Last year a friend sent me a copy of “Popping the Crypto Bubble.” I read the first few chapters before life got in the way and recently re-discovered it while unpacking and finally finished reading it.

This is a book I should have liked, after all, for years I have been labeled as a “crypto critic” or as a “no-coiner” terms that I thought were inaccurate or even slurs.1

In fact, for several years I wrote a private newsletter that was circulated among many now prominent anti-coiners. So if there is someone who should have wanted this book to be great, it is me. But it is not. It is actually a bad book.

I have formally written eight book reviews for “blockchain-related” books and I would rank this at the bottom. Part of it is the poor editing which has been highlighted by at least one other commentor. For example, the bibliography section is out of sync and is missing an entire chapter.2

But the bulk of the feedback is that the chapters are sloppily assembled with a hodgepodge of polemical rants. The substance comes across as a broken record of anger and angst.

In addition, the book is typically associated with a singular author, Stephen Diehl, but there is no unified voice throughout the book. Instead, many passages read as though they were carved out in a Google Doc by one of his two co-authors (co-workers actually).

As a result, a reader will find themselves ploughing through some semi-technical explanation of a financial product only to hear Diehl’s voice wedge itself at the very end, claiming it was all a scam or fraud or both. It is tiring because it happens so often.

Before diving into the book, worth mentioning that unlike virtually every other book on this topic, the authors do not provide their background or motivation in any section, although the tone is clear as early as page 1.

For readers unfamiliar, the three co-authors worked together at a US-based company called Adjoint, a tech firm I was introduced to in July 2017 when it was involved in doing something with smart contracts which Diehl has removed from his LinkedIn bio.3 Adjoint announced “Uplink” a couple months after that call.

Obviously it is okay for people to change their minds. Some people do not like the local sports team when they move to a different state or province. Some people fall out of love for avocado toast. Some people like working on “the next generation of distributed ledgers.”

So what changed Diehl’s mind between 2017 and 2022? According to Diehl’s presentation in December 2017 he was all-in on blockchains; then in a group presentation in April 2018, the co-founders were still on-board the blockchain train. It is not clear from the book (perhaps he has said somewhere else?) but he leaves no doubt that he is not a fan of cryptocurrencies or blockchains or smart contracts or web3.

Below is a breakdown of issues with each chapter. Note: all transcription errors are my own.

Chapter 1: Introduction

In the second paragraph on p.1 the authors write:

The overarching idea of cryptocurrency is based on a complex set of myth-making built on a simple unifying aim: to reinvent money from first principles independent of current power structures.

Where is the citation or source to back up that claim? Perhaps some Bitcoin maximalists hold that core view as their raison d’être to “reinvent money” but if we were to say, use the title of popular conference panels, it isn’t actually as common in 2023 or probably even June 2022 when the book was published. However the onus is on Diehl et al., to provide evidence for the claim and it is not presented.

Grammar: in the same paragraph there is a glaring grammatical issue on the first page of the book. It was also highlighted by one Amazon review:

On the same page the authors write:

While a software is political, some software is more political than other.

Not only is there a missing “s” at the end, but it is not really clear what this means even with the following sentences related to the 2007-2009 Global Financial Crisis. Is Solitaire political? Is Excel political?

The concluding sentence of that same paragraph concludes:

The divisions over cryptocurrency are based on a philosophical question: Do you worry more about the abuse of centralized power, or about anarchy?

Again, no citation or anything to surmise why this is the philosophical question.

For instance, there seems to be a range of motivations for why a regulated financial institution operates a trading desk involved in the cryptocurrency world, or why that same organization might have a different business unit that builds a custodial product for their tokenization efforts. I have sat in meetings with these types of entities and I do not recall hearing anarchy mentioned, but maybe my sample size is too small or outdated.4

Chapter 2: The History of Crypto

On p. 3 the authors put in a pullquote:

Cryptocurrencies were intended as a peer-to-peer medium of payment but have since morphed into a product whose purpose is almost exclusively as a speculative investment.

Perhaps Bitcoin and some of its immediate clones were intended for payments (at least according to the original whitepaper) but again, no citation for the latter claim about speculative investment. Maybe that is true. Either way, later in the book the authors change their tune and say that cryptocurrencies are a reimaging of money. There is little consistency from beginning to end.

The first couple pages describing “the Cypherpunk Era” are okay but the authors slip up stating:

In the 21st century, most money is digital, represented as numerical values in databases holding balance sheets for bank deposits.

This may seem pedantic but the authors do not state what part of the world they are describing in the 21st century. If it is the U.S. then they probably mean to use “electronic” not “digital.” There are no digital dollars in circulation yet as the Federal Reserve has not issued a central bank digital currency (CBDC).

Instead, users are often left with siloed representations of non-fungible dollars “issued” by a menagerie of entities, typically intermediaries such as commercial banks. The e-Cash Act and STABLE Act were a couple of proposals to move in that direction, but as of this writing we do not currently have a “digital dollar” in the U.S.

On p. 5 the authors write:

To most consumers today, this is transparent, although it was first, in the early 2000s that, consumers became aware of the digitization of their money in the form of increasing online banking.

Who are these consumers, where are they based? If the authors are describing the U.S. a future edition of the book should be specific.

Continuing on p. 5 they write:

However, in the early days of e-commerce, there was still apprehension around receiving and making payments over the internet with credit cards. To fill this gap, PayPal emerged as a service to support online money transfers, which allowed consumers and businesses to transact with a single entity that would process and transmit payments between buyers and sellers without the need for direct-to-bank transfers.

On the one hand it is clear why PayPal was used as an illustration for this evolving time period, yet it should not be trotted out as a “success story.”

As highlighted by legal scholars such as Dan Awrey, PayPal has always operated as a “shadow bank” and “shadow payment” provider.5 Its management shoe horned the company into the bedrock of U.S. e-commerce all while dodging banking regulators calls for the erection of a state or national-chartered bank.

While some readers may be okay with that outcome, Diehl et. al., explicitly deride this specific type of behavior from pegged coin issuers (stablecoins). Incidentally, in the process of writing this review, PayPal announced the release of a pegged, centrally-issued stablecoin – PYUSD – on the Ethereum network. How does PayPal operate now? The same as it always has: which happens to be very similar to how centralized stablecoin issuers.

On p.7 they write:

The mechanism described in the bitcoin whitepaper proposed a novel solution for the double-spend problem, which did not require a central trust authority.

This part of the chapter is fairly straightforward and dry and lacks any of the hysterical commentary. Since there is no unified voice, perhaps it was written by one of the two fellow co-authors?

Either way, it is not explored or mentioned in this chapter (or anywhere else) but of the eight references in the Bitcoin whitepaper, three of them cite the works of Haber & Stornetta, whose digital signing concepts illustrate that there are indeed “useful” things that the blockchain world has contributed (see slides 22-24). Of course that would be contrary to the narrative this book is attempting to defend.

Worth mentioning that the writers typically use lower case b and e for both bitcoin and ethereum even when they are discussing the networks and protocols. This is a little confusing because conventionally, it is fairly common to use lowercase b to describe the unit-of-account, whereas uppercase B to describe the network or code.

For instance on p. 8 they write:

Moreover, the bitcoin algorithm took a particularly interesting approach to consensus by attempting to create a censorship-resistant network where no participants is privileged. The consensus process was eventually consistent and tied the addition of new transactions to the solution of a computational problem in which computers that participated in the consensus algorithm would need to spend a given amount of computational work to attempt to confirm the writes. This approach, known as proof of work created what is known as a random sortition operation in which a network participant would be selected randomly and probabilistically based on how much computational power (called hashrate) was performed to attempt consensus.

A couple of nitpicks:

(1) There is no singular “bitcoin algorithm.” Arguably the best explanation of the moving parts that Bitcoin uses is from Gwern Branwen: Bitcoin is Worse is Better. This is not the only time the authors incorrectly describe a bundle of technology.

(2) The authors should be clearer that “proof of work” itself is a concept that pre-dates Bitcoin by more than a decade (Dwork & Naor 1993). Over the past five years, more of the technical-inclined papers on this topic typically refer to the way proof-of-work is used in Bitcoin as Nakamoto Consensus. The authors mention Nakamoto Consensus a few chapters later however they are strangely very thrifty when it comes to footnotes or citations so a second edition should include this nuance.

On p. 8 they write:

Therefore the bitcoin architecture created a computational game mechanic in which the computers in this network (called miners) competed to perform consensus actions and successfully confirming a block of transactions gave a fixed reward to the first “player” to commit a set transactions.

This is not quite right. A phenomenon called “orphaning” (similar to uncles in Ethereum) occurs when more than one miner simultaneously solves (discovers) a block. At some point one of the branches is orphaned (pruned) when other miners build on one but not the other tree.

This is part of the reason why a hardcoded 100 blocks (roughly ~17 hours) is required before a miner can issue themselves a block reward (e.g., the coinbase transaction has a block maturity time box).

A typo occurs on the last sentence of that paragraph:

The critical ideas encoded in the protocol are the predetermined release schedule, fixed supply, and support for those protocol changes that have support off a majority of participants.

This has a typo: off –> of

On p. 8 the authors write:

One of the core algorithms used in most blockchains is a hash function.

While reading this it was:

(1) unclear why they used ‘algorithm’ and;

(2) which blockchain does not use a hash function?

On p. 9 they discuss difficulty adjustments:

This mechanism allows the difficulty of bitcoin mining to be artificially adjusted proportionally to the rewards.

It is not quite clear what “artificial” means here. In Bitcoin, the supply schedule for the issuance of new bitcoins halves roughly every four years (actually less than four years but we will discuss that later).

Those with commit access could theoretically modify the fixed rewards / supply schedule, and miners could update their node software to increase or decrease that amount. But none of this action is artificial, so why use that word?

We could argue that chronologically early miners received a disproportionally higher amount of rewards relative to the frequent empty blocks they built and processed for the first ~5 years. Is that fair? Probably not. Is it artificial? Probably not.

On p.9 they discuss censorship resistance:

The censorship resistance of this algorithm was the critical improvement over existing eCash systems which previously had a single legal point of failure, in that the central register or central node would have to be stored in a single server that could be targeted by governments and law enforcement. In this trustless peer-to-peer (P2P) model–the same mechanism that powered Napster and BitTorrent–all computers participated in the network, and removing any one node would not degrade the availability of the whole network. Just as previous P2P networks routed around intellectual property laws, bitcoin routed around money transmitter laws.

There are a few issues with this:

(1) Which algorithm are the authors referring to as an “algorithm,” the entire Bitcoin codebase circa 2009?

(2) Napster was quasi-centralized, it provided an index of files and that is why it was a relatively easy target for lawsuits by the music industry (RIAA) and law enforcement.

(3) The authors have a habit of wading into legal and regulatory territory without providing much in the way of definitions or what jurisdictions they are describing.

For instance, in the last sentence they are probably referring to the U.S. In the U.S., each individual state has laws and regulations around money service businesses (MSB), of which money transmission (MTL) is a subset of. Some states do not. At the federal level some entities are required to register with FinCEN which enforces the Bank Secrecy Act (BSA). A second edition should include specific jurisdictions to strengthen the authors arguments.

(4) This may be perceived as pedantic, in section 1 of the original Bitcoin whitepaper it describes the motivation of building a network for participants to engage in online commerce without having to rely on financial institutions. Conventionally this is more of a stab at know-your-customer (KYC) collection gathering requirements.6

On p.10 they write about how Bitcoin was first marketed, stating:

This new era marks a rapid expansion of a cottage industry of startups and early adopters who would build exchanges, mining equipment, and market network to proselytize the virtues of this new technology. The culture around the extreme volatility of the asset created a series of memes within the subculture of HODL (a portmanteau of the term “holding,” standing for “hold on for dear life”), which encourages investors to hold the asset regardless of price movement.

Couple of issues:

(1) It is clear later in the book that the authors have a gripe about how blockchains are proselytized. I deeply sympathize with their disdain towards shilling. I violently agree with them in some parts. But, like in the rest of the book, they miss the opportunity to provide the reader with specific examples.

(2) I have pointed this out in several other book reviews but the etymology, the genesis of “hodl” did not originate as an acronym or portmanteau. It came from a drunk poster on the BitcoinTalk forum, there are many articles discussing this. However, what the authors describe “hodl” to mean is correct.

On p.11 they start a new section on the “grifter era,” stating:

In addition to bitcoin, a series of similar technologies based on the same ideas emerged in the 2011-2013 era. The first movers were Litecoin, Namecoin, Peercoin, and a parody token known as Dogecoin based on an internet meme.

Several issues with this:

(1) Why did the authors use uppercase for four cryptocurrencies instead of lowercase?

(2) A second edition should probably arrange the first three by chronology or alphabetized. For instance, Namecoin was an evolution of BitDNS (a project that was spun up just as Satoshi stopped formally contributing to Bitcoin). It was launched in April 2011 and due to its utility usually is not placed in the same category as Litecoin or Dogecoin.

In the same paragraph they note that:

As of August 2018, the number of launched cryptocurrency projects exceeded 1600.

It is unclear why the authors chose that specific time frame. For instance, according to CoinGecko, they have identified 10,052 coins as of this writing. The infrequently updated “Deadcoins” database lists 1729 entries as of January 2023.

The next sentence is a little quizzical:

In 2015 a significant extension to the bitcoin model called the ethereum blockchain was launched with the aim to build a “world computer” in which programmable logic could be expressed on the blockchain instead of only simple asset transfers.

It is only eleven pages into the book but we still have not been provided a clear definition of an “algorithm” versus a “model” versus a “protocol.”

Ethereum (which the authors do not capitalize either) is significantly different than Bitcoin so to call it an extension is a bit of a stretch.

Also, Bitcoin uses a transaction model called unspent transaction outputs (UTXOs) whereas Ethereum uses a different model called Accounts. The former is unable to actually transfer assets per se, hence the creation of “colored coin” schemes starting in 2012 to enable other assets to be created (nearly all of the original “colored coin” efforts have disappeared and heterogenous assets that use the Bitcoin blockchain are currently conductible via the Ordinals protocol).7

Two sentences later the authors change the capitalization again:

In addition to fully visible transaction models of previous tokens, chains such as Monero and Zcash would incorporate privacy-enhancing features into the design, allowing participants to have blinded transactions that would obscure the endpoint details for illicit transactions with no public audit record.

