Several subsequent separateinvestigationsinto Silbert’s social media activity raised questions around anti-touting provisions of securities laws. If ETH or ETC was a security in 2016 due to a coordinated hard fork that was notsufficiently decentralized, who could be held liable for actively promoting a coin to unsophisticated investors? For instance, earlier this year actor Steven Seagal was penalized for not disclosing his paid endorsement of Bitcoiin2Gen (B2G). Does touting matter if a coin is or is not a security?
(27) The scandal and fallout around Joi Ito (and MIT) knowingly accepting funds from sex offender Jeff Epstein is still on-going. Last year we learned that Epstein was not just interested in Bitcoin, but he reached out to invest and fund Bitcoin-related companies and efforts (perhaps even DCI). For instance, Elizabeth Stark (from Lightning Labs) pointed out that she turned down an investment offer. Did Epstein put money into entities such as Digital Garage, which Ito co-founded?11 What about Digital Garage’s portfolio companies?
(28) The IOTA mainnet was stopped for days then weeks, and the non-anonymous founders fought in public about past grievances including funds that were supposed to build hardware devices… that were unaccounted for. The IOTA network, like EOS and Cardano, are arguably still centralized due to the smattering of nodes operated by a handful of entities. At what point are these types of networks deemed centralized money transmission operators (MTO) with the need to register with FinCEN and other similar regulators?12
(29) Where is Binance’s headquarters? Their executives often claim to not have offices – even when they are visited by the police… yet these same Binance executives appear in photo-ops on islands and jurisdictions found on the FATF blacklist. Where are they domiciled from a legal perspective? Do they pay taxes somewhere?
(30) In 2017, OKCoin and Huobi were penalized for not disclosing to their customers that they were re-investing deposits in other financial products. It is rumored that other coin exchanges have used their customer deposits and cash reserves to manipulate various coin prices which ultimately wreck retail investors, all because they can see trader’s positions and know exactly what amount of manipulation will close positions. How common is this?
(31) What happened to all of the funds donated to the dubiously self-serving ‘DefendCrypto’ effort? Recall that Kik conducted an ICO because it was running out of fundraising options… and then later sued by the SEC. Were all of the ‘community donations’ simply handed over to their lobbying organization (Blockchain Association) to spend carte blanche?
(32) Why do some coin exchanges employ outspoken tribalists or maximalists? What does this mean for how the exchange treats trades and orders for non-tribal-approved coins?
(33) How much do coin lobbying organizations charge to get fines or sanctions reduced? At least one DC-based organization removed the name of a prominent coin exchange (despite accepting their funds) after a lawsuit from NY AG was announced. Do these types of advocacy / lobbying organizations return the funds from illicit actors? When will the coin holdings of staff at coin lobbying organizations be required to be disclosed?13
(34) Over the past five years, numerous corporates and enterprises have publicly announced partnerships with more than a dozen different coin issuers. Most of these are vanity projects that end after 3-6 months. However, prior to the public announcement, it is alleged that insiders acquire coins with the expectation of a jump in prices.14 How common is this and how to remove this temptation from future decision-makers?
(35) CryptoDeleted was silenced by embarrassed social media personalities as it screen grabbed their boisterous coin shilling. How many other times has this specific type of suspension occurred on Twitter and other platforms with respect to documenting coin shills?
(36) Without providing any proof at the time, several prominent coin promoters claimed to have – or will have – donated large quantities of money to charitable organizations. In the case of Brock Pierce, more than two years ago his plans to donate $1 billion was uncritically reported on. Binance and other coin intermediaries that are in continuous legal limbo, also frequently claim to donate to causes in developing countries or for COVID-19. How much has actually been donated? Do operators believe such donations make up for listing P&D coins that fleeced retail investors?
(37) During the height of the fraudulent ICO boom days of 2017, dozens of coin funds were purportedly spun up to capitalize off the quick pump-and-dump on retail investors that was taken place globally.15 At the time, one article listed 15 such funds, most of whom appear to have fallen to the way side, and at least one (Polychain) that was sued by multipledifferent LPs for lack of transparency. How many of these funds got early access discounts and quietly dumped coins as soon as the coin got listed? How many actually paid taxes on the rumored ill-gotten gains?
(38) Soldering ASIC mining chips into always-on devices has repeatedly proven to be a bad deal for the consumer due to the fixed unit of labor within each device. Yet nearly every year starting with the 21.co toaster and Bitfury light bulb, a new manufacturer jumps into the fray to release yet another one of these environmental hazards. As an aggregate, how many of these all-in-one Earth sizzling devices have been shipped to consumers?
(39) Whatever happened to Halong mining? Their Dragonmint rig was repeatedly hyped by prominent maximalists back in late 2017 and early 2018. They shipped some units but they’ve been silent for a couple of years. Just one-and-done?
(40) With the release of the latest Raspberry Pi 4 and increasingly cheap SSDs, will node operators begin to (again) support larger block sizes? Aside from politics and ideology, what are the show-stopping technical reasons for not doing so? Too much to sync for a mobile device?
Bonus! Is ransomware fully dependent on the liquidity of cryptocurrencies? If so, will regulators and law enforcement eventually close down coin exchanges in order to snuff out this evergrowingparasite?
Again, this list is non-exhaustive and fairly US-centric. It also doesn’t even scratch the surface of C-level executives and apparatchiks who repeatedly use their social media platforms to push “buy the dip” memes onto unsophisticated investors.
Acknowledgements: many thanks to AC, GW, JS, CP, VB, AW, RS, AC, and CK for their feedback and suggestions.
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Tether Inc. has repeatedly misled the public about the 1:1 backing of its coin. As it has not regularly released an independent audit, some researchers such as Nicholas Weaver, hypothesize that there could be an imbalance that inflates bitcoins price level. [↩]
Note: other partners, co-founders, and early employees are supposedly constrained by similar limits, not just McCaleb. [↩]
Did Blockstream really own a Gulfstream IV? If so, why did a small software company need one? Why did they remove their team page a couple years ago? [↩]
As we have mentioned elsewhere, a fundamental problem for all current cryptocurrencies is that they are not exempt from nemo dat and have no real fungibility because they purposefully were not designed to integrate with the legal system. [↩]
Some mining pools have a service that enables certain customers to pay higher fees to expedite transactions. [↩]
For instance, Charlie Lee (the creator of Litecoin), worked at Coinbase and claims to have had no influence on Coinbase’s decision to list Litecoin. Bobby Lee, his older brother, ran a coin exchange in China called BTCC. Back in 2014, BTCC introduced a marketing campaign for listing Litecoin (“Brothers Reunited“) which Charlie was purportedly involved in. [↩]
Update 6/9/2020: According to a reader who compiled the code: “Original Bitcoin source code included the poker lobby and an eBay-like marketplace with a review system and essentially a sub-currency called “atoms” which were kind of like seller reputation / review kudos tokens.” [↩]
As an aside, is there any additional connotation to Mt. Gox and the term Mutum Sigillium (which means a sealed deposit)? [↩]
As an aside, one US exchange allegedly confiscated and sold CLAM coins that were airdropped on its user base, without their knowledge. [↩]
Other ‘coinfluencers’ involved in the ETC split include Charles Hoskinson. [↩]
Related: what about DeFi infrastructure, how many developers will be forced to adhere to rules and compliance requirements? Clearly most are not in-line with the PFMIs! Also, what was given (negotiated) with the dForce hacker? [↩]
A couple sources claim that multiple personnel at three different DC-based lobbying groups including Coin Center have large undisclosed coin holdings (such as ZEC) which are believed to be a direct conflict-of-interest with how these organizations market themselves as “neutral.” [↩]
For instance, a Fortune 100 company has investigated a former project lead who purchased a large quantity of a coin without disclosing it to the management team; it is believed this person may have even chosen to do this project with the coin issuer in the first place just for the ‘cheap’ coins because from a technical perspective, there was little merit in pursuing this architecture. [↩]
One interesting story during this time frame was in September 2017, when several Chinese government agencies launched a large crackdown of ICOs and shut down many coin exchanges. Law enforcement perused WeChat chat histories to identify P&D ring leaders. A prominent coin investor based in Shanghai was supposedly tipped off and booked a seat on a private airplane from Shanghai for Los Angeles. Upon landing this person then flew to Georgia where they had a home and remained for several months. During this time this individual, in an agreement with Chinese governmental bodies, disgorged a large part of their ill-gotten coin earnings and later returned to China. [↩]
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.
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.
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 ‘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.
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?
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 nosettlement 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.
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.
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.
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.
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.
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:
what types of blockchains they had in mind?
how the legal hooks into certain blockchains behave versus anarchic chains?
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.
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
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 havefallen 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:
Lightning has been massively hyped with still relatively subdued traction
Lightning is a separate network – it is not Bitcoin – and thus must be protected and secured through other non-mining means
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.
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 itevolved 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.
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 habetand 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“).
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.
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:
it is a form of centralization which could have legal and regulatory consequences with respect to being viewed as notsufficiently decentralized
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.2021
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?
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 onits “blockchain” platform.
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.
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:
Which Bitcoin fans are the authors referring to, the maximalists?
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.
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:
Pretty sure the authors meant to say “distributed” not “digital”
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.
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.
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 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.
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.
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.
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 Newscovered 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.
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.
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. [↩]
Ryan Zurrer, second-in-command at Polychain, was recently fired from Polychain amid weak performance this year. [↩]
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. [↩]
Mike wrote the first line of code for Corda over three years ago. [↩]
The initial conversation with Bob took place in San Francisco during Coin Summit. Bob later became a key person at Chainalysis. [↩]
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. [↩]
Oddly the authors of the book do not name “Corda” in this book… they use the phrase: “R3’s distributed ledger” instead. [↩]
At the time of this writing there are: 5 incubated “Frameworks” and 6 incubated “Tools.” [↩]
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. [↩]
The past 6 months have seen an evolution of insanity to sanity. Just kidding!
One observation I have seen is that a few of the most vocal coin promoters have finally sat down and spoken with policy makers. Or rather, they finally started attending events in which policy makers, regulators, and decision makers at institutions speak at.
For those of us who have been attending and participating in regulatory-focused events for several years, the general messaging hasn’t changed that much: laws and regulations around financial market infrastructure and financial instruments exist for legitimately good reasons (e.g., systemic risks can be existential to society).
What has changed is that there are a few new faces from the coin world — most of which have previously pretended or perhaps did not even know that there is parallel world that can be engaged with.
It is still too early to see whether or not this governance education will be helpful in moderating their coin-focused excitement on social media but it seems to be the case that regulators and policy makers are still further ahead in their understanding of the coin world than vice versa. Maybe next year coin issuers and promoters will finally dive into the PFMIs which have been around since 2012.
Below are some of the activities I was involved and participated in.
[Note: the 10th anniversary of the Bitcoin whitepaper is this month. Below is a detailed interview with one of the first individuals to have interacted with Satoshi both in public and private: Ray Dillinger.
All of the written responses are directly from Ray with no contributions from others.]
Q1: Tell us about yourself, what is your background?
A1: I am originally from Kansas. At about the same time I entered high school I became interested in computers as a hobbyist, although hobby computers were still mostly useless at that time. I got involved in early BBS systems when DOS hadn’t been released yet, modems were acoustically coupled and ran at 300 bits per second or slower, and software was stored mostly either on notebook paper or cassette tapes.
The early interest in computers is part of my lifelong tendency to become deeply involved in technology and ideas that are sufficiently interesting. This has led me to develop interests, obsessions, and expertise in a huge variety of things most of which the public does not discover reasons to care about until much later.
I graduated from KU with a degree in Computer Science in December of 1995 after spending far too long alternating between semesters of attending classes and semesters of working to pay for classes.
After graduation I moved to the San Francisco Bay area. I worked for several AI startups in the next seven years and hold a couple of patents in natural-language applications from that work. After that, I worked the night shift for FedEx for some years while doing occasional security consulting gigs during daytime hours. I am currently doing AI algorithm research and implementation (and some cryptographic protocol/document design) at a FinTech startup. I work on General AI projects on my own time.
I am somewhat pessimistic by nature and tend to assume until given reason to believe otherwise that anyone trying to sell me something or convince me of something is a scammer. I know that’s irrational, but knowing doesn’t make the belief stop. I have an abiding hatred of scammers and find them viscerally disgusting.
I consider making noise to be rude, avoid crowds and public appearances, and distrust anyone speaking faster than they can think. Although I write a great deal, I rarely speak and strongly dislike talking on the phone.
In spite of my peculiar interests and asocial tendencies, I somehow managed to get married to a wonderful woman who tolerates an unbelievable degree of geekdom in an unbelievable variety of subjects, ranging from mild interest to full-on mad scientist levels in scope. I am tremendously thankful to have her in my life, and to whatever degree
I might be considered social, she deserves most of the credit.
I became marginally involved with Bitcoin in its early development because cryptocurrency, and the application of block chains to cryptocurrency in particular, are interesting. I ceased to be involved in Bitcoin when the next steps would necessarily involve salesmanship, frequent talking, and social interaction, because those things are not interesting.
Q2: Perry Metzger created the now infamous Cryptography mailing list years ago. When did you join and what made you interested in cryptography?
A2: I joined so many years ago it’s hard to remember. It was pretty much as soon as I became aware of the list, but I’m sure it was more than fifteen years ago. It may have been late 2001 or early 2002.
I think I may even have been one of the first twenty or thirty posters on that list – it was still very young.
I remember being vaguely annoyed that it hadn’t been available when I was actually still in college and doing a crypto project in a grad-level networking course – I’d been a member of the even-earlier ‘cypherpunks’ list back when I was in school, but its strident political ideologues (including a guy named Hal Finney, whom you’ve probably heard of)
annoyed me, even back then.
‘cypherpunks’ was where I became aware of and started corresponding with Hal. Although, way back then, I think we were both mostly annoying to each other. And possibly to others as well. Hal had been stridently political all the way from those days (and probably before) to the day he died, and in retrospect, I think I really needed some ‘remedial human-being lessons’ and some wider education at the time. I’ve learned a lot since then – and perspective outside the narrow specialties we studied in school really does matter.
Q3: There were a lot of other non-cryptocurrency related discussions taking place simultaneously in November 2008 and many of the frequent posters didn’t comment on Bitcoin when it was first announced. What interested you in it? How involved would you say you were with providing coding suggestions prior to the genesis block that following January?
A3: I was interested in it for several reasons. First, Bitcoin was a digital cash protocol, and digital cash protocols have some significant challenges to overcome, and I’d been interested in them for a long time already. I’d even designed a couple by then. The first I designed was unsound. The second, which is the only one worth talking about, which I’ll talk more about below.
Second, Bitcoin used a central proof chain (which we now call a block chain) as means of securing the history of each note, and I had known for a long time that any successful digital cash protocol had to use proof chains in some form or it couldn’t circulate (couldn’t be spent onward by someone who’d been paid in it). And I was very, very much interested in proof chains, especially for a digital cash protocol. I had already used proof chains (very differently) for a digital cash protocol when I extended Chaum’s e-cash protocol in 1995.
(see Digression #1 below to understand the differences between my protocol and Satoshi’s, and their effect on protocol design.)
Third, Satoshi eventually convinced me that he wasn’t a scammer. I’m sort of a natural pessimist at heart, and digital cash protocols have a long history of scammers, so at first I had assumed the worst. I think a lot of others also assumed the worst, which would be why few of them responded. I made my first couple of replies without even having read it yet, to see how he responded before I wasted mental effort on something that would probably turn out to be a scam.
When I finally bothered to actually read the white paper, and spent the mental effort to understand it, I realized that (A) it wasn’t the usual incompetent bullshit we’d seen in far too many earlier digital-cash proposals, and (B) Its structure really and truly contained no Trusted Roles – meaning the opportunity to scam people was NOT built into the structure of it the way it had been with e-gold, e-cash, etc.
Fourth, and absolutely the clincher for me; it was very very INTERESTING! It was an entirely new paradigm for a digital cash protocol, and had no Trusted Roles! Nobody had EVER come up with a digital cash protocol having no Trusted Roles before!
Of course it wasn’t a “serious” proposal, I thought. It wouldn’t work for any kind of widespread adoption (I thought at the time) because of course people would conclude that spent hashes which absolutely couldn’t be redeemed for the electricity or computer power that had been used to create them were valueless. And it would never scale beyond small communities or specialized applications of course because of its completely stupid bandwidth requirements.
But it was INTERESTING!
I could never have come up with Bitcoin because of the tremendous bandwidth. Without Satoshi’s proposal, the idea of transmitting every transaction to every user would just have bounced off my mind as inconceivable. Hell, I didn’t even understand it the first couple of times through the white paper because I was looking for ANY WAY AT ALL to parse those sentences and ‘transmitting every transaction to every user wasn’t even a POSSIBLE parse for me until Satoshi explicitly told me yes, that really was what he meant.
When I finally understood, I started doing math to prove to him that it was impossible, tried to relate bandwidth to rate of adoption and got a largest possible answer that’s only about one-eighth of today’s number of nodes. I was assuming transaction volume proportional to userbase, which would be at least three times the transactions that today’s blocksize-limited block chain handles, and looking at a version of the protocol which doubled it by transmitting every transaction twice. So,GIGO, I was wrong – but for good reasons and in the correct order of magnitude anyway.
But that was a couple orders of magnitude larger than the highest answer I had expected to get! And that meant Satoshi’s idea actually seemed…. surprisingly plausible, if people really didn’t care about bandwidth.
The fact that bandwidth seemed to be available enough for the proposal to be technically plausible was sort of mind-boggling. So was the idea that so many people did not care, at all, about bandwidth costs.
(See digression #2 to understand why it was hard for me to accept that
people now consider bandwidth to be valueless.)
Anyway, problems aside, it was INTERESTING! If the proof-of-concept actually sort-of worked at least on scales like for a campus or community merchandise token or something it would extend our understanding of protocol design!
What I had done back in 1995 had been INTERESTING for a different reason. At that time nobody had ever come up with a digital cash protocol that allowed people who’d been paid digital coins to respend them if they wanted instead of taking them right back to the issuer. Of course it wouldn’t work for general adoption because of its own problems, but it had extended our understanding of protocol design back then, so back then that had been INTERESTING!
And before that, Chaum had demonstrated a digital cash protocol that worked at all, and at the time that was INTERESTING!
And in between a whole bunch of people had demonstrated ways to cooperate with bankers etc to have different kinds of access to your checking account or whatever. Some of those had had privacy features v. the other users, which were also INTERESTING!
And so on. I was very much looking at things that improved our understanding of digital cash protocols, and had no idea that Bitcoin was intended for widespread release.
Anyway, Satoshi and I talked offlist about the problems, and possible solutions, and use of proof chains for digital cash, and my old protocol, and several previous types of digital cash, and finally he sent me the proof chain code for review.
And the proof chain code was solid, but I freaked out when I saw that it used a Floating Point type rather than an Integer type for any kind of accounting. Accounting requirements vs. floating point types have a long and horrible history.
The worst that could happen from a rounding error, as long as everybody gets the *SAME* rounding error, is that the miner (whose output is unspecified in the block and defined as “the rest of the TxIn values input”) gets a few satoshis more or less than if the rounding error hadn’t happened, and no satoshis would be created or destroyed.
But if people on different clients get *DIFFERENT* rounding errors, because of different representation or differently implemented operations, the chain forks. And That Would Be Bad.
It was when we started talking about floating-point types in accounting code that I learned Hal was involved in the effort. Hal was reviewing the transaction scripting language, and both the code he had, and the code I had, interacted with the accounting code. So Satoshi brought him in for the discussion on floating point, and both of us reviewed the accounting code. Hal had a lot of experience doing exact math in floating point formats – some of his crypto code in PGP even used float types for binary operations. So he wasn’t as freaked-out about long doubles for money as I was. We talked a lot about how much divisibility Bitcoins ought to have; whether to make ‘Satoshis’ an order of magnitude bigger just to have three more bits of cushion against rounding errors, or keep them near the limit of precision at 10e-8 bitcoins in order to assure that rounding errors would always fail. Failing, immediately, detectably, and hard, at the slightest error, is key to writing reliable software.
So I went over the accounting code with a fine-toothed comb looking for possible rounding errors. And I didn’t find any.
Which is more than a little bit astonishing. Numeric-methods errors are so ubiquitous nobody even notices them. Inevitably someone multiplies and divides in the wrong order, or combines floats at different magnitudes causing rounding, or divides by something too small, or makes equality comparisons on real numbers that are only equal 65535 times out of 65536, or does too many operations between sequence points so that they can be optimized differently in different builds, or uses a compiler setting that allows it to do operations in a different sequence, or checks for an overflow/rounding in a way that the compiler ignores because it can prove algebraically that it’s “dead code” because it will never be activated except in case of undefined behavior (like eg, the roundoff or overflow that someone is checking for)! Or SOMETHING. I mean, in most environments you absolutely have to FIGHT both your language semantics and your compiler to make code without rounding errors.
Clearly I hadn’t been the first pessimistic screaming hair-triggered paranoid aware of those issues to go over that accounting code; I could not find a single methods error. The ‘satoshi’ unit which is the smallest unit of accounting, is selected right above the bit precision that can be handled with NO rounding in the double float format, and every last operation as far as I could find was implemented in ways that admit no rounding of any bits that would affect a unit as large as a satoshi.
To cause rounding of satoshis in the Bitcoin code, someone would have to be adding or subtracting more than 21 million Bitcoins (I think it’s actually 26 million, in fact…). So, the Bitcoin chain is, I believe, rounding-free and will continue to check regardless of whether clients use any higher floating point precision.
For comparison Doge, which has so many coins in circulation that amounts larger than 26 million Doge are actually transacted, has rounding errors recorded in its block chain. If a new client ever uses a higher-precision float format, their old chain won’t check on that client. Which would be seen as a bug in the new client, and “corrected” there (by deliberately crippling its accuracy when checking old blocks). In fact it’s a bug in the Doge coin design which will never be fixed because they’ve already committed too much to it.
Integers. Even with code that is meticulously maintained and tested for consistency, even where methods errors have been boiled out by somebody’s maniacal obsessive dedication, Integers would have been so much cleaner and easier to check.
Why I was VERY interested in proof chains and digital cash protocols.
When I extended Chaum’s protocol in 1995, I had used proof chains attached to each ‘coin’, which grew longer by one ‘link’ (nowadays we say ‘block’) every time the coin changed hands. That allowed coins to circulate offline because all the information you needed to make another transaction was in the chains attached to the individual coins. In order to make it possible to catch double spenders, the ‘links’ contained secret splits which, if two or more contradictory links were combined, would reveal the identity of the spender.
So, it could circulate offline and make transfers between users who weren’t even connected to the Internet. It didn’t have the ferocious bandwidth expense and even more ferocious proof-of-work expense of Bitcoin. Double spenders couldn’t be caught until the differently-spent copies of a coin were compared, potentially after going through several more hands which meant you had to have some kind of resolution process. And a resolution process meant you absolutely had to have a Trusted Certificate Authority with a database that could link UserIDs to RealWorld IDs in order to figure out who the RealWorld crook was.
Buyer and seller had to have valid UserIDs issued by the Trusted CA, which were known to each other even if to no one else. And although not even The Trusted CA could link UserIDs and transactions except in case of a double spend, the parties to each transaction definitely could. Either party could later show and cryptographically prove the details of the transaction including the counterparty’s UserID, so your transactions were “Private”, not “Secret”. Finally, the ‘coins’ were non-divisible meaning you had to have exact change.
It was, at best, clunky compared to Bitcoin, and not being able to identify double spends until unspecified-time-later would probably be a deal-killer for acceptance. But it also had some advantages: It didn’t create a central permanent ledger that everybody can datamine later the way Bitcoin does, so Trusted CA or not it might actually have been better privacy in practice. It was completely scalable because no transaction needed bandwidth between anybody except buyer and seller. And it had no proof-of-work expense. But it needed a God-Damned Trusted Certificate Authority built directly into the design, so that CA’s database was open to various kinds of abuse.
I had no comprehension of modern attitudes toward bandwidth costs.
I mean, I knew it had gotten cheap, but it was still taking me hours, for example, to download a complete Linux distribution. I figured other people noticed big delays like that too, and wide adoption of Bitcoin would mean slowing down EVERYTHING else they (full nodes anyway) did. I just hadn’t understood that – and still have trouble with – the idea that by 2008, nobody even cared about bandwidth any more.
I got my first computer, because at that time privately owned computers were INTERESTING! So I had to, even though they were also mostly useless. (See a pattern here?)
But at that time, computers were not communications devices. At All. If you hadn’t invested in something called a “LAN”, which anyway could only work inside one building, probably cost more than the building itself, and was useless unless you’d also invested in multiple computers, you moved data back and forth between your machines and your friends’ machines using cassette tapes. Or, if and your friend were both rich enough to buy drives, or had been lucky enough dumpster diving to get drives you could repair, and had access to the very expensive media through some kind of industrial or business supply place, you might have done it using floppy disks. Which held eighty kilobytes.
I got my first modem a few years later, and modems at the time were flaky hardware only BARELY supported by single-tasking systems that had never been designed to handle any signal arriving anywhere at a time they did not choose. If your computer didn’t respond fast enough to interrupts, a modem could crash it. If you were running anything that didn’t suspend and resume its business correctly (and most things didn’t because they’d never had to before) or anything that was coded to use the same interrupt, the modem would crash it. If the software on your end ever started taking too long to execute per input character, the modem would fill up the short hardware buffer faster than your software could empty it, and crash it. If you transmitted characters faster than the software running on the remote system could handle them, you’d crash the remote system. There were no error correcting protocols because none of us had the compute power to run them fast enough to avoid a crash at the speeds the modems ran.
And that modem couldn’t transmit or receive characters even as fast as I could type. Sometimes you could crash the remote system just by accidentally typing too fast for a minute or two.