A second edition needs to explain why the authors flip capitalization around. Is it only uppercased if the chain is mentioned just once?

Later in the book the authors do go on to describe some of the privacy and confidentiality approaches but only with the context of criminogenic behavior. It could be helpful for readers to have some citations of relevant papers or articles since the topic intersects with securing accounts, assets, and transfers in traditional finance.8

The next paragraph jarringly switches gears to proof-of-work mining (without mentioning PoW):

Early entrepreneurs realized that they could gain an advantage over traditional server farms if they built faster and more specialized hardware to compute these hashes. These entrepreneurs began to build ASICs (Application Specific Integrated Circuit), custom hardware circuits that could do the computations required for the bitcoin network more efficiently than traditional CPUs offered by companies like Intel and AMD.

For some reason this section omits two intermediate steps between CPU mining and ASIC mining. These would be GPU mining and FPGA mining. More importantly it misses the opportunity of pointing out that Satoshi herself was surprised and sullen when she learned that miners had figured out how to scale GPU mining the way ArtForz and Laszlo Hanyecz revealed.

A few sentences later they dive into mining pools:

These mining pools became a centralized and very lucrative business for early investors. An example is, the Chinese company BitMain, which began to centralize most of the computational resources, resulting in 70% of all bitcoin mining being concentrated in mainland China by 2019.

The authors skip a few years and neglect to mention key figures in the creation of commercialized ASICs such as Yifu Guo. Nor do they mention, in dollars or some other figure, how lucrative these pools were. Or which the first public ones were (Slush and Eligius were among the first).

This section also conflates mining hardware (used in farms) with pools which provide the block building itself for an aggregation of mining farms. Lastly, the capitalization of BitMain is incorrect (the company markets the hardware in either all caps – BITMAIN – or Bitmain).

On p. 12 they write:

The underutilization of coal-fired power production and Chinese capital restrictions on renminbi outflows offered a unique opportunity for enterprising Chinese citizens to move capital outside of the mainland beyond government controls. In 2018 the Chinese government officially declared cryptocurrency minig an undesirable activity. The same year, Bloomberg reported $50 billion of capital flight from the Chinese state using the Tether cryptocurrency.

This is not the correct chronology. Because the authors do not provide many citations it is unclear what they were referring to in 2018. A quick googling found a possible related article but the actual real big ban took place in two separate actions in May and September 2021. As their book was published in mid-2022, the authors could have used more recent figures here.

Note: later in Chapter 25 they do reference a more up-to-date story. They also not explain the specific legal and regulatory woes that miners faced in China which led them to move hardware overseas in the second half of 2021.

In addition, the authors only mention energy generation in passing but neglect to mention a key culprit for why Bitcoin (and other PoW-based coins) flocked to specific regions of China: subsidized electricity from hydroelectric dams due to overcapacity / overproduction of dams. This has been widely documented by others.9

Some of the miners literally packed up their machines onto trains after the rainy season was over and decamped for provinces in the north such as Xinjiang and Inner Mongolia, where coal-fired plants powered their wares for the remainder of the dry season. A crazy phenomenon and one the authors should consider adding in the next edition.

On p. 12 they write:

The Grifter Era period also saw the introduction of stablecoins such as Tether, aiming to be a stable cryptoasset with its price allegedly pegged to the US dollar and theoretically backed by a reserve of other assets. This is followed by a 2019 period of market volatility and market consolidation of cryptocurrencies, during which many unfounded ideas fell off and left a handful of 20 projects which would dominated trading volume and developer mindshare.

In this section the authors never really define what time the “Grifter Era” takes place. Based on the actual words they wrote up until this point we have years: 2011-2013, 2015, 2017, 2018, and 2019. Yet they specifically mention a “stable cryptoasset with its price allegedly pegged to the US dollar” which sounds like a “stablecoin” such as Tether (USDT). But Tether was actually launched as Realcoin in 2014.

Also, the authors do not mention any of the “20 projects” which dominated volume and mindshare. Seems like a curious omission. Does that include Binance and Cosmos then?

The chapter comes to an abrupt end, with the final paragraph:

In 2021 China outright banned all domestic banks and payment companies from touching cryptoassets and banned all mining pools in the country. At the same time, the United States continued to be hit by an onslaught of cyberterrorism and ransomware attacks that began to attack core national infrastructure and the country’s energy grids.

What is the reader supposed to take away from this chapters concluding remark? Later in the book the authors dive into ransomware but readers are not provided any citations or sources for where we can learn more about these specific cyberattacks.

For example, prior to being blocked by him on Twitter, I briefly corresponded with Diehl regarding ransomware. I even agreed (and still agree) with some of his points he has made on the specific topic. Yet here he misses the opportunity to connect liquidity (and banked-trading venues) with ransomware payouts. The next edition to clarify the current non sequitur.

Chapter 3 Historical Market Manias

This is one of their stronger chapters. It succinctly discusses the history of past manias and subsequent crashes including the South Sea Bubble, the Mississippi Bubble, the Railway Mania, Wildcat banking, the 1929 stock market collapse, Albanian pyramid schemes, Enron, and others.

While most of the prose is in a unified voice, at the tail end of the Wildcat section on p. 26 they write:

The wildcat banking era is an important lesson to learn from the past, given the recent fringe efforts to return to a digital variant of private money with stablecoins and cryptoassets.

It is followed by three citations all related to the topic at hand. Yet the authors fail to distinguish – as they fail to distinguish later in the section on stablecoins – that in the U.S. all commercial banks issue the equivalent of private money and credit.

In fact, it is the expansion of this credit (and leverage) by private banks and other lending institutions that often leads to booms and busts in the modern era. During this time frame both M1 and M2 aggregates – publicly money – basically grew linearly apart from the recent COVID-era emergency responses.

This distinction is important because to be consistent, the authors should recognize that in the U.S. credit expansion from non-banks and certain fintechs like PayPal, fall under the umbrella of “shadow banking” and “shadow payments” which predates the creation of Tether (USDT) and other centralized pegged coins by decades.

To be consistent, the authors need to update their priors and at a minimum reconcile for the audience what they prescribe all “shadow banking” and “shadow payments” should be required (or not) to do. Singling out “private money” without recognizing the very important nuance that most money and credit retail users interact with is private, is disingenuous.

While talking about the history of Beanie Babies, on p. 33 they write:

Buyers of Beanie Babies could never find the whole collection in one store, and the artificially limited supply meant it always appeared that the products were selling out. By limiting the distribution channels, creating the toys as part of a broader collection and simultaneously creating a variable artificial scarcity within the collection, the company bootstrapped a collectible item seemingly based on a small children’s toy which had very little intrinsic value unto itself–Not unlike the crypto market for non-fungible tokens (NFTs) today.

This is not necessarily a bad example but there are two more germane examples with respect to collectible NFTs:

(1) In the U.S., baseball card production is a licensed activity based on I.P. that Major League Baseball (MLB) has a monopoly on.10 The manufacturing arrangement effectively states who can and cannot produce the likeness of players, coaches, teams, logos, etc. on memorabilia.

Over the past several decades, collectible card manufacturers have remained relatively static yet these manufacturers (such as Topps and Fleer) created a glut of cards in the lates ’80s and early ’90s.11

Coincidentally, in the process of writing this review, MLB sued Upper Deck, “accusing it of trademark infringement for using its logos on trading cards without permission.”

(2) Getty Images. While they do have some non-commercial, royalty free stock galleries, Getty acquires the I.P. of images and uses an army of lawyers to sue anyone who violates or infringes on those rights. They attempt to artificially restrict the usage of easily reproducible imagery. 12

On p. 24 the discuss the Dot-com bubble of 1995-2001, stating:

The most recent bubble in living memory was is the dot-com bubble in the 1990s.

Two issues with this sentence:

(1) Grammar or typo with “was is”

(2) The very next page they discuss the subprime mortgage crisis which seems to be chronologically at ends with “most recent bubble” for the dot-com bubble. Which is the most recent?

On the final sentence of p. 24 they write:

Shortly after that, the use of the web for private commercial applications exploded. The era saw the rise of Google, eBay, PayPal, and Amazon coupled a vast Cambrian explosion of both technologies and new business models.

While all four of these technically co-existed during the time frame stated, only two of them went public before the end of 2001, the timeframe they gave.

Also, it is unclear why these Big Tech companies repeatedly receive a free pass throughout the section and the whole book. Apart from one subsection later on Occupy Wall Street and a small passage in the Conclusion, one consistency throughout the book is that the authors seem to be okay with the status quo and incumbency of both legacy financial institutions and Big Tech companies.

This seems at odds with the view of holding entities such as pegged-coin issuers accountable since cloud providers are largely unaccountable systemic utilities.

For instance, academics such as Lee Reiners have argued that cloud providers – such as AWS and Google Computer – should be regulated under Dodd-Frank Title VIII. Likewise another scholar, Vili Lehdonvirta, has argued that these cloud empires are as powerful as states yet unaccountable.

Both Reiners and Lehdonvirta are typically categorized (incorrectly?) as anti-coiners yet both of them provide a much more even handed treatment of systemic risks, such as large commercial banks, than the authors of Popping the Crypto Bubble.

On p. 37 they discuss the subprime mortgage crisis of 2003-2008, writing:

In the decade of real estate euphoria, the amount of mortgage-derived credit increased from $900 billion to $62 trillion.

That seems like a pretty big change over time, but there is no citation for readers to learn more. A second edition should provide one.

On p. 39 they describe the venture capital bubble of 2010-present, discussing WeWork and Uber blitzscaling, writing:

While these companies did achieve scale, they became mired in controversy and scandals as a direct results of their predatory and unsustainable business model. Although both WeWork and Uber went public, neither company was able to become profitable and is now trading at fractions of their inflated private valuations.

In mid-2022, when the book was published, part of that closing statement was untrue. WeWork pulled its IPO in 2019 and merged with a SPAC for a direct listing in October 2021.13

The authors missed the opportunity to dunk on SPACs which screwed over retail investors.14

On p. 41 the authors wrote about the Crypto Bubble 2016-present, a lot of which I agreed with. However one passage quickly falls into a rant, on p. 42 they write:

The simple undoing of this idea of a new financial system is that there is no economy in crypto; because it can never function as a currency. Nothing is priced in crypto. No commerce is done in crypto. No developed economy recognizes crypto as legal tender or collects taxes on it. The price of crypto simply oscillates randomly, subject to constant market manipulation and public sentiments of greed and fear, detached from any activity other than speculation. Crypto is a pure casino investment wrapped in grandiose delusions. As an investment, it is almost definitionally a bubble because crypto tokens have no fundamentals, no income, and correspond to no underlying economic activity.

A second edition could reword and cut out half of the rant and turn it into a much stronger statement all without using broad sweeping a priori cudgels.

For instance, saying “never” implies the authors know the future. But they, like the readers, cannot know the future of every cryptocurrency or blockchain to come. We need to use the facts-and-circumstances, an evidence-based approach, to determine which cryptocurrency (or token) currently has legs and which ones do not. Saying they all cannot is sloppy and lazy polemics. It is soothsaying.

Another area for improvement: in 2014 Yanis Varoufakis may have been the first economist to articulate – in long form – that a cryptocurrency like bitcoin (with an inelastic supply) will unlikely to be part of a circular flow of income. The authors could add that reference to make their argument stronger, after all, they are no stranger to Varoufakis who they cite in the next chapter.

They could also make the distinction between an anarchic cryptocurrency such as bitcoin or litecoin, which have inelastic supplies versus Dai or Rai, which are only minted when collateral is deposited into a contract. This would take an additional explanation of dynamic supply via collateralized debt positions (CDP) but would help inform the reader that there is another world beyond fixed supply coins such as bitcoin and its antecedents.

Another example they could use to buff up their argument is to provide references of jurisdictions that did attempt to accept cryptocurrencies as a form of payment for taxes, but then later stopped the effort. Ohio is one example of this occurrence.

Chapter 4 Economic Problems

The first few pages of this chapter start off strong. I even found myself nodding in agreement when the pointed out on p. 46 the euphemism some coin promoters use “cryptoassets” in lieu of “cryptocurrencies” to make the former more palatable. We highlighted that in the book review of an equally bad book, Cryptoassets by Burniske and Tatar.

But then it begins to go off the rails, again, starting on p. 52 they write:

In addition, without any nation-state recognizing cryptocurrencies as its sole legal tender, there is no demand for the currency to pay one’s taxes. The demand for cryptocurrency is only based on either criminality or speculation.

The book is full of these opinions stated as facts.

Again, if there is one person who wants to agree with Diehl et. al., it is me. I have written a slew of posts and papers, most of which are linked to on this site, which have attempted to dive into these very topics. But they are not doing themselves any favors by being so stingy on citations or explaining how they arrived at only two categories: criminality or speculation.

And this hurts their credibility because their claims could be stronger by simply googling or asking experts if they know of a citation they could add. Right now, their bold confidence comes across identically as coin promoters who claim – without evidence – the central banks are going to collapse in the face of Bitcoin’s choo-choo-train.

To both groups of people we can respond with Hitchen’s razor: what can be asserted without evidence can also be dismissed without evidence. And unfortunately for Diehl et. al., a large portion of the book could simply be dismissed due to a lack of evidence (or citations).

While discussing deflationary assets, they write on p. 52:

The US dollar has the deepest and most liquid debt markets mainly because the dollar has a relatively predictable inflation rate on a long time scale, and its monetary parameters remain predictable up to the scale of decades. Thus the risk of servicing loans is readily quantifiable, and banks can build entire portfolios of loans to their communities out of their reserves.

A future version should explain that specifically the authors (likely) mean the market for U.S. Treasury bonds, not dollars themselves.

On p. 53 they write:

Unlike in the fiat system, where the market conditions for debt products organically determine the supply of money in circulation relative to demand, a cryptocurrency must determine both supply and demand prescribed in unchangeable computer code. This would be like if the United States Federal Reserve decided what the monetary policy of the United States would be from their armchair in 1973 and into the future, regardless of any future market conditions, pandemics, or recessions.