Computer security wasn’t a thing. Pretty much anybody you allowed to connect could at least crash your system and probably steal anything on your computer or delete everything on your computer if they really wanted to. The host programs weren’t *intended* to allow that, but something as simple as transmitting an unexpected EOT signal could often crash them – sometimes crashing the whole machine, sometimes leaving the caller at the all-powerful command-line prompt. Stuff like that happened all the time, just by accident! So people were understandably reluctant to let strangers connect to their systems.
There was one place in my whole state that I could call with it where I found people who’d leave a modem running on their machine despite the risk of crashes, and would allow a stranger on their system. That sysop, in an act of sheer grace that he didn’t have to extend and which nobody was paying him for, allowed me to connect to it. There were no such things as commercial providers; they could not exist until at least some system security actually worked.
There was barely even any commercial software: Every machine came with its own BIOS and Operating System, and the ONLY way to distribute a program that would run on more than a tiny fraction of systems was to distribute it as source code which people could tweak and fix and adapt in order to get it running, and commercial vendors didn’t want to distribute any source code.
So our software was all shared. It came from fellow hobbyists, and unless we were physically in the same room to exchange media (and had the ability to read and write media compatible with the other’s systems), we could not share it without using bandwidth.
Long distance calls were over a dollar a minute, modems ran at 160 or 300 bits per second, and I could have burned through my entire monthly paper route income in under three hours.
Finally, every second I was connected to that remote system, that phone line was busy and everybody else couldn’t use it. And the other users needed it for reasons FAR more important than I did. They were military veterans, some of them profoundly not okay after Viet Nam, using it as sort of a hobby-mediated support group, and I was a fifteen-year-old kid hobbyist with a paper route. Hobby in common or not, I had no illusions about the relative value of our access. So I tried to be a good guest; I took my turns as fast as possible, at times least likely to conflict as possible, using as many pre-recorded scripts (played off a cassette tape deck!) as possible to waste absolutely no time, and got off. I didn’t want to keep anybody out of something which was that important to them.
That’s the way things were when I started learning about the value of bandwidth.
No matter how much bandwidth I’ve got now, no matter how cheap it becomes, I’m still aware of it and it’s still important to me to not waste it. I’ve sweated every byte every time I’ve designed a protocol.
And that’s why – to me anyway – universal distribution of a globally writable block chain is still amazing. Just the fact that it’s now POSSIBLE seems incredible.
Q4: When Satoshi released the white paper, you had many public exchanges with her on that mailing list. For instance, you asked her about inflation and Satoshi seemed to think that there could be some price stability if the number of people using it increased at the same level as the supply of bitcoins increased. But, relative to the USD, there has never really been much price stability in its history to date. Is there a way to re-engineer Bitcoin and/or future cryptocurrencies to do so without having to rely on external price feeds or trusted third parties?
A4: Whoof… that’s a hard question. “Is not Gross Matter Interchangeable with Light?” was considered impossible until Einstein figured it out. And the people who’d been asking that question didn’t even recognize or care about Einstein’s answer because his answer wasn’t about bodies and souls and the afterlife. If the answer is ‘yes’ but the re-engineering involved changes the fundamental qualities that make you (or anybody) value cryptocurrencies, then is the answer really yes?
Satoshi tried to do it by anticipating the adoption curve. We know how that turned out.
I think it’s fundamentally impossible to plot an adoption curve before launch. I mean, I was the pessimist who assumed that there’d be a small group, formed early, that wasn’t going to be growing at all as these additional millions of coins pumped into that campus or that community economy. So I figured, some initial value and rapid inflation thereafter.
Satoshi was far less pessimistic in figuring a widespread and fairly gradual adoption, and had picked the logarithmic plot to put coins into the economy at about the rate envisioned for adoption, assuming Bitcoin would follow a logarithmic adoption curve. It wasn’t a bad guess, as it’s a decent approximation to the Bass Diffusion Model, but the
parameters of the curve were completely unknown, and the Bass curve often appears after something’s been around a long time – not just when it’s launched.
Most importantly, nobody anticipated Bitcoin’s primary use as being a vehicle of financial speculation. The Bass Diffusion Model isn’t applicable to speculative commodities, because price changes in speculative commodities are responsive to PREVIOUS price changes in the speculative commodity. That makes them nonlinear and chaotic.
And that, I think, is what it comes down to. If people will be using something as a vehicle of speculation, then its price point is chaotic and defies all attempts to stabilize it by predicting and compensating for it. So I think we need to abandon that notion.
You’ve already ruled out the idea of external price feeds and trusted third parties, because those would change the fundamental qualities that make you value cryptocurrencies.
That leaves internal price feeds: If a cryptocurrency is used as a medium of exchange in other fungible assets, and those exchanges are recorded in its own block chain, then exchanges of crypto for dollars and exchanges of crypto for, eg, gold bars are visible in the block chain and could at least in theory be used to detect economic conditions and adjust the rate of issue of cryptocoins.
But the fly in that ointment is, again, the fact that the crypto is being used as a speculative asset. People can read the block chain before the changes are made, anticipate what changes the code is about to make, and will front-run them. Or, operating as “Sybil and her Sisters”, make a thousand completely bogus transactions in order to fool the software into doing something crazy. Either way reintroducing positive feedback via market manipulation.
Most schemes aimed at stabilizing the value of a coin via any automatic means assume that the price can be changed by changing the rate of issue. But the more coins are in circulation, the less possible it becomes for changes in the rate of issue to shift the price, meaning it devolves back to the first case of nonlinear and chaotic feedback. IOW, the new coins being added represent a much smaller fraction of the available supply, and withholding them will affect almost no one except miners.
Honestly I’m very surprised Tethercoin isn’t dead yet. What they propose, economically speaking, simply will not work. They got themselves somehow declared to be the only way to get money OUT of a major wallet, which props up their transaction volume, but if the people haven’t already walked away with most of the money they’re supposedly holding but won’t say where, then I’m very surprised.
Q5: About a year ago you wrote a highly-commented upon, passionate retrospection published on LinkedIn. You called out a lot of the nonsense going on then, is there anything that has been on your mind since then that you wanted to expand upon?
A5: Um. Artificial Intelligence, Financial Markets, Human Brains and how they are organized, the nature, origins and mechanisms of consciousness and emotion, a generalization of neuroevolution algorithms intended to scale to recurrent networks of much greater complexity than now possible, scope of political corruption and the politics of divisiveness, gene migration and expression, the way cells control and regulate mutation in different kinds of tissues, directed apoptosis via a multiplicity of P53 genes as a preventive for cancer (happens naturally in elephants; easy to do with CRISPR; engineered humans would probably be radiation-resistant enough for lifetimes in space, or just plain longer-lived, or both), history of the Balkans, history of the Roman Empire, ancient religions, writing a science fiction novel ….
You know, things that are INTERESTING! I actually _can’t_ turn my brain off. It’s a problem sometimes.
I have had a few thoughts about cryptocurrencies, however, which is probably what you intended to ask about.
I have figured out how to redesign the cryptographically secured history database built by cryptocurrencies so that you don’t need any full nodes. There are other ways to organize the blocks that give the proof property you need; They don’t have to form something that’s only a chain, and you don’t have to have specialized nodes for the purpose of holding them because everybody can hold just the blocks they need to show the validity of their own txOuts.
In order to verify the validity of any txOut, you need three things: to see the block where it was created, to be sure that block is part of the same database as that proposed for the transaction, and to be sure that no block exists between those two in which that txOut was spent in another transaction.
Call it a “Block Hyperchain”, by reference to the N-dimensional hypercube it’s based on and the block chain it replaces.
I should be clear and say there are things it does and things it doesn’t do. If your goal is to check all transactions, you’ll download a scattering of blocks for each transaction that soon add up to most of the block database, so someone who wants to check every transaction will rapidly accumulate the whole database.
But most users should be happy with just the few blocks they need to demonstrate the validity of the txOuts they hold, and it’s damn nice to be able to download a client, open it up, and just use it with minimal delay because someone offered to pay you bitcoins one minute ago and you want to be able to make sure the transaction he’s offering is valid RIGHT NOW, instead of waiting to accumulate the whole chain to check anything.
Suppose we pick a base, for convenience, of 10. This helps make things easy to explain because we work with base-10 numbers, but we could have picked 16 and used hexadecimal for our explanations.
In a base-10 Block Hyperchain, every block that’s published has its own set of transactions, and the hashes of the blocks 10^N blocks ago for every integer value of N from N=0 to N <= log10 of block height.
Every block would record its own transactions, and also one list of destroyed txOuts per integer value N over the same range.
Each destroyed-txOut list would be all txOuts created in blocks whose block numbers match (modulo 10^N) the current block number, that have been destroyed in the last 10^N blocks.
If someone shows me a transaction seeking to spend a txOut, I want to check and see if it’s valid. Ie, I want to see the block where it was created, and see evidence that it hasn’t been spent since.
So I can look at that txOut’s ID and know it was created in block 124. If the current block is 7365, I get block 7365 and 7364 to make sure it hasn’t been spent in those, the same way we can do with a block chain.
Then I have a block whose last digit matches the last digit of the block where the txOut was created. So I start checking the 10-block txOut-destroyed lists. I check the list in block 7364 to make sure it wasn’t spent in blocks 7354 to 7363.
Then, jumping back by 10-block increments (relying on the second recorded hash in the header), I can check to make sure it hasn’t been spent in the previous ten blocks to each of blocks 7354, 7344, and 7334. Then I get block 7324.
Now I’m at a block whose last 2 digits match the block where the txOut was created, so I can start checking the previous hundred blocks using the second txOut-destroyed list, and jumping back by hundred-block increments using the third recorded hash. So I get blocks 7224 and 7124.
Finally, I’m at a block whose last 3 digits match the block where the txOut was created, so I can start jumping back by thousand-block increments, checking the thousand-block txOut-destroyed lists. So I get blocks 6124, 5124, 4124, 3124, 2124, 1124, and finally 124.
So finally, I have a txOut created over 7200 blocks previous to the current block, and I have downloaded a total of 15 blocks to make sure that it was created in the same Hyperchain and hasn’t been spent since.
The number of blocks downloaded is proportional to the log base 10 of the number of blocks in the chain.
The blocks I’ve downloaded are larger because of the spent-txOut lists, but the spent-txOut lists have an average length that is the same regardless of the span of blocks they cover. Lists that report transactions from a set 10x as long, only need to report individual transactions from that set 1/10 as often.
With more efficient access to the history database, it is possible to substantially raise transaction bandwidth. People who make transactions during the next 7 blocks or so would need to see that block; Later on, people who accept txOuts created during that block will need to see that block. And there’ll be about 49 blocks worth of txOuts, scattered through the earlier history, that someone eventually has to traverse this block to verify.
All this means you have drastically smaller bandwidth requirements (remember I obsess on bandwidth costs?) for the same transaction volume but larger data-at-rest requirements (for any weirdo who for whatever reason feels like they need to collect the WHOLE database in one place, and why would anybody do that?) by a factor of seven.
And I keep thinking I’m going to do it, because it’s INTERESTING! And I ought to do it, because it’s VALUABLE! But then I think about the current state of the cryptocurrency world and the quality of the people it would bring me into contact with and the ways people would try to scam with it and the number of people who’d find reasons to lie to me or about me, and then I get a sour stomach and go on to do something ELSE!
And feel vaguely guilty for not doing it, because it actually would be valuable.
It’s really hard for me to be motivated or enthusiastic about a cryptocurrency project, until the whole field is more full of people I’d be happy to interact and exchange ideas with and less full of …. um.
The words that come to mind really shouldn’t be printed. [This is fine meme] I don’t mind if people know I’m sort of upset with the conditions and business ethics out there, or even that being so upset is literally preventing me from doing something useful. But I’d rather not have it expressed in terms that are an incitement to violence.
Anyway, moving on; In order to mine, someone would have to be able to see seven of the previous blocks; a different set of seven every time. But if I thought bandwidth was going to waste, that doesn’t even START to address the costs of hashing! Deploying something that saves bandwidth without also figuring out a way to save hashing would fail to address a critical point.
So, I’ve had a bunch of thoughts about mining. Most of which aren’t as interesting or valuable as the thought about how to organize the history database. In favor of mining, it’s good that someone is able to join the network permissionlessly, help secure it, get paid, and initially get coin into circulation going from “none” to “some”.
My thoughts for securing a chain without proof-of-work are something I suppose I ought to call “Proof-of-Total-Stake.”
Congratulations! This conversation with you got me to name it! I had been calling it “proof-of-activity” but I see that name has acquired a much more specific meaning than it had when I started calling this by it, and no longer fits.
I still need to figure out what to call my revised structure for the block history database though.
Proof-of-Total-Stake means measuring the priority of a fork by the total value of TxOuts that existed BEFORE the fork that have been spent AFTER the fork. In other words, the total stake: how much of EVERYBODY’s money the blocks formed after the fork represent. That is a well-founded mechanism for security that doesn’t involve trusted parties nor burning hashes. It’s the only one I’ve come up with. In the long run, unless somebody comes up with another fundamentally new idea, or accepts the idea at least of trusted block signers, that’s what I think a proper cryptocurrency would have to wind up with.
But there’s a problem with it.
Proof-of-Total-Stake, by itself, doesn’t provide an obvious way to determine who gets to form the next block – which can be a CRUCIALLY important security concern.
And Proof-of-Stake, including Proof-of-Total-stake, doesn’t handle the initial, permissionless, distribution of coins. They can’t go from “none” to “some.” They can only go from “some” to “some more.”
So I think it could only be deployed along with some kind of mining.
Q6: We first started interacting some four years ago when I was doing some research on dead cryptocurrencies, most of which were just direct clones or copies of Bitcoin. At the time you were doing the heavy lifting categorizing how they died in a BitcoinTalk thread. Today sites like Deadcoins.com have tried to do something similar. Even though loud advocates at events like to claim blockchains ” live immutably forever” empirically there are probably just as many dead blockchains than living blockchains. What do you think the top reason for why so many blockchains lose support to the point of death and do you think those reasons will change much in the future?
A6: By far the vast majority of those people were not doing anything INTERESTING! A lot of the honest ones discovered that it was a lot of work and had other commitments in life. A lot of the dishonest ones made their money and walked away leaving the suckers behind. A lot of people discovered that maintaining a codebase needed more programming chops than they actually possessed, and quietly withdrew from the field. A fair number ran into scammers and crooks whose utterly disgusting behavior left them convinced they wanted to do something else rather than meeting any more of those guys.
But the most important point? Hardly any of those coins was ever used in any transaction for an actual thing – not even an initial experiment like Laszlo’s Pizza.
Most of them were only ever mined by people who intended absolutely nothing beyond immediately converting them into Bitcoin, and only ever held by people who daily watched their value trying to guess the right time to sell them for Bitcoin.
It’s not so much that most of them *failed* – it’s more the case that the vast majority never even remotely began to *succeed*. There was no economic activity, meaning sales of merchandise or payment for work, that they facilitated. Put bluntly, they just didn’t do anything beyond providing a temporary and completely discardable medium for speculation and scamming. And, as surely as atomic decay, they got used, for that purpose only, and discarded.
Q7: Based on the original white paper, the intent of Bitcoin was to be an e-cash payment system which could be utilized without needing to disclose a real identity to an administrator. It seems that over time several different tribes have popped up, including those who market Bitcoin as a form of “e-gold.” What do you think of the visible fracture that has occurred between the various Bitcoin tribes? Does proof-of-work really act as a type of DRM for coin supply or do all the forks we have seen turn the advertised “digital scarcity” and “digital gold” into an oxymoron?
A7: That endless fight, starting with the block size fight, with everybody yelling and nobody listening, pretty much convinced me that the “community” which had grown around Bitcoin was in deep trouble.
The differences between the various proposed technical changes to the block chain, are far less important to the futures of those forks, than the integrity of the people who support and do business using them.
But the technical merits were never discussed by most. Instead, repetitive sound bites and slogans about them containing absolutely no new information were shouted. Integrity was seldom displayed either. Instead, the fight was carried forward almost exclusively by partisans who had already decided what was the only possible solution that they would accept, and in many cases using tactics that inspire an absolute refusal to support their interests, or even participate in the communities where they are found.
If someone hires a troll army to attack a community by astroturfing fake support for something, can you respect that person? If someone drives people who disagree away with personal abuse, is that a reasonable method for coming to an agreement about a protocol? Is it a valid form of technical reasoning to launch a sabotage against a block chain based consensus mechanism? What can you say about someone who buys existing accounts of users whom others trust in order to fake trusted support for their agenda? How about when it happens after those users whom others trust have been driven away or left in disgust? Is it a respectful negotiator interested in the insights of others in solving a problem, whose negotiating skills include locking the damn doors and refusing to let someone leave the room until they get his signature on an “agreement” that they wrote without his knowledge before he even got there?
Is someone who would participate in a fight, on those terms, someone whose agenda or business interests you really want to support? Hint: You already know that people who fake support for their agenda, or tell lies about other in order to discredit them, or who deliberately deceive others about the merits of their own proposal or others’ proposals, are doing business by means of fraud. Do you want to carry on until the fraud is financial and the victim is you?
These factions had no interest whatsoever in reaching a consensus. And nothing prevented each from implementing their idea and launching, with no hard feelings from anybody and no fight. The only thing they were really fighting over was the name “Bitcoin,” which was absolutely unrelated to the technical merit of any proposal. And, to a first approximation, the other merits of having the name is a thing that none of them even mentioned during the fight.
Technically speaking, there is not much wrong with any of these forks. They address certain problems in different ways slightly favoring the interests of different groups, but not seriously to anyone’s disadvantage. None of them was entirely without technical merit.
On the other hand none of them make more than a tiny amount of difference. None helped with the bandwidth or transaction volume by anything more than a small constant factor, so the problem they were supposedly about solving was not in fact solved, nor even very much affected.
So while none of the proposed changes were objectionable in themselves, there was really no *very* compelling reason for any of them to be implemented. Each of those ideas is merely a stopgap that pushes the rock down the road another foot or two without moving it out of the way. If you want to move that rock out of the road, you will need a much more powerful idea.
Q8: You’ve mentioned that limited supplies simply incentivizes hoarding which leads to low economic activity. You have proposed a type of “proof-of-activity” replacement. Can you expand more on either of these views?
A8: Suppose you have an economy that’s growing (more value is being created) but has a constant supply of coins.
In that case your coins represent, let’s say, one-millionth or so of the money that’s in circulation.
And, as the economy continues to grow, your coins will continue to represent one-millionth or so of the money that’s in circulation. But that will be one-millionth or so of a lot more actual wealth. In fact, your money, just sitting there in your wallet, is GUARANTEED to rise in value by the same fraction that the economy is growing by. In our terms, this would be exactly the market average, as though you were holding stocks invested in ALL the businesses in your economy in proportion according to their capitalization. This is what index funds and IRAs make, mostly, but it’s making it with no risk.
Now, if you offer any investor a risk-free investment that’s guaranteed to make the same return as the market average, that investor would be mad to pass it up. No investor is confident that she’ll beat the market average in any given year. That’s why they call it “AVERAGE!” And volatility – variance in return – is an unqualified bad thing because it will always take an 11% gain to make up for a 10% loss. That money sitting right there in her wallet is the best investment she could possibly make. There might be things that would make as much or more money, but all of them involve risk out of proportion to their marginal return. Let other investors do that; they’re suckers and she’ll make the same money they do.
The problem with that is that the other investors are looking at the same question. And reaching the same conclusion. Why invest in companies doing anything productive, and expose yourself to risk, when you can make the same money just by holding your investment in your wallet?
And then who invests in the businesses that, if they were working, would actually create the value these people all intend to have some share in?
… (sound of crickets chirping) … Suckers.
Suckers who lose more often than they win, because it takes an 11% gain to recover a 10% loss. And the money the lose? Eventually trickles into the hands of the people who are hoarding it.
With no reason for investors to invest in business, the businesses eventually starve and the economy shrinks. And all those coins that represent one-millionth of the economy’s wealth start representing one-millionth of less and less actual value.
This is what happened to ancient Rome. They used metals (gold and silver and bronze) as currency, and their economy collapsed WHILE people had plenty enough money to keep it going! Everybody stashed all their coins expecting to benefit later from prospering businesses, and the businesses, for want of capital, did not prosper.
Then the death spiral started: everybody stashed their coins waiting for the economy to come back so the coins would be worth their “real” value, and the economy never came back. The coins were never worth their “real” value, until the people who remembered where the coins were buried had also been buried.
It’s a millennium-and-a-half later and we are STILL finding stashes of Roman coins! The people who could have gotten their economy moving again, if they had EVER supported a business, instead buried their money in sacks.
The government tried to get it moving again, or pretend for a while that it hadn’t collapsed, making coins with increasingly ridiculous adulterated alloys. But that didn’t change the underlying dynamic.
The Gold bugs of course have all told each other a different version of this story, where the adulterated coins were the cause of the collapse rather than the increasingly desperate attempt to recover from it. And it’s pointless to try to convince them otherwise; they believe they already know the only possible truth. But for those actually motivated to investigate, the chronology of the events is reasonably clear.
The next thing is about “Proof-of-Total-Stake”, which I guess is what I’m going to call this idea for securing the chain.
The fundamental idea behind Proof-of-Total-Stake is that the priority of any branch of a fork is the total amount of EVERYBODY’s money which that fork represents. That means, coins generated in that fork and pre-existing coins brought into the fork by transactions.
Coins generated in a fork are the coinbase transactions; Coins moved into the fork from earlier parts of the chain are TxOuts from earlier in the block chain that have been spent during the fork.
But we have to know which BRANCH of the fork they were spent into. ie, someone trying to create a fork should not be able to stick transactions from the valid branch of the chain into it, or they can match the txOut spending from earlier in the chain. This is the basic problem with most implementations of proof-of-stake, which some writers have called “nothing at stake.” Whatever resource you are using to secure the chain is meaningless when it can be used to secure *BOTH* forks of the chain.
In order to prevent the replay attack, each transaction would have to “stake” a recent block, making a commitment to supporting only forks which include that block. This adds a field to each transaction.
The new field would give the (hash) ID of a block, indicating that this particular transaction is not valid in any branch of the chain which does not include the staked block.
So, let’s say that two transactions “coffee” and “eggs” are made at the same time, after the chain forks at block 50. “Coffee” stakes block 48 and “eggs” stakes block 51A.
When “coffee” appears in block 51B, the total stake of fork B is increased by that amount; its weight counts toward that resolution of the fork.
Then “eggs” is added to block 52A, and can’t be placed in chain B because it staked a block doesn’t exist in chain B. Now “eggs” counts as stake in favor of the A branch and “coffee” counts as stake in favor of the B branch.
But then “coffee” appears in branch 53A, where it is also valid because the same block 48 is behind both branches. This cancels out its support for branch B, just by being equal – revealing that stake which can be used in favor of both chains counts for nothing.
Security happens because some finite resource (coins created before the branch point and spent in transactions that are staked after the branch point) is committed detectably and irrevocably to the support of one branch (by staking after the branch point), and cannot be used to support any other.
This is exactly what Bitcoin does with hashes: Hashes per second and number of seconds spent hashing are finite. Hashes are irrevocably used in support of one branch (because the hash preimage can never be made to match a different block). And the fact that they are used to support a particular branch is detectable.
Well, strictly speaking there’s only one “detectable” hash in each block. All we know about the others is, on average, how rare that one “detectable” one was and therefore, on average, how many they must have been.
But it’s still the same basic criteria. Some finite resource, committed detectably and irrevocably to the support of one branch, which cannot be used to support conflicting branches. And proof-of-total stake says that resource is the amount of EVERYBODY’s coins that branch represents.
With transactions supporting the basic security of the chain, and the idea behind coinbases being that they are payment for providing chain security, we want our “coinbases” to reward the people who make transactions that stake recent blocks.
PoTS is strong in the long run, or when the chain is seeing a high volume of legitimate transactions, but has its own problems.
Transactions in most cryptocurrencies are a very bursty use of something with long latent periods. Absent heavy transaction volume, you can’t really expect PoTS to definitively reject a branch in such a way that a crook couldn’t resurrect it with a very large spend. If the crook has more coins than the difference in total-stake between the two forks, the crook could resurrect the “dead” fork.
This is why the “interest” payments (actually per-transaction coinbases of a particular sort) when a transaction staking a recent block are made. To encourage a fairly constant stream of transactions that support one particular version of the chain up to a very recent block.
But the peril with that is that you want to structure it in such a way that you don’t incentivize people to overwhelm your bandwidth by transferring every coin they own from their left pocket to their right every block either. So the actual design would come down to some compromise between transaction fees, and interest payments on transactions staked in very recent blocks, where the breakevens represent the transaction volume you want.
And there are a couple of final things to address together. First, PoTS, while it has a workable rule for figuring out which branch of forks is preferred, is pretty silent about who gets to form blocks and how. Second, Interest on coins spent has the “nothing to something” problem where if you don’t have anything in the system to start with, you won’t have anything ever. These are both classic problem with PoTS coins. The final design has to include some additional kind of coin creation that doesn’t depend on previous holdings (even if it gets de-emphasized after a while) and some way to determine who forms the next block.
Q9: ICOs have been around in some form or fashion for about five years now. What’s your view on these fundraising schemes?
A9: The SEC is bouncing on them pretty hard, and as far as I can see it’s pretty much deserved. Everybody wants something they can freely trade on secondary markets, and sell on the basis of its future value, but they also want to lie about it by saying it isn’t a security.
It is a security. If a security is sold by a company to raise money, but does not represent a bond (a promise to buy it back) nor a stock (a share in future earnings) then an investor is getting nothing for her money – except maybe a receipt for having made a donation.
Another investor (a “real” investor who knows and understands a broad market, not a speculator who made a lot of money by a couple of strokes of sheer luck) will not buy it from them, at any price. Such a thing has only speculative value.
If something’s continued value depends on a company, but the company’s continued existence doesn’t depend on that thing having value, it would be an excellent thing to not buy.
And all of that, we can say without ever touching on ethics and business practices of the people who run them. But when we do touch on the people who run them, the story gets worse. Much worse. Much, much worse. In this most are following the path trod by Altcoins. And racking up a very similar ratio of efforts that fail, or which never even start to succeed.
Q10: You have alluded to tokenized securities in the LinkedIn article as well as our correspondence, what is your take on this topic? What are the advantages versus say, simply doing what Carta (formerly eShares) does?
A10: I would have to answer that admitting to some degree of ignorance about Carta. As I remember eShares, it was very much a top-down stock and option management tool, in that a private company with (non-traded) shares typically uses it to keep track of who owns what – actually issuing assets or recording changes in their status, making info about them available for the holders but mostly just to view online.
What it does not do, as I understand it, is directly enable the shareholders to trade those shares or options with each other. Nor does it handle securities involved with or created by more than one company at a time. It is a management interface, not a market.
I envision a block chain – sigh, now I have to come up with a name again. Phooey. I never care about naming anything, and then someone wants me to talk about one of my ideas and I have to come up with a name for it on the spot. Let’s go for the pun and call it the Stock Trading and Options CryptoAsset Keeper. I could come up with something even dumber, but for the sake of exposition, call it STOCK.
The idea is that STOCK would act both as a Transfer Agent (which Carta does) AND a market (which AFAIK Carta does not). A company could issue securities such as stocks and bonds directly on the STOCK block chain (“cryptoassets”) and the block chain could record trades in those issues against its native cryptocurrency. The benefit here is the clear record and history to keep track of all trades and the current disposition of all the different cryptoassets – the stocks, the bonds, and the “cash” used to trade in them, would all be on the chain.
As long as no off-chain assets like bushels of wheat or truckloads of sneakers need to be delivered, and dividends/prices/etc accruing to these instruments are paid out (or in) in the cryptocurrency, the block chain could then function directly as market, transfer agent, means of delivery, and payment channel. The task of converting the cryptocurrency to and from actual fiat, and the heavily regulated business of delivering the fiat currency, could be left to already-established cryptocurrency markets.
Trading in stocks/bonds/etc is highly regulated, and debts (NEGATIVE amounts) can crop up unexpectedly when companies go south or options traders go bust. Stuff gets into the RealWorld quickly when someone has to be found for debt payments, served process, and/or prosecuted for fraud, etc. So STOCK couldn’t be an “anonymous/permissionless” chain, at least not for regulated trades. Each person or entity authorized to actually make securities trades would have to have a vetted, verified ID as specified by KYC laws, and would have to sign each such transaction with a public/private key pair proving Identity.
From the point of view of investors, STOCK would be a very sluggish market – submit your trade, have a completely random execution window averaging ten minutes (or whatever) during which the price might change, then a whole block of transactions all fly past at once and everybody’s waiting for the next completely randomly-timed block. On the other hand, you don’t need an agent, or a broker, or a company transfer agent, or a registrar, or a clearance period, or ANY of those people who normally collect fees on every trade. You could actually have a market where the buyer and seller get the exact same price with no ‘float’ whatsoever. And you don’t have to worry about what time it is. NASDAQ closes at 5PM new york time, and then a whole bunch of “off-market,” “private,” and “over the counter” trades that nobody but the insiders can participate in or see happen. But STOCK would go on making blocks twenty-four hours a day seven days a week. Why should it ever stop?
The SEC would be all over it of course; they’d be sticking a microscope up the butts of everybody involved to make sure that there was absolutely no scamming the investors. Which is, after all, their job. And they’d require KYC compliance, and a whole lot of other regulatory compliance. But, y’know, that’s kind of how starting any _legitimate_ business in financial services works. No need to feel special or particularly victimized about that.
And the regulators would need some privileged keys that could be used to “seize” assets when a court orders them to, as part of a settlement for fraud or theft or something. And everything else. There’s a great irony that they’re interested in nobody having the opportunity to scam the investors, but they structurally require, just to be able to do their fundamental mission, builtins to the protocol that if misused would allow somebody to scam the investors.
But once satisfied and functioning within the law, I think they’d welcome STOCK as something that puts down a visible, provable, inalterable, unfakeable history of all trades.
Q11: Is there any cryptocurrency you think could become widely used outside of geeks, cypherpunks, and ideologues? If not, what would need to change and how? Has any popular coin ossified to such an extent that it can’t meaningfully evolve?
A11: Homer Husband and Harriet Housewife want convenience and familiarity. Which is mostly about form factor and compatibility. They do not want to deal with key management in any form.
To do that, you have to make a hardware wallet small enough to fit into a wallet or a purse. It doesn’t have to be literally credit card sized, but couldn’t be much bigger. It should be the size of a stack of five credit cards, at most. Or maybe it gets stuck back-to-back onto their cell phone. It has to have an end that acts like a chip card, or an edge that acts like a mag stripe, or both, so that it can interact with the grocery stores, auto shops, restaurants, etc that Homer and Harriet already do business with.
That’s very very important, because Homer and Harriet aren’t evangelists. The mechanic they’ve been going to for fifteen years has never heard of cryptocurrency and is never going to deal with the inconvenience of getting set up to accept it. He wants people to pay cash or pay with a card, and Homer and Harriet would NEVER consider arguing with him about it, don’t want to go to the effort of explaining it to him, and probably couldn’t explain it very well anyway. If they have to do any of those things, that’s a deal-breaker.
After that you have to get your cryptocurrency onto the Plus or Cirrus network, using the same interface as a foreign fiat currency. That would allow Homer and Harriet to automate the sale and exchange to whatever local people think is money, or the purchase and exchange to crypto, when they want to spend or accept stuff from that “card.” This will mean that they get hit with some extra fees when they use it, but
those fees are both unavoidable if you want to be on those networks, and relatively familiar to them.
Finally, there’s that key management thing. You could handle most of it by making the wallet do it. But sooner or later, that hardware wallet is going to fall and bounce of the curb, and go crunch under the tires of a bus. Or, you know, get dropped into the ocean accidentally, or just get lost.
Homer and Harriet are NOT willing to accept that this is not something they can recover. The only thing that they accept not being able to recover, when they lose their wallet, is familiar, folding fiat currency. And that’s why they don’t keep very much of folding fiat actually in their regular wallets.
If you do convince them that losing the wallet makes the funds unrecoverable, they will never want to have more than fifteen dollars on it, which will mean it isn’t useful. So, your hardware wallet has to interact with SOMETHING that keeps enough information about what’s on it, to enable a new wallet to recover everything that got lost.
Q12: Mining farms, mining pools, and ASICs. Many accounts are that Satoshi did not anticipate the full industrial scale these would reach. Do you agree with this? What are your views on mining pools and ASICs as we know them know today (specifically as described by Eric Budish’s paper)?
A12: My first problem with ASICs is that they can be used for exactly two things: Mining cryptocurrencies, and carrying out attacks on cryptocurrencies.
Every day of every year, people who own those enormous ASIC farms are deciding which is the most profitable use of them, on that day.
And the rewards for mining cryptocurrencies ratchet downward every couple of years.
That seems problematic. I keep watching to see what emerges each time the reward ratchets down, but I haven’t seen evidence yet that any of the big ASIC farms have turned around on any large scale.
My second problem with ASICs is that they are sucking up ridiculous amounts of energy that can never be recovered or used for anything else. I don’t so much mind this when converting the energy into heat is actually useful – replacing electric heaters in the basement of a building with a bank of Antminers that use the same amount of power is
energy-neutral and helps secure the chain.
But that’s not what happens in huge ASIC farms. All that heat is just waste. Nobody’s home is made more comfortable, no furnace’s power bill is alleviated, no greenhouses are enabled to grow food in the winter, nobody’s oven gets to bake bread with that heat, and all that energy is just plain gone.
The Bitcoin chain issues the same number of coins per day regardless of how much energy is spent; I’d like to think that spending a whole lot less of it, at least in ways where the heat produced isn’t useful, would be better.
But then we get back to the first problem; If honest miners start spending a whole lot less on the energy costs of hashing, then there’s a whole lot of ASICs not being used, and the owners of those are going to be looking around making their daily decision about what’s more profitable….
So the logic finally does work out the same. Security requires the vast majority of those ASIC boxes to be in use mining. It just seems such a colossal expenditure of power, and it might be that a different design could have achieved chain security without that global cost.
My third problem with ASICs is that they have become a way for their owners to steal money from the taxpayers in many nations. Countries that mean to do a good thing for everybody, create “development zones” with subsidized electricity, paid for by the taxpayers of that country. And then people move in with ASIC farms to suck up that electricity which the public paid for, and convert it into bitcoins in their private possession. These are business that employ very few people, drive the development of no other resources, and otherwise do pretty much nothing for the development of the local economy. IOW, the taxpayers who paid for that electricity are definitely not getting their money’s worth in economic development.
My fourth problem with ASICs is that there really is no way to monitor centralization of hashing power. People keep pretending that they’re tracking whether a 51% attack is underway, but I think most of them probably suspect, as I do, that what they’re really tracking is probably nothing more than whether or not the cabal of ASIC farm owners
remembered to configure that new warehouse full of machinery to use a different identifier.
In all fairness, this last thing results directly from anonymous, permissionless mining, which is something that was a very specific and very much desired part of Satoshi’s vision; he wanted anybody to be able to connect and participate, without any interference of a gatekeeper. But there can never be security from a Sybil attack when you don’t have any way of tracking RealWorld identities, and a “majority” can never be
relied on to be more than the front for some cabal or business interest, as long as a Sybil attack is possible.
And that was what Proof-of-work was supposed to prevent. In those early days everyone was thinking of hashing power as a side effect of computing infrastructure that was likely to be there, or be useful, for other purposes when it wasn’t hashing. And EVERYBODY has a use for warehouses full of computers, so it was easy to think that hashing power would remain at least somewhat distributed. The idea that someone would amass enormous numbers of special-purpose machines which made every other kind of computer in the world utterly useless for mining and which are themselves utterly useless for any other job (except attacking the network), was not, I think, really considered.
Satoshi definitely understood, and planned, that there would probably be server farms devoted to mining and that economies of scale and infrastructure would eventually drive individuals with ordinary desktop machines out of the mining business by being more efficient and making it unprofitable for the less efficient machines.
But I’m pretty sure he didn’t think of miners in places with artificially low subsidized rates for electricity outcompeting all other miners because of that advantage, driving the concentration of the vast majority of hashing power into just one country where it’s subject to the orders and whims of just one government and a few businessmen who
pal around with each other.
So he probably figured, yes, there’d be a few dozen large-ish server farms and a couple hundred small-ish server farms, but I’m pretty sure he envisioned them being scattered around the planet, wherever people find it worthwhile to install server farms for other reasons.
I’m fairly sure Satoshi’s notion of the eventual centralization of hashing power didn’t really encompass todays nearly-complete centralization in a single country, owned by a set of people who are subject to the whims and commands of a single government, who very clearly know each other and work together whenever it’s convenient.
And I find it worrisome.
Those enormous mining farms, and the way economics drove them together, are a structural problem with converting electricity into security.
I am not comfortable with the implication that, for any Proof-of-Work block chain including Bitcoin, economics will eventually devolve to the point where, when Beijing says ‘jump’ the mining and security of that block chain says ‘how high?’
And that is one of the greatest reasons why I look around for a different means of securing block chains.
I recently created a thread that on Twitter regarding the lower-bound estimates for how much electricity the Bitcoin blockchain consumed using publicly available numbers.
The first part of this post is a slightly modified version of that thread.
The second part of this post, below part 1, includes additional information on Bitcoin Cash, Ethereum, Litecoin, and Monero using the same type of methodology.
The original nested thread started by explaining why a proof-of-work (PoW) maximalist view tries to have it both ways.
You cannot simultaneously say that Bitcoin is – as measured by hashrate – the “most secure public chain” and in the same breath say the miners do not consume enormous quantities of energy to achieve that. The fundamental problem with PoW maximalism is that it wants to have a free energy lunch.
All proof-of-work chains rely on resource consumption to defend their network from malicious attackers. Consequently, a less resource intensive network automatically becomes a less secure network.1 I discussed this in detail a few years ago.
Part 1: Bitcoin
Someone recently asked for me to explain the math behind some of Bitcoin’s electricity consumption, below is simple model using publicly known numbers:
the most common mining hardware is still the S9 Antminer which churns out ~13 terahashes/sec
Thus the hashrate pointed at the Bitcoin network today is about 50,000,000 terashashes.
Dividing one from the other, this is the equivalent of 3,846,000 S9s… yes over 3 million S9s.
While there is other hardware including some newer, slightly more energy efficient gear online, the S9 is a good approximate.
Because the vast majority of these machines are left on 24/7, the math to estimate how much energy consumption is as follows:
in practice, the S9 draws about 1,500 watts
so 1,500 x 24 = 36kWh per machine per day
Note: here’s a good thread explaining this by actual miners.
In a single month, one S9 will use ~1,080 kWh.
Thus if you multiply that by 3,846,000 machines, you reach a number that is the equivalent of an entire country.
for a single day the math is: ~138.4 million kWh / day
annually that is: ~50.5 billion kWh / year
For perspective, ~50.5 billion kWh / year would place the Bitcoin network at around the 47th largest on the list of countries by electricity consumption, right between Algeria and Greece.
But, this estimate is probably a lower-bound because it doesn’t include the electricity consumed within the data centers to cool the systems, nor does it include the relatively older ASIC equipment that is still turned on because of local subsidies a farm might receive.
In Iceland, the finance minister has warned that cryptocurrency mining – which uses more power than the nation’s entire residential demand – could severely damage its economy.
Recent analysis from a researcher at PwC places the Bitcoin network electricity consumption higher, at more than the level of Austria which is number 39th on that list above. Similarly, a computer science professor from Princeton estimates that Bitcoin mining accounts for almost 1% of the world’s energy consumption.2
Or to look at it in a different perspective: the Bitcoin network is consuming the same level of electricity of a developed country – Austria – a country that generates ~$415 billion per year in economic activity.
Based on a recent analysis from Chainalysis, it found that Bitcoin – which is just one of many proof-of-work coins – handled about $70 million in payments processed for the month of June. Yet its cost-per-transaction (~$50) is higher than at any point prior to November 2017.
You don’t have to be a hippy tree hugger (I’m not) to clearly see that a proof-of-work blockchains (such as Bitcoin and its derivatives) are currently consuming significantly more resources than they create. However this math is hand-waved away on a regular basis by coin lobbyists.
The figure also didn’t include the e-waste generated from millions of single-use ASIC mining machines that are useful for about ~12 months; or the labor costs, or building rents, or transportation, etc. These ASIC-based machines are typically discarded and not recycled.
In addition to e-waste, many mining farms also end up with piles of discarded cardboard boxes and styrofoam (source)
Part 2: Bitcoin Cash
With Bitcoin Cash the math and examples are almost identical to the Bitcoin example above. Why? Because they both use the same SHA256 proof-of-work hash function and as a result, right now the same exact hardware can be used to mine both (although not simultaneously).3
So what do the numbers look like?
The BCH network hashrate has been hovering around 4 – 4.5 exahashes the past month. So let’s use 4.25 exahashes.
Note: this is about one order of magnitude less hashrate than Bitcoin so you can already guesstimate its electricity usage. But let’s do it by hand anyways.
An S9 generates ~13 TH/s and 4.25 exahashes is 4.25 million terahashes.
After dividing: the equivalent of about 327,000 S9s are used.
Again, these machines are also left on 24/7 and consume about 36 kWh per machine per day. So a single S9 will use ~1,080 kWh per month.
327,000 S9s churning for one day: ~11.77 million kWh / day
Annually this is: ~4.30 billion kWh / year
To reuse the comparison above, what country’s total electricity consumption is Bitcoin Cash most similar to?
How much economic activity does Moldova and Cambodia generate with that electricity consumption? According to several sources, Cambodia has an annual GDP of ~ $22 billion and Moldova has an annual GDP of ~$8 billion.
For comparison, according to Chainalysis, this past May, Bitcoin Cash handled a mere $3.7 million in merchant payments, down from a high of $10.5 million in March a couple months before.
Also, the Bitcoin Cash energy consumption number is likely a lower-bound as well for the reasons discussed above; doesn’t account for the e-waste or the resources consumed to create the mining equipment in the first place.
This illustrates once again that despite the hype and interest in cryptocurrencies such as Bitcoin and Bitcoin Cash, there is still little real commercial “activity” beyond hoarding, speculation, and illicit darknet markets. And in practice, hoarding is indistinguishable from losing a private key so that could be removed too. Will mainstream adoption actually take place like its vocal advocates claim it will?
Discarded power supplies from Bitcoin mining equipment (source)
At the time of this writing, the Ethereum network is still largely dominated by large GPU farms. It is likely that ASICs were privately being used by a handful of small teams with the necessary engineering and manufacturing talent (and capital), but direct-to-consumer ASIC hardware for Ethereum didn’t really show up until this summer.
There are an estimated 10 million GPUs churning up hashes for the Ethereum network, to replace those with ASICs will likely take more than a year… assuming price stability occurs (and coin prices are volatile and anything but stable).
For illustrative purposes, what if the entire network were to magically switch over the most efficient hardware -the Innosilicon A10 – released next month?
Innosilicon currently advertises its top machine can generate 485 megahashes/sec and consumes ~ 850 W.
So what is that math?
The Ethereum network is ~300 TH/s which is around 300,000,000 megahashes /sec.
Quick division: that’s the equivalent of 618,557 A10 machines.
Again, each machine is advertised to consume ~850 W.
in a single day one A10 consumes: 20.4 kWh
in a month: ~612 kWh
So what would 618,557 A10 machines consume in a single day?
– about 12.6 million kWh / day
– about 4.6 billion kWh / year
That works out to be between Afghanistan or Macau. However…
Before you say “this is nearly identical to Bitcoin Cash” keep in mind that the Ethereum estimate above is the lowest of lower-bounds because it uses the most efficient mining gear that hasn’t even been released to the consumer.
In reality the total energy consumption for Ethereum is probably twice as high.
Why is Etherum electricity usage likely twice as high as the example above?
Because each of the ~10 million GPUs on the Ethereum network is significantly less efficient per hash than the A10 is. 4 Note: an example of a large Ethereum mine that uses GPUs is the Enigma facility.
For instance, an air-cooled Vega 64 can churn ~41 MH/s at around 135 W which as you see above, is much less efficient per hash than an A10.
If the Ethereum network was comprised by some of the most efficient GPUs (the Vega 64) then the numbers are much different.
Starting with: 300,000,000 MH/s divided by 41 MH/s. There is the equivalent to 7.32 million Vega GPUs generating hashes for the network which is more in line with the ~10 million GPU estimate.
one Vega 64 running a day consumes ~3.24 kWh
one Vega 64 running a month: ~77.7 kWh
If 7.32 million Vega equivalent GPUs were used:
in a day: ~ 23.71 million kWh
in a year: ~8.65 billion kWh
That would place the Ethereum network at around 100th on the electricity consumption list, between Guatemala and Estonia.
In terms of economic activity: Guatemala’s GDP is around $75 billion and Estonia’s GDP is around $26 billion.
What is Ethereum’s economic activity?
Unlike Bitcoin and Bitcoin Cash, the stated goal of Ethereum was basically to be a ‘censorship-resistant’ world computer. Although it can transmit funds (ETH), its design goals were different than building an e-cash payments platform which is what Bitcoin was originally built for.
So while merchants can and do accept ETH (and its derivatives) for payment, perhaps a more accurate measure of its activity is how many Dapp users there are.
There are a couple sites that estimate Daily Active Users:
State of the Dapps currently estimates that there are 8.93k users and 8.25K ETH moving through Dapps
DappRadar estimates a similar number, around 8.37k users and 8.57K ETH moving through Dapps
Based on the fact that the most popular Dapps are decentralized exchanges (DEXs) and MLM schemes, it is unlikely that the Ethereum network is generating economic activity equivalent to either Guatemala or Estonia.5
For more on the revenue Ethereum miners have earned and an estimate for how much CO2 has been produced, Dominic Williams has crunched some numbers. See also this footnote.6
According to Malachi Salacido (above), their mining systems (in the background) are at a 2 MW facility, they are building a 10 MW facility now and have broken ground on a 20 MW facility. Also have 8 MW of facilities in 2 separate locations and developing projects for another 80 MW. (source)
Part 4: Litecoin
If you have been reading my blog over the past few years, you’ll probably have seen some of my Litecoin mining guides from 2013 and 2014.
If you haven’t, the math to model Litecoin’s electricity usage is very similar to both Bitcoin and Bitcoin Cash. From a mining perspective, the biggest difference between Litecoin and the other two is that Litecoin uses a hash function called scrypt, which was intended to make Litecoin more “ASIC-resistant”.
Spoiler alert: that “resistance” didn’t last long.
Rather than diving into the history of that philosophical battle, as of today, the Litecoin network is composed primarily of ASIC mining gear from several different vendors.
One of the most popular pieces of equipment is the L3+ from Bitmain. It’s basically the same thing as the L3 but with twice the hashrate and twice the power consumption.
So let’s do some numbers.
Over the past month, the Litecoin network hashrate has hovered around 300 TH/s, or 300 million MH/s.
Based on reviews, the L3+ consumes ~800 W and generates ~500 MH/s.
So some quick division, there are about 600,000 L3+ machines generating hashes for the Litecoin network today.
As an aggregate:
A single L3+ will consume 19.2 kWh per day
So 600,000 will consume 11.5 million kWh per day
An annually: 4.2 billion kWh per year
Coincidentally this is roughly the same amount as Bitcoin Cash does as well.
So it would be placed around 124th, between Moldova and Cambodia.
Again, this is likely a lower-bound as well because it assumes the L3+ is the most widely used ASIC for Litecoin but we know there are other, less efficient ones being used as well.
What about activity?
While there are a few vocal merchants and a small army of “true believers” on social media, anecdotally I don’t think I’ve spoken to someone in the past year who has used Litecoin for any good or service (besides converting from one coin to another).
We can see that — apart from the bubble at the end of last year — the daily transaction volume has remained roughly constant each day for the past 18 months. Before you flame me with a troll account, consider that LitePay collapsed before it could launch, partly because Litecoin still lacks a strong merchant-adopting ecosystem.
In other words, despite some support by merchant payment processors, its current usage is likely as marginal as Bitcoin and Bitcoin Cash.
Genesis Mining facility with Zeus scrypt mining equipment (source)
Part 5: Monero
The math around Monero is most similar to Ethereum in that it is largely dominated by GPUs.
In fact, earlier this year, a large number of Monero developers convinced its boisterous userbase to fork the network to prevent ASICs from being used. This resulted in four Monero forks and basically all of them are dominated by high-end GPUs.
For the purposes of this article, we are looking at the fork that has the highest hashrate, XMR. Over the past month its hashrate has hovered around 475 MH/s.
Only 475 MH/s? That may sound like a very diminutive hashrate, but it is all relative to what most CPU and GPU hashrate performance is measured in Monero and not other coins.
For example, MoneroBenchmarks lists hundreds of different system configurations with the corresponding hashrate. Similarly there are other independent testing systems that provide public information on hashrates.
Let’s take that same Vega 64 used above from Ethereum. For Monero, based on tweaking itgenerates around 2000 hashes/sec and consumes around 160 W.
So the math is as follows:
475,000,000 hashes/sec is the current average hashrate
A single Vega 64 will generate about 2000 hashes/sec
The equivalent of 237,500 Vega 64s are being used
Each Vega 64 consumes about 3.84 kWh per day
So 237,500 Vega 64s consume 912,000 kWh per day
And in a year: 332 million kWh
The 332 million kWh / year figure is a lower-bound because like the Ethereum Vega 64 example above: it doesn’t include the whole mining system, all of these systems still need a CPU with its own RAM, hard drive, and so forth.
As a result, the real electricity consumption figure is much closer to Haiti than Seychelles, perhaps even higher. Note: Haiti has a ~$8.4 billion economy and the GDP of Seychelles is ~$1.5 billion.
So what about Monero’s economic activity? Many Monero advocates like to market it as a privacy-focused coin. Some of its “core” developers publicly claimed it would be the best coin to use for interacting with darknet markets. Whatever the case may be, compared to the four above, currently it is probably the least used for commercial activity as revealed by its relative flat transactional volume this past year.
A now-deleted image of a Monero mining farm in Toronto (source)
Above were examples of how much electricity is consumed by just five proof-of-work coins. And there are hundreds of other PoW coins actively online using disproportionate amounts of electricity relative to what they process in payments or commerce.
This article did not dive into the additional resources (e.g., air conditioning) used to cool mining equipment. Or the subsidies that are provided to various mining farms over the years. It also doesn’t take into account the electricity used by thousands of validatingnodes that each of the networks use to propagate blocks each day.
It also did not include the huge amount of semiconductors (e.g. DRAM, CPUs, GPUs, ASICs, network chips, motherboards, etc.) that millions of mining machines use and quickly depreciate within two years, almost all of which becomes e-waste.7 For ASIC-based systems, the only thing that is typically reused is the PSU, but these ultimately fail as well due to constant full-throttle usage.
In summation, as of this writing in late August 2018:
Bitcoin’s blockchain likely uses the same electricity footprint as Austria, but probably higher
Bitcoin Cash’s blockchain is at least somewhere between Moldova and Cambodia, but probably higher
Ethereum’s blockchain is at least somewhere between Guatemala and Estonia, but probably higher
Litecoin’s blockchain is at least somewhere between Moldova and Cambodia, but probably higher
One of Monero’s blockchains is at least somewhere between Haiti and Seychelles, but probably higher
Altogether, these five networks alone likely consume electricity and other resources at an equivalent scale as The Netherlands especially once you begin to account for the huge e-waste generated by the discarded single-use ASICs, the components of which each required electricity and other resources to manufacture. Perhaps even higher when costs of land, labor, on-going maintenance, transportation and other inputs are accounted for.