This is a bit of a strawman and lacks needed nuance.

(1) In the U.S. the majority of money and credit expansion (and contraction) comes from private, commercial banks and other lending institutions, not just the Federal Reserve.

(2) The authors criticism is valid with respect to coins with fixed supplies that are purposefully attempting to replicate “money” but not every cryptocurrency or token is attempting to do that. In fact, as mentioned above, both Dai and Rai are dynamically issued based on collateral deposited, there is no fixed supply of either.

(3) There seems to always be debates around “unchangeable computer code” but most of this ideological debate has been sidestepped by issuing new smart contracts with upgrades (or downgrades or sidegrades).

Either way, the authors could strengthen at least one of their arguments by referencing David Andolfatto’s 2015 presentation (at the time, Andolfatto was a vice president at the St. Louis Federal Reserve).

On p. 55 they write:

A positive-sum game is a term that refers to situations in which the total of gains and losses across all participants is greater than zero. Conversely, a negative-sum game is a game where the gains and losses across all participants sum is less than zero, and played iteratively with increasing participants, the number of losers increases monotonically. Since investing in bitcoin is a closed system, the possible realized returns can only be paid out from funds paid in by other players buying in.

Even though I largely agree with what they wrote here (and throughout much of the chapter), the authors introduce a new concept (a ‘closed system’) without defining what that is. And then they move on to the next thing to rail against.

It is frustrating because they could have explained to readers how, in proof-of-work networks such as Bitcoin, value leaks from the ecosystem: to state owned energy grids and semiconductor companies who typically do not reinvest the value (capital) back into the network.

Occasionally you will hear about a mining operator sponsoring a Bitcoin Core developer or helping with a lightning implementation, but by and large, the block rewards in Bitcoin are value that is extracted from the network by non-participants, or dead players.15 The authors do so somewhat later, but this would be a good place to drop a foreshadow towards that section, or at the very least define what a “closed system” is.

On p. 56 the authors inexplicably alternate between writing “a cryptoasset” and “crypto assets” within one paragraph.

Another example of a rant that takes away from the story they have built up through the chapter, on p.56 they write:

Crypto assets are completely non-productive assets; they have no source of income and cannot generate a yield from any underlying economic activity. The only money paid out to investors is from other investors; thus, investing in cryptoasssets is a zero-sum-game from first principles. If one investor bought low and sold high, another investor bought high and sold low, with the payouts across al market participants sum to zero. Crypto assets are a closed loop of real money, which can change hands, but no more money is available than was put in. Just as a game of libertarian musical chairs in which nothing of value is created, participants run around in a circle trying to screw each other before the music stops. This model goes by the name of a greater fool asset in which the only purpose of an investment is simply sell it off to a greater fool than one’s self at a price for more than one paid for it.

The voice of this author does not flow with the voices of the other authors. It sounds a lot like a long tweet and should be excised due to is repetitiveness. We get it, you hate cryptocurrencies / cryptoassets. It was clear the first dozen times you said it.

Another issue with this particular rant is that it inappropriately uses the term “first principles” when they probably should have used something like axiomatically. Or “by definition” which they have previously used. In addition, and more importantly, it is empirically incorrect.

There are blockchain projects, such as Onyx from JP Morgan that serve as a counterfactual to the a priori argument laid out above. A future edition either needs to reconcile with the fact that there are non-self-referential blockchain projects alive and in production, or excise the rants altogether.

On p. 58 they write:

Many economists and policymakers have likened cryptoassets to either Ponzi schemes or pyramid schemes, given the predatory nature of investing in cryptoassets. Crypto assets are not a Ponzi scheme in the traditional legal definition. Nevertheless, they bear all the same payout and economic structure of one except for the minor differentiation of a central operator to make explicit promises of returns. Some people have come up with all manner of other proposed terms of art for what negative-sum crypto investments might be called:

• Decentralized Ponzi scheme
• Headless Ponzi scheme
• Open Ponzi scheme
• Nakamoto scheme
• Snowball scheme
• Neo-Ponzi scheme

It would be nice if the authors came to consensus on whether it was spelled “crypto assets” or “cryptoassets.” Also, it is unclear who came up with the descriptive names above, however, it is likely that Preston Byrne should be credited with “Nakamoto Scheme.”

I currently think a decent description of Bitcoin itself is how J.P. Koning categorizes it as a game akin to a decentralized chain letter:16d

Overall this chapter sounds a bit too much like a rehashed version of BitCon from Jeffrey Robinson. It could easily be improved by removing the repetitious everything-is-a-fraud refrain and adding relevant references.

Chapter 5 Technical Problems

This chapter is tied with Exchanges for probably being the weakest in the whole book. Part of the problem is the authors conflate scaling limitations that Bitcoin specifically has, with the rest of the blockchain world. There is no nuance, they make a number of inaccurate statements, and the chapter itself is assembled in a haphazard fashion.

For instance, on p. 59 they write:

The fundamental technical shortcomings of cryptocurrency stem from four major categories: scalability, privacy, security, recentralization, and incompatibility with existing infrastructure and legal structures.

That is at least five categories. Yet the book subsections include four: scalability, privacy, security, and compliance. There is no specific section on ‘recentralization’ as most of it is mentioned within scalability.

Continuing, on p. 59 they write:

In computer science scalability refers to a class of engineering problems regarding if a specific system can handles the load of users required of it when many users require it to function simultaneously. However regarding this problem, the technological program of bitcoin carries the specific seed of its own destruction by virtues of being tied to a political ideology. This ideology opposes any technical centralization, and this single fact limits the technical avenues the technology could pursue in scaling.

The entire chapter should be re-titled “Technical limitations of Bitcoin” because currently it is filled with strawmen. It appears that the authors have spent almost no time with blockchains beyond Bitcoin and Ethereum. Blockchain engineers and architects are well aware of these limitations and some have launched faster, more scalable “layer 1” blockchains in responses.

Note: these are not endorsements. Some examples include Algorand, Avalanche, Cosmos, Near, Polkadot, and Solana. All of these existed prior to the publication of their book.

Others have built “layer 2” rollups that sit-atop a layer 1 blockchain; these L2s are often significantly faster than the L1 they reside on top of. This includes Arbitrum, Base, Optimism, and zkSync. Even though both optimistic rollups and zk-rollups concepts existed prior to the publication of this book, yet they get barely a passing mention on page 63.

Continuing on p. 60 they write:

The bitcoin scalability problem arises from the consensus model it uses to confirm blocks of pending transactions. In the consensus model, the batches of committed transactions are limited in size and frequency, and tied to a proof of work model in which miners must perform bulk computations to confirm and commit the block to the global chain. The protocol constrains a bitcoin block to be no more than 1MB in size and a single block is committed only every 10 minutes. For comparison, the size of doing an average 3-minute song encoded in the MP3 format is roughly 3.5 MB. Doing the arithmetic on the throughput results in the shockingly low figure that the bitcoin network is only able to do 3-7 transactions per second. By comparison the Visa payment network can handles 65,000 transactions per second.

Working backwards, even though I agree with their point – and have even used Visa as an example – once again the authors do not provide any citations for anything above. There is no reason to be stingy across 247 pages.

But the bigger issue is that the authors fail to see how even forks and variants of Bitcoin itself – such as Bitcoin Cash – have successfully increased the block size to 32 MB, so it is possible to do it. With faster block times and a move over to proof-of-stake, block throughput on a future iteration of Bitcoin could be considerably faster than it is today.17

The problem that the authors almost identified is that between 2015-2017 prominent Bitcoin maximalists purged the Bitcoin Core community of “bigger block” views which then ossified Bitcoin development. Even so, the authors should have included the fact that SegWit and Taproot – both of which were locked in prior to the publication of this book – effectively allow for larger block sizes (to more than 2 MB).

On p. 61 they write:

An appropriate comparison would be the Visa credit card network, whose self-reported figures are 3,526 transactions per second. Most credit card transactions can be confirmed in less than a minute, and the network handles $11 trillion of exchange yearly. Credit cards and contactless payments are examples of a success story for digital finance that have become a transparent part of everyday life that most of us take for granted. The comparison between bitcoin and Visa is not perfect, as Visa can achieve this level of transaction throughput by centralizing transaction handling through its own servers that has taken thirty years of building services to handle this kind of load. The slow part of transaction handling is always compliance, ensuring parties are solvent, and detecting patterns of fraudulent activity. However, for the advocates proposing that bitcoin can handle retail transactions loads on a global scale, this is the definitive benchmark that must be reached for technical parity.

There a singular citation provided, but nothing from Visa itself. But the biggest problem with this passage is that it defends rent-seeking incumbents. In the U.S., Visa and Mastercard operate a duopoly that is good for their shareholders.

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

Perhaps the bill goes nowhere, but the grievances it highlights are relevant for this book. For example, the E.U. capped interchange fees in 2015. Should Americans be granted lower fees as well?

Note: we are fortunate that public infrastructure upgrades, such as FedNow, will lower the costs to users across the country, however that is not intended as a point-of-sale or even retail-facing infrastructure (FedNow is an upgrade to the back-end). Plus its adoption may be slow.

This conversation could also discuss how commercial banks historically suffer from vendor lock-in from core banking software providers (such as FIS, Fiserv, Jack Henry), a cost that is eventually passed down to users as well.18

Also, it is worth pointing out that despite the authors celebratory mood towards Visa and Mastercard, according to the Bank of Canada many merchants do not actually like them:

They accept credit cards, but don't underestimate how much small businesses loathe them, describing credit as the slowest, riskiest, most expensive, and least reliable payments option.

chart via @bankofcanada's recent merchant acceptance survey: https://t.co/Lw15PrKJCg pic.twitter.com/UugRXToMP4

— John Paul Koning (@jp_koning) August 8, 2023

Lastly, the only people who are still claiming that “bitcoin can handle retail transactions loads on a global scale” are Bitcoin maximalists. While very vocal on social media, fortunately they represent a small minority of the fintech world.

Yet the authors repeatedly build strawmen arguments to counter the maximalist viewpoint without (1) identifying an specific examples; (2) without acknowledging that there is more to the blockchain universe than an orange memecoin that is ossified.

On p. 61 they write:

The scalability issues of the bitcoin protocol are universally recognized, and there have been many proposed solutions that alter the protocol itself. Bitcoin development is a collaboration between three spheres of influence: the exchanges who onboard users and issue the bulk of transactions, the core developers who maintain the official clients and define the protocol in software, and the miners who purchase the physical hardware and mine blocks. The economic incentives of all of these groups are different, and a change to the protocol would shift the profit centers for each of the groups. For example, while the exchanges would be interested in larger block sizes (i.e., more transactions), the miners (who prioritize fee-per-byte) would have to purchase new hardware and receive less in mining rewards for more computational work and thus incur significant electricity cost. This stalemate of incentives has led to mass technical sclerosis of the base protocol and a situation in which core developers are afraid of major changes to the protocol for fear of upsetting the economic order they are profiting from.

There are plenty of good arguments to be made about challenges and issues surrounding Bitcoin, this is not one of them.

For starters, there is no citation for “bulk of transactions.” In the past, some centralized exchanges have attempted to bulk release transactions on-chain, however the authors do not give us any idea what percentage as of mid-2022.19

Chain analytics companies such as Elliptic and Chainalysis likely have some idea, it is unclear if anyone reached out to discuss it with them.20

Strangely the authors do not use a single chart or image throughout the book which is somewhat weird considering how many visuals could help their arguments.

For instance, above is a line chart from Bitinfo Charts showing the daily on-chain transaction usage of Bitcoin over the past three years. The black vertical line is the date the book was published. We can see that up until this past spring, on-chain transaction volume fluctuated roughly between 250,000 and 350,000 transactions per day.

The recent uptick in late April this year is due to the popularity of Ordinals, a new NFT-focused protocol that uses Taproot (an “upgrade” implemented about two years ago).

Furthermore, and most importantly: an increased block size does not force miners to purchase new hardware and receive less mining rewards and higher electricity costs. This is not even an argument that “small block” proponents such as Luke-Jr have made.21 It is just plain wrong.

Recall that “mining blocks” for proof-of-work networks has split the “mining” job into two separate organizational efforts: (1) mining farms, which operate hashing equipment; (2) mining pools, which aggregate the work generated by mining farms, into a block.

Larger block sizes do not create any new difficulty or work for mining farms, the entities who have to deal with changing electrical costs. Rather, block makers (mining pools) have to spend an extra few seconds validating and sorting transactions.

This is why the “small(er) block” argument was fundamentally wrong and why other blockchains, especially proof-of-stake based ones, have successfully increased block sizes and reduced block intervals. Mining farms typically only purchase new hardware when their current gear is no longer profitable to mine with, a larger block size is not one of those reasons.

Also, it is unclear which developers the authors spoke with but usually most developers that earn a salary or “profit” off of Bitcoin development are those that work at a company that operates mining equipment, such as Blockstream.

On p. 62 they discuss the overhyped lightning network, writing:

The lightning network itself introduces a whole new set of attack vectors for double spends and frauds as outlined in many cybersecurity papers such as the Flood and Loot attack. This attack effectively allows attackers to make specific bulk attacks on state channels to drain users’ funds. The lightning network is an experimental and untested approach to scaling, with progress on this scaling approach having stagnated since 2018. According to self-reported lightning network statistics, less than 0.001% of circulating bitcoin were being managed by the network, and transactions volume has remained relatively flat after 2019. No merchants operate with the lightning network for payments and as of today it is nothing more than a prototype.

I tend to agree with the authors views that lightning is mostly vaporware. Yet there are probably more accurate arguments than theirs. For starters, lightning is not “untested.” It is has been live and in the wild for years.

Second, according to Bitcoin Visuals, both nodes and channels were increasing during the first half of 2022 when this book was published. Specifically it is the network capacity and capacity per channel that have stagnated or declined (something the authors could mention). However, one counter-point that a lightning promoter could rightly make is that a small amount of bitcoin (sats) could in theory be used in a high velocity (high turnover) manner.

For instance, even though the velocity of M2 has declined over the past several decades yet we would not consider the U.S. economy as having declined over the same period of time. However we do not know what the velocity of sats is on lightning at this time. Perhaps it is negligible.