The Netherlands has the 18th largest economy in the world, generating $825 billion per annum.
I know many coin supporters say that is not a fair comparison but it is. The history of development and industrialization since the 18th century is a story about how humanity is increasingly more productive and efficient per unit of energy.
Proof-of-work coins are currently doing just the opposite. Instead of being more productive (e.g., creating more outputs with the same level of inputs), as coin prices increase, this incentivizes miners to use more not less resources. This is known as the Red Queen Effect.89
For years, proof-of-work advocates and lobbying organizations like Coin Center have been claiming that the energy consumption will go down and/or be replaced by renewable energy sources.
But this simply cannot happen by design: as the value of a PoW coin increases, miners will invest more capital in order to win those coins. This continues to happen empirically and it is why over time, the aggregate electricity consumption for each PoW coin has increased over time, not decreased. As a side-effect, cryptocurrency mining manufacturers are now doing IPOs.10
Reporters, if you plan to write future stories on this topic, always begin by looking at the network hashrate of the specific PoW coin you are looking at and dividing it by the most common piece of mining hardware. These numbers are public and cannot be easily dismissed. Also worth looking at the mining restrictions and bans in Quebec, Plattsburgh, Washington State, China, and elsewhere.
To front-run an example that coin promoter frequently use as a whataboutism: there are enormous wastes in the current traditional financial industry, removing those inefficiencies is a decades-long ordeal. However, as of this writing, no major bank is building dozens of data centers and filling them with single-use ASIC machines which continuouslygenerate random numbers like proof-of-work coins do. That would be rightly labeled as a waste.
In the aggregate, U.S. PCS systems process approximately 600 million transactions per day, valued at over $12.6 trillion.
It shouldn’t take the energy footprint of a single country, big or small, to confirm and settle electronic payments of that same country. The fact of the matter is that with all of its headline inefficiencies (and injustices), that the US financial system has — the aggregate service providers still manage to process more than three orders of magnitude more in transactional volume per day than all of the major PoW coins currently do.11 And that is just one country.
Frequent rejoinders will be something like “but Lightning!” however at the time of this writing, no Lightning implementation has seen any measurable traction besides spraying virtual graffiti on partisan-run websites.
Can the gap between the dearth of transactional volume and the exorbitantly high cost-per-transaction ratio be narrowed? Does it all come down to uses? Right now, the world is collectively subsidizing dozens of minuscule speculation-driven economies that in aggregate consumes electricity on par with the 18th largest real economy, but produces almost nothing tangible in exchange for it.
What if all mining magically, immediately shifted over to renewable energy?
Izabella Kaminska succinctly described how this still doesn’t solve the environmental impact issues:
Renewable is displacement. Renewable used by bitcoin network is still renewable not used by more necessary everyday infrastructure. Since traditional global energy consumption is still going up, that ensures demand for fossil continues to increase.
To Kaminska’s point, in April a once-shuttered coal power plant in Australia was announced to be reopened to provide electricity to a cryptocurrency miner. And just today, a senator from Montana warned that the closure of a coal power plant “could harm the booming bitcoin mining business in the state.”
It is still possible to be interested in cryptocurrencies and simultaneously acknowledge the opportunity costs that a large subset of them, proof-of-work coins, are environmental black holes.12
If you’re interested in discussing this topic more, feel free to reach out. If you’re looking to read detailed papers on the topic, also highly recommend the first two links listed below.
If the market value of a coin decreases, then because hashrate follows price, in practice hashrate also declines. See also a ‘Maginot Line’ attack [↩]
Another estimate is that Bitcoin’s energy usage creates as much CO2 as 1 million transatlantic flights. [↩]
There have been proposals from various developers over the years to change this hash function but at the time of this writing, both Bitcoin and Bitcoin Cash use the same one. [↩]
And because many of these mining systems likely use more-powerful-than-needed CPUs. [↩]
Note: Vitalik Buterin highlighted this discrepancy earlier this year with the NYT: The creator of Ethereum, Vitalik Buterin, is leading an experiment with a more energy-efficient way to create tokens, in part because of his concern about the impact that the network’s electricity use could have on global warming. “I would personally feel very unhappy if my main contribution to the world was adding Cyprus’s worth of electricity consumption to global warming,” Mr. Buterin said in an interview. [↩]
At 8.65 billion kWh * $0.07 / kWh comes to around $600 million spent on electricity per year. Mining rewards as of this writing: 3 ETH * $267 / ETH * 6000 blocks / day equals to $4.8 million USD / day. Or ~$1.7 billion per year. This includes electricity and hardware. Thanks to Vitalik for double-checking this for me. [↩]
Just looking at the hash-generating machines, according to Chen Min (a chip designer at Avalon Mining), as of early November 2017, 5% of all transistors in the entire semiconductor industry is now used for cryptocurrency mining and that Ethereum mining alone is driving up DRAM prices. [↩]
As described in a Politicoarticle this past spring: “To maintain their output, miners had to buy more servers, or upgrade to the more powerful servers, but the new calculating power simply boosted the solution difficulty even more quickly. In effect, your mine was becoming outdated as soon as you launched it, and the only hope of moving forward profitably was to adopt a kind of perpetual scale-up: Your existing mine had to be large enough to pay for your next, larger mine.” [↩]
Following the dramatic drop in coin prices since January, Nvidia missed its revenue forecast from cryptocurrency-related mining: Revenues from miners were $289 million in Q1, which was about 10% of Nvidia’s revenue. The forecast for Q2 was $100 million and the actual revenues ended up being $18 million. [↩]
On average, the Bitcoin network confirms about 300,000 transactions per day. A lot of that is notcommercial activity. Let’s take the highest numbers from Chainalysis and assume that each major cryptocurrency is processing at least $10 million in merchant transactions a day. They aren’t, but let’s assume that they are. That is still several orders of magnitude less than what US PCS systems do each day. [↩]
The ideological wing within the cryptocurrency world has thus far managed to convince society that negative externalities are ‘worth the cost.’ This narrative should be challenged by both policy makers and citizens alike as everyone must unnecessarily bear the environmental and economic costs of proof-of-work blockchains. See also the Bitcoin Energy Consumption Index from Digiconomist and also Bitcoin is not a good fit for renewable energy. Here’s why. [↩]
As mentioned in my previous post, below are five thoughts for what could take place in 2018, categorized by degree of likelihood: most likely –> least likely.
(1) Continued mania
The euphoria around cryptocurrencies and ICOs continues due almost entirely because of retail sentiment, not just because of institutional action. Every valuation model that has been proposed to gauge what the price of a certain coin will be, fails almost entirely because of the inability to model sentiment. Contra Chris Burniske (note: he did not really disclose that he owned bitcoins while covering cryptocurrencies as an analyst), there are no ‘fundamentals’ to nearly any coin, in fact, many of the “top” coins don’t even do what they claim to do.
Want proof? Look at the most talked about ICOs and altcoins and airdrops that were created in 2013-2014. How many of them have actually delivered what they marketed? Basically none. Yet, if they are still listed on an exchange, odds are they are trading at near all-time highs because retail investors really don’t care about functionality or utility: they want narratives that paint pictures of Moonlambos in their near future.
This phenomenon is best described as “coin nihilism”:
So as long as there is free-entry to create and market a cryptocurrency to the masses, coin domination (who is the king of the castle) will be fluid. The only entities capable of changing that is law enforcement via coordinated regulatory action (e.g., debanking of exchanges due to regulatory guidance).1
Or as one of my OTC trader friends recently remarked:
“This is why crypto is doomed for pump and dump because the market can’t react to increased demand with more supply. So if interest fades you just keep getting clobbered with new supply like 2014 redux.”
When you have free-entry and no gatekeepers when it comes to creating money supply, people will just create a new coin as it always has more financial upside.
Besides governments, what else could stop the pump train? Hackers seem focused on low-hanging fruit – no one bothers to actually attack technical weaknesses in a blockchain. “Early adopters,” old guard (OG) whales cashing out faster than demand can absorb the coin supply may be the only other large counterbalance to the mania.2
Both criminal and civil lawsuits will continue to be filed against issuers and developers of both cryptocurrencies and ICOs. On the criminal side, the wrinkle will be that it will not just be securities and/or commodities regulators. Law enforcement agencies involved with monitoring money transmission (such as FinCEN and FINTRAC) will announce more than one criminal suit against developers who either enabled money laundering to take place on their platforms and/or failed to comply with some other area of BSA (or other regional equivalent).3
Rather than go through the laundry list of all the areas for regulatory and law enforcement action, check out (attorney) Christine Duhaime’s explanation.
With that said, while a case could be made that entities like Bitcoin Core – and its vocal surrogates – behave a lot like administrators, there are few indications that the any development team will be sued right now.
(3) Pumpers and VCs are going to pump and won’t be held accountable
Pretty much the most popular twitter personalities nowadays are the shills and pumpers who benefits from one anothers antics. It’s a non-stop contest to see who can say the most outrageous things about what cryptocurrencies will do to the world. The winner gets to cash out on a secondary market and buy a Swiss resort. The loser who said Junkcoin would only jump 10x instead of 100x also gets to cash out and retire in the Hamptons.
How many of the most egregious examples of investors and advisors that promoted these will be held accountable? Probably very few even though the SEC put out a press release specifically around the promotion of ICOs… we still regularly see ads for ICOs on social media (e.g., “general solicitation”).
For those hoping that techbros and their apologists will be held accountable, this is probably not that year. This includes lobbying groups involved in disinformation campaigns for their own ideological purposes.
If we were to aggregate the amount of revenue generated by enterprise-focused DLT vendors, based on the known RFPs that were won last year and are currently being bid on, I’d guesstimate that about $100 – $200 million is at play this year. This is based on the fact that most RFPs seem to be for less than $10 million. It’ll take at least 6-12 months to build an MVP and then even longer to get approval for additional phases.
As mentioned in my previous post: unfortunately our sample size of big infrastructure builds on the enterprise side is still limited. Examples include the the DA / ASX deal (which took 2 years for a final decision to be made). Another large one is the DTC trade, the vendor of which is IBM. If built and put into production, these will eventually recoup costs but the bigger revenue will likely come from actual enterprise-licenses: seats to use the network.
For an inside perspective, I reached out to one of my close friends working at a DLT vendor who provided the following view:
This year’s revenue is one thing. There is also recurring revenue (run vs build). There is also the fact that last year some/many deals were “bought” for marketing and credential building purposes (so they are subsidized). But I think this year suppliers are less willing to buy the business and bid low on price. We (the industry) could be in steady state production by year end for some implementations. I think $100-200m is broadly right for revenue to play for this year.
His estimate included Q/A support and SLAs.
I also would predict that, just like last year, there will be very few new enterprise-focused vendors entering the market from the early stage startup world. And that enterprise vendors struggle as a whole to attract and retain junior developers because they have to compete with cryptocurrency-related projects that may provide higher compensation during this bull market.
(5) Cryptocurrencies as financial market infrastructure
I think this is the least likely theme to occur this – and we should thank the gods – is using a cryptocurrency (anarchic) chain as FMI. Despite the mud that coin lobbyists and evangelists throw at enterprise-focused DLT vendors, cryptocurrency networks are systemic risks to the financial world and should be avoided at this time.
It is one thing to have a coin bubble driven by unsophisticated retail investors. It is another to have a coin bubble because of leverage and integration with some real financial instruments. And it is another to have a coin bubble – and the mission critical systems of the world’s financial intermediaries – directly impacted by these coin fluctuations and not be able to hold any of the validating nodes accountable… because they are pseudonymous miners in a jurisdiction that doesn’t recognize the standing of a foreign lawsuit.
If you are reading this, you are probably not terribly sympathetic to anyone who loses their shirt at this time for buying some random coin. On the other hand, you would be justified if you are worried that a national payment or securities depository is being run on top of Bitcoin via some kind of colored coin Rube Goldberg system. Reducing systemic risks to the financial world has been a top priority of financial regulators since 2008.
At the time of this writing, none of the existing cryptocurrencies being built seems to have gone through or respects a PFMI check-off. Or maybe that is a risk regulators and regulated financial institutions will be willing to take?
As a friend recently said, with cryptocurrencies you always have to expect the unexpected. People are quick to forget the bear market of 2014-2015. Will the irrational exuberance die down once most of these cryptocurrency and ICO projects fail to deliver on their promises? Maybe not, but then again, check out the coin rankings over time on these four charts.
I am actually kind of optimistic for new ideas being tested out in certain ecosystems, like Ethereum (note: this is not an endorsement of Ethereum or ETH/ETC). Now that proof-of-stake, via Casper, is being brought out of the lab and onto a testnet, we might be able to scratch off the environmental impact issue that is a blight on proof-of-work networks. CryptoKitties, via ERC721, is a neat demonstration of how to potentially create non-fungible property (assuming courts recognize it as such). I have been giving this some thought on other areas that this could be reused and commercialized. Note: there is an entire, virtual zoo of copy cats that has now arrived, including puppies and other animals.
What do you think, will heads begin to roll as law enforcement learns what shenanigans are going on? Will an ETF-based on bitcoin futures be approved? It seems likely that the CME and CBOE will add futures trading for ether, what about other coins? Coinbase and several other former bitcoin-only exchanges have already announced that they will add more altcoins and everybody is guessing which one will be next. Will 2018 be a repeat of 2014 with altcoin mania again dominating mindshare?
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One reviewer who works at an OTC desk commented: “Almost all of the OTC trading counterparties and exchange we have use just a couple banks. It would be trivial to cut the spigot off overnight. Also if I’m a regulator and want to go after the toxic sludge flowing through the fiat side of this world I hit one of these banks that provides the liquidity.” [↩]
One trader at an OTC desk commented that: “Real institutional liquidity, beyond what we have now, would help. I’d argue part of the reason why things get so out of hand so fast is because the market infrastructure isn’t there to handle it correctly.” [↩]
One reviewer at an exchange commented: “I think regulatory scrutiny is actually gonna land next year from CFTC and SEC in a real way. The CFTC in particular has a duty now to police spot, wait till we get the first settlement of CME or CBOE where someone intentionally puts the auction in the tank or DoS’s the exchanges.” [↩]
Most traders only brag about their winning trades, not their losses. [↩]
[Note: I neither own nor have any trading position on any cryptocurrency. I was not compensated by any party to write this. The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise. See Post Oak Labs for more information.]
2017 taught us many things, including the fact that no one reads (or writes) or pays for long-form content any more. Even with lovable memes and animated gifs, keeping an audience’s attention is hard.
Already too distracted to read further? How about a quick video from JP Sears on how to appropriately Bitcoin Shame your friends and family:
The other takeaway for 2017 is that, if in doubt, open up hundreds of social media accounts and shill your way to riches. The worst thing that could happen is no one buys your coin. The best thing that happens is that someone buys your coin and you can then convert the coin into real money, retire, and act like you are super-wise thought leader with oodles of entrepreneurial and investing experience.
Some other stories with revisiting from the past year:
If we were being intellectually honest we would say that the only goal post anyone cared about this year was that the price of cryptocurrencies, as measured in real money, and how high they soared.1 And that the main reason this occurred is because Bob knew Alice and Carol were both going to buy a lot of say, bitcoin, thereby pushing up the price, so he did too. The Economistcalled it “the greater fool theory.” But The Economist are great fools for not buying in at $1, so let’s ignore them.
Basically none of the feel-good goals about lowering remittance fees or increasing financial inclusion promoted in previous years by enthusiasts have really materialized. In fact, at-risk users and buyers in developing economies probably got screwed on the ICO bandwagon as insiders and sophisticated investors who were given privileged early access to pre-sales, dumped the coins on secondary markets and hoi polloi ended up holding the bag on dozens of quarter-baked ICOs.2
Oh, but transaction fees for Bitcoin are at all-time highs, that’s a real milestone right?
There are many reasons for this, including the fact that Bitcoin Core’s scaling roadmap has thus far failed to achieve its advertised deadlines (see section 5 below).3 Maybe that will change at some point.
Shouldn’t higher fees be a cause for celebration with “champaign” (sic)? 4
Some Bitcoin Core representatives and surrogates have created an ever expanding bingo card of scapegoats and bogeymen for why fees have gone up, ranging from:
blaming Roger Ver and Jihan Wu as demonic-fueled enemies of Bitcoin
to labeling large chunks of transactions as ‘spam attacks’ from nefarious Lizard-led governments5
to flat out bitcoinsplaining: higher fees is what to expect when mass adoption takes place!
I’m sure you’ll be on their bingo card at some point too.
Just like Visa and other widely used payment network operators charge higher and higher rates as more and more users join on… oh they don’t.6 But that’s because they censor your freedom loving transactions! Right?
So what’s the interim solution during this era of higher fees? Need to send a bitcoin payment to someone?
You know how supermarkets used to hold items on layaway? They still do, but it’s not as common to use, hence why you googled the term. Well, in light of high fees, some Bitcoin Core developers are publicly advising people to open up a “tab” with the merchant. You know, just like you do with your favorite local bartender.
Fun fact: the original title of the Satoshi whitepaper was, Bitcoin: a peer-to-peer electronic layaway system.
This faux comparison didn’t age well. In 2014 this was supposed to be a parody. (Source)
For example, the ad above was promoted far and wide by Bitcoin enthusiasts, including Andreas Antonopoulos who still tries to throw sand in Western Union’s eye. Seriously, watch the linked video in which Antonopoulos claims that Bitcoin will somehow help the poor masses save money such that they can now invest in and acquire clean water. It’s cringe worthy. Did Bitcoin, or Bitcoin-related businesses, actually do any of the things he predicted? Beyond a few one-time efforts, not really.7 Never mind tangible outcomes, full steam ahead on the “save the world” narrative!
Many enthusiasts fail to incorporate in their cartoonish models: that the remittance and cross border payment markets have a set of inflexible costs that have led the price structure to look the way it does today, and a portion of those costs, like compliance, have nothing to do with the costs of transacting.8 There may be a way of reducing those costs, but it is disingenuous (and arguably unethical) to pull on the heart strings of those living on subsistence in order to promote your wares.9
Rather than repeat myself, check out the break down I provided on the same Western Union example back in 2014. Or better yet, look at the frequently updated post from Save on Send, who has the best analysis bar none on the topic.
Back to loathing about ‘adoption’ numbers: few people were interested in actual usage beyond arbitrage opportunities and we know this because no one writes or publishes usage numbers anymore.10 I’ll likely have a new post on this topic next quarter but for a quick teaser: BitPay, like usual, still puts out headline numbers of “328% growth” but doesn’t say what the original 2016 baseline volume was in order to get the new number today.
I don’t strive to pick on BitPay (to be fair they’re like the only guys to actually publish something) but unfortunately for them, the market still has not moved their way: Steam recently dropped support for Bitcoin payments and a Morgan Stanley research note (below) showed that acceptance from top 500 eCommerce merchants dropped from 5 in 2016 to 3 in 2017.11
“This is possibly the saddest bitcoin chart ever” – BI. Source: Morgan Stanley
Due to a lack of relevant animated gifs, a full break down on the topic wouldn’t fit in this article. But just a quick note, there were a number of startups that moved decisively away from their original stated business case of remittances and instead in to B2B plays (BitPesa, Bitspark) or to wallets (Abra). 12 These would be worth revisiting in a future article.13
So what does this all have to do with “legitimization”?
If you haven’t seen the Godfather trilogy, it’s worth doing so during or after the holiday break.14
This year we have collectively witnessed the techbro re-enactment of Godfather: Part 3 with the seeming legitimization of online bucket shops and dodgy casinos, aka cryptocurrency intermediaries, you wouldn’t talk about in polite company.
All of the worst elements of society, like darknet market operators, hate groups, and malware developers, effectively got eff you money and a cleansing mainstream “exit” courtesy of financial institutions coming in and regulators overwhelmed by all of the noise.15 Just like in No Country for Old Men, the bad guy(s) sometimes win. This isn’t the end of that story but the takeaway for entrepreneurs and retail investors: don’t work or build anything. Just shill for coins on social media morning, noon, and night.
(2) Red Scares
I am old enough to remember back in 2013 when Bitcoin “thought leaders” welcomed Chinese Bitcoin users. In late 2013, during the second bull run of that year, there were frequent reddit threads about how mainland Chinese could use Bitcoin to route around censorship and all the other common civil libertarian tropes.
Guess what happened? On December 5th, 2013, the People’s Bank of China and four other ministries issued guidance which restricted activities that domestic banks could do with cryptocurrencies, thereby putting spot exchanges in a bit of a bind, causing panic and subsequently a market crash. Within days there were multiple “blame China” threads and memes that still persist to this day. Case in point: this thread titled, “Dear China” which had Mr. Bean flipping off people in cars, was voted to the top of /r/bitcoin within a couple months of the government guidance. Classy.
As I detailed in a previous post, earlier in the autumn, several state organs in China finally closed down the spot exchanges, which in retrospect, was probably a good decision because of the enormous amounts of scams and deception going on while no one in the community was policing itself.16 In fact, some of the culprits that led Chinese exchanges into the dishonesty abyss are still around, only now they’re working for other high-profile Bitcoin companies. 17 Big surprise!
For example, Reuters did an investigation into some of the mainland exchanges this past September, prior to the closure of the spot exchanges. They singled out BTCC (formerly BTC China) as having a checkered past:
Internal customer records reviewed by Reuters from the BTCChina exchange, which has an office in Shanghai but is stopping trading at the end of this month, show that in the fall of 2015, 63 customers said they were from Iran and another nine said they were from North Korea – countries under U.S. sanctions.
It’s unclear how much volume BTCC processed on behalf of North Koreans, one former employee says the volumes were definitely not zero.18 These were primarily North Koreans working in China, some in Dandong (right across the border).
For perspective: North Korea has been accused of masterminding the WannaCry ransomware attack and also attacking several South Korea exchanges to the tune of around $7 million this year. Sanctions are serious business, check out the US Department of Treasury resource center to learn more.19
Isn’t China the root of all problems in Bitcoinland?
In this bull market it is unclear why Paul has to resort to PR stunts, like making fearmongering tweets or opening a strike/call option at LedgerX with the bet that bitcoin will be worth $50,000 next year.20 There are many other ways to better utilize this capital: rethink investing in funds run by managers who are not only factually wrong but who spread fake rumors around serious issues like nationalization.
For instance, I don’t normally publicly write about who I meet, but this past July, while visiting Beijing I sat down with about a dozen members of their ‘Digital Money‘ team (part of the People’s Bank of China group involved in exploring and researching blockchain-related topics). 21 They had already spoken with my then-current employer as well as many other teams and companies (apparently the Zcash team saw them the very next day). While I don’t want to be perceived as endorsing their views, based on my in-depth discussion that day, this Digital Money team had clearly done their homework and heard from all corners of the entire blockchain ecosystem, both cryptocurrency advocates and enterprise vendors. They were interested in the underlying tech: how could the big umbrella of blockchain-related technology improve their financial market infrastructure?
Look at it another way: the Chinese government (or any government for that matter) has no need to nationalize Bitcoin, what value would it bring to them? It would just be a cost center for them as miners don’t run for free.22 In contrast, their e-RMB team, based out of Shenzhen, has been experimenting with forks/clones of Ethereum. This is publicinformation.
But what about Jihan and Bitmain? Aren’t they out to kill Bitcoin?
I can’t speak on his intentions but consider this: as a miner who manufacturers and sells SHA256 hardware that can be used by both Bitcoin and Bitcoin Cash (as well as any SHA256 proof-of-work coin), Bitmain benefits from repeat business and satisfied customers. It is now clear that the earlier Antbleed campaign effort to demonize Bitmain was a massive PR effort to create a loss of confidence in Bitmain as it was promoted by several well known Bitcoin Core supporters and surrogates to punish Bitmain for its support for an alternative Bitcoin scaling roadmap and client. In fact, as of this day, no one has brought forth actual evidence beyond hearsay, that covert ASICBoost is/was taking place. Maybe they did, but you’d need to prove this with evidence.
Speaking of PR campaigns and mining…
(3a) Energy usage / mining
Over the past two months there have probably been more than a dozen articles whitewashing proof-of-work mining energy consumption numbers. Coin Center, a lobbying group straight out of Thank You for Smoking, has its meme team out on continuous social media patrols trying to conduct damage control: no one must learn that Bitcoin mining isn’t free or that it actually consumes resources!
The title of the article above is complete clickbait BS. Empirically proof-of-work mining is driving miners to find regions of the world that have a good combination of factors including: low taxes, low wages, low energy costs, quick time-to-market access (e.g., being able to buy and install new hashing equipment), reliable energy, reliable internet access, and low political turmoil (aka stability).23 Environmental impact and “clean energy” are talking points that Van Valkenburgh allege, but don’t really prove beyond one token “we moved to renewables!” story. The next time Coin Center pushes this agenda item, be sure to just ask for evidence from miners directly.24.
Another example is in a recent Bloomberg Viewcolumn from Elaine Ou (note: the previous company that she co-founded was shut down by the SEC). She wrote:
Digital currency is wasteful by design. Bitcoin “miners,” who process transactions in return for new currency, must race to solve extremely difficult cryptographic puzzles. This computational burden helps keep the transaction record secure — by raising the bar for anyone who would want to tamper with it –- but also requires miners to build giant farms of servers that consume vast amounts of energy. The more valuable bitcoin becomes, the more miners are willing to spend on equipment and electricity.
Mining a proof-of-work coin (such as Bitcoin) can only be as ‘cheap‘ or ‘efficient’ as the block reward is worth. As the market price of a coin increases so too does the capital expended by miners chasing seigniorage. This, we both agree on.
In the long run, proof-of-work miners will invest and consume capital up to the threshold in which the marginal costs of mining (e.g., land, labor, electricity, taxes, etc.) roughly equals the marginal revenue they receive from converting the bitcoins into foreign currency (aka real money) to pay those same costs. This, we also both agree on.
What Ou makes a mistake on is in her first sentence: digital currencies are not all wasteful, only the proof-of-work variety are. Digital currency != cryptocurrency.25
I know, I know, all other digital currencies that are not proof-of-work are crap coins and those who make them are pearl-clutching morons. Contra Ou and Coin Center, it is possible for central banks, and even commercial banks, to issue their own digital currency — and they could do so without using resource intensive proof-of-work.26 The Bank of International Settlements recently published a good paper on the various CBDC models out there, well worth a read. And good news: no mountains of coal are probably used in the CBDC issuance and redemption process.27
Back to proof-of-work coins: a hypothetically stable $1 million bitcoin will result in a world in which miners as a whole expend up to $1 million in capital to mine. If the network ever became cheaper to operate it would also mean it is cheaper to permanently fork the network. You can’t have both a relatively high value proof-of-work coin and a simultaneously non-resource intensive network.
While it is debatable as to whether or not Bitcoin mining is wasteful or not, it empirically does consume real resources beyond the costs of energy and the externalization of pollution onto the environment. The unseen costs of hash generation for a $20,000 bitcoin is at least $13 billion in capital over a year that miners will eventually consume in their rent-seeking race albeit from a combination of resources.
I quickly made the chart (above) to illustrate this revenue (or costs depending on the point of view).28 These are the eight largest proof-of-work-based cryptocurrencies as measured by real money market prices.
There are a few caveats: (1) some of the block rewards adjust more frequently than others (like XMR); (2) some of the coins have relatively low transaction fees which equates to negligible revenue so they were not included; (3) the month of December has seen some very high transaction fees that may or may not continue into 2018; (4) because block generation for some of these is based on an inhomogeneous Poisson process, blocks may come quicker than what was supposed to be “average.”
How to interpret the table?
The all-time high price for Bitcoin was nearly $20,000 per coin this year. If in the future, that price held stable and persisted over an entire year, miners would receive about $13 billion in block rewards alone (not including transaction fees). Empirically we know that miners will deploy and consume capital up to the point where the marginal costs equals the marginal value of the coin.29 So while there are miners with large operating margins right now, those margins will be eaten up such that about $13 billion will eventually be deployed to chase and capture those rewards. Consequently, if all 8 of these proof-of-work coins saw their ATH extended through 2018, ceteris paribus, miners would collectively earn about $32.6 billion in revenue (including some fees).
There are a variety of sites that attempt to gauge what the energy consumption is to support the network hashrate. Perhaps the most frequently cited is Digiconomist. But Bitcoin maximalists don’t like that site, so let’s put together an estimate they cannot deny (yes, there are climate change denialists in the cryptocurrency world).
For the month of December, the network hashrate for Bitcoin hovered around 13.5 exahash/second or 13.5 million terahash/second (TH/s).
To get a lowerbound on how many hash-generating machines are being used, let’s look at a product called the S9 from Bitmain. It is considered to be the most “efficient” off-the-shelf product that public consumers can order in volume.30 This mining unit generates around 13.5 TH/s.
So, if we were to magically wave our hands and replace all of the current crop of Bitcoin mining machines into the most efficient off-the-shelf product, we’d need about 1 million of these to be manufactured, shipped, installed, and maintained in order to generate the equivalent hashrate that the Bitcoin network has today. Multiply 1 million S9’s times the amount of energy individually used by a S9 and you’d get a realistic lowerbound energy usage for the network today.31
Note: this doesn’t factor in land prices, energy costs, wages for employees, building the electrical infrastructure (e.g., installing transformers), and many other line items that are unseen in the chart above. It also doesn’t include the most important factor: as more mining hashrate is added and the difficulty rating adjust upward, it dilutes the existing labor force (e.g., your mining unit does not improve or become more productive over time).
The tweet above is not a rare occurrence. If you are reading this, you probably know someone who tried to mine a cryptocurrency from an office computer or maybe their computer was the victim of ransomware.
You may not think of much of the externalization and socialization of equipment degradation that is taking place, but because mining is a resource intensive process, the machines used for that purpose depreciate far faster than those with normal office usage.32 To date, no one has done a thorough analysis of just how many work-related computers have been on the receiving end of the mining process but we know that employees sometimes get caught, like the computer systems manager for the New York City Department of Education or the two IT staffers in Crimea.33
Even if miners eventually fully utilize renewable energy resources, most hash-generating machines currently deployed do not and will not next year. These figures also do not factor in the fully validating nodes that each network has that run out of charity (people run them without any compensation) yet consume resources. According to Bitnodes, Bitcoin has around 11,745 nodes online. According to EtherNodes, Ethereum has around 26,429 nodes online.
So is there an actual upperbound number?
There is, by dividing hashpower by cost and comparing to costs of various known processor types. For instance, see this footnote for the math on how two trillion low-end laptop CPUs could be used.34 ‘35
Just looking at the hash-generating machines, according to Chen Min (a chip designer at Avalon Mining), as of early November, 5% of all transistors in the entire semiconductor industry is now used for cryptocurrency mining and that Ethereum mining alone is driving up DRAM prices.
This is not to say you should march in the streets demanding that miners should forgo the use of coal power plants and only use solar panels (which of course, require consumption of resources including semiconductors), there are after all, many other activities that are relatively wasteful.
But some Bitcoin and cryptocurrency enthusiasts are actively whitewashing the environmental impact of their anarchic systems and cannot empirically claim that their proof-of-work-based networks are any less wasteful or resource intensive than the traditional foreign capital markets they loathe.
In point of fact, while the traditional financial markets will continue to exist and grow without having to rely on cryptocurrencies for rationally pricing domestic economic activity, in 2018, as in years prior, Bitcoinland is still fully dependent on the stability of foreign economies providing liquidity and pricing data to the endogenous labor force of Bitcoin. Specifically, I argue in a new article, that miners cannot calculate without using a foreign unit of account; that economic calculations on whether or not to deploy and consume capital for expanding mining operations can only be done with stable foreign currency.36
Keep in mind that cryptocurrencies such as Bitcoin only clear (not settle) just one coin (or token) whereas traditional financial markets manage, transact, clear and settle hundreds of different financial instruments each day. 37 For comparison, the Federal Reserve estimates that on any given day about 600 million payment, clearing, and settlement transactions take place in the US representing over $11 trillion in value.38 But this brings up a topic that is beyond the scope of this article. Next section please.
(4) MIT’s Digital Currency Initiative
On the face of it, MIT’s DCI effort makes a lot of sense: one of the world’s most recognized institutions collaborating with cryptocurrency developers and projects worldwide.
But beneath the slick facade is a potential conflict of interest that has not been looked at by any media outlet. Specifically, around its formal foray into building tools for central bank digital currency (CBDC). Rob Ali, a well-respected lawyer turned research scientist (formerly with the Bank of England), was hired earlier this year by DCI to build and lead a team at MIT for the purpose of continuing the research he had started at the BoE. This is no secret.
Less known is how this research has now morphed into a two-fold business:
DCI charges central banks about $1 million a year to be a partner.39 What this allows the central bank to do is send staff to MIT and tap into its research capabilities. This includes MIT representatives co-authoring a couple of papers each year focused on topics that the central bank is keen to explore. Multiple central banks have written checks and are working together with DCI at this time.
Building and licensing tools and modules to central banks and commercial banks. DCI has hired several Bitcoin developers whom in turn have cloned/forked Bitcoin Core and Lightning. Using this code as a foundation, DCI is building IP it aims to license to central banks who want to build and issue central bank digital currency.
Where is the conflict of interest?
DCI is housed within MIT’s Media Lab, whose current director is Joi Ito. Ito is also the co-founder and director of Digital Garage. Digital Garage is an investor in Blockstream and vocal advocate of Lightning; coincidentally Blockstream is building its own Lightning implementation. Having made several publiccomments in favor of Bitcoin Core’s hegemony, Ito also appears to be a critic of alternative blockchain implementations.
In looking at his publicly recorded events on this topic Ito does not appear to disclose that the organizations he co-runs and invests in, directly benefit from the marketing efforts that Bitcoin Core and Lightning receive. Perhaps this is just miscommunication.
I’m all for competition in the platform and infrastructure space and think central bank digital currencies are legit (again check out this BIS paper) but this specific DCI for-profit business should probably be spun off into an independent company. Why? Because it would help reduce the perception that Ito – and others developers involved in it – benefits from these overlapping relationships. After all, Bitcoin Core arguably has a disproportional political clout that his investment (Blockstream) potentially benefits from if/when Lightning goes into production.40 And again, this is not to say there shouldn’t be any private-public partnerships or corporate sponsorships of academic research or that researchers should be prohibited in investing in companies, rather just a recommendation for disclosure and clarity.
(5) Lightning Network
If you haven’t seen The Money Pit (with Tom Hanks), it is well worth it for one specific reason: the contractors and their staff who are renovating Hanks’ home keep telling Hanks that it will be ready in two weeks.
And after those two weeks are over, Hanks is informed yet again that it will be ready in another two weeks.
The Lightning Network, as a concept, was first announced via a draft paper in February 2015. Its authors, Tadge Dryja and Joseph Poon, had initially sketched out some of the original ideas at their previous employer Vaurum (now called Mirror).
Lightning, as it is typically called, is commonly used in the same breath as “the scaling solution,” a silver bullet answer to the current transactional limitations on the Bitcoin network.41 Nearly three years later, after enormous hype and some progress, a decentralized routing version still has not gone into production. Maybe it will eventually but not one of its multiple implementations is quite ready today unless you want to use a centralized hub.42 Strangely, some of the terminology that its advocates frequently use, “Layer 2 for settlement,” is borderline hokum and probably has not been actually vetted to see if it fulfills the requirements for real “settlement finality.”43
And like multiple other fintech infrastructure projects, some of its advocates repeatedly said it would be ready in less than 6 months, several times. For instance:
On October 7, 2015, Pete Rizzo interviewed multiple developers including Tadge Dryja and Joseph Poon regarding Lightning. Rizzo wrote that: “In interview, Dryja and Poon suggested that, despite assertions project development could take years, Lightning could take as little as six months to be ready for launch.”
On April 5, 2016, Kyle Torpey interviewed Joseph Poon regarding expected time lines, stating that: “Lightning Network co-creator Joseph Poon recently supplied some comments to CoinJournal in regards to the current status of the project and when it will be available for general use. Poon claimed a functional version of the Lightning Network should be ready this summer.”
A month later, on May 5, 2016, Kyle Torpey interviewed Adam Back regarding his roadmap. Torpey wrote that: “While all of these improvements are being implemented on Bitcoin’s base layer, various layer-2 solutions, such as the Lightning Network, can also happen in parallel. The Lightning Network only needs CHECKSEQUENCYVERIFY (along with two other related BIPs) and Segregated Witness to be accepted by the network before it can become a reality on top of the main Bitcoin blockchain.”
On November 12, 2016, Alyssa Hertig interviewed several developers including Pierre-Marie Padiou, CEO of ACINQ, one of the startups trying to building a Ligthning implementation. According to Padiou: “The only blocker for a live Lightning implementation is SegWit. It’s not sure how or when it will activate, but if SegWit does activate, there is no technical thing that would prevent Lightning from working.”
Segregated Witness (SegWit) was activated on August 24, 2017. More than four months later, Lightning is still not in production without the use of hubs.
Not to belabor the point, just this past week, one of the executives at Lightning Labs (which is building one of the implementations) was interviewed on Bloomberg but wasn’t asked about their prior rosy predictions for release dates. To be fair, there is only so much they could cover in a six minutes allocation.
“Building rock solid infrastructure is hard,” is a common retort.
Who could have guessed it would take longer than 6 months? Yes, for regular readers of my blog, I have routinely pointed out for several years that architecting and deploying financial market infrastructure (FMI) is a time consuming, laborious undertaking which has now washed out more than a handful of startups attempting to build “enterprise” blockchains.
For example, Lightning as a concept predates nearly every single enterprise-focused DLT vendor’s existence. While not an equal comparison (they are trying to achieve different goals), there are probably ~5 enterprise-focused, ‘permissioned’ platforms that are now being used in mature pilots with real institutional customers and a couple could flip the “production” button on in the next quarter or so.4445
For what it is worth, enterprise DLT vendors as a whole did a very poor job managing expectations the past couple of years (which I mentioned in a recent interview). And they certainly had their own PR campaigns during the past couple of years too, there is no denying that. Someone should measure and quantify the amount of mentions on social media and news stories covering enterprise vendors and proposals like Lightning.46
Better late than never, right? So what about missed time frames?
In a recent (unscientific) poll I did via Twitter (the most scientific voting platform ever!) found that of the more than 1,600 voters, 81% of respondents thought that relatively inexpensive anonymous Lightning usage won’t really be good to go for at least 6+ months.
Just as Adam Back proposed a moratorium on nebulous “contention” for six months (beginning in August), I propose a moratorium on using the term “Lightning” as a trump card until it is actually live and works without relying on hubs. But don’t expect to see the crescendo of noise (and some signal) to die down in the meantime, especially once exchanges and wallets begin to demonstrate centralized, MSB-licensed implementations.47
With that suggestion, I can see it now: all of the Lightning supporters flaming me in unison on Twitter for not being a vocal advocate. Sure beats shipping code! To be even handed, Lightning’s collective PR effort was just one of many others (hello sofachains!) that could be scrutinized. A future post could look at all funded infrastructure-related efforts to improve cryptocurrency networks. Which ones, if any, showed much progress in 2017. 48
Interested in reading more contrarian views on the Lightning Network? See Gerard and Stolfi (and Stolfi2x) (and Stolfi3x). Let’s revisit in 6 months to see what has been launched and is in production.
(6) Objective reporting and analysis
Without sugar coating it: with the exception of a few stories, coin media not only dropped the ball on critically, objectively covering ICO mania this past year, but was largely complicit in its mostly corrupt rise. This includes The Information, which is usually stellar, but seems to have fallen in the tank with the ICO pumpers. That is, unless you’re a fake advisor and then they’ve got your number.
It took some time, but eventually mainstream and a few not-so-mainstream coverage has brought a much needed spotlight on some of the shady actions that took place this year. There were also a number of good papers from lawyers and academics published throughout 2017.
Note: that the SEC’s order against the Munchee ICO also relied on highlighting specific claims in the white paper.
Unfortunately 2017 will probably go down as the year in which several generations of nerds turned into day-trading schmucks, with colorful technical charts and all.50 This included even adopting religious slogans like: Buy the dip! Weakhands! HODL! We are the new 1%! The dollar is crashing! It’s not a bubble, it’s an adoption curve!
A few parting bits of advice: unfollow anyone that says this time things are different or the laws of economics have changed or calls themselves a “cryptolawyer” or who previously got shutdown by the SEC or who doesn’t have a LinkedIn page. Rethink donating or investing funds to anyone who makes up rumors about mining nationalization or who was fired for gambling problems or has a communications team solely dedicated to designing memes for Twitter.51
Cryptocurrencies aren’t inherently bad and ideas like ERC721 are even cool.52 But as neat as some of the tech ideas may be, magic internet coins sure as heck continue to attract a lot of Scumbag Steves who are enabled by participants that have turned a blind eye. It’s all good though, because everyone will somehow get a Moonlambo after the final boss is beaten, right?
I will have a separate post discussing predictions for 2018 but since we are reflecting on 2017, below are a few other areas worth looking into now that you’re a paper zillionare:
We have real empirical observation of hyperdeflation occurring: in which it is more rational to hoard the coin instead of spend it. As a result, Bitcoin-focused companies that have accumulated bitcoin are still raising capital from external financial markets denominated in foreign currency instead of deploying (consuming) their own bitcoin. And these same startups are receiving valuations measured, not in terms of bitcoin, but in terms of a foreign unit of account. What would change this trend?
Bitcoinland, with its heavy concentration of wealth, looks a lot like a feudal agrarian economy completely dependent on other countries and external financial markets in order to rationally deploy capital and do any economic calculation. Is there a way to build a dynamically adjustable cryptocurrency that does not rely on foreign capital or foreign reference rates?
How much proof-of-work related pollution has been externalized and socialized on the public at large due to subsidies in various regions like Venezuela? What are the effects, if any, on global energy markets?
As traditional financial markets add products and solutions with direct ties to cryptocurrencies (futures, options, payments, custody), by the end of 2018 how much of the transactional activity on Bitcoin’s edges will be based on non-traditional financial markets (e.g., LocalBitcoins)?
There were a lot of publicity stunts this year. Working backwards chronologically, the Andreas Antonopoulos donation could have been a publicity stunt, it also could be real. The argument goes: how is someone with a best selling book, who charges $20,000+ for speaking engagements, and who has been receiving bitcoins for years (here is the public address), still in debt. Maybe he is, maybe his family fell on hard times. But few asked any questions when an anonymous person sent what amounted to $1 million in bitcoin enabling him to reset his tax basis. (Hate me for writing this? As an experiment, earlier this month I put up a Bitcoin and Ethereum address on the sidebar of the home page, feel free to shower me with your magic coins and prove me wrong. I promise to convert it all into dirty filthy statist bucks.) A few months prior to that, Jamie Dimon was accused of everything but eating babies after he said “Bitcoin is a fraud.” Dozens of “Dear Jamie” letters were written begging him to see Bitcoin with their pure rose-tinted eyes. At what point will Bitcoin enthusiasts grow some thick skin and ignore the critics they claim don’t matter? And while we can continue to add PR stunts forever, the “fundraiser” for Luke-Jr’s home after Hurricane Irma had zero proof that it was his house, just a picture that Luke-Jr. says it was and the rest of the Bitcoin Core fan club promoting it. Trust but verify?
[Note: if you found this research note helpful, be sure to visit Post Oak Labs for more in the future.]
Many thanks to the following for their constructive feedback: VB, YK, RD, CM, WG, MW, PN, JH
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Bitcoin fans basically walked onto the field before the football game, toppled the goal posts, and carried it outside the stadium declaring themselves victorious without having actually played the match. [↩]
I am sure I will be accused of being a “Bitcoin Cash shill” (which obviously I must be, there is no other explanation!) for pointing this out, but last week, one vocal Bitcoin Core supporter even proposed a commit to change the wording on Bitcoin.org surrounding low fees: “These descriptions of transaction features are somewhat open to interpretation; it would probably be best not to oversell Bitcoin given the current state of the network.” [↩]
As an actor on a classic Saturday Night Live sketch said: “You may ask how we at the Change Bank, make money? It’s simple, volume.” [↩]
I take issue with anyone claiming to be able to label transactions specifically as spam without doing an actual graph analysis. See Slicing Data for more. Proof-of-lizard is not to be conflated with lizardcoin. [↩]
Note: this is not an endorsement of Visa, I do not have any equity or financial stake in Visa. [↩]
One reviewer commented: “One problem that affects all cryptocurrencies whether proof of work or of stake: What reason do most people have for using them that won’t run afoul of social policy objectives? As long as people need to convert them to regular fiat currencies, they have a distinct disadvantage. The only exception would be in failed economies where stable fiat currencies are restricted, until those governments see a cryptocurrency as a potential substitute and ban it. It is not even clear why a government would need to issue a cryptocurrency (not a CBDC). If it wants to serve unbanked people it could open or subsidize a bank for them which is what is being attempted in a few developing countries.” [↩]
One reviewer commented: “Fully peer-to-peer without banks ultimately leads to creating a new currency. A new currency means that for international payments you have the additional costs of converting into the currency and converting out of the currency. A currency not linked to a real world economy is always going to have a more volatile price (assuming it has any price at all). Volatility in FX always, always leads to higher transaction costs for exchange because the bid offer spread has to be wider. This is before you even get into the mining proof or work model and all its inherent flaws, which again ultimately result from trying to build a financial system without banks.” [↩]
One reviewer noted that: “Transferwise, Currency Fair, Revolut, Mondo and other startups are already doing it. And they’re doing it without having to break the rules and laws banks and Western Union have to play by. They’re building actual real, potentially sustainable businesses that are useful to society. They’re just not grabbing the headlines like the greater fool / Nakamoto Scheme is. When you build a real business, your scope for false promise making behind incoherent computer science jargon is pretty small.” [↩]
I even stopped aggregating numbers 18 months ago because fewer companies were making usage numbers public: it’s hard to write about specific trends when that info disappears. Note: if you think you have some interesting info, feel free to send it my way. [↩]
BitPay has diversified its portfolio of services now, expanding far beyond the original merchant acceptance and recently closed a $30 million funding round. However, the problem with their growth claims is they are typically measured in $USD volume. So, as the value of bitcoin has grown 10-20x (as measured in USD) in the past year, it is unclear how much BitPay has really grown in terms of new customers and additional transactions. Note: the same can be said for most Bitcoin-specific companies making big growth-related claims, BitPay is just one example. [↩]
Movements occurred in other areas too, on the enterprise side, Chain was perhaps the most well known company to pivot away from that vertical. [↩]
One reviewer commented: “2017 was a good year for B2B players with some prominent funding rounds (e.g., Bitspark, Veem, BitPesa) and some claimed growth on blockchain “rails” (but also on non-blockchain) namely Veem and BitPesa. A big surprise of 2017 was a much broader awareness of cryptocurrencies, i.e., free massive PR. The Coinbase app became more popular than Venmo (and far ahead of any bank). As a result, one of the most intriguing questions right now for 2018 is if/how Coinbase could capitalize on this opportunity to become a full-fledged bank leveraging the best of banking-like services from players like Xapo, Uphold, and Luno?” [↩]
I suppose it is safe to assume that if you’re reading this, you are coin millionaire so you don’t worry about fiat-mandated holiday breaks like the rest of us. [↩]
Not all medium-to-large coin holders are the adopters you now see wearing suits on television talk shows. Most coin holders, including the abusive trolls and misogynists on social media, have seen a large pay raise, enabling the worst elements to continue their bullying attacks and illicit activities. See Alt-right utilizes bitcoin after crackdown on hate speech from The Hill [↩]
Worth pointing out that Ryan Selkis is attempting to push forward with a the self-regulatory effort called Messari. See also: The Brooklyn Project. [↩]
Earlier this year, right after the law enforcement raids in China, one of the senior executives left BTCC but still remains on the board of the parent company that operates BTCC. He quickly found a new senior role at another high-profile Bitcoin-focused company and uses his social media accounts to vigorously promote Bitcoin Core and maximalism. [↩]
As explored in a previous post, fake volumes among the Chinese exchanges was not uncommon and several of the large exchanges attempted to gain funding from venture capitalists while simultaneously faking the usage numbers. As one former employee put it: “That was an extraordinary attempt at fraud — faking the numbers through wash trading and simply printing trades, while using that data to attract investment and establish their valuation.” [↩]
Coinbase got into some problems in early 2015 when one of its investor decks highlighted the fact that cryptocurrencies, such as Bitcoin, could be used to bypass sanctions. [↩]
Ari Paul runs a small “crypto” hedge fund called BlockTower Capital (estimated to have between around $50-$80 million AUM) that like many companies in this space, faces an ongoing lawsuit. Unclear why LPs didn’t just buy and hold cryptocurrencies themselves and cut out the hysteria and management fees. [↩]
Yea, I know, “money” is already digital… I didn’t give them that name, they did. [↩]
One reviewer noted: “The fact remains that if you replace the mining process with a a centralized system for validation of transactions and up-to-date of balances you could run the whole thing on an ordinary sized server for a few thousand dollars per year. Centralisation and a more logical data model are vastly better technically speaking. And it would be far easier to add in compliance and links to banks for more robust and honest methods for exchanging between a centralized bitcoin and fiat. What would the Chinese government gain from mining?” [↩]
One of the often overlooked benefits of setting up a mining farm in China is that many of the parts and components of mining equipment are either manufactured in China and/or final assembly takes place in China. So logistically it is much quicker to transport and install the hardware on-site within China versus transport and use overseas. [↩]
I know a bunch and could maybe introduce them though some of them make public appearances at conferences so they can usually be approached or emailed. [↩]
In fact, many regulators, such as the ECB, categorize cryptocurrency as a type of “virtual currency,” separate from a “digital currency.” [↩]
There is often confusion conflating “transaction processing” and “hash generation,” the two are independent activities. Today mining pools handle the transaction processing and have sole discretion to select any transactions from the memory pool to process (historically there have been thousands of ’empty’ blocks) — yet mining pools are still paid the full block reward irrespective of how many transactions they do or not process. Hash generation via mining farms has been a discrete service for more than 5 years — think of mining pools as the block makers who outsource or subcontract the hash generation out to a separate labor force (mining farms) and then a mining pool packages the transactions into a block once they receive the correct proof-of-work. Note: “fees” to miners is a slightly different but related topic. [↩]
CBDCs have their own issues, like the risk of crowding out ordinary banks in market for deposits in a low interest rate environment but they have little in common with anarchic crytocurrencies. [↩]
Many thanks to Vitalik Buterin for his feedback and suggestions here. [↩]
There are other mining manufacturers, including some who only build for themselves, such as Bitfury. [↩]
Interestingly enough, the market price for one of these machines is around $2,000. And if you do the math, you’ll see exactly what all professional miners do: it’d only cost $2 billion to buy enough machines to generate 100% of the network hashrate and claim all the $13 billion in rewards to yourself! In other words, the seigniorage is big, fat, and juicy… and will attract other miners to come and bid up the price of mining to the equilibrium point. [↩]
There are many walk-throughs of bitcoin mining facilities, including this video from Quartz. [↩]
In the process of writing this article, a new story explained how more than 105,000 users of a Chrome extension were unknowingly mining Monero. Heroic theft of CPU cycles, right? [↩]
In theory, and practice, the upperbound is not infinite. We know from the hashrate being generated that there are a finite amount of cycles being spent repeatedly multiplying SHA256 over and over. Perhaps a possible, but improbable way to gauge the upperbound is to take the processing speed of a low-end laptop CPU (which is not as efficient at hashing as its ASIC cousins are). At 6 MH/s, how many seventh generation i3 chips would it take to generate the equivalent of 13.5 million TH/s? On paper, over 2 trillion CPUs. Note: 1 terahash is 1 million megahashes. So 1 million laptop CPUs each generating 6 MH/s on paper, would collectively generate around 6 TH/s. The current network hashrate is 13.5 exahash/s. So you’d need to flip on north of 2 trillion laptop CPUs to reach the current hashrate. In reality, you’d probably need more because to replace malfunctioning machines: a low-end laptop isn’t usually designed to vent heat from its CPU throttled to the max all day long. [↩]
One China-based miner reviewed this scenario and mentioned another method to arrive at an upperbound: “Look at the previous generation of ASICs which run at 2-3x watt per hash higher. The previous generation machines normally get priced out within 18 months. But with differing electricity costs and a high enough price, these machines get turned on. Or they go to cheap non-petrodollar countries like Russia or Venezuela. So your base load of 1 million machines will have an upperbound of 2x to 3x depending on prevailing circumstances.” [↩]
It may be also worth pointing out that the “evil Chinese miners blocking virtuous Core” narrative is hard to justify because Bitcoin’s current relatively high fees are a direct result of congestion and has consequently increased miner revenue by 33% (based on December’s fees). So in theory, it’s actually in the miners interest to now promote the small block position. Instead, in reality, most miners were and are the ones advocating for bigger block sizes, and certain Bitcoin Core representatives were blocking those proposals as describedelsewhere but we’re not going down that rabbit hole today. [↩]
One reviewer commented: “Financial instruments that either directly perform a service to our economy and even indirectly via speculation, enable price discovery for things that are important to people’s lives. Who’s lives is Bitcoin really important to right now? To this day the only markets it can claim to have any significant market share in, let alone be leader in, is illicit trade and ransomware. The rest appears to be just people looking to pump and shill.” [↩]
It’s also probably not worth trying to start a discussion about what the benefits, if any, there is for society regarding cryptocurrency mining relative to the resources it collectively consumes, as the comments below or on social media would simply result in a continuous flame war. Note: colored coins and metacoins create distortions in the security assumptions (and rewards) for the underlying networks. Watermarked tokens are neither secure nor proper for financial market infrastructure. [↩]
It is not $1 million straight, there are multiple levels and tiers. [↩]
There is an ongoing controversy around key decision makers within Bitcoin Core (specifically those who approve of BIPs) and their affiliation with Blockstream. One of Blockstream’s largest investors, Reid Hoffman, said Blockstream would “function similarly to the Mozilla Corporation” (the Mozilla Corporation is owned by a nonprofit entity, the Mozilla Foundation). He likened this investment into “Bitcoin Core” (a term he used six times) as a way of “prioritiz[ing] public good over returns to investors.” [↩]
Because it is its own separate network, it actually has cross-platform capabilities. However, historically it has been promoted and funded for initial uses on the Bitcoin network moreso than others. [↩]
Yes, I am aware of the demo from Alex Bosworth, it is a big step forward that deserves a pat on the back. Now to decentralize routing and provide anonymity to users and improve the UI/UX for normal users. [↩]
This is not an endorsement of a specific platform or vendor or level of readiness, but examples would include: Fabric, Quorum, Corda, Axcore, Cuneiform, and Ripple Connect/RCL. [↩]
While Lightning implementations should not be seen as a rival to enterprise chains (it is an apples to oranges comparison), the requirements gathering and technical hurdles needed to be overcome, are arguably equally burdensome and maybe moreso for enterprise-focused companies. Why? Because enterprise-focused vendors each need approval from multiple different stakeholders and committees first before they deploy anything in production especially if it touches a legacy system; most Lightning implementations haven’t actually formally defined who their end-customer is yet, let alone their needs and requirements, so in theory they should be able to “launch” it faster without the check-off. [↩]
For instance, CoinDesk currently has 229 entries for “lightning,” 279 entries for “DLT,” and 257 entries for “permissioned.” [↩]
It bears mentioning that Teechain, can achieve similar KPIs that Lightning can, via the use of hardware, and does so today. BitGo’s “Instant” and payment channels from Yours also attempt to achieve one similar outcome: securely transmitting value quickly between participants (albeit in different ways). [↩]
We’d need to separate that from the enterprise DLT world because again, enterprise vendors are trying to solve for different use cases and have different customers altogether. Speaking of which, on the corporate side, there is a growing impatience with “pilots” and some large corporates and institutions are even pulling back. By and large, “blockchain stuff” (people don’t even agree on a definition still or if it is an uncountable noun) remains a multi-year play and aside from the DA / ASX deal, there were not many 2017 events that signaled a shorter term horizon. [↩]
Note: both the Fedcoin and CAD-coin papers were actually completed and sent to consortium members in November 2016 then three months later, published online. [↩]
One reviewer commented: “There seems to be a whole new wave of both suckers and crooks to exploit the geeks. I have read some the Chartist analysis on forums for more traditional forms of day-trading such as FX day-trading and it is exactly the same rubbish of trying to inject the appearance of intelligence and analysis into markets that the day-traders (and those encouraging them) simply do not understand.” [↩]
A former Coinbase employee, now running a “crypto” hedge fund, was allegedly fired for gambling issues. Maybe he wasn’t but there are a lot of addicts of many strains actively involved in trading and promoting cryptocurrencies; remember what one of the lessons of Scarface was? [↩]
The past several months have been pretty productive especially in terms of education.