And lastly, I too am tired of the lightning promoters who used to say “it is only 18 month away.” Either way, the authors could use some other data and charts to back-up their thesis.

For example, the line chart (above) is from The Block which shows the capacity of lightning measured in USD and BTC over the past three years. The vertical green line is approximately when the book was published. As we can see, while the amount of BTC has increased about 20% since the book was written, as measured in real money (USD), the value locked-up on lightning has not really changed much in the past couple of years.

For comparison, above is a line chart from DeFi Llama. It shows the total value locked up (TVL) on Ethereum for the past five years measured in USD. The vertical dashed line is the date the book was published.

You can visibly see how the collapse of Terra (LUNA and UST) six weeks prior had immediate knock-on effects, sending the coin world into a bear market (as measured in USD).

On p. 63 they write:

Outside of the bitcoin network, there are similar problems in other cryptocurrencies. The bitcoin meme of technical indirection through Layer 2 solutions have been translated to other systems and their development philosophies. This perspective views the base protocol as being only a settlement layer for larger bulk transfers between parties, and those smaller individual payments should be handled by secondary systems with different transaction throughputs and consistency guarantees. The ethereum network has taken a different set of economic incentives in its initial design. At the time of writing, this network is still only capable of roughly 15 transactions per second. There is a proposed drastic protocol upgrade to this network known as ethereum 2.0 which includes a fundamental shift in the consensus algorithm. This project has been in development for five years and has consistently failed to meet all its launch deadlines, and it remains unclear when or if this new network will launch. Since this new network would alter the economics of mining the protocol, it is unclear if there will be community consensus between miners and developers that the protocol will go live or whether they will see the same economic stalemate and sclerosis that the bitcoin ecosystem observes. The ethereum 2.0 upgrade is unlikely to ever complete because of the broken incentives related to its development and roll-out.

Even in mid-2022 when this book was published, this fortune telling was a big L. Why? Because in December 2020 the proof-of-stake mechanism for Ethereum was successfully launched. It was called the Beacon Chain. Two months after the book was published, “The Merge” successfully occurred in which the proof-of-work function (and mining) were completely shut off.

Now you might be thinking that it is unfair to ding the authors and give them a loss on this prediction. But prior to The Merge, there were already about a half a dozen public Ethereum testnets that successfully transitioned from PoW to PoS. In either case, the authors should at the very least hedged their strong language.

It is worth pointing out that one of the anti-coiners that Stephen Diehl has endorsed (and cited) is Hilary Allen, who used the Financial Times to push a similar set of inaccurate predictions regarding Ethereum around the same time frame. This non-empirical, a priori approach does not help the credibility of their arguments. Reconsider citing them.22

For instance, on p. 63 they write:

The broader cryptocurrency community has seen a zoo of alternative proposed scaling solutions, these proposals going by the technical names such as sidechains, sharding, DAG networks, zero-knowledge rollups and a variety of proprietary solutions which make miraculous transaction throughput claims. However the tested Nakamoto consensus remains the dominant technology. At the time of writing, there is little empirical evidence for the viability of new scaling solutions as evidenced by live deployments with active users. Central to the cryptocurrency ideology is a belief that this technical problem must be tractable, and for many users, it is a matter of faith that a future decentralized network can scale to Visa levels while maintaining censorship resistance and avoiding centralization.

There are a few issues with this including the fact that the authors lump a bunch of technical names together without providing any context. This is a disservice to the reader who should google them to understand the nuances of say, sharding and zero-knowledge rollups.

Secondly, the authors introduce “Nakamoto consensus” for the first time without providing any context or definitions. Recall that pages ago this was noted as term that is conventionally used in long-form writing. It is good that they are aware of the term, but it is unfortunate that it came this far into the book and without any context.

Lastly, not every single cryptocurrency project or even blockchain effort is explicitly targeting “Visa levels.” Some blockchains that can process a few hundred transactions per second (TPS) are not trying to be a universal settlement layer. This is a strawman argument.

In addition, not that it should matter but Visa itself has both invested in blockchain-related companies for at least seven years and has partnered with other blockchain-related projects and even conjured up a way to pay for ETH gas fees with credit cards.23 Blockchains can be used for more than just money and payments, the authors should hedge their a priori mantra in the next edition.

For what it is worth, I am also skeptical that some of the L2s that have been announced for Ethereum will see a large amount of active users anytime soon. But it is disingenuous to throw the baby out with the bath water like the authors routinely do.

For instance, L2Beat is a frequently updated site that illustrates the total value locked (TVL) across more than two dozen L2s. It is worth keeping an eye on because TVL is one piece of evidence to back up a claim.

On p. 64 they write:

However, the inescapable technical reality is that every possible consensus algorithm used to synchronize the public ledger between participants are all deeply flawed on one of several dimensions: they are either centralized and plutocratic, wasteful, or an extraneous complexity added purely for regulatory avoidance.

This false dichotomy could easily be turned on the authors: guess who also operates centralized ledgers? Too big to fail banks. Are the participants also plutocratic and wasteful? This is not really the place to turn the tables on the authors but it is clear, one-third into the book, they have it out for public chains due to an ideology that regularly provides incumbents a free pass.

Why is that? It is possible to be both critical of cryptocurrency zealotry and also systemically important financial institutions (SIFIs). It is not one or the other. Why carry water for High Street banks? Let us not cherry pick favorites.

On p. 64 they write:

A consensus system that maps wasted computation energy to a financial return, both in electronic waste and through carbon emissions from burning fossil fuels to run mining data centers, is Proof of Work. Proof of work coins such as bitcoin is an environment disaster that burns entire states’ worth of energy and is already escalating climate change, vast amounts of e-waste, and disruption to silicon supply chains (see Environmental Problems). The economies of scale of running mining operations also inevitably result in centralized mining pools which results in a contradiction that leads to recentralization.

I agree with the authors, and have written so elsewhere.

However, a nitpick, the centralization of mining pools arose due to variance in mining rewards, and are not related to running mining farms. Pooling hashrate helps smooth out payouts much like pooling lottery tickets does in an office lottery pool.

On p. 64 they write:

The alternate consensus model proof of stake is less energy-intensive; however its staking model is necessarily deflationary; it is not decentralized, and thus results in inevitably plutocratic governance which makes the entire structure have a nearly identical payout structure to that of a pyramid scheme that enriches the already wealthy. This results in a contradiction that again leads to recentralization, which undermines the alleged aim of a decentralized project. The externalities of the proof of stake system at scale would exacerbate inequality and encourage extraction from and defrauding of small shareholders.

What is the source for everyone one of those claims? It is unclear.

The authors do provide a single reference from David Rosenthal attached to the final sentence of the paragraph. Rosenthal’s post primarily focuses on maximal extractable value (MEV) which is not a topic that comes up in this chapter or anywhere in the book.

It is possible that the authors were referring to Ethereum for some of their arguments.

For the sake of brevity, let us assume the authors are 100% correct about Ethereum having all of the failing listed above. But Ethereum was not the only public chain using proof-of-stake in mid-2022. Which of say, the top 20 PoS networks was decentralized? The authors do not even provide a metric for readers to measure or understand what is or is not decentralized.

For instance, the authors could have created a table that provides how many validators and/or validating pools per chain, or the distribution of tokens, of the percentage of token supply that is staked, and so forth.24

How are readers supposed to get on board and agree with the authors when the authors spend every other page ranting rather than providing coherent, evidence-based arguments?

On p. 64 they write:

Any Paxos derivative, PBFT, or proof of authority systems are based on a quorum of pre-chosen validators. In this setup, even if they are permissionless in accepting public transactions, the validation an ordering of these transactions is inherently centralized by a small pool of privileged actors and thus likewise involves recentralization. Any other theoretical proposed system that is not quorum-based and requires no consumption of time/space/hardware/stake resources would be vulnerable to Sybil attacks which would be unsuitable for the security model of a permissionless network.

The only reference the authors provide a single link regarding Sybil attacks to a presentation from David Rosenthal.

What is Paxos? What is PBFT? What is proof of authority? Once again the authors throw these acronyms and terms at the audience without even briefly describing them anywhere. What is proof of time or proof of space? Readers can clearly google after the fact, and find things on Chia or Bram Cohen, but why did the authors not feel compelled to provide any context?

The final sentence itself can be chucked out the window due to Hitchen’s razor: that which can be asserted without evidence, can be dismissed without evidence. This book has not created credibility for the authors, rather, just the opposite.

On p. 64 they conclude:

The fundamental reality is that cryptocurrency currently does not scale and cannot adapt itself to fit the existing realities of how the world transacts. The technology can never scale securely without becoming a centralized system that undermines its very existence.

One of the citations is to an article about how almost no one uses bitcoin for commerce – a comment I tend to agree with. The other reference is to another presentation from David Rosenthal. Even if Rosenthal endorsed their views it is still an a priori claim.

And more importantly: the onus is on the party making the positive claim. Their strident language “never scale securely” leaves no wiggle room and is tantamount to fortune telling.

On p. 66 they have dived into the privacy section, writing about Bitcoin:

This features means that while accounts are anonymous, the global transaction data can be used to infer specific properties about when, with whom, and in what amounts an address is transacting.

This is not quite true for other chains. A user (or organization) can run a node or a bunch of nodes scattered around the global and may be able to infer some information. But once the activity goes off-chain, into a custodian like a centralized exchange, then inferences become guesses without direct access.

On p. 66 they write:

The tracking and tracing of bitcoin involved in criminal activities has emerged as a standard practice in law enforcement and emerging companies such as ChainAnalysis have been able to deduce quite a bit of implied information simply from public information. Unlike with bank accounts, law enforcement does not require a subpoena of public information for an ongoing investigation. Notoriously many users of darknet services such as the Silk Road were caught because of a misunderstanding about the transparency of the bitcoin ledger used by these actors.

Couple of issues:

(1) Spelling: ChainAnalysis should be corrected to read Chainalysis

(2) While the authors are probably correct, the last sentence needs a citation or reference. For instance, a highly cited relevant paper is: A Fistful of Bitcoins: Characterizing Payments Among Men with No Names by Meiklejohn et al.

On p. 67 they discuss traditional banking, writing:

When a wire transfer is issued by a company whose corporate account is at HSBC in London to Morgan Stanley in New York City, the metadata contained within that transaction could contain commercially sensitive information. For example, if a British company is sending large amounts of funds to a newly created American division, it may indicate the intent for the company to expand into the American market. There are cases where the constellation of transactions between known entities could be used to deduce confidential information about the parties. However, this fact poses an existential question about the efficacy of cryptocurrency networks as an international payment system if pseudonymous accounts leak information.

Perhaps Flashboys is a little out-of-date but it could be worth mentioning the role high-frequency trading firms play(ed) in this scenario. This type of scenario exists in the cryptocurrency world too, as analytics firms provide granular on-chain data to trading firms (and sometimes the trading firms themselves build a boutique set of tools).25

On p. 69 they write about security:

In addition, these exchanges are some of the most targeted entities on the planet for hackers. In 2019, twelve major exchanges were hacked and the equivalent of $292 million was stolen in these attacks. Over time and in conjunction with bubble economics, these events have only increased in severity and frequency.

This could be true but where is the citation for the final sentence? Do the authors mean to also include decentralized exchanges (such as automated market makers) as well as bridges?

On p. 69 they write:

While some best practices can mitigate this risk, the fundamental design of bitcoin-style systems is that the end-user is responsible for their own keys and wallets by safeguarding their cryptographic secrets. This can be done through several strategies. So-called cold wallets are wallet key stored in physical objects such as paper and not connected to electronic devices.

Couple of questions:

(1) What is a “bitcoin-style system”? Do the authors mean blockchains in general or forks of Bitcoin or UTXO-based blockchains?

(2) Why do they say “so-called”? Private key management has been an ongoing area of trial-and-error since at least the invention of public key cryptography by Martin Hellman, Ralph Merkle, and Whitfield Diffie.

On p. 70 they write:

There are many news stories of ransom, kidnapping, and murder of crypto asset holders who attempted to safeguard their wallets personally.

Any chance they could refer to or cite one of them in a future edition?

On p. 70 they conclude with:

Of course, the natural solution to this would simply be that most users should not be their own bank; instead, they should use a “cryptobank” which holds their funds and provides them access. However, this is ultimately just recreating the same centralized authority system which cryptocurrency advocates attempted to replace. Providing cryptocurrency security for the masses either introduces more social problems that thee technology has no answer to or results in a recentralization that undermines its own idological goals. After all, we already have centralized banks and existing payment systems that work just fine.

While I agree with the first part of this passage, that a considerable amount of effort and resources has recreated the same sorts of centralized organizations but with less accountability and recourse, there are at least three problems with their patronizing tone:

(1) Typo “thee” should be “the”

(2) What jurisdictions are they writing about?

(3) Most importantly: the authors explicitly defend incumbents and legacy organization. They are defending a financial cartel without presenting any reasons to do so.

For example, because of implicit bail out expectations in the U.S., commercial banks are able to rent-seek off of society, as do private payment systems via usurious fees. While the authors pay some lip service in a section on “Occupy Wall Street” and in the “Conclusion” at the very end, it bears mentioning that executives and board directors at too big to fail (TBTF) institutions were not held directly accountable after massive bailouts in 2008-2009.

In point of fact, systemically important financial institutions (SIFIs) have become more concentrated since Dodd-Frank was passed in 2010. In the U.S., the deregulation of “midcap” regional banks in 2018, partially led to the subsequent collapse of several high profile commercial banks eight months ago, including Silicon Valley bank, Silvergate bank, and Signature bank. All of which required FDIC assistance to wind down.

Clearing houses (CCPs) are larger than ever and their systemic importance creates an implicit government bailout expectation which results in an ongoing moral hazard situation.26

In the U.S., not only are retail users stuck with a duopoly that extract rents but users are expected to regularly provide third parties with personally identifiable information (PII) to improve the user experience of sending funds in real time via fintech apps (like Venmo). This includes, normalizing man-in-the-middle (MITM) attacks through apps like Plaid, which integrate with retail banks.

I personally do not think most cryptocurrency projects or efforts solve any of these issues, but there is no reason to carry water for the status quo like the authors repeatedly do. Again, it is possible to critique both the world of blockchains as well as traditional finance. They are not mutually exclusive.

On p. 70 they start discussing compliance, writing:

The movement, storage, and handling of money are regulated, and most countries have laws on the international movement of funds. Showing up at an airport in Berlin with undeclared cash above €10,000 will and one in quite a bit of trouble.

What kind of trouble? Jailtime? No one knows because the authors drop that warning in the middle of a paragraph and go along.

On p. 72 they discuss cross-border payments and international money transfers, stating:

The inability to move money from a country is ultimately one of domestic internal infrastructure development and external international relations, rather than technical limitations Moreover, the proposed use case for cryptocurrency as a mode of international remittances is fundamentally limited because of a lack of a coherent compliance story. Even if we were to use cryptocurrency as a hypothetical international settlement medium, this system has not removed financial institutions from the equation. The system’s entry and exit points would have to perform the same checks of outgoing and incoming money flow required by many international agreements.

In general this is accurate and I even agree with the thrust of their argument. However it still lacks nuance because they do not specify which cryptocurrencies they are discussing.

For instance, SaveOnSend has chronicled the rise and fall of “rebittance” companies (Bitcoin-focused remittance providers) for years. And the graveyard for such startups is deep and wide.27

But the nuance the authors should make is that there is a clear distinction between Bitcoin (with a fixed supply) and a pegged stablecoin such as Dai or LUSD (from Liquity) which are dynamically minted, there is no fixed supply. Whether Dai or LUSD are used for international payments is something they could discuss, maybe neither are?

The passage also lacks any specifics or citations. A future edition could discuss the costs and frictions associated with correspondent banking and SWIFT’s decision to deploy gpi as a reaction to blockchain euphoria.28

Lastly, and perhaps importantly, it does not include discussions around real world asset-linked peggedcoins such as USDC and USDT.

Without detracting too much from the book itself, it is worth pointing out that the idea of commercial banks directly issuing “stablecoins” has been a topic of discussion since at least 2015.

At R3, some banks that participated in Project Argent later joined IBM’s now defunct endeavor called World Wire which used Stellar. One of the challenges that frequently surfaced during these experiments and deployments involved the legality of granting interest to token holders.

This is still a touch-and-go hot potato as we can see with the roll out of the European Union’s Markets in Crypto-Assets (MiCA).29 A second edition could also discuss this possibility in the CBDC section later on.

And since the authors seem very focused on the U.S., they might want to discuss the recent supervisory actions from the Federal Reserve regarding how domestic banks can transact with pegged stablecoins. But enough of doing their homework for them.

On p. 73 they conclude, stating:

Of course, like all cryptocurrency arguments, the counterargument is ideological: compliance is a non-issue because nation-states should not exist and should not have capital controls. This ideological goal is inexorably embedded in the design of cryptocurrency, making it an unscalable and untenable technology for any real-world application where sanctions, laws, and compliance are an inescapable part of doing business in financial services.

The sole citation is to a decent paper from Brian Hanley, about Bitcoin and just Bitcoin. The authors once again created a strawman and used it to broadly smear all cryptocurrency-related projects, even those unrelated to Bitcoin. This is lazy.

While I agree with some of their conclusions, an empirical-based investigation for arguing their position would be to tediously dissect the issues and challenges of other blockchains too. Look at the facts-and-circumstances for each, just like public prosecutors do.

Chapter 6: Valuation Problems

On p. 76 they discuss asset classification, writing:

Transactions on speculative crypto tokens such as bitcoin and ethereum are considerably more expensive than credit card networks and wire services. More over, as we know they do not scale to national level transactions volumes, and lack the most basic consumer payments protections found in nearly every traditional payment system. No economy trades in crypto, no large-scale commerce is completed in the currency, and no goods or services are denominated in crypto because of its hyper volatility. Crypto payments are uniformly worse than any other payment mechanism except perhaps for illegal purchases. Let us therefore consider these aspect separately through a number of different theories.

There is a bit to digest here:

(1) Typo: “transactions” should be “transaction”

(2) It is a bit odd that for all the water they carry for traditional finance, Diehl et al. do not provide many citations that strengthen their argument.

For instance, in December 2016, the Federal Reserve published its widely cited “DLT” paper. On p. 3 the authors of Fed paper wrote about payment, clearing, and settlement (PCS) systems: “In the aggregate, U.S. PCS systems process approximately 600 million transactions per day, valued at over $12.6 trillion.”

The authors of the Fed paper also included a citation for that figure: Average daily volume and value were calculated using 2014 data on U.S. retail and wholesale PCS systems and were approximated based on the number of business days in the year. See Committee on Payment and Market Infrastructures (2015), Statistics on Payment, Clearing and Settlement Systems in the CPMI Countries.

Yet Diehl et al. do not mention real time gross settlement (RTGS) systems at all in the book. This would help strengthen their arguments and improve their credibility in certain sections.

(3) The authors do not provide specific dollar or euro amounts for how much more expensive it is to use bitcoin or ethereum versus credit card networks and wire services. They could be right but providing specifics would strengthen their argument.

(4) Overall the paragraph comes across as being highly opinionated – especially when using subjective words like “worse,” please provide evidence next time.

On p. 77 they discuss the theory of the greater fool, writing:

Crypto tokens have no such use or organic demand and exist purely to speculate on detached from any pretense of use-value. Cryptoassets are speculative financial assets with neither use-value nor any other fundamental value, while not being monetary; and can therefore not be commodities or currencies. The demand for a crypto asset is not generated by any use-value but rather from a narrative and the the greater fool theory. A financial asset that behaves like a commodity — by virtue of a lack of underlying cashflows – but whose demand is derived purely from its self-referential exchange value or sign value, rather than use-value, is sometimes in academic literature referred to as a pseudo-commodity.

There are at least six problems with this passage:

(1) The first two sentences are fairly repetitive, they could be condensed into one.

(2) The authors use “cryptoassets” but not “crypto assets” — there is no consistency.

(3) The authors could have done a literature review to see if anyone else previously had created an ontological analysis of cryptocurrencies. They would likely find a handy paper titled: “Bitcoin: a Money-like Informational Commodity” by Jan Bergstra and Peter Weijland.

Why? Because this particular book section feels like Diehl et al., are fumbling around in trying to create categories for something like Bitcoin, especially the last sentence regarding a “pseudo-commodity.”30

(4) I do not have any strong views as to what cryptocurrency (or cyptoasset) is or is not a commodity but specific regulators in specific jurisdiction do. Why did the authors fail to include any definitions or views from relevant bodies, like the Commodity Futures Trading Commission (CFTC)?

(5) Next, regarding “pseudo-commodity” the authors do not provide any references to any academic literature. A quick googling found this entry:

Were Diehl et al. referring to Karl Marx’s definition of “pseudo-commodities”?

(6) Lastly, later in the book they swap “greater fool theory” with Keynesian Beauty Contest. It is unclear why they use one versus the other. Either way, the authors claims still lack nuance due to the actual usage of real world assets (RWA) such as pegged stablecoins.

While I have been critical of some of these parasitic tokens, a few do in fact exist and do in fact represent legal claims to actual (off-chain) value. This is important because by failing to recognize the existence of RWA, the authors do a disservice to their stronger argument (self-referential value). A future edition should include a discussion on different types of RWAs separate from cryptoassets such as bitcoin.

On p. 80 they conclude, writing:

Crypto assets are quantitatively a completely irrational investment, and theoretically treating them as a sensible asset class necessitates irrational assupmtions of infinities or introductions of absurdities that contradict all of established economic thought. We are thus left with the most obvious conclusion: crypto is a bubble much like tulips, Beanie Babies, and other non-productive curio that humans have manically speculated on in the past. It is a financial product whose only defining property is random price oscillations along a path that inevitably leads to its ruin.

There are three issues with this:

(1) Once again the authors flip back to “crypto assets” instead of “cryptoasset.”

(2) In the second sentence they insert a word “curio” that doe not make sense. What is a curio?

(3) Lastly, they predict a future “ruin,” they are fortune tellers. That which is presented without evidence can be dismissed without evidence.

Chapter 7: Environmental Problems

For long-time readers of this website it is probably easy to guess that I am sympathetic towards arguments surrounding the negative environmental externalities created by proof-of-work cryptocurrencies. So I should be a fan of this chapter. And I mostly am.

But one of the quibbles upfront is that as this book progresses, the chapter lengths get shorter and shorter. For instance, this chapter is less than six pages long. An editor would likely have recommended combining similar themes together, and/or truncating longer chapters. The next edition could probably combine this with Ethical Problems since there is some overlap.

With that said, there are a few issues in this chapter. On p. 81 they write:

The technical inefficiencies of cryptocurrencies are the mark of a technology that is over-extended and not fit for purpose. However, what is even more concerning is the environmental footprint these technologies introduce into the world. Bitcoin and currencies that use proof of work consensus scheme require massive energy consumption to maintain their networks. This feature is central to their operation and is the mechanism that allegedly “builds trust” in the network. No network participant has any privileged status except in the amount of energy they expend to maintain the consistency of the network itself. The amount of energy spent in this global block lottery results in an expected direct return per watt, which is statistically predictable. In a nutshell, the premise of mining is to prove how much power one can waste, and the more power one can waste, the more resources one receives in return. The system is fundamentally inefficient in its design.

While I agree with the thrust of this paragraph, it still needs some nuance. In addition, an “s” should probably be added to the word “scheme.”

What nuance is needed?

For starters, a new and even old PoW network does not automatically require massive energy consumption. Rather, what happens in practice is that miners will deploy capital (hardware) up to the point where marginal costs equals the marginal value (MC=MV) of the block reward.

That is to say, when bitcoin was trading for $10 per coin, rational miners were spending no more than $10 to mine a coin.31 If bitcoin’s value measured in USD dipped below the marginal cost of mining, it would be more rational to turn off the machines and purchase the coins themselves. Were all miners rational during the time period of say, 2011 when the prices fluctuated around that level? This dovetails into conversations around edge cases for why a miner would unprofitably farm a PoW coin (such as for virgin coins).

At any rate, in 2011 when the price of bitcoin was around $10, a block reward (of 50 bitcoins) would be worth $500 (sans transaction fees). On average roughly 144 blocks are mined per day. Thus rational miners in aggregate would spend at most $72,000 per day, this includes both hardware and operational costs.

Annualized this would amount to roughly $26.2 million in capital. That is still a lot of money, but is significantly less than the costs to maintain and operate the Bitcoin network when the value of each bitcoin is $30,000 like today.

In other words, “massive energy consumption” is not an iron clad rule. It just happens that we know the resources deployed (consumed) to maintain a PoW network grow (or fall) in direct proportion to the coin value. This same phenomenon occurs in other industries, such as mining for physical commodities including petroleum or gold.

A quick googling shows there are a couple of papers on this topic of “siegniorage” that the book could possibly cite.

Lastly, while Bitcoin’s money supply schedule is fixed, there are two reasons why returns are not statistically predictable:

(1) According to Bowden et al., actual block propagation (arrivals) do not follow the (theoretical) homogenous Poisson process that was expected upon its release in 2009. This is one of the reasons that halvenings do not fall precisely every four years but have instead been “compressed” and are slightly accelerated.32 In theory the halvings should occur on odd years during January, but the next halving will actually occur about eight months ahead of schedule.

(2) No one can accurately predict or know the future price of bitcoin. And it is the future price that determines how much additional capital miners will deploy (in aggregate) which then shapes the difficulty level. This is one of the reasons why executives at Bitcoin mining companies have to publicly put on a “bullish” persona: future price is existential to their hashing operations.

One other paragraph that should be refined is on p. 85, where they discuss environmental horrors:

Whether bitcoin has a legitimate claim on any of society’s resources is a question that does not have a scientific answer, it is fundamentally an ethical question. There are many activities where humans burn massive amounts of fossil fuels for entertainment activities or activities that do not serve any productive purpose. For example, Americans burn 6.6 TWh annually for holiday lightning. The software industry must ask whether we should sustain a perpetually wasteful activity in perpetuity.

Starting in reverse, the authors actually did a self-whataboutism. Pretty rare. Recall that a whataboutism is a technique to deflect blame or responsibility by pointing out something unrelated that is also bad.

The authors do not need to compare Bitcoin’s resource usage with anything besides other public chains attempting to provide disintermediated payments (like a proof-of-stake chain). There are a lot of activities that humanity (purposefully) wastes resources on, such as nuclear weapons research and development. But nuclear weapons R&D has nothing to do with running a pseudonymous peer-to-peer payment network. That is an apples-to-oranges comparison.

Similarly, holiday lighting, like leaf blowing, wastes resources. But holiday lighting is not an apples-to-apples comparison with running a payments network. The authors have the upperhand in this chapter but sabotage themselves midway by incorporating the logic of Bitcoin maximalists like Nic Carter.33

The bulk of the chapter does cite and use references to peer-reviewed research, which is something that should be replicated across the whole book in a future edition.

Chapter 8: Cryptocurrency Culture

This chapter could have been a lot stronger than it was. It was an okay chapter but it missed the opportunity to really dive into the crazy cult of Bitcoin maximalism. At fifteen pages it felt short but still makes some decent observations, primarily with the history and background of cypherpunks.

With that said, there are still some issues that could be ironed out. For instance, on p. 87 they write:

The intellectual center of cryptocurrency culture is the premise to reinvent money from first principles independent of existing power structures. The cryptocurrency phenomenon can therefore be viewed as a political struggle over the fundamental question of “who should exercise power over money” in a world idealized by its acolytes. There is a great insight to learn about the movement from their manifestos: How a group describes their path to utopia gives a great deal of insight into their mind and values.

They then refer to a paper from Sandra Faustino. So what is the issue with this introductory paragraph?

They unintentionally use the revisionist history and language of Bitcoin maximalists.

Not every cryptocurrency project is attempting to reinvent money. Furthermore, with Bitcoin itself, the word payment (not money) is mentioned 15 times in the original whitepaper.

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

This distinction is important because it actually hurts Diehl et al. argument, that “cryptocurrency culture is the premise to reinvent money” because that empirically is not the case as we can see with many tokens unrelated to money.