For instance, my “Eight Things” article had over 100,000 views in its first week alone thanks largely to landing on the front page Hacker News and reshares on social media. I may write-up an article breaking down its reception at a later date.
And interestingly, one of my older articles from 2014 recently ended up on the front of /r/DataIsBeautiful generating 15k+ views over a couple of days.
Below are some of my outward facing appearances. If you’re interested in chatting about the topics below, feel free to reach me via Post Oak Labs.
Last year, when the CME first announced that it was considering backing a Bitcoin-related futures product, it also announced the CME CF Bitcoin Reference Rate (BRR). At the time, the reference pricing data came from the following cryptocurrency exchanges: Bitfinex, Bitstamp, GDAX, itBit, Kraken and OKCoin.com (HK).
As of today, the CME has formally whittled down those six into a smaller group of four exchanges: Bitstamp, GDAX, itBit and Kraken.
They did not publicly disclose why they removed Bitfinex and OKCoin, although we can speculate:
It is likely they removed OKCoin because of the laws and regulations around cryptocurrencies in China over the past year included various types of bans. OKCoin’s mainland spot price exchange for yuan <-> cryptocurrency have been shut down. OKEX, an international subsidiary of OKCoin, replaced the China-based exchanges on its own index (including OKCoin itself).
Bitfinex’s corporate and organizational structure has been described in previous articles. Even though it has the largest trading volume and is the key player to price discovery, it has a lot of red flags around compliance and transparency (described in the links at the top) that likely made organizations such as the CME uneasy.
It bears mentioning that the proposed Winklevoss COIN ETF also went through a similar evolution in terms of how to price the instrument. The principals initially created and used the Winkdex. The Winkdex included many different cryptocurrency exchanges over time, including Mt. Gox and BTC-e. Eventually, in future amended filings to the COIN ETF, the Winkdex was completely discarded in favor of a daily auction price conducted at an exchange (Gemini) that the principals and creators of the COIN ETF owned and managed. This is chronicled in a paper I wrote last year.
So what does this have to do with the CME and how did the CME (un)intentionally weigh in on the Bitcoin block size debate?
During the recent Bitcoin Core versus SegWit2X (S2X) political battle, one of the four exchanges that constitute the CME reference rate announced which ticker symbol would be attributed to a specific chain.
GDAX (Coinbase), made the following public announcement on October 25:
In our prior blog post we indicated that at the time of the fork, the existing chain will be called Bitcoin (BTC) and the Segwit2x fork will be called Bitcoin2x (B2X).
Since then, some customers have asked us to clarify what will happen after the fork. We are going to call the chain with the most accumulated difficulty Bitcoin.
We will make a determination on this change once we believe the forks are in a stable state. We may also consider other factors such as market cap and community support to determine stability.
It’s important for us to maintain a neutral position in any fork. We believe that letting the market decide is the best way to ensure that Bitcoin remains a fair and open network.
Note: original emphasis is theirs.
There have been severalarticles that attempted to track and chronicle what all of the exchanges announced with respect to the ticker symbol and the fork. At the time of this writing, itBit, Kraken, and Bitstamp have not publicly commented on this specific fork (although they have publicly signaled specific views on other proposed forks in the past).
And this creates a challenge for any financial institution attempting to create a financial instrument that is compromised of a basket of cryptocurrency-specific prices from different, independent cryptocurrency exchanges.
Ignoring the lack of adequate market surveillance for the moment, if there is a future fork and the constituent exchanges that comprise the reference data choose different forks to be represented by the same ticker symbol, this will likely create problems for the financial product.
For instance, in a hypothetical scenario in which a fork occurs, and two of the exchanges comprising the BRR index choose one side of the fork to list as “BTC” and the other two exchanges choose the other fork to also represent “BTC,” because these forks are linked to separate different ecosystems and even economic systems the combination could impact the volatility of the product.
Or in short: there is no universal agreement or consensus from cryptocurrency exchanges comprising the BRR about what the ticker symbol, let alone the chain should be defined as.
Over the past several years the primary debate has been around scaling, specifically around block sizes. What if future forks are fought over changes to transaction fees, money supply, or KYC requirements? This isn’t idle speculation as these have been proposed in the past with both Bitcoin and other cryptocurrencies (Ethereum Classic held an event last year to focus on what the future money supply generation rate should be).
Obviously this is a situation the CME (and similar financial institutions) wants to avoid at all costs.
In order to do this, it’ll have to pick a side and either:
a) force an errant exchange on its index to fall in line or lose the free marketing; or
b) ditch it from the index
Either way, as by far the largest player in the market, in doing so it will be governing what Bitcoin is. Unlike what most Bitcoin promoters often think: traders follow liquidity not the other way around so the CME is likely to become kingmaker in Bitcoin political disputes. It is going to become a key arm in its governance. That said, as we have seen before, rather than directly get involved with the tribes and religions of development they might simply defer to the incumbent Bitcoin Core rules — so that they can remain above the politics and out of any legal liabilities.
For more detailed commentary on this topic, be sure to read the articles linked to at the top. This will be worth re-visiting once the CME and other regulated institutions fully launch their proposed products.
Acknowledgements: special thanks to Ciaran Murray for several insights articulated above.
[Note: I neither own nor have any trading position on any cryptocurrency. I was not compensated by any party to write this. The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise. See Post Oak Labs for more information.]
Alternative title: who will be the Harry Markopolos of cryptocurrencies?
If you don’t know who Harry Markopolos is, quickly google his name and come back to this article. If you do, and you aren’t completely familiar with the relevance he has to the cryptocurrency world, let’s start with a little history.
Don’t drink the Koolaid
With its passion and perma-excitement, the cryptocurrency community sometimes deludes itself into thinking that it is a self-regulating market that doesn’t need (or isn’t subject to) government intervention to weed out bad actors.1 “Self-regulation,” usually refers to an abstract notion that bad actors will eventually be removed by the action of market forces, invisible hand, etc.
Yet by most measures, many bad actors have not left because there are no real consequences or repercussions for being a bad dude (or dudette).
Simultaneously, despite the hundreds of millions of dollars raised by VCs and over a couple billion dollars raised through ICOs in the past year or so, not one entity has been created by the community with the power or moral authority to rid the space of bad apples and criminals. Where is the regulatory equivalent of FINRA for cryptocurrencies?2
Part of this is because some elements in the community tacitly enable bad actors. This is done, in some cases, by providing the getaway cars (coin mixers) but also, in other cases, with a wink and a nod as much of the original Bitcoin infrastructure was set-up and co-opted by Bitcoiners themselves, some of whom were bad actors from day one.3
There are many examples, including The DAO.4 But the SEC already did a good dressing down of The DAO, so let’s look at BTC-e.
BTC-e is a major Europe-based exchange that has allegedly laundered billions of USD over the span of the past 6 years. Its alleged operator, Alexander Vinnik, stands accused of receiving and laundering some of the ill-gotten gains from one of the Mt. Gox hacks (it was hacked many many times) through BTC-e and even Mt. Gox itself.5 BTC-e would later go on to be a favorite place for ransomware authors to liquidate the ransoms of data kidnapping victims.
Who shut down BTC-e?
It wasn’t the enterprising efforts of the cryptocurrency community or its verbose opinion-makers on social media or the “new 1%.” It was several government law enforcement agencies that coordinated across multiple jurisdictions on limited budgets.6 Yet, like Silk Road, some people in the cryptocurrency community likely knew the operators of the BTC-e and willingly turned a blind eye to serious misconduct which, for so long as it continues, represents a black mark to the entire industry.
In other cases, some entrepreneurs and investors in this space make extraordinary claims without providing extraordinary evidence. Such as, using cryptocurrency networks are cheaper to send money overseas than Western Union. No, it probably is not, for reasons outlined by SaveOnSend.7
But those who make these unfounded, feel-good claims are not held accountable or fact-checked by the market because many market participants are solely interested in the value of coins appreciating. Anything is fair game so as long as prices go up-and-to-the-right, even if it means hiring a troll army or two to influence market sentiment.
And yet in other cases, the focus of several industry trade associations and lobbying groups is to squarely push back against additional regulations and/or enforcement of existing regulations or PR that contradicts their narrative.8
Below are eight suggested areas for further investigation within this active space (there could be more, but let’s start with this small handful):
Bitfinex is a Hong Kong-based cryptocurrency exchange that has been hacked multiple times.9 Most recently, about 400 days ago, $65 million dollars’ worth of bitcoins were stolen.
Bitfinex eventually painted over these large losses by stealing from its own users, by socializing the deficits that took place in some accounts across nearly all user accounts.10 Bitfinex has – despite promising public audits and explanations of what happened – provided no details about how it was hacked, who hacked it, or to where those funds were drained to.11 It has also self-issued at least two tokens (BFX and RRT) representing their debt and equity to users, listed these tokens on their own exchange and allowed their users to trade them.12
There have been suggestions of impropriety, with its CFO (or CSO?) Phil Potter publicly explaining how they handle being de-banked and re-banked:
“We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you… shift to a new corporate entity, lots of cat and mouse tricks that everyone in Bitcoin industry has to avail themselves of.”
Yet there is little action by the cryptocurrency community to seek answers to the open questions surrounding Bitfinex. I wrote a detailed post several months ago on it and the only reporters who contacted me for follow-ups were from mainstream press.
There are a lot of reasons why, but one major reason could be that some customers have financially benefited from this lack of market surveillance because relatively little KYC (Know Your Customer) is collected or AML (Anti-Money Laundering) enforced, so some trades and/or taxes are probably unreported.13 This wouldn’t be an isolated incident as the IRS has said less than 1,000 United States persons have been filing taxes related to “virtual currencies” each year between 2013 – 2015.
But that’s not all.
The latest series of drama began earlier this spring: Bitfinex sued Wells Fargo who had been providing correspondent banking access to Bitfinex’s Taiwanese banking partners. Wells Fargo ended this relationship which consequently tied up tens of millions of USD that was being wired internationally on behalf of Bitfinex’s users. About a week later Bitfinex dropped the suit and at least one person involved on the compliance side of a large Taiwanese bank was terminated due to the misrepresentation of the Bitfinex account relationship.
This also impacted the price of Tether.
Tether, as its name suggests, is a proprietary cryptocurrency (USDT) that is “always backed by traditional currency held in our reserves.” It initially used a cryptocurrency platform called Mastercoin (rebranded to Omni) and recently announced an ERC20 token on top of Ethereum.1415
As a corporate entity, Tether’s governance, management, and business are fairly opaque. No faces or names of employees or personnel can be found on its site.16 Bitfinex was not only one of its first partners but is also a shareholder. Bitfinex has also created a new ICO trading platform called Ethfinex and just announced that Tether will be partnering with it in some manner.17
Tether as an organization creates coins. These coins are known as Tethers that trade under the ticker $USDT each of which, as is claimed on their webpage, is directly linked, 1-for-1, with USD and yen equivalents deposited in commercial banks. But after the Wells Fargo suit was announced, USDT “broke the buck” and traded at $0.92 on the dollar.18 It has fluctuated a great deal during the summer currently trades at $1.00 flat.
Which leads to the question: are the seven banks listed by the recent CPA disclosure aware of what Tether publicly advertises its USDT product as?19
Who is responsible for issuance, and how if at all can they be redeemed? Are they truly backed 1:1 or is there some accounting sleight-of-hand taking place behind the scenes?20 Where are those reserves going to be exactly? Who will have access to them? Will either Tether (the company) or Bitfinex going to use them to trade?21 These are the types of questions that should be asked and publicly answered.
The only reason anyone is learning anything about the project is because of an anonymous Tweeter, going by the handle @Bitfinexed, who seemingly has nothing better to do than listen to hundreds of hours of audio archives of Bitcoiners openly bragging about their day trading schemes and financial markets acumen (in that order).
Despite myself and others having urged coin media to do so, to my knowledge there have been no serious investigations or transparency as to who owns or runs this organization. Privately, some reporters have blamed a lack of resources for why they don’t pursue these leads; this is odd given the deluge of articles posted every month on the perpetual block size debate that will likely resolve itself in the passage of time.
The only (superficial) things we know about Tether (formerly Realcoin) is from the few bits of press releases over time.22 Perhaps this is all just a misunderstanding due to miscommunication.23 Who wants to fly to Hong Kong and/or Taiwan to find out more?
(2) Ransomware, Ponzi’s, Zero-fee and AML-less exchanges
China’s two biggest bitcoin exchanges, Huobi and OKCoin, collectively invested around 1 billion yuan ($150 million) of idle client funds into “wealth-management products.”
In other words, the reason these exchanges were able to operate and survive while charging zero-fees is partially offset by these exchanges using customer deposits to invest in other financial products, without disclosing this to customers.24
Based on conversations with investigative reporters and former insiders, it appears that many, if not most, mid-to-large exchanges in China used customer deposits (without disclosing this fact) to purchase other financial products. It was not just OKCoin and Huobi but also BTCC (formerly BTC China) and others. This is not a new story (Arthur Hayes first wrote about it in November 2015), but the absence of transparency in how these exchanges and intermediaries are run ties in with what we have seen at BTC-e. While there were likely a number of legitimate, non-illicit users of BTC-e (like this one Australian guy), the old running joke within the community is that hackers do not attack BTC-e because it was the best place to launder their proceeds.
Many exchanges, especially those in developing countries lacking KYC and AML processes, directly benefited from thefts and scams. Yet we’ve seen very little condemnation from the main cheerleaders in the community.25
For example, two years ago in South Africa, MMM’s local chapter routed around the regulated exchange, patronizing a new exchange that wouldn’t block their transactions.26 MMM is a Ponzi scheme that has operated off-and-on for more than twenty years in dozens of countries. In its most current incarnation it has raised and liquidated its earnings via bitcoin. As a result, the volume on the new exchange in South Africa outpaced the others that remained compliant with AML procedures. Through coordination with law enforcement it was driven out for some time, but in January of this year, MMM rebooted and it is now reportedly back in South Africa and Nigeria. The same phenomenon has occurred in multiple other countries including China, wherein, according to inside sources, at least one of the Big 3 exchanges gave MMM representatives the VIP treatment because it boosted their volume.
It was a lack of this market surveillance and customer protections and outright fraud that eventually led to many of the Chinese exchanges being investigated and others raided by local and national regulators in a coordinated effort during early January and February 2017.27
Initially several executives at the non-compliant exchanges told coin media that nothing was happening, that all the rumors of investigation was “FUD” (fear, uncertainty, doubt). But they were lying.28
Regulators had really sent on-site staff to “spot check” and clean up the domestic KYC issues at exchanges. They combed through the accounting books, bank accounts, and trading databases, logging the areas of non-compliance and fraud. This included problems such as allowing wash-trading to occur and unclear margin trading terms and practices.29 Law enforcement showed these problems (in writing) to exchange operators who had to sign and acknowledge guilt: that these issues were their responsibility and that there could be future penalties.
Following the recent government ban on ICO fundraising (described in the next section), all exchanges in China involved in fiat-to-cryptocurrency trades have announced they will close in the coming weeks, including Yunbi, an exchange that was popular with ICO issuers.30 On September 14th, the largest exchange in Shanghai, BTCC (formerly BTC China), announced it would be closing its domestic exchange by the end of the month.31 It is widely believed it was required to do so for a number of compliance violations and for having issued and listed an ICO called ICOCoin.32
The two other large exchanges, OKCoin and Huobi, both announced on September 15th that they will be winding down their domestic exchange by October 31st.33 Although according to sources, some exchange operators hope this enforcement decision (to close down) made by regulators will quietly be forgotten after the Party Congress ends next month.34
One Plan B is a type of Shanzhai (山寨) hawala which has already sprung up on Alibaba whereby users purchase discrete units of funds as a voucher from foreign exchanges (e.g., $1,000 worth of BTC at a US-based exchange).35 Many exchanges are trying to setup offices and bank accounts nearby in Hong Kong, South Korea, and Japan, however this will not solve their ability to fund RMB-denominated trades.36
It is still unclear at this time what the exact breakdown in areas of non-compliance were largest (or smallest).37 For instance, how common was it to use a Chinese exchange for liquidating ransomware payments?
As mentioned in an earlier post, cryptocurrencies are the preferred payment method for ransomware today because of their inherent characteristics and difficulty to reclaim or extract recourse. One recent estimate from Cybersecurity Ventures is that “[r]ansomware damage costs will exceed $5 billion in 2017, up more than 15X from 2015.” The victims span all walks of life, including the most at-risk and those providing essential services to the public (like hospitals).
But if you bring up this direct risk to the community, be prepared to be shunned or given the “whataboutism” excuse: sure bitcoin-denominated payments are popular with ransomware, but whatabout dirty filthy statist fiat and the nuclear wars it funds!
Through the use of data matching and analytics, there are potential solutions to these chain of custody problems outlined later in section 8.
(3) Initial coin offerings (ICOs)
Obligatory South Park reference (Credit: Jake Smith)
Irrespective of where your company is based, the fundraising system in developed – let alone developing countries – is often is a time consuming pain in the rear. The opportunity costs foregone by the executive team that has to road show is often called a necessary evil.
There has to be a more accessible way, right? Wouldn’t it just be easier to crowdfund from (retail) investors around the world by selling or exchanging cryptocurrencies directly to them and use this pool of capital to fund future development?
Enter the ICO.
In order to participate in a typical ICO, a user (and/or investor) typically needs to acquire some bitcoin (BTC) or ether (ETH) from a cryptocurrency exchange. These coins are then sent to a wallet address controlled by the ICO organizer who sometimes converts them into fiat currencies (often without any AML controls in place), and sends the user/investor the ICO coin.38
Often times, ICO organizers will have a private sale prior to the public ICO, this is called a pre-sale or pre-ICO sale. And investors in these pre-sales often get to acquire tokens at substantial discounts (10 – 60%) than the rate public investors are offered.39. ICO organizers typically do not disclose what these discounts are and often have no vesting cliffs attached to them either.
The surge in popularity of ICOs as a way to quickly exploit and raise funds (coins) and liquidate them on secondary markets has transitively led to a rise in demand of bitcoin, ether, and several other cryptocurrencies. Because the supply of most of the cryptocurrencies is perfectly inelastic, any significant increase (or decrease) in demand can only be reflected via volatility in prices.
Hence, ICOs are one of the major contributing factors as to why we have seen record high prices of many different cryptocurrencies that are used as gateway coins into ICOs themselves.
According to one estimate from Coin Schedule, about $2.1 billion has been raised around the world for 140 different ICOs this year.40 My personal view is that based on the research I have done, most ICO projects have intentionally or unintentionally created a security and are trying to sell it to the public without complying with securities laws.41 Depending on the jurisdiction, there may be a small handful of others that possibly-kinda-sorta have created a new coin that complies with existing regs.42 Maybe.
Ignoring the legal implications and where each fits on that spectrum for the moment, many ICOs to-date have pandered to and exploited terms like “financial inclusion” when it best suits them.43 Others pursue the well-worn path of virtue signaling: Bitcoiners condemning the Ethereum community (which itself was crowdfunded as an ICO), because of the popularity in using the Ethereum network for many ICOs… yet not equally condemning illicit fundraising that involves bitcoin or the Bitcoin network or setting up bucket shops such as Sand Hill Exchange (strangely one of its founders who was sued by the SEC now writes at Bloomberg).
The cryptocurrency community as a whole condemned the “Chinese government” for its recent blanket ban on fundraising and secondary market listing of ICOs.44 The People’s Bank of China (PBOC) is one of seven regulators to enforce these regulations yet most of the public antagonism has been channeled at just the PBOC.45
Irrespective of whether you think it was the right or wrong thing to do because you heart blockchains, the PBOC and other regulators had quite valid reasons to do so: some ICO creators and trading platforms were taking funds they received from their ICO and then re-investing those into other ICOs, who in turn invested in other ICOs, and so forth; creating a fund of fund of funds all without disclosing it to the public or original investors.46 ICO Inception (don’t tell Christopher Nolan).
In China and in South Korea, and several other countries including the US, there is a new cottage industry made of up entities called “community managers” (CM) wherein an ICO project hires an external company (a CM) who provides a number of services:
for X amount of BTC the CM will actively solicit and get your coin listed on various exchanges;
the CM takes a sales commission while marketing the coin to the public such that after the ICO occurred, they would take a juicy cut of the proceeds; and several other promotional services.47
The ICO issuers and fundraising/marketing teams usually organize a bunch of ICOs weekly and typically employ a market maker (known as an “MM” in the groups) whose role is to literally pump and dump the coin. They engage in ‘test pumps’ and ‘shakeouts’ to get rid of the larger ICO investors so they can push the price up on a thin order book by 10x, 20x, or 30x before distributing and pulling support. You can hire the services of one of these traders in many of the cryptocurrency trading chat groups.48
There were even ICO boot camps (训练营) in China (and elsewhere) usually setup with shady figures with prior experience in pyramid schemes.49 Here they coached the average person to launch an ICO on the fly based on the ideas of this leader to people of all demographics including the vulnerable and at-risk.50 Based on investigations which are still ongoing, the fraud and deceit involved was not just one or two isolated incidents, it was rampant.51 Obtaining the training literature that was given to them (e.g., the script with the promises made) would make for a good documentary and/or movie.