On p. 93 they write about technoliberarianism, stating:

At the same time, questions concerning digital assets and what ownership meant in a world of bytes instead of atoms were being explored. The technology to copy and disseminate files freely became available was effectively a solved problem by 2010. These technologies marked the move toward censorship-resistant platforms, where information could be shared resiliently against removal by external actors.

The paragraph continues on but readers are never provided with a citation or reference for the year 2010. What exactly happened by that year?

Are the authors referring to streaming services? Perhaps they are thinking about digital rights management (DRM)? Or oppositely, are they casually suggesting anyone can share files via a protocol like BitTorrent? Who knows.

On p. 95 they write:

A malaise has descended over Silicon Valley as an unexpected dystopia has unfolded in the wake of the hopeful disruption. In the absence of advancement in the field, many developers have retreated into technolibertarin fantasies that center around pipe-dream decentralized technologies as a panacea to the world’s problems.

On the one hand I agree with the authors observation. I worked and lived in the Bay Area for five years, my wife even worked in the semiconductor industry in Santa Clara, right at the center of it. But for all of the talk about “Silicon Valley” being head over heals for cryptocurrencies, the reality was very different in 2014-2015.

For instance, during this time frame representatives from Pantera Capital, such as Johnny Dilley, were openly antagonistic towards anything that was not Bitcoin.34

In a now-deleted tweet, Brian Armstrong (co-founder and CEO of Coinbase) exuded what was the feeling du jour in the Bay Area.35

On p. 95 they ironically dive into Austrian Economics, stating:

Austrian economics had already gained some prominence in the late-19th and early-20th century from the studies of philosophers and economists Ludwig von Mises, Friederich von Hayek, and Murray Rothbard.

The authors should tweak the chronology here because two-out-of-three did not rise to any prominence in the English-speaking world until after World War II. Rothbard was not even born until 1926.

More to the point: why is it that these authors ironically dove into Austrian economics? Because some anti-coiners, such as the book authors, often use non-empirical means to arrive at a conclusion: a priorism is their cudgel.

For instance, they write on p. 96:

The school of Austrian economics differs from orthodox economics in its methodology. Instead of proceeding from an empirical framework of observations and measurements, Austrian economics is a presuppositional framework that attempts to create a model to describe all human economic activity by purely deductive reasoning.

This is a little too bit on the nose because that is precisely what the authors do in chapter after chapter, eschewing empiricism for a priorism.

As I have pointed out on this website and on social media: the Horseshoe Theory of non-empiricism between Bitcoin maximalism and anti-coiners, both regularly use a priori arguments rather than provide empirical evidence.

Diehl et al., like Michael Goldstein and Elaine Ou before them, cannot claim to be evidence-driven while simultaneously using deduction to arrive that “all cryptocurrencies are useless.”36

On p. 96 the authors twice mention this modus operandi:

The Austrians call this line of reasoning praxeology, a pure axiomatic-deductive system that its founder Mises claims can be knowable and derived independent of experience, in the same way that mathematics can be known.

And:

Mainstream economics arises out of the empiricism philosophy in which all knowledge is derived from experience, where true beliefs derive their justification from measurements, observations, and coherence to scientific models which make falsifiable claims.

This last quote is a doozy because Diehl et al., regularly make falsifiable claims because we know empirically there are non-self-referential blockchain projects and smart contracts that actually work.

It is incredulous to trot out a strawman and deductively claim that every cryptocurrency on the planet, even future iterations, cannot work. Lord give us the confidence of strident a priorism.

On p. 99 they write about fiat money, stating:

Just as the gold supply on Earth is limited, the number of bitcoins is similarly constrained by a fixed supply.

While a lot of Bitcoiners like to make this analogy, it is untrue. The supply of gold is somewhat elastic, limited by the cost of recovery (and mining). Whereas the supply of bitcoin is perfectly inelastic.

On p. 101 they mention in passing that:

Nevertheless, cryptocurrency advocates have repackaged the Austrian arguments and rebased them with bitcoin or other cryptocurrencies as their center. Trade books central to the bitcoin movement (such as The Bitcoin Standard) proceed from an exclusively Austrian perspective to posit the notion of bitcoin as a basis for a new global reserve currency to displace the US dollar and an alleged improvement on gold.

This would have been the perfect time to discuss the antics of specific Bitcoin maximalists, such as Saifedean Ammous.

Speaking of which, earlier in the book (p. 79) the authors mentioned a paper by Nassim Taleb. Yet what went unmentioned was that in 2018 Taleb wrote the foreword to Ammou’s book, The Bitcoin Standard. Two years ago Taleb would have a public change of heart.

To tie this back to the beginning of this book review, when did Diehl et al., have a change of heart following the launch of Uplink? Was there any “last straw” moment?

On p. 101 the authors discuss Financial Nihilism, writing:

While the ideologies and ideas around crypto vary, the most common worldview held by most crypto investors is simply a complete lack of any worldview. In normal philosophy, this perspective is called nihilism: the belief that all values are baseless and that nothing can be known or communicated.

Citation needed. How do the authors know what “the most common worldview held by most crypto investors”?

Did they conduct a survey at a conference? What can be asserted without evidence can be dismissed without evidence.

Chapter 9: Ethical Problems

This chapter could have been one of the stronger ones – after all, not a month goes by without some crazy high profile hack – but instead it felt a bit like a worn shoe due to repetitive polemics.

For example, on p. 103 they write:

Slot machines are a technology, yet it is a technology that is purpose-built for financial exploitation. In many ways, cryptocurrency carries the same moral character as slot machines. Cryptocurrencies are purpose-built for avoiding regulation and facilitating illicit financing, effectively enabling a dark network for payments in which illegal transactions external to the technology can be achieved within the system. There are several major categories into which the inescapable harm of cryptocurrencies falls.

Contra Diehl et al., not every cryptocurrency, or blockchain project is the same, nor are all purpose-built for avoiding regulation and facilitating illicit financing.

The clearest examples – although boring as they may be – are the permissioned blockchains used by enterprises. 37 A non-exhaustive list includes Project Ion from the DTCC, Onyx from JP Morgan, and BSTX (powered by tZERO).38 Maybe none of these projects grow beyond a small niche market, but they each serve as an empirical counter-example to the a priori argument made directly above. Readers are encouraged to follow Ledger Insights for more in this arena.

On p. 104 and again on p. 133 the authors mention a “FATF blocklist” but that does not exist. What they are probably referring to is the FATF “black list.”

On p. 105 they discuss selling snake oil, writing:

Day-trading cryptocurrencies can negatively affect the mental health of individuals involved in this activity. The stress and anxiety associated with attaching one’s life savings and well-being to an unnaturally volatile market can be both exhilarating and exhausting. The mental energy required to maintain a portfolio exposed to this level of risk requires a great deal of time, focus, and discipline that many retail investors lack and that in the long term may have a deleterious effect on mental well-being.

The authors provide a reference to a good article from Vice that interviews specific participants. A reader might ask, how is day-trading cryptocurrencies different than day-trading other assets? This is not answered because the authors immediately move on to the next topic, illicit activity.

On p. 107 they discuss illicit activity, stating:

Even more sophisticated launders use a technique known as chain hopping in which value in one cryptocurrency is swapped in a trade with the equivalent value in another cryptocurrency and then swapped back. This technique further obscures the origin of funds commonly using privacy coins such as Monero and ZCash.

A few issues with this statement:

(1) Misspelling, it should be “launderers” not “launders”

(2) The first sentence should state that the user switches value from one cryptocurrency to a different liquid cryptocurrency. It is unclear how often this type of swap happens and the authors do not provide any stats (likely because the precise figure is based on data from centralized exchanges). 39

(3) How “common” is the swap to Monero and ZCash? They reference a paper from 2018 and on p. 40 the author, Anton Moiseienko, describes the mechanics of “chain-hopping” but no stats are provided as to how frequently it occurs. So can it really be said this commonly occurs or not?

On p. 107 they write:

In addition, self-service laundromats such as tornado.cash provide automated money laundering services on the ethereum blockchain and require no technical expertise. These services are used to launder funds stolen from ransomware attacks using chain hopping techniques.

There are a couple of inaccuracies in this paragraph:

(1) For users of Ethereum, there is no native on-chain privacy or confidentially function, everything is public by default. It is not clear how many users used Tornado Cash to launder funds but anecdotally there appears to be many people who tested out the dapp without attempting to do anything nefarious.

How do we know? Because roughly two months after the book was published, OFAC, (a unit of the U.S. Treasury department) sanctioned Tornado and there were knock-on effects that impacted bystanders who received small amounts of ether (ETH) that had originated from Tornado. OFAC later revised the sanctions guidance to make a carve-out for the bystanders who received this ‘dust.’

(2) Tornado Cash did not have the ability to do anything with chain hopping, this is factually incorrect. Users of Tornado may have moved ETH to an exchange or a bridge and then swapped the ETH for a different asset, but Tornado did not have “chain hopping” capability. Note: over the years other developers deployed clones of Tornado on other chains, these were not linked or bridged to one another.

(3) It is worth skipping to p. 245 wherein the authors make some unfounded claims about privacy. Someone needs to ask the authors: are developers allowed to create confidentiality or privacy-enhancing tech on public chains? If not, why not?

On p. 107 the authors also write about Crypto Capital, regarding Bitfinex, and Yakuza crime syndicates in Japan. Both paragraphs are good concise explanations of what occurred but neither one included any citations or sources. A second edition should provide at least one.

On p. 108 they misspell “Stellar” as “Steller.”

On p. 109 they wrote:

In 2019 an early developer on the ethereum project was arrested by the FBI for allegedly providing technical instructions to the North Korean on the technical mechanisms to launder money through the ethereum network between North and South Korea.

There are a couple of issues with this:

(1) Grammar: rewrite “to the North Korean” instead it should probably read: “to the North Korean government”

(2) This is not a fair description of what Virgil Griffith was accused of doing. The transaction between North Korea and South Korea was intended to be a symbolic peace gesture and my understanding was that Griffith’s intent was for the South Korean government to approve it. This is a poor example by the authors because North Korea was going to violate sanctions in significantly worse ways. For instance, according to Chainalysis, North Korean hackers stole around $2.2 billion in cryptocurrency during 2022. Griffith’s demonstration did not bolster the hackers capabilities.

On pgs. 109-111 they discuss the unbanked, overall this was a decent section. However there are not many citations or references. Highly recommend citing a new paper from Olivier Jutel, “Blockchain financialization, neo-colonialism, and Binance.”

On pgs. 111-113 the authors discuss the MMM Ponzi, it was well-written. However, the second to last paragraph states:

Cryptocurrency is not standing on some moral pillar, nor is it acting as some technological Robin Hood. Instead it is simply removing all the processes protecting both sides of transactions and distributing those trust mechanisms to those parties. Bitcoin ATM operators are now forced to step in to prevent the vulnerable from scams where banks would have generally served as the safeguard. Instead of protecting the vulnerable against fraud, cryptocurrency now pushes this obligation on individuals themselves.

I tend to agree with most – if not all – of this passage. But it should be written to include a couple of nuances:

(1) Not all cryptocurrencies are the same and the authors should give specific examples. After all, there are at least 10,000 coins and tokens floating around, do the know for certain each is marketed or advertised as “some technological Robin Hood”? No, this is hyperbolic.

(2) Banks are probably not the best example to use here.

Why not? Because in the U.S., commercial banks are frequently fined and penalized over abusive conduct they have towards their customers. For instance, last month Bank of America agreed to pay $250 million in fines and compensation to cover “junk fees” it had levied on customers. Last December, the Consumer Financial Protection Bureau (CFPB) fined WellsFargo $3.7 billion for rampant mismanagement and abuse of customer accounts.

A future edition should just scrub reference of banks in this paragraph because it does not help their argument.

Chapter 10: The Cult of Crypto

This chapter is one I was looking forward to. I had hoped they would dive into the seedy world of coin lobbyists and maximalists. Instead readers are given a pretty vanilla description across six pages. A second edition should build on this foundations. For instance, they mention just one of Michael Saylor’s crazy quotes when we could probably fill an entire book with his loony toons.

For instance, on p. 115 they introduce the section thusly:

Cryptoassets are inherently negative-sum and, as such, consistently hemorrhage money.

This is factually untrue. Perhaps proof-of-work coins are negative sum (for reasons discussed a few times already) but real world assets (RWA), tokens representing off-chain claims on tangible goods, are not necessarily hemorrhaging money. Their histrionics are all so tiresome.

On p. 116 they discuss the golden calf, writing:

They cryptocurrency movement shares many aspects of economically-based new religious movements such as Scientology. Crypto is fundamentally a belief system built around apocalypticism, the promise of utopia for the faithful, and a process for discrediting external critics and banishing heretical insiders.

The authors provide two citations. A paper about Bitcoin from Vidan and Lehdonvirta and then a very strange article from the Financial Times.

Why is the FT article strange? Because it frames Chris DeRose as a victim when in reality he is often the predator. For example, DeRose, and his podcasting co-host Joshua Unseth, are very public about their misogyny, they denigrate women and have attacked them online.

For instance:

DeRose and Unseth have subsequently deleted their twitter accounts and started new ones.

Prior to his outspoken mysoginy, DeRose – who just happens to be a vocal Bitcoin maximalist – frequently attacked me.

For example:

Eight years ago, Chris DeRose (aka brighton36) attempted to smear me on reddit (see above). He purposefully used a screenshot of a presentation, without linking to the presentation. Fortunately sanity prevailed and the world eventually learned what the maximalists (and anti-coiners) both seem to try and coverup: there are other blockchains beyond Bitcoin.

But back to the specific paragraph on p. 116: parts of it are accurate. There are purity police that purge heathens who recommend larger block sizes and propagandists who fund bot armies to dog pile perceived adversaries. But it is not fair to say that “crypto is fundamentally a belief system built around apocalypiticsim.” There certainly does appear to be a great deal of overlap between some Bitcoiners and perma-doomer communities like Zero Hedge.

But anecdotally, looking through the various projects appearing on DeFi Llama, many do not appear to use “apocalyptical” oriented language on their landing pages. Again, the onus is on those making the positive claim: the authors need to backup this view in a future edition.

On p. 117 they write:

A key differentiating factor of the crypto ideology is that it lacks a central doctrine issued by a single charismatic leader; it is a self-organizing high control group built from individuals on the internet who feed a shared collective together. An organic movement it has arisen, evolved, and adapted to be a more viral doctrine of maintaining faith in a perceived future financial revolution in which the faithful view themselves as central. The inevitability of cryptocurrency’s future is dogma that is sacred and cannot be questioned.

This is a pretty good passage and anecdotally seems to jive with my own experiences. Worth pointing out that the authors crib a bit of that content from an article written by Joe Weisenthal.

Ironically the same toxic behavior occurs within the anti-coiner community too. Several of the prominent figureheads regularly block any criticism or feedback, this includes Diehl himself.40

From pgs. 117-121 they discuss trust believers. It is a pretty good section. They also note an interesting etymology. Writing on p. 118:

The communities and ideologies for the cryptocurrency subculture are fostered through mediums such as Twitter, Telegram groups, 4chan messages boards, Reddit, and Facebook groups. In cryptocurrency culture, promoting a specific investment is shilling for the coin. The term shilling comes from casino gambling, where shills are casino employees who play with house money to create the illusion of gambling activity in the casino and encourage other suckers to start or continue gambling with their own money.

The passage continues but it was very helpful context considering how frequently people are accused of shilling for this or that coin or token. They also reference an interesting article from Vice detailing how much coin shills are paid to shill.

Near the end of the chapter they write on p. 120:

The cryptocurrency ideology provides a psychological, philosophical, and mythmaking framework that, for many believers, provides sense-making in a world that seems hostile, rigged against them, and out of their control. They crypto movement fits all the textbook criteria of a high control group: it provides a mechanism for determining an in-crowd and an out-crowd (nocoiners vs. coiners).

The passage but this part is ironic for a couple of reasons. First there is some truth to it: in 2014 there were entire threads on reddit and Twitter discussing a “bear whale” that must be slain. Someone even drew a painting of it. Cultish behavior. The authors provided two citations, one to William Bernstein’s The Delusions of Crowds and the other a relevant paper from Faustino et al.

Yet something big and important is missing: the authors use the term “nocoiner” for the first and only time. They do so without providing any explanation or definition for what it is. And this is where their credibility suffers.

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

If there is one take away from this book: do not willingly use the term “nocoiner” to describe yourself.

Overall this chapter was so-so but it also has the most future potential since the antics and drama-per-second are non-stop in the coin world.

Chapter 11: Casino Capitalism

This was another short chapter (just six pages) and the tone came across as if it was written by just one of the trio. It is dry and pretty straightforward. If we were to guess, it probably was not written by whomever uses “greater fool” like it is going out of fashion.

For example, on p. 125 there is a perfect time to use it:

However, many self-described “investors” are indistinguishable from gamblers. They may be driven by the same thrill-seeking and irrational behavior in picking stocks, just like they would pick numbers on a roulette wheel. One type of this investing is known as speculation which is investing in an asset for the sole reason that one believes that someone else will buy it for a higher price, regardless of the fundamentals.

The rest of the chapter is fairly vanilla. They introduce the term LIBOR but do not mention the infamous LIBOR scandal or how LIBOR was phased out in 2021-2022.

There are still a couple areas for improvement. For instance, on p. 128 they write:

Despite pathological examples of casino capitalism in the world, these types of behavior and products are overwhelming the exception and not the rule. When companies have positive quarterly earning statements, their stock prices rises, and in contrast their stock price falls when they have negative earning statements.

This is not a natural law or something universal. In fact, forward guidance can often impact share prices too. As can euphoria that the authors described in Chapter 3.

A future edition should employ an editor to cut down on the repetition. This statement has already been made several time prior with the highlighted or italicized word being “greater fool.” Pages later, they will inexplicably use the term “Keynesian Beauty Contest.”

Chapter 12: Crypto Exchanges

Because of how many successful hacks and scams have occurred this chapter should have been a slam dunk. Instead this six page chapter was once again miserly on citations leaving the readers with little to trust besides the words of the authors.

On the first paragraph of p.131 they write:

The vast majority of investors in the crypto market go through a centralized business known as a cryptocurrency exchange.

How much is “vast majority”? We are not informed. In addition, the authors do not explain the difference between a banked exchange and a bankless exchange. Probably a more accurate intro sentence would be: Apart from miners and merchants, virtually all retail users on-board through a few dozen banked exchanges.

At the bottom of p. 131 they write:

Customers deposit funds with the exchange either through credit card payments, ACH, or international wire transfers to the exchange’s correspondent banking partners. Ostensibly crypto exchanges make money by charging transaction fees, offering margin trading accounts, and taking a percentage of withdrawals from their accounts. However, in practice, these exchanges engage in all manner of predatory behavior and market manipulation activities – a far more lucrative business.

How lucrative is market manipulation? They do not provide that answer.

And the one reference they provide is to a story by Matt Ranger that seem to use a number of spurious correlations. Putting that aside, the authors attempt to describe a banked centralized exchange (CEX). In perusing the current list of spot exchanges on CoinGecko, several dozen CEXs appear to be unbanked or bankless.

That is to say, users can move “crypto-in-and-out” but there is no way to convert or withdraw the asset balances into real money via a bank. It would be interesting to know what percentages of spot volume take place on banked versus bankless exchanges.

On p. 132 they write:

Cryptocurrency exchanges are extraordinarily profitable, as they serve as the primary gateway for most retail users to interact with the market.

Exactly how profitable they are? Who knows, we are not provided that detail.

For instance, what about the dozens of now defunct exchanges listed at Cryptowiser? Were they not profitable?

Continuing on p. 132:

The largest exchanges by volume have set up outside of jurisdictions where the bulk of their customers’ cash flow originates. There are a small number of regulated exchanges. Still, the major exchanges as a percentage of self-reported volume are unregulated and located in the Caribbean Islands and Southeast Asia.

How do they know where the bulk of an exchange cash flow originates? They do not provide a citation for that claim.

Perhaps it is true but what can be asserted without evidence can also be dismissed without evidence.

Also the authors provide a list of 9 specific jurisdictions: but only one is in Southeast Asia, four are in and around Europe, three are in the Caribbean, and one is in the Indian Ocean. So they should probably revise how state where the “major exchanges as percentage of self-reported volume” are located.

On p. 133 they write:

Many of the CEOs and founders of these exchanges are regularly seen in jurisdictions on the Financial Action Task Force (FATF) blocklist, interacting with sanctioned persons. Most personally avoid traveling to both the European Union and the United States for fear of prosecution.

How many is most? How many altogether? Any specific example of who that might be? Changpeng Zhao (CZ), founder of Binance? Kyle Davies, co-founder of Three Arrows Capital? Who knows.

As mentioned previously, they mistakenly state “FATF blocklist” when the actual term is “FATF black list.”

On p. 134, they write:

There is no regulation preventing any exchange employees from trading on non-public information or prioritizing their personal trades, manipulating the construction of the exchanges’ order book, or interfering with clients’ orders. Indeed, the ability to insider trade is seen by employees as one of the perks of working for a crypto exchange.

This chapter could have been a lot stronger if the authors simply provided specific names. It is pretty easy to do.

For instance, just before its direct listing in 2021, Coinbase paid $6.5 million to settle a suit with the CFTC over a Coinbase employee – Charlie Lee – who used his key position to wash trade. Two weeks before the book was published, the Department of Justice charged Nathaniel Chastain for insider trading while employed at OpenSea.

Enforcement may be uneven and perhaps lax, but it can and does occur depending on jurisdiction.

Also, how do the authors know that “the ability to insider trade is seen by employees as one of the perks of working for a crypto exchange”? Perhaps that is true, but where is the source?

On p. 135 they write:

However, many crypto exchanges over margin accounts allow up to 100 or 125 times, figures that are deeply predatory, and unseen in traditional markets.

There are at least two issues with this:

(1) Typo: “over” should be “offer”

(2) Perhaps in the equities market 100x or 125x leverage is uncommon but foreign exchange (FX) market trading venues frequently offer even higher rates. According to Benzinga, at least three FX platforms allow higher than 125x leverage. Is this good or bad? I do not have a strong view, and am using this as an counterexample that high leverage is unseen in traditional markets.

On p. 135 they write:

Many exchanges profit from liquidating some accounts as well as taking transaction fees on top of these insanely risky positions. Several class-action lawsuits filed in the United States allege exchange involvement. In a class-action lawsuit brought against several exchanges in the US, the plaintiffs allege:

[The defendant] acts like a casino with loaded dice, manipulating both its systems and the market its customers use for its own substantial financial gain.

Which lawsuits were these? What were the outcomes? Did the defendants (exchanges) lose and/or settle?

A quick googling discovers that the quote above came from a lawsuit naming BitMEX as the defendant. It is unclear what the status of that lawsuit but it was filed over three years ago.

Even though it is repetitive, I do agree with part of their concluding paragraph:

Crypto exchanges, just like casinos, entice customers with false promises of financial windfalls and get-rich-quick schemes. And they often omit the unspoken truth that the intermediary company sitting between investors and sellers is often a dodgy network of shell entities with predatory intentions and which could disappear with a moment’s notice – leaving customers with no legal recourse.

It is not accurate to say all crypto exchanges entice customers in that manner but putting that aside, it is unfortunate the authors previously used this same sort of verbiage many times before it finally lands.

In fact, eight years ago I gave a speech at a BNY Mellon event that highlighted some of the same issues mentioned in the chapter. Hopefully the authors publish a second edition because this chapter could be the bedrock of a good set of arguments.

Chapter 13: Digital Gold

Another short chapter (seven pages) that unfortunately only superficially looks at some important narratives.

Writing on p. 139 they state:

In the absence of cryptocurrency’s efficacy as a peer-to-peer electronic payment system, the narrative around the technology has shifted away from he use case outlined in the original paper and onto a new proposition: cryptocurrency is “digital gold” or a “store of value.”

This is revisionist history from a Bitcoin maximalist. As mentioned above, Samuel Patterson went through everything Satoshi ever wrote.

But this is besides the point: not every cryptocurrency or cryptoasset is attempting to be a new form of money or payment. CoinGecko tracks more than five dozen unique categories besides “money” or “payments.” Maybe all of the projects fail. Maybe none of them are interesting to the authors.

But the existence of these categories (and projects) serve as an empirical counterexample that nullifies the authors sweeping claims.

On p. 139 they write about fools gold:

The argument of crypto promoters is that cryptocurrency can be a store of value suitable for the world at large and form an economic basis for global economies on a long time scale.

Which promoters? Name names. Dan Held, Peter McCormack, and a slew of other maximalists might make that claim. Are their views representative of all “crypto promoters”? The second edition should be nuanced because this is tiring.

On p. 140 they write a very long paragraph, midway they state:

Cryptocurrencies are the purest exemplar of speculative investment and are one of the most volatile assets ever conceived. Cryptocurrencies have seen ludicrous price movements in response to global events such as the 2019 coronavirus outbreak, regulatory clampdowns, and exchange hacks. Drawdowns of 40-50% of value regularly occur with seemingly no underlying reason for the movements.

Is there a way to measure volatility? How about compared with say FX or a specific equity index? The authors could be right (and probably are here) but by not providing any reference or citation, readers are left in a lurch.

On p. 141 they write:

To all but the most faithful, the question “Do you see your grandchildren storing their savings in bitcoin?” is difficult to answer. A sensible answer would be probably not. To those who believe in the continuation of rapid technical progress, it is difficult to predict technology trends two to three years in advance, much less decades. As a thought experiment, if we believe in the bitcoin-maximalist (or any maximalist vision) rhetoric that “there can be only one global token,” that first-mover advantage dominates all other factors, this precludes any competitors from ever existing. In this model, the bitcoin ledger is the final authoritative store of value whose continuity is eternal.

This is the first and only time the authors mention “bitcoin maximalism.” Yet even here they do not succinctly define what it is.

Furthermore, the authors state that it is “difficult to predict technology trends two to three years in advance” yet they repeatedly not only make bold predictions in each chapter but they a priori claim that all cryptocurrencies inherently fail, are scams, cannot work, ad nauseam. This is a contradiction.

If the authors who wrote the paragraph above agree with their inability to predict the future then the next edition needs edits that reconcile with the multitude of contradictory claims.

On p. 141 they write:

Thus all subsequent technologies will either build on top of bitcoin sidechains or are fundamentally heretical in their vision.

What are sidechains? Who knows, the authors just lob it in there. For what it is worth, it is actually a topic we have discussed for nearly 9 years on this blog. Here is a slightly dated comparison.

On p. 141 they write:

The non-maximalist view argues against any single cryptocurrency universality. If we play devil’s advocate and assume cryptocurrency technology is not a technical dead end, then cryptocurrency markets can be seen as an economy of ideas in which the best and most technically efficient solutions attract the most investment. Rational investors will choose to store the most value in proportion to their merits. However, in this model, anyone’s current token can and will be replaced by a better one at some point, and this must repeat ad infinitum. Unless there is a continuity of account states between evolutions of the technologies, then the value held in deprecated chains will eventually be subject to flight to safer and more advanced chains. Under this set of assumptions, we again conclude that any one cryptocurrency cannot be a store of value. Their structure is identical to stock in companies that rise and fall tethered to humans activity and is inconsistent with the store of value model.

Working backwards, what is “the store of value model”? The authors do not say.

Furthermore, if we take a “screenshot” of any technology vertical decades apart there are shifts of who the industry leader is. From PCs, to printers, to scanners, to spreadsheet vendors. An entire category – smartphones – did not exist twenty years ago.41

Why is it so hard to fathom that there can be more than one blockchain in existence at one time? There are dozens of RTGSs deployed around the world, despite the existence of Visa and Mastercard… because they do different things.

The problem with this hypothetical illustrates how the Horseshoe Theory of non-empiricism that ties Bitcoin maximalism together with nascent anti-coin ideology. If you are a priori anti-cryptocurrency in any form, then by definition it does not matter what empirical evidence someone provides as a counterexample.

Thus the existence of more than one operational blockchain in the same time and space is futile to reconcile by definition.