In other words, the ICO rackets have recreated many aspects of the financial services industry (underwriters, broker/dealers) but without any public disclosures, organizational transparency, investor protections, or financial controls. Much like boiler rooms of days past. It is no wonder that with all of this tomfoolery, according to Chainalysis, that at least $225 million worth of ETH has been stolen from ICO-related fundraising activity this past year.52
At its dizzying heights, in China, there were about sixty ICO crowdfunding platforms each launching (or trying to launch) new ICOs on a monthly basis.53 And many of these platforms also ran and operated their own exchanges where insiders were pumping (and dumping) and seeing returns of up to 100x on coins that represented “social experiments to test human stupidity” such as the performance art pictured below.
One recent estimate from Reuters was that in China, “[m]ore than 100,000 investors acquired new cryptocurrencies through 65 ICOs in January-June .”54 It’s still unclear what the final straw was, but the universal rule of don’t-pitch-high-risk-investment-schemes-to-grandmothers-on-fixed-incomes was definitely breached.
As a result, the PBOC and other government entities in China are now disgorging any funds (about $400 million) that ICOs had raised in China.55 This number could be higher or lower depending on how much rehypothecation has taken place (e.g., ICOs investing in ICOs). All crowdfunding platforms such as ICOAGE and ICO.info have suspended operations and many have shut down their websites. In addition, several executives from these exchanges have been given a travel ban.56
Cryptocurrency exchanges (the ones that predated the ICO platforms) have to delist ICOs and freeze plans from adding any more at this time. Multiple ICO promotional events, including those by the Fintech Blockchain Group (a domestic fund that organized, promoted, and invested in ICOs) have been canceled due to the new ban.57 Several well-known promoters have “gone fishing” overseas. This past week, Li Xiaolai, an early Bitcoin investor and active ICO promoter, has publicly admitted to having taken the ICO mania too far (using a car acceleration example), an admission many link to the timing of this crackdown and ban.58
A real ICO in China: “Performance Art Based on Block Chain Technology” (Source)
For journalists, keep in mind this is (mostly) just one country described above. It would be a mistake to pin all of the blame on just the ICO operators based in China as similar craziness is happening throughout the rest of the world (observe the self-serving celebrity endorsements). Be sure to look at not just the executives involved in an ICO but also the advisors, investors, figureheads, and anyone who is considered “serious” lending credibility to dodgy outfits and dragging the average Joe (and Zhou) and his fixed income or meager savings into the game.
There may be a legitimate, legal way of structuring an ICO without running afoul of helpful regulations, but so far those are few and far between. Similarly, not everyone involved in an ICO is a scammer but it’s more than a few bad apples, more like a bad orchard. And as shown above with the initial enforcement actions of just one country, short sighted hustling by unsavory get-rich-quick partisans unfortunately might deep-six the opportunities for non-scammy organizations and entrepreneurs to utilize a compliant ICO model in the future.59
(4) VC-backed entities
Theranos, Juicero, and Hampton Creek, meet Coinbase, 21.co, Blockstream, and several others.
Okay, so that may be a little exaggerated. But still the same, few high-profile Bitcoin companies are publishing daily active or monthly active user numbers for a variety of reasons.
Founded in May 2012, the only known unicorn to-date is Coinbase. Historically it has kept traction stats close to the chest but we got a small glimpse at what Coinbase’s user base was from an on-going lawsuit with the IRS. According to one filing, between 2013-2015 (the most recent publicly available data) Coinbase had around 500,000 users, of which approximately 14,355 accounts conducted at least $20,000 in business.60 This is a far cry from the millions of wallets we saw as a vanity statistic prominently displayed on its homepage during that same time period.61
What did most users typically do? They created an account, bought a little bitcoin, and then hoarded it – very few spent it as if it were actual money which is one of the reasons why they removed a publicly viewable transaction chart over a year ago.62
To be fair, the recent surge in market prices for cryptocurrencies has likely resulted in huge user growth. In fact, Coinbase’s CEO noted that 40,000 new users signed up on one day this past May. But some of this is probably attributed to new users using Coinbase as an on-and-off ramp: United States residents acquiring bitcoin and ether on Coinbase and then participating in ICOs elsewhere.63
After more than $120 million in funding, 21.co (formerly 21e6) has not only seen an entire executive team churn, but a huge pivot from building hardware (Bitcoin mining equipment) into software and now into a pay-as-you-go-LinkedIn-but-with-Bitcoin messaging service. Launched with much fanfare in November 2015, the $400 Amazon-exclusive 21.co Bitcoin Computer was supposed to “return economic power to the individual.”
In reality it was just a USB mining device (a Raspberry Pi cobbled together with an obsolete mining chip) and was about as costly and useful as the Juicero juicing machine. It was nicknamed the “PiTato” and unit sales were never publicly disclosed. Its story is not over: in the process of writing this article, 21.co announced it will be launching a “social token” (SOC) by the end of the year.64
Blockstream is the youngest of the trio. Yet, after three years of existence and having raised at least $76 million, as far as the public can tell, the company has yet to ship a commercial product beyond an off-the-shelf hardware product (Liquid) that generates a little over $1 million in revenue a year.65 It also recently launched a satellite Bitcoin node initiative it borrowed from Jeff Garzik, who conceived it on a budget of almost nothing about three years ago.66
To be fair though, perhaps it does not have KPIs like other tech companies. For instance, about two and half years ago, one of their largest investors, Reid Hoffman, said Blockstream would “function similarly to the Mozilla Corporation” (the Mozilla Corporation is owned by a nonprofit entity, the Mozilla Foundation). He likened this investment into “Bitcoin Core” (a term he used six times) as a way of “prioritiz[ing] public good over returns to investors.” So perhaps expectations of product roadmaps is not applicable.
On the flipside, some entrepreneurs have explained that their preference for total secrecy is not necessary because they are afraid of competition (that is a typical rationale of regular startups), but because they are afraid of regulators via banks.67 For example, a regulator sees a large revenue number, finds out which bank provides a correspondent service and if the startup is fully compliant with AML, CFT, and KYC processes, starts auditing that bank, and banks re-evaluates NPV of working with a startup and potentially drops it. Until that changes, we will not know volumes for Abra, Rebit, Luno, and others and that is why a year-old claim about 20% market share in the South Korea -> Philippines remittance corridor remains evidence-free.6869
While we would all love to see more data, this is a somewhat believable argument. A more insightful question might be if/when we get to a point where supporting Bitcoin players becomes enough of real revenue that banks would agree to higher investments and support. In the meantime, business journalists should drill down into the specifics about how raised money has been spent, is compliance being skirted, customer acquisition costs, customer retention rate, etc.70
(5) The decline of Maximalism
If you were to draw a Venn diagram, where one circle represented neo Luddism and another circle represented Goldbugism, the areas they overlap would be cryptocurrency Maximalism (geocentrism and all).71 This increasingly smaller sect, within the broader cryptocurrency community, believes in a couple of common tenets but most importantly: that only one chain or ledger or coin will rule them all. This includes the Ethereum Classic (ETC) and Bitcoin Core sects, among others.
They’re a bit like the fundamentalists in that classic Monty Python “splitters” sketch but not nearly as funny.
If you’re looking to dig into defining modern irony, these are definitely the groups to interview. For instance, on the one hand they want and believe their Chosen One (typically BTC or ETC) should and will consume the purchasing power of all fiat currencies, yet they dislike any competing cryptocurrency: it is us versus them, co-existence is not an option! The rules of free entry do not apply to their coin as somehow a government-free monopoly will form around their coin and only their coin. Also, you should buy a lot of their coin, like liquidate your life savings asap and buy it now.
Artist rendering of proto-Bitcoin Maximalism, circa 14th century
This rigidity has diminished over time.
Whereas, three years ago, most active venture capitalists and entrepreneurs involved in this space were antagonistic towards anything but bitcoin, more and more have become less hostile with respect to new and different platforms.
For instance, Brian Armstrong (above), the CEO of Coinbase, two and a half years ago, was publicly opposed to supporting development activities towards anything unrelated to Bitcoin.
But as the adoption winds shifted and Ethereum and other platforms began to see growth in their development communities (and coin values), Coinbase and other early bastions of maximalism began to support them as well.
There will likely be permanent ideological holdouts, but as of this writing I would guesstimate that less than 20% of the bitcoin holders I have interacted with over the past 6-9 months would label themselves maximalists (the remaining would likely self-identify with the “UASF” and “no2x” tags on Twitter).
So interview them and get their oral history before they go extinct!
There is very little publicly available analysis of what is happening with Bitcoin transactions (or nearly all cryptocurrencies for that matter): dormant vs. active, customers vs. accounts, transaction types (self-transfers vs. remittances vs. B2B, etc.).
On-chain transaction growth seems to be slowing down on the Bitcoin network and we don’t have good public insights on what is going on: are there are pockets of growth in real adoption or just more wallet shuffling?
In other words, someone should be independently updating “Slicing data” but instead all we pretty much see is memes of Jamie Dimon or animated gifs involving roller coaster prices.72
In the real world, “market cap” is based on a claim on a company’s assets and future cash flows. Bitcoin (and other cryptocurrencies) has neither — it doesn’t have a “market cap” any more than does the pile of old discarded toys in your garage.
“Market Cap” is a really dumb phrase when applied to the cryptocurrency world; it seems like one of those seemingly straightforward concepts ported to the cryptocurrency world directly from mainstream finance, yet in our context it turns into something misleading and overly simplistic, but many day traders in this space who religiously tweet about price action love to quote.
The cryptocurrency “market cap” metric is naively simplistic: take the total coin supply, and multiply it by the current market price, and voila! Suddenly Bitcoin is now approaching the market cap of Goldman Sachs!73
To begin with, probably around 25% or more of all private keys corresponding to bitcoins (and other cryptocurrencies too) have been permanently lost or destroyed.74 Most of these were from early on, when there was no market price and people deleted their hard drives with batches of 50 coins from early block rewards without backing them up or a second thought.
Extending this analogy, 25% of the shares in Goldman Sachs cannot suddenly become permanently ownerless. These shares are registered assets, not bearer assets. Someone identifiable owns them today and even if there is a system crash at the DTCC or some other CSD, shareholders have a system of recourse (i.e., the courts) to have these returned or reissued to them with our without a blockchain. Thus, anytime you hear about “the market price of Bitcoin has approached $XXX billion!” you should automatically discount it by at least 25%.
Also, while liquidity providers and market makers in Bitcoin have grown and matured (Circle’s OTC desk apparently trades $2 billion per month), this is still a relatively thinly traded market in aggregate. It is, therefore, unlikely that large trading positions could simultaneously move into and out of billion USD positions each day without significantly moving the market. A better metric to look at is one that involves real legwork to find: the average daily volume on fee-based, regulated spot exchanges combined with regulated OTC desks. That number probably exists, but no one quotes it. Barring this, an interim calculation could be based on “coins that are not lost or destroyed.”
(7) Buy-side analysts and coin media
We finally have some big-name media beginning to dig into the shenanigans in the space. But organizations like CoinDesk, Coin Telegraph, and others regularly practice a brand of biased reporting which primarily focus on the upside potential of coins and do not provide equal focus on the potential risks.75 In some cases, it could be argued that these organizations act as slightly more respectable conduits for misinformation churned out by interested companies.76
Common misconceptions include continually pushing out stories like the example above, on “market caps” or covering vanity metrics such as growth in wallet numbers (as opposed to daily active users). It is often the case that writers for these publications are heavily invested in and/or own cryptocurrencies or projects mentioned in their stories without public disclosure.
This is not to say that writers, journalists, and staff at these organizations should not own a cryptocurrency, but they should publicly disclose any trading positions (including ‘hodling’ long) as the sentiment and information within their articles can have a material influence on the market prices of these coins.
For instance, CoinDesk is owned by Digital Currency Group (DCG) who in turn has funded 80-odd companies over the last few years, including about 10 mentioned in this article (such as Coinbase and BTC China). DCG also is an owner of a broker/dealer called Genesis Trading, an OTC desk which trades multiple cryptocurrencies that DCG and its staff, have publicly acknowledged at having positions in such as ETC, BTC and LTC.77
What are the normal rules around a media company (and its staff) retweeting and promoting cryptocurrencies or ICOs the parent company or its principals has a stake in?
If coin media wants to be taken seriously it will have to take on the best practices and not appear to be a portfolio newsletter: divorce itself of conflicts of interest by removing cross ownership ties and prominently disclose all of the remaining potential conflicts of interest with respect to ownership stakes and coin holdings. Markets that transmit timely, accurate, and transparent information are better markets and are more likely to grow, see, and support longer-term capital inflows.78
For example, if Filecoin is a security in the US (which its creators have said it is), and DCG is an equity holder in Filecoin/Protocol Labs (which it is)… and DCG is an owner in CoinDesk, what are the rules for retweeting this ICO above? There are currently 16 stories in the CoinDesk archive which mention Filecoin, including three that specifically discuss its ICO. Is this soliciting to the public?79
Similarly, many of the buy-side analysts that were actively publishing analysis this past year didn’t disclose that they had active positions on the cryptocurrencies they covered. We recently found out that one lost $150,000 in bitcoins because someone hacked his phone.
At cryptocurrency events (and fintech events in general), we frequently hear buzz word bingo including: smart assets, tokens, resilience, pilots, immutability, even in-production developments, but there is often no clear articulation of what are the specific opportunities to save or make money for institutions if they acquire a cryptocurrency or uses its network to handle a large portion of their business.80
This was the core point of a popular SaveOnSendarticle on remittances from several years ago. I recommend revisiting that piece as a model for similar in-depth assessments done by people who understand B2B payments, correspondent banking and other part of global transfers. Obviously this trickles into the other half of this space, the enterprise world which is being designed around specific functional and non-functional requirements, the SLAs, compliance with data privacy laws, etc., but that is a topic for another day.
What about Coin Telegraph? It is only good for its cartoon images.81
There are some notable outliers that serve as good role models and exceptions to the existing pattern and who often write good copy. Examples of which can be found in long end note.82
Obviously the end note below is non-exhaustive nor an endorsement, but someone should try to invite some or all these people above to an event, emceed by Taariq Lewis. That could be a good one.
What about solutions to the problems and opaqueness described throughout this article?
There are just a handful of startups that have been funded to create and use analytics to identify usage and user activity on cryptocurrency networks including: Chainalysis, Blockseer, Elliptic, WizSec, ScoreChain, Skry (acquired by Bloq) – but they are few and far between.83 Part of the reason is because the total addressable market is relatively small; the budgets from compliance departments and law enforcement is now growing but revenue opportunities were initially limited (same struggle that coin media has). Another is that the analytic entrepreneurs are routinely demonized by the same community that directly benefits from the optics they provide to exchanges in order to maintain their banking partnerships and account access.
Such startups are shunned today, unpopular and viewed as counter to the roots of (pseudo) anonymous cryptocurrencies, however, as regulation seeps into the industry an area that will gain greater attention is identification of usage and user activities.
For instance, four years ago, one article effectively killed a startup called Coin Validation because the community rallied (and still rallies) behind the white flag of anarchy, surrendering to a Luddite ideology instead of supporting commercial businesses that could help Bitcoin and related ideas and technologies comply with legal requirements and earn adoption by mainstream commercial businesses. For this reason, cryptocurrency fans should be very thankful these analytics companies exist.
Source: Twitter. Explanation: Wanna Cry ransomware money laundering with Bitcoins in action. Graph shows Bitcoin being converted to Monero (XMR) via ShapeShift.io
More of these analytics providers could provide even better optics into the flow of funds giving regulated institutions better handling of the risks such as the money laundering taking place throughout the entire chain of custody.
Without them, several large cryptocurrency exchanges would likely lose their banking partners entirely; this would reduce liquidity of many trading pairs around the world, leading to prices dropping substantially, and the community relying once again on fewer sources of liquidity run out of the brown bags on shady street corners.84
One key slide from Kim Nilsson’s eye-opening presentation: Cracking MtGox
And perhaps there is no better illustration of how these analytic tools can help us understand the fusion of improper (or non-existent) financial controls plus cryptocurrencies: Mt. Gox. Grab some warm buttery popcorn and be sure to watch Kim Nilsson’s new presentation covering all of the hacks that this infamous Tokyo-based exchange had over its existence.
Journalists, it can be hard to find but the full order book information for many exchanges can be found with enough leg work. If anyone had the inclination to really want to understand what was going on at the exchange, there are 3rd parties which have a complete record of the order book and trades executed.
Remember, as Kim Nilsson and others have independently discovered, WillyBot turned out to be true.
The empirical data and stories above do not mean that investors should stop trading all cryptocurrencies or pass on investing in blockchain-related products and services.
To the contrary, the goal of this article is to elevate awareness that this industry lacks even the most basic safeguards and independent voices that would typically act as a counterbalance against bad actors. In this FOMO atmosphere investors need to be on full alert of the inherent risks of a less than transparent market with less than accurate information from companies and even news specialists.
Cryptocurrencies aren’t inherently good or bad. In a single block, they can be used as a means to reward an entity for securing transactions and also a payment for holding data hostage.
One former insider at an exchange who reviewed this article summarized it as the following:
The cryptocurrency world is basically rediscovering a vast framework of securities and consumer protection laws that already exist; and now they know why they exist. The cryptocurrency community has created an environment where there are a lot of small users suffering diffuse negative outcomes (e.g., thefts, market losses, the eventual loss on ICO projects). And the enormous gains are extremely concentrated in the hands of a small group of often unaccountable insiders and “founders.” That type of environment, of fraudulent and deceptive outcomes, is exactly what consumer and investor protection laws were created for.
Generally speaking, most participants such as traders with an active heartbeat are making money as the cryptocurrency market goes through its current bull run, so no one has much motive to complain or dig deeper into usage and adoption statistics. Even those people who were hacked for over $100,000, or even $1 million USD aren’t too upset because they’re making even more than that on quick ICO returns.
We are still at the eff-you-money stage, in which everyone thinks they are Warren Buffett.85 The Madoffs will only be revealed during the next protracted downturn. So if you’re currently getting your cryptocurrency investment advice from permabull personalities on Youtube, LinkedIn, and Twitter with undisclosed positions and abnormally high like-to-comment ratios, you might eventually be a bag holder.86
Like any industry, there are good and bad people at all of these companies. I’ve met tons of them at the roughly 100+ events and meetups I have attended over the past 3-4 years and I’d say that many of the people at the organizations above are genuinely good people who tolerate way too much drivel. I’m not the first person to highlight these issues or potential solutions. But I’m not a reporter, so I leave you with these leads.
While everyone waits for Harry Markopolos to come in and uncover more details of the messes in the sections above, other ripe areas worth digging into are the dime-a-dozen cryptocurrency-focused funds.
Future posts may look at the uncritical hype in other segments, including the enterprise blockchain world. What happened after the Great Pivot?
[Note: if you found this research note helpful, be sure to visit Post Oak Labs for more in the future.]
To protect the privacy of those who provided feedback, I have only included initials: JL, DH, AL, LL, GW, CP, PD, JR, RB, ES, MW, JK, RS, ZK, DM, SP, YK, RD, CM, BC, DY, JF, CK, VK, CH, HZ, and PB.
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One reviewer commented: “Another meta-topic is the notion of “community,” which is a myth if you ask me. Why hasn’t the “community” done “X”? Because the word is mostly a marketing fiction.” See also the discussion of the idea that “Code is not law” [↩]
One former regulator mentioned: “The cryptocurrency community needs to police itself better or it risks being policed more severely by unfriendly and unsympathetic regulators. Self-regulation is what certain hands-off banking supervisors attempted with US banks and other financial institutions 15 years ago and that ended poorly for many parties including those who were not directly responsible for making the poor decisions in the first place. Even in sports it is understood, with the exception of golf, it doesn’t work. In this Wild West atmosphere where are the sheriffs?” [↩]
Not unique to cryptocurrencies, but by enabling such bad actors, certain platform operators may even increase their short term profit. [↩]
For an in-depth look at these different costs, it is highly recommended to read this post from Save on Send. Some are convinced that this is the case because, on a small scale, the illiquidity of the end points serves to finance the operation, i.e. buying BTC with USD then selling BTC for MXN, may allow an apparent savings when compared with traditional remittance service providers. Also oft-forgotten is the cost of cash-out and distribution of cash at the end point; also KYC / AML / CFT functions are frequently left-off the calculation. [↩]
One reviewer stated that, “Any working groups advising the government on policy are certainly worthy of investigation. Who are these people and what are their potential conflicts of interest? For starters, in the US look at The Bitcoin Foundation and the Blockchain Alliance.” [↩]
It has a complex corporate structure and is nominally based in Hong Kong, operations and incorporation of subsidiaries are in other jurisdictions including BVI. [↩]
There were exceptions. Some users reported smaller haircuts as they were customers of SynapsePay. Another user claims to have retained a lawyer and he did not have any haircut. I independently verified this with an executive at SynapsePay. [↩]
Phil Potter, an executive at Bitfinex, has spoken about the hack on multiple different podcasts including once in detail, but this has since been deleted. [↩]
Bitfinex also recently announced that they will be doing an ICO (called NEC) to capitalize on the current token mania. [↩]
Bitfinex does do KYC and AML when a user withdraws USD and when they receive subpoenas. [↩]
One reviewer noted that: “Theoretically they could maintain a fractional reserve to service redemptions although this isn’t a problem per se, provided that it is disclosed. By saying you have “cash” backing, you could have some really bizarre stuff, like USD loans to unsavory entities. But maybe they do not do this either.” [↩]
One reviewer commented: “Tether offers users a way to move USD from one country to another, much like Western Union. So Tether should be obligated to run KYC/AML checks on not only those who are depositing US$ funds to get new Tethers (as it currently does), but also everyone who uses second-hand Tethers (it doesn’t). Now if Tether was like bitcoin, and had no physical address, it would be complicated for the authorities to enforce this requirement. But Tether is anchored to the brick & mortar banking system, so law enforcement should be easier, will it?” [↩]
One reviewer commented: “Let’s assume the worst for Tether, what does that mean? If it were to collapse would it harm the small investors or the whales? A few exchanges that allow Tether also allow you to hold your deposits in USD, aside from the ability to send USDT between exchanges, which arguably could actually be a net positive because it allows clients to net positions between exchanges potentially reducing the overall credit in the system. But this goes back to one of their continual issues: lack of communicating and transparency for how the whole money issuance and transmission process works.” [↩]
Note: they did have withdrawal fees which likely generated revenue from arbitrageurs. Several of the larger exchanges also raised venture capital and setup (and still run) order books outside of China with other business lines which may help offset some costs. [↩]
In addition to lying about being investigated, they were lying about the true volume on their exchanges. When the zero-fee domestic exchanges were required to add a minimum fee (to discourage wash trading), volume plummeted. [↩]
The 19th National Congress of the Communist Party of China starts on October 18th. All exchanges involving fiat-to-cryptocurrency trades will be closed. Both OKCoin and Huobi have overseas platforms (with independent order books and bank accounts independent of the domestic Chinese exchanges). These have cryptocurrency-to-cryptocurrency trading and will remain operating. Currently, users of the domestic fiat-to-currency platform can move their coins to the overseas platforms. [↩]
At one time or another, the spot price for each of the three large Chinese exchanges was a constituent part of several different pricing indices including the Winkdex, TradeBlock XBX index, and others such as OKEX (OKEX is an international subsidiary of OKCoin who replaced these exchanges on its own index). This is potentially problematic because, as I detailed in my COIN ETF report, these exchanges were prone to mismanagement, crashes, and ultimately quick closure. Going forward, what other sources of reliable pricing data can ETFs use that also accurately reflect market prices? [↩]
One insider in China noted that: “These exchanges had multiple chances to clean up their act and even self-regulate but because of the competitive pressures in China towards zero-fees, no one wanted to be left behind. It was a type of collective action failure, so the government finally had to come in and clean up the mess because no one else would.” [↩]
Note: volumes can and will be written on this section alone. If not on the legalities but on the ‘pump and dumps’ that have taken place. [↩]
One former regulator suggested: “Ignoring for the moment the overarching legal implications of what they did, because these activities took place on blockchains, future researchers should be able to eventually provide very accurate estimates the costs and losses to investors who put their trust and money into deceptive ICO organizers who were unscrupulous.” [↩]
Some argue this ban may just be temporary and cite a CCTV 13 interview with Hu Bing with the Institute of Finance and Banking who says the government will issue licenses in the future. [↩]
As of this writing there are many rumors circulating regarding how these new guidelines could impact cryptocurrency mining operators based in China. One recent story from the Wall Street Journal articulates a rumor that miners will need to also shut down operations because they are trading cryptocurrencies without a license. More existentially, if all fiat-to-cryptocurrency exchanges shut down domestically, miners would need a new method to liquidate their coins because they need to pay utilities in RMB (e.g., it doesn’t help to have a JPY or KRW-denominated bank account because Chinese utilities require being paid in RMB). [↩]
One insider noted that: “A New Zealand based person (and company) is one of the main men in all of this. I’ve encountered him on a number of occasions. He’s a complete fraudster. For example he told a group I am in that MGO would be listed on Poloniex within weeks of launch. Months later he hasn’t even got it on Bittrex. He’s now buying up lots of it wholesale from disenchanted investors who’ve taken a massive hit recently and will inevitably be sitting on a pile when the intentionally delayed launch and pump happens.” [↩]
Whalepool and The Coin Farm on Telegram are both examples of this type of coordination. [↩]
Based on translated stories from after the investigations as well as conversations with observers of these training sessions. [↩]
According to a source close to the investigations, law enforcement are using WeChat correspondence to chronicle the intentional cases of fraud and deceit. In some cases, ICO organizers would run a public WeChat group, providing investors with false information and then use a private WeChat group with a smaller circle of insiders to “laugh at the stupidity” of these investors and coordinate dumps. As a result, ICO organizers are leaving WeChat to use platforms like Telegram. See China’s WeChat crackdown drives bitcoin enthusiasts to Telegram from South China Morning Post [↩]
That is the best case scenario because it assumes that there were not additional losses to fraud and mismanagement, which we know there has been. [↩]
He had to refund the ICOs he promote (plus with an added premium). [↩]
One reviewer commented: “The inevitability of regulations coming down the pipeline is a certainty (not just “blanket bans”). Whether it’s 1 month or 1 year, regulations or enforcement of existing regulations will be coming in. A lot of these participants in the market seem to want to get in before regulations come into effect but in many jurisdictions they can still be liable for past actions (depending on the statute of limitations). That’s part of what I think is driving this tremendous amount of ICOs right now.” [↩]
At the time of this writing Coinbase has raised more than $225 million. By January 2015, Coinbase had in aggregate raised just north of $106 million. The ongoing lawsuit with the IRS states that there were 500,000 users by the end of the 2013 – 2015 period, of which 14,355 had done $20,000 or more of trading. Future research can look into Coinbase’s customer acquisition costs over time (e.g., switching costs) versus the same costs traditional banks have. Note: this also does not include the user numbers at GDAX, their platform marketed to professional traders. [↩]
According to an alleged insider (which may be untrue), some Coinbase users allegedly didn’t even know they may have been entitled to things like CLAM coins. Maybe they weren’t. Tangentially, the continual high percentage of hoarding done by cryptocurrency enthusiasts suggests that this still remains a virtual commodity and continues to fail the medium of exchange test needed to be defined as a transactional currency. [↩]
At this time, it is unclear what the breakdown of these new (or old) users are acquiring cryptocurrencies on Coinbase and then participating in ICOs. As a company, Coinbase has been publicly supportive of the ICO zeitgeist and hosted multiple meetups where ICO creators presented. Earlier this year it co-sponsored a publication discussing the securities law framework of tokens. Based on several interviews for this article, users of both the Coinbase wallet and its subsidiary, GDAX, currently can send bitcoins and ether from their user accounts to participate in ICOs. It is unclear how often this is screened and/or prevented. For perspective, a former employee was allegedly fired for sending bitcoins from his Coinbase account to gamble on Chinese web casinos. Assuming this is true (and it may not be) then Coinbase could have the knowledge and/or ability to prevent users from participating in ICOs or other off-platform activity that violates its terms of service. [↩]
Another tech company that supposedly struggled raising funding and later issued its own coin (through an ICO) is Kik, through its Kin Foundation. [↩]
If this post is true (and it may not be), a dozen or so exchanges paying between $7,000 – $10,000 a month is roughly $1.4 million a year. The SaaS monthly estimate has been independently validated from conversations with a couple participating exchanges. [↩]
One reviewer recommended: “If I were a journalist, I would more closely scrutinize the social media habits of the executives (and their surrogates) on these teams so the ecosystem can ascertain the relationship between the amount of time senior employees spend opining on Twitter, Reddit, mailing lists, IRC, WhatsApp, Slack, WeChat, Telegram, BitcoinTalk, GitHub, Discord, etc., and the number of hours in a working day, or number of products shipped. Other social media analytics ideas for journalists: look at the Twitter tribes of Bitcoin (and other cryptocurrencies). Who is aligned with whom and pushing what agendas? Who are the trolls associated with those different tribes? How many suspect accounts are associated with each group? For example, how many accounts that were just created, or never tweeted before, or only have followers from within their own tribes?” [↩]
One reviewer argued that, “It could also because they want to protect their valuations and because they are privately held companies that may be legally forbidden to divulge this information.” [↩]
This article in Quartz did not provide actual data or evidence that these remittance numbers were real, no one fact-checked it and instead, reproduced similar headlines for several months. [↩]
According to a recent interview with Forbes, after nearly two years of operations Abra only has 73 users per day. They are currently raising another round at this time; it is believed that this will help fund their compliance team and for licenses which they currently lack. [↩]
One reviewer said, “A counterpoint could be: VC returns are even sharper than standard Pareto; 1:9 or even 1:99 as opposed to 2:8. Startups are hard – most fail – why should cryptocurrency world be any different?” [↩]
One reviewer suggested that: “In the future, you should explain why Maximalism is a type of Authoritarianism and is not to be conflated with cypherpunks.” [↩]
The theatrics around “BearWhale”-like events still persists. For example, one current conspiracy theory is that: “the Chinese government is shutting down Bitcoin miners to mine bitcoins themselves.” This is most likely false and the proposed solution is to “use satellites.” But in talking with professional miners in China, many of them have contracts directly with State Grid, so they could lose access to energy in a worst-case scenario and satellites would not be of any use (assuming any of those rumors are true). [↩]
To be fair, this is not unique to the cryptocurrency space. [↩]
Genesis Trading is also the marketing and distribution agent for Bitcoin Investment Trust and Ethereum Classic Investment Trust, two regulated financial products. DCG also is an owner in Grayscale Investments which is the legal sponsor both of these Trusts [↩]
Some employees in coin media have used social media channels to discuss various cryptocurrencies including ICOs over the past year. How many of these were sponsored or received a cut of the coins to do so? [↩]
Nearly all of the coin media site allow ICO advertisements as well. What are the terms and benefits that these media sites receive in exchange for displaying these advertisements and advertorials? [↩]
Note: this is not an exhaustive list and I’ll likely be flamed for not including X but including Y. Journalists who write good original stories include: Nathaniel Popper, Matt Levine, and Matt Leising. There have been several good op-eds written by lawyers which have appeared on CoinDesk, including Joshua Stark, Jared Marx, Brian Klein, Benjamin Sauter and David McGill. Some other original, constructive views that should be highlighted include Stephen Palley, Ryan Straus, George Fogg, Miles Cowan, Patrick Murck, Amor Sexton, Houman Shadab, Angela Walch, Scott Farrell, Claire Warren, Simon Gilchrist, and two perpetual curmudgeons: Izabella Kaminska and Preston Byrne (very prickly at times!). Non-lawyer thought-leaders, technical, and subject matter experts with bonafides worth interviewing include: Adam Krellenstein, Alex Batlin, Alex Waters, Andrew Miller, Andy Geyl, Antony Lewis, Ari Juels, Arvind Narayanan, Christian Decker, Christopher Allen, Ciaran Murray, Colin Platt, Danny Yang, Dave Hudson, David Andolfatto, David Schwartz, Dominic Williams, Duncan Wong, Elaine Shi, Emily Rutland, Emin Gun Sirer, Ernie Teo, Fabio Federici, Flavien Charlon, Gideon Greenspan, Ian Grigg, Ittay Eyal, Jackson Palmer, Jae Kwon, James Hazard, James Smith, Jana Moser, Jeff Garzik, JP Koning, John Whelan, Jonathan Levin, Jonathan Rouach, Jorge Stolfi, Juan Benet, Juan Llanos, Kieren James-Lubin, Lee Braine, Leemon Baird, Makoto Takemiya, Mark Williams, Matthew Green, Martin Walker, Massimo Morini, Michael Gronager, Mike Hearn, Muneeb Ali, Piotr Piasecki, Richard Brown, Robert Sams, Ron Hose, Sarah Meiklejohn, Stefan Thomas, Stephen Lane-Smith, Vitalik Buterin, Vlad Zamfir, Yakov Kofner, Zaki Manian, Zennon Kapron, and Zooko Wilcox-O’Hearn, as well as dozens of others from several different financial institutions and enterprises too long to list. I also think that Michael del Castillo, Ian Allison, Simon Taylor, Jon Southurst, and Arthur Falls try to do an honest job reporting too. Epicenter TV is arguably the best podcast in this space. [↩]
Chainalysis has a partnership with Circle which in turn enabled Circle to open up an account with Barclays. Two years ago, an alleged business plan for Chainalysis was leaked online and unsurprisingly, some in the community were up in arms that this small company provided these forensic services. [↩]
Below are some of the stated positions of several different regulators around the world regarding ICOs. In chronological order:
Brazil’s equivalent of the SEC, the Comissão de Valores Mobiliários (CVM), published (July 13th) initial legislation instruction (Instrução CVM No. 588) regulating crowdfunding via ICOs: (Portuguese announcement)
Canadian Securities Administrators (CSA), including the Ontario Securities Commission, published its views on August 24th on ICOs: (Staff Notice) (Announcement)
Israel Securities Authority announced on August 30th that it is forming a committee to look at ICOs: (Hebrew announcement) (English)
The Financial Supervisory Commission (FSC) in South Korea announced on September 3rd that it held a joint task force meeting to strengthen regulations around digital currency trading, including fundraising with ICOs: (BusinessKorea)
The People’s Bank of China, along with 6 other Chinese government bodies including the national securities regulator (CSRC), publicly banned ICO fundraising in China on September 4th: (CN announcement) (English) (Bloomberg) (Reuters)
SFC in Hong Kong announced its views on ICOs on September 5th: (Announcement)
The UK Financial Conduct Authority (FCA) announced that it was keeping a close eye on ICOs on September 6th: (FT)
The Securities Commission (SC) of Malaysia issued a press release cautioning investors in ICOs on September 7th: (DNA)
The Dubai Financial Services Authority (DFSA) warned investors that ICOs were risky on September 13th: (Statement)
The Securities and Exchange Commission in Thailand issued some statements regarding ICOs on September 14th: (Comments)
Gibraltar Financial Services Commission (GFSC) issued an official statement regarding ICOs on September 22nd: (Statement)
North American Securities Administrators Association (NASAA) issued its annual paper and warned of risks around cryptocurrencies and ICOs on September 26th: (Press release)
Macau Monetary Authority (MMA) announced that banks cannot engage with ICOs and cryptocurrencies either “directly or indirectly” on September 27th: (Statement)
The Australian Securities and Investments Commission (ASIC) released formal guidance and comments about ICOs on September 28th: (Information Sheet)
The Financial Services Commission in South Korea said all kinds of initial coin offerings (ICO) will be banned as trading of virtual currencies needs to be tightly controlled and monitored on September 29th: (Reuters) (Yonhap)
The Financial Market Supervisory Authority (FINMA) in Switzerland announced it is investigating ICO procedures and issued formal guidance on September 29th: (Press Release)
SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds on September 29th: (Press release)
Abu Dhabi’s Global Market’s Financial Services Regulatory Authority (FSRA) released guidelines on ICOs on October 9th: (Guidelines)
The Central Bank of Lithuania announced its position and guidelines regarding ICOs on October 11th: (Press release)
The US Commodity Futures Trading Commission (CFTC), through its internal division, LabCFTC, released a primer on cryptocurrencies including ICOs on October 17th: (Press release)
The Financial Markets Authority (FMA) released commentaries on cryptocurrencies and ICOs on October 25th: (Press release) (Commentary)
Japan’s Financial Services Agency (FSA) issued a short statement warning users and business operators about the risks of ICOs on October 27th: (Statement)
The European Securities and Markets Authority (ESMA) issued two public statements on ICOs: one on risks and the other on rules applicable to firms involved in ICOs on November 13, 2017: (Press Release)
What do they all say? A friend who is an attorney said it concisely: when you sell securities, you have to comply with securities laws.
If you plan to do an ICO or some kind of token sale, be sure to speak with more than one lawyer or law firm to get a legal opinion about what it is you are actually selling (or not).
And if you’re interested, below is an interview of Nick Morgan. He is an attorney who previously was part of the SEC’s enforcement team. He discusses The DAO, securities regulations, and the current ICO frenzy.
ECB’s Draghi rejects Estonia’s virtual currency idea – Reuters
Initial Coin Offerings: Know Before You Invest – FINRA
It is early into 2017 and at fintech events we can still hear a variety of analogies used to describe what blockchains and distributed ledger technology (DLT) are and are not.
One of the more helpful ones is from Peter Shiau (formerly of Blockstack.io) who used an automobile analogy involving the Model T to describe magic internet chains:1
The Ford Motor Company is well known for its production engineering innovation that gave us the Model T. To this day, the Ford Model T is one of the best selling automobiles of all-time thanks to the sheer number produced and affordability for American middle class families. And while it was remarkable that Ford was able to sell so many cars, it is well understood Ford’s true innovation was not the Model T but in fact the modern assembly line.
It was this breakthrough that enabled Ford to build a new car every 93 minutes, far more quickly than any of its competitors. Not unlike the Model T, cryptocurrencies like Bitcaoin, are every bit the product of a similar innovative process breakthrough that today we call a “blockchain.”
Carrying the analogy a little further, what is even more powerful about this modern equivalent of the assembly line is that it is not just useful for building cars but also vans and trucks and boats and planes. In just the same way, a blockchain is not just useful for creating a cryptocurrency, but can be applied to a many different processes that multiple parties might rely on to reach agreement on the truth about something.
Less helpful, but all the same plentiful, are the many red herrings and false equivalences that conferences attendees are subjected to.
Arguably, the least accurate analogy is that public blockchains can be understood as being “like the internet” while private blockchains “are like intranets”.
Why is this one so wrong and worthy of comment?
Because it is exactly backwards.
For example, if you want to use a cryptocurrency like Bitcoin, you have to use bitcoin; and if you want to use Ethereum, you have to use ether. They are not interoperable. You have to use their proprietary token in order play in their walled garden.
As described in detail below, the internet is actually a bunch of private networks of internet service providers (ISPs) that have legal agreements with the end users, cooperate through “peering” agreements with other ISPs, and communicate via a common, standardized routing protocols such as BGP which publishes autonomous system numbers (ASNs).
In this respect, what is commonly called “the Internet” is closer to interoperable private, distributed ledger networks sharing a common or interoperable communication technology than anarchic, public cryptocurrency blockchain networks, which behave more like independent isolated networks.
Or in short: by design, cryptocurrencies are intranet islands whereas permissioned distributed ledgers — with interoperability hooks (“peering” agreements) — are more like the internet.2
Let’s do a short hands-on activity to see why the original analogy used at fintech conferences is a false equivalence with implications for how we need to frame the conversation and manage expectations in order to integrate DLT in to our reference and business architecture.
If you are using a Windows-based PC, open up a Command window. If you’re using a Mac or Android device, go to a store and buy a Windows-based PC.
Once you have your Command window open, type in a very simple command:
Wait a few seconds and count the hops as your signal traces the route through various network switches and servers until you finally land on your destination. From my abode in the SF area, it took 10 hops to land at Google and 7 hops to land at Microsoft.
If you did this exercise in most developed countries, then the switches and servers your signal zigged and zagged through were largely comprised of privately owned and operated networks called ISPs. That is to say, what is generally described as “the internet” is just a bunch of privately run networks connected to one another via several types of agreements such as: transit agreements, peering agreements, and interconnect agreements.
By far the most widely used agreement is still done via the proverbial “handshake.” In fact, according to a 2012 OECD report, 99.5% of internet traffic agreements are done via handshakes. There is also depeering, but more on that later.
What do all these agreements look like in practice?
According to the 2016 Survey of Internet Carrier Interconnection Agreements (pdf):
The Internet, or network of networks, consists of 7,557 Internet Service Provider (ISP) or carrier networks, which are interconnected in a sparse mesh. Each of the interconnecting links takes one of two forms: transit or peering. Transit agreements are commercial contracts in which, typically, a customer pays a service provider for access to the Internet; these agreements are most prevalent at the edges of the Internet, where the topology consists primarily of singly connected “leaf” networks that are principally concerned with the delivery of their own traffic. Transit agreements have been widely studied and are not the subject of this report. Peering agreements – the value-creation engine of the Internet – are the carrier interconnection agreements that allow carriers to exchange traffic bound for one another’s customers; they are most common in the core of the Internet, where the topology consists of densely interconnected networks that are principally concerned with the carriage of traffic on behalf of the networks which are their customers.
Colloquially it is a lot easier to say “I want to use the Internet” instead of saying “I want to connect with 7,557 ISPs interconnected in a sparse mesh.”
Back to topology, each ISP is able to pass along traffic that originated from other networks, even if these external networks and the traffic therein originate from foreign countries, because the physical systems can speak to one another via standardized transport protocols like TCP and UDP and route via BGP.34
Thus there is no such thing as a physical “internet rail,” only an amalgam of privately and publicly owned networks stitched together.
And each year there is inevitably tension between one more ISP and consequently depeering takes place. A research paper published in 2014 identified 26 such depeering examples and noted that while depeering exists:
Agreements are very quite affair and are not documented for, they are mostly handshake agreements where parties mutually agree without any on record documentation. This argument is supported by the fact that 141,512 Internet Interconnection Agreements out of 142,210 Internet Agreements examined till March 2011 were Handshake Agreements.
This is the main reason you do not hear of disputes and disagreements between ISPs, this also dovetails into the “net neutrality” topic which is beyond the scope of this post.
Just as the internet is an imperfect analogy for blockchains and DLT in general, so is its offspring the “intranet” is a poor analogy for a permissioned blockchains. As noted above, the internet is a cluster of several thousand ISPs that typically build business models off of a variety of service plans in both the consumer and corporate environments.
Some of these server plans target corporate environments and also includes building and maintaining “private” intranets.
What is an intranet?
An intranet is a private network accessible only to an organization’s staff. Generally a wide range of information and services from the organization’s internal IT systems are available that would not be available to the public from the Internet. (Source)
And while more and more companies migrate some portion of their operations and work flows onto public and private “clouds,” intranets are expected to be maintained given their continued utility. From an infrastructure standpoint, notwithstanding that an intranet could be maintained one or more more servers through Software Defined Networks (SDNs), it is still a subset of a mash up of ISPs and mesh networks.
What does this have to do with magic internet chains?
A private blockchain or private distributed ledger, is a nebulous term which typically means that the validation process for transactions is maintained by known, identified participants, not pseudonymous participants. Depending on the architecture, it can also achieve the level of privacy that is associated with an intranet while staying clear of the hazards associated with preserving true pseudonymity.
Why is the “intranet” analogy so misleading and harmful?
For multiple reasons.
For starters, it is not really valid to make a sweeping generalization of all identity-based blockchains and distributed ledgers, as each is architected around specific use-cases and requirements. For instance, some vendors insist on installing on-premise nodes behind the firewall of an enterprise. Some vendors setup and run a centralized blockchain, from one or two nodes, for an enterprise. Some others tap into existing operational practices such as utilizing VPN connections. And others spin up nodes on public clouds in data centers which are then operated by the enterprise.
There are likely more configurations, but as noted above: from a topological perspective in some cases these private blockchains and distributed ledgers operate within an intranet, or on an ISP, or even as an extranet.
Fundamentally the biggest difference between using an ISP (“the internet”) and using an intranet is about accessibility, who has access rights. And this is where identity comes into play: most ISPs require the account holder to provide identification materials for what is effectively KYC compliance.
Thus while you may be visit a coffee shop like Starbucks who provides “free” access, Starbucks itself is an identified account holder with an ISP and the ISP could remove Starbucks access for violating its terms of service. Similarly, most coffee shops, airports, schools, etc. require users to accept a terms of service acknowledging that their access can be revoked for violating it.
Source: FireFox 51.0.1
In short, both the internet and intranet are in effect part of identity and permission-based networks. There is no such thing as an identity-less internet, only tools to mask the users identity (e.g., Tor, Peerblock, Whisper). In the same way that, “private” intranets are a fallacy.
Anarchic chains, which were designed to operate cryptocurrencies like Bitcoin, attempt to create an identity-less network on top of an identifiable network, hence the reason people involved in illicit activities can sometimes be caught.
Interestingly, where the internet analogy does hold up is in how public, anarchic blockchains are no less challenged by the effort and complexity of truly masking identity. I mentioned this in a footnote in the previous post, but it deserves being highlighted once more. Anarchic blockchains inspired by cryptocurrencies such as Bitcoin, used blocks because Satoshi wanted identity-free consensus (e.g., pseudonymity). That implies miners can come and go at will, without any kind of registration, which eliminated the choice of using any existing consensus algorithm.
As a result, Satoshi’s solution was proof-of-work (PoW). However, PoW is susceptible to collisions (e.g., orphan blocks). When a collision occurs you have to wait longer to obtain the same level of work done on a transaction. Thus you want to minimize them, which resulted in finding a PoW on average every ten minutes. This means that in a network with one minute propagation delays, not unlikely in a very large network (BGP sees such propagation times) then you waste ~10% of total work done, which was considered an acceptable loss rate in 2008 when Satoshi was designing and tweaking the parameters of the system.
Distributed ledgers such as Corda, use a different design and exist precisely as an identified network, where members cannot just come and go at will, and do have to register. With Corda, the team also assumes relatively low propagation times between members of a notary cluster. One of the key differences between mere PoW (i.e. hashcash) and a blockchain is that in the latter, each block references the prior – thus PoWs aggregate. It can be tough to do that unless all transactions are visible to everyone and there is a single agreed upon blockchain but if you do not, you will not get enough PoW to yield any meaningful security
When fintech panels talk about the notion of “open” or “closed” networks, this is really a red herring because what is being ignored is how identity and permission work and are maintained on different types of networks.
From the standpoint of miner validation, in practice cryptocurrencies like Bitcoin are effectively permission-based: the only entity that validates a transaction is effectively 1 in 20 semi-static pools each day. And the miners/hashers within those pools almost never individually generate the appropriate/winning hash towards finding a block. Each miner generates trillions of invalid hashes each week and are rewarded with shares of a reward as the reward comes in.
And if you want to change something or possibly insert a transaction, you need hashrate to do so. Not just anyone running a validating node can effect change.
More to the point, nearly all of these pools and many of the largest miners have self-doxxed themselves. They have linked their real world identities to a pseudonymous network whose goals were to mask identities via a purposefully expensive PoW process. As a result, their energy and telecommunication access can be revoked by ISPs, energy companies, and governments. Therefore calling anarchic or public blockchains “open” is more of a marketing gimmick than anything else at this stage.
AOL and CompuServe were early, successful ISPs; not intranets.5 Conflating these terms makes it confusing for users to understand the core technology and identify the best fit use-cases. 6
Alongside the evolution of both the “cloud” and ISP markets, it will be very interesting to watch the evolution of “sovereign” networks and how they seek to address the issue of identity.
Because of national and supranational laws like General Data Protection Regulation (GDPR) that impacts all network users irrespective of origin.
For instance, Marley Gray (Principal Program Manager Blockchain at Microsoft) recently explained in an interview (above) how in order to comply with various data regulations (data custody and sovereignty), Microsoft acquired fiber links that do not interact with the “public” internet. That is to say, by moving data through physically segregated “dark” networks, Microsoft can comply with requirements of its regulated customers.
And that is what is missing from most fintech panels on this topic: at the end of the day who is the customer and end-user.
If it is cypherpunks and anarchists, then anarchic chains are built around their need for pseudonymous interactions. If it is regulated enterprises, then identity-based systems are built around the need for SLAs and so forth. The two worlds will continue to co-exist, but each network has different utility and comparative advantage.
Acknowledgements: I would like to thank Mike Hearn, Stephen Lane-Smith, Antony Lewis, Marcus Lim, Grant McDaniel, Emily Rutland, Kevin Rutter, and Peter Shiau for their constructive feedback. This was originally sent to R3 members on March 31, 2017.
From a network perspective, some of the integration and interop challenges facing DLT platforms could be similar to the harried IPv4 vs IPv6 coexistence over the past decade. Who runs the validating nodes, the bridges — the links between the chains and ledgers — still has to be sorted out. One reviewer noted that: If you equate IPv4 (TCP/UDP/ICMP) to DLTv4 where BGPv4 enables IPv4 networks to interact, we need an equivalent for BPGv4, say DLTGPv4 (DLT Gateway Protocol) for DLTv4 fabrics (ISPv4s) to interact and the same thing for IPv6 and DLTv6 where DLTv6 is a different DLT technology than DLTv4. So the basic challenge here is solving integration of like DLT networks. [↩]
Venture capitalists such as Marc Andreessen and Fred Wilson have stated at times that they would have supported or invested in something akin to TCPIPcoins or BGPcoins. That is to say, in retrospect the missing element from the “internet stack” is a cryptocurrency. This is arguably flawed on many levels and if attempted, would likely have stagnated the growth and adoption of the internet, see page 18-19. [↩]
One reviewer noted that: Because of the IPv4 address restrictions (address space has been allocated – relying on auctions etc for organizations to acquire IPv4 addresses), some sites now only have an IPv6 address. Most devices today are dual stack (support IPv4 and IPv6), but many ISPs and older devices still only support IPv4 creating issues for individuals to access IPv6 resulting in the development of various approaches for IPv4 to IPv6 (e.g. GW46 – my generic label). I think, the question with DLTGW46 is whether to go dual stack or facilitate transformation between v4 and v6. [↩]
A reviewer who previously worked at AOL in the mid ’90s noted that: “In its early days, AOL was effectively a walled garden. For example, it had its own proprietary markup language called RAINMAN for displaying content. And access to the internet was carefully managed at first because AOL wanted its members to stay inside where content was curated and cultural norms relatively safer — and also desirable for obvious business reasons.” [↩]
One reviewer commented: “In my opinion, the “internet” cannot be created by a single party. It is an emergent entity that is the product of multiple ISPs that agree to peer – thus the World Wide Web. DLT-based and blockchain-based services first need to develop into their own robust ecosystems to serve their own members. Eventually, these ecosystems will want to connect because the value of assets and processes in multiple ecosystems will increase when combined.” [↩]