On p. 142 they discuss bugs:

An advance in the mathematics of elliptic curves could theoretically yield a more efficient factoring technique that would render the specific choice of primitive used in historical wallets vulnerable to attack. While there is currently no known attack on the particular curved used in bitcoin, but however alternative technologies like IOTA have chosen combinations of specific, unverified primitives that have been proven unsound.

What unverified primitive were these? Who knows, the author does not provide a reference. A quick googling revealed that it may be a vulnerability with a hash function, Curl, that the IOTA developers created.

Speaking of bugs, if they write a second edition the authors could zero in on CVE-2018-17144, a bug that was first discovered by Bitcoin Cash developers in the summer of 2018. Bitcoin Core developers (who act as the de facto gatekeepers of Bitcoin) kept the severity of the bug under wraps until it was patched.

On p. 143 they write this whammy:

A standalone against cryptocurrency as a store of value is purely statistically. The exchange value of most cryptocurrency markets is highly correlated. As bitcoin moves, so does the whole crypto market. Both ethereum and bitcoin have a correlation coefficient of 0.9. Buying into any cryptocurrency besides bitcoin means one’s investment is overwhelming exposed to bitcoin’s extraordinary volatile price movements. Given bitcoin’s dominance and its distinction in driving the price of all other tokens, there is little reason to invest in anything but bitcoin.

Ta-da. Ladies and gentlemen, I present to you the anti-coiners who are actually Bitcoin maximalists. Re-read the paragraph above slowly.

The line chart (above) illustrates the market value of approximately 10 different cryptoassets starting in January 2016 to August 2023. While Bitcoin (BTC) typically does hover around 40-50% mark, there is no ironclad rule that says it always will. 42

Furthermore, this book review will not say what assets you should or should not buy. Will traders see higher returns over the long run by investing in a cryptocurrency that is not Bitcoin?

Unlike the authors of the book, we cannot predict the future. But you should definitely invest everything into PTK.

On p. 144 they discuss entities in control of >50% of voting/mining power:

Blockchains such as the ETC chain have recorded these events, and we have seen successful attacks frequently occur in the wild. This kind of attack would be expensive and energy-intensive. However, given the mining centralization it is already the case that four companies on the Chinese mainland control over 60% of the bitcoin hash power. This context represents a situation where four Chinese executives potentially are a social attack vector. The continuity of their interests is inexorably linked to bitcoin’s proposition as a store of value.

There a few issues with this passage:

(1) The authors do not say what ETC stands for, this is the first time it is presented to the reader. It is Ethereum Classic.

(2) How many times has ETC been successfully attacked? Who knows, the authors do not provide any details or references. A quick googling finds a news story stating that Ethereum Classic was hit by at least three successful 51% attacks in the month of August 2020. Yikes, that sounds like some evidence that could help bolster the authors claims, why did they not include it?

(3) Just above this paragraph the authors identify nine blockchains that have 1-4 entities in control of more than 50% of voting or mining power. They claim Dogeoin has 4 and Litecoin has 3.

But this hurts their credibility because Dogecoin has used “merge mining” with Litecoin since September 2014. I know this because I wrote an (accurate) prediction saying Dogecoin would eventually need to merge mine with Litecoin.

And guess what, Dogecoin’s existence is still driven by Litecoin’s existence. Dogecoin is fully dependent on Litecoin’s infrastructure. The article should be updated to include this type of information.

(4) Lastly, even when this book was published (June 2022) the aggregate hashrate coming from China-based mining farms had dropped well below 60%. The authors provide no citation so it is unclear when they were researching or writing this chapter.

For example, according to an article from May 2022, it was estimated that China-based mining farms generated ~21% of the network hashrate.

On p. 144 they write:

Additionally blockchains governed by standard consensus algorithms have regularly seen the emergence of so-called forks. A fork is when a subset of miners and participants diverge on their use of a single chain of blocks, resulting in two historical ledgers with different spending activities. Most major cryptocurrencies have seen forks, including bitcoin, which has bitcoin cash, bitcoin SV, bitcoin gold, while ethereum has ethereum classic. Economically this is an extraordinary event since the holders of wallets have active accounts on both chains, and their tokens now have two historical accounts of their provenance.

At least two issues with this:

(1) What are “standard consensus algorithms”?

Recall back in Chapter 2 they regularly swapped wordings between protocol and algorithm. And only described Nakamoto Consensus. What other consensus algorithms are there?

In Chapter 5 they casually mentioned Paxos and PBFT in passing but never conveyed any information to readers. So who knows what they are thinking here.

(2) Why do the authors have an issue with capitalizing the word bitcoin or ethereum? No one in any media writes “bitcoin SV” or “ethereum classic” because these are proper nouns. An editor would have helped them.

On p. 144 they write:

Physical commodities cannot “split” and have multiple version of themselves that pop into existence from nowhere.

This is a strawman because blockchains are not physical. Some lawyers have argued – and some regulators like the CFTC have made the case that certain (all?) cryptoassets might be “commodities.” This book review does not have the space to discuss the different external views from legal experts.

How do hardforks impact RWAs – such as pegged stablecoins – that reside on the chain?43 Are hard forks similar to “stock splits” in traditional finance?

Maybe this is something the authors could discuss in the next edition. Perhaps they can start by looking at how at least one student thinks hard forks should be taxed.

On p. 145 they discuss potential attack vectors:

State-level actors who thought bitcoin was a threat to sovereignty would be capable of causing mass disruptions or even destroying the network. If not fatal, such an attack would likely cause a massive movement in price that could effectively annihilate global liquidity. The most likely actor to engage in this kind of attack in terms of capacity and incentive is the People’s Republic of China.

Honestly, you have to use movie-voiceover-guy for that last sentence. And the authors do not provide any citation or reference to back up this cunning plan from the Chicoms!

On p. 146 they write:

The question of bitcoin as a store of value in these catastrophic events is threefold: whether they are possible on short time scales, whether they are possible on long time scales, and on what time scales is the destruction of value possible. The externalities of nation-states failing or quantum computers are irrelevant to the continuity of physical commodities value. No process could cause all land, precious metals, or stones in all of the world to devalue simultaneously.

Gold’s historical claim as a store of value are a complex mix of factors: its industrial uses, decorative uses, long history of price stability, non-perishability, maintenance-free storage, and its millennia spanning narrative and collective fiction. Crypto advocates want to declare bitcoin as their new “digital gold” and yet all they bring is a weak fiction detached from the other necessary properties of a store of value.

Cryptocurrencies can never function as a store of value or digital gold. Instead, they are purely speculative volatile assets whose intrinsic value is built on nothing but faith in an expanding pool of greater fools that must expand infinitely and forever.

Is it appropriate to use the Breaking Bad diner scene template for the concluding paragraphs on chapter 13? Yes.

The authors cannot stop talking about bitcoin in a book called “Popping the Crypto Bubble.” It is not even clear who or what they are arguing with since they do not quote anyone or anything on this entire page.

Who is this rant directed at?

No other chain really exists apparently. No other use case exists beyond the one they build the strawman for (money/payments). It is all so tiring. But don’t worry, there is 100 pages more!

Chapter 14: Smart Contracts

The authors try out some “gotchas” but academic lawyers have beaten them to the punch by 5+ years.

For instance, at the beginning of p. 147 they write:

Smart contracts are a curiously named term that has sparked a great deal of interest due to the confusion of its namesake. Like many blockchain terms, a smart contract is a semantically meaningless term in the larger corpus of discussion, and its usage has been defined to mean great many different things to a great many people.

Strangely, the authors do not cite anyone or anything in the first few pages of this chapter. Yet there are “intro to smart contracts” at various law schools across the country, dozens of legal papers discussing ideas like “Code is not law” or what a “smart contract” might represent in a specific jurisdiction.44

Where is the cursory introduction to the history of “smart contracts”? The key figures or dates? Nada. Instead the authors take a deliberately dismissive tone. Because it is easier to dismiss out of hand a priori than do a literature review.

On p. 148 this is the pullquote:

Smart contracts have absolutely nothing to do with legal contracts.

Maybe that is true, where is the rigorous explanation or citation? Oh there is not any.45

On p. 150 after discussing Solidity and the EVM, they write:

Solidity was meant to appeal to the entry-level Javascript developer base, which uses coding practices such as copying and pasting from code aggregator sites like Stack Overflow. As a result, Solidity code generally has a very high defect count and has resulted in a constant stream of high-profile security incidents directly related to coding errors. Some studies have put the defect count at 100 per 1000 lines.

Which studies? Which high-profile security incidents? Who knows, there are no citations.

On p. 151 they write:

Moreover, smart contracts introduce a whole other dimension of complexity to the problem by forcing developers not only to verify the internal consistency and coherence of their software logic but also to model any and all exogenous financial events and market dynamics surrounding the price of the casino tokens used in the software. This hostile execution environment turns a pure computer science question into a composite question of both finance and software and expands the surface area of the problem drastically. At some point in the future, our theoretical models may be able to tackle such problems, but likely not for a long time as these problem are of a truly staggering complexity.

A couple of issues with this:

(1) Is there any number or percentage the author can give to illustrate how “truly staggering” the complexity is?

(2) Do some dapps have a large surface attack, yes. Do DeFi-related hacks still occur on a monthly basis, yes.

Imperfect as they may be, according to DeFi Llama there are a sundry of complex dapps that secure $24 billion of TVL on Ethereum right now, many of which were launched prior to the publication of the book. This include automated market makers such as Uniswap as well as lending protocols such as Aave and Compound.

These serve as illustrations, examples that the authors “long time” is already in the present. Their prediction was wrong.

Unsurprisingly, none of these dapps are mentioned in the book.

On p. 152 they write:

Meanwhile, the reality is that today smart contracts are an unimaginably horrible idea and it is a genuinely horrifying proposition to base a financial system on these structures. Smart contracts synthesize brittle, unverifiable, and corruptible software with irreversible transactions to achieve a result that fails in the most violent way possible when the wind blows even slightly the wrong way. They further lack a key component that most software engineering deployed in the wild requires, a human-in-the-loop to correct errors in the case of extreme unforeseen events such as fraud and software failure.

And what were the authors citations and references in the rant above?

Zilch. It is just their opinion.

I actually want to agree with them on a couple of points but each sentence has something fundamentally wrong with it, notwithstanding the hysterical language.46

The rant continues on the next paragraph:

Thus the very design of smart contracts and blockchain-based assets is entirely antithetical to good engineering practices. The idea of smart contracts is rooted in libertarian paranoia concerning censorship resisters and ignoring externalities instead of a concern for mitigating public harm.

And what are good engineering practices? The authors provide no citation or explanation, it is just their opinion.

Furthermore, recall that the authors worked on Uplink six years ago – which involved using smart contracts – was that idea ‘libertarian paranoia’?

On p. 152 they write:

The most catastrophic smart contract was undoubtedly the DAO hack. The DAO was an experimental, decentralized autonomous organization that loosely resembled a venture fund. Exampled simply, it is a program that would allow users to invest and vote on proposals for projects to which the autonomous logic of the contract would issue funds as a hypothetical “investment.” It was a loose attempt at building what would amount to an investment fund on the blockchain. The underlying contract itself was deployed and went live, consuming around $50 million at the then exchange rate with Ether cryptocurrency. The contract contained a fundamental software bug that allowed an individual hacker to drain DAO accounts into their accounts and acquire the entirety of the community’s marked investment. This hack represented a non-trivial amount of the total Ether in circulation across the network and was a major public relations disaster for the network. The community controversially decided to drastically roll back the entire network to a previous state to revert the hacker’s withdrawal of funds and restore the contract to regular operation.

In the last sentence they cited the 2017 The DAO report from the SEC.

There are at least four issues with it, working backwards:

(1) It is missing “the” between with and Ether in the 5th sentence.

(2) The community is not defined here, there were a number of key participants who were discussed in several books, including one I reviewed last year. This chapter is ten pages long, there is ample space to discuss the “most catastrophic smart contract” in more depth.

(3) How do they define “most catastrophic smart contract”? Do they mean by ETH or USD lost?

(4) Strangely, the authors do not mention that a hardfork took place and two separate networks emerged: Ethereum Classic (which was the original chain that the “DAO hack” still existed on) and Ethereum, where the hack was effectively smoothed over. Seems like a glaring omission.

On p. 153 they write:

The grandiose promise of smart contracts was for applications that build decentralized Internet applications called dApps. These dApps would behave like existing web and mobile applications but counter interface with the blockchain for persistence and consume or transmit cryptocurrency as part of their operations.

There is a big typo that make the 2nd sentence unintelligible: “but counter interface.” What does that mean? An errant “counter” in the middle?

Continuing in the same paragraph:

Much of the smart contract narrative is built around phony populism and the ill-defined idea that there is an upcoming third iteration of the internet (a Web 3.0) that will interact with smart contracts to provide a new generation of applications. In practice, none of that has manifested in any usable form, and the fundamental data throughput limitations of blockchain data read and write actions make that vision impossible.

You will never have guessed it but Stephen Diehl was a co-organizer for the anti-Web3 letter that circulated two weeks before his book was published. Imagine that, what an amazing marketing coup.

And guess what, he never defines what Web 3.0 is in that letter nor do the authors do so in this book. This despite the fact that Gavin Wood articulated one in 2014.

Sure they can disagree with Wood and other Web 3.0 promoters, but it is misleading to claim it is an “ill-defined idea.”

Furthermore, everything in their second sentence is falsifiable, they cannot make the claims a priori and just walk away.

For instance, there are a group of developers attempting to push a “Sign-in with Ethereum” (SIWE) movement, allowing users to authenticate with off-chain services by signing a message. This is one attempt to reduce the dependence on the oligopoly of single-sign-on from Big Tech firms. One live implementation comes from Auth0 and Spruce.

Don’t like SIWE? Fine, but it existed last year when the authors said nothing did any any usable form.

But how were the authors supposed to know? That is the whole point of market research and due diligence.

The authors continue on p. 153:

Most live smart contracts instead fall into a limited set of categories: gambling, tumblers, NFTs, decentralized exchanges, and crowd sales. The vast majority of code running on the public ethereum network falls into one of these categories, with a standard set of open-source scripts driving the bulk of the contract logic that is evaluated on the network. However, there is a wide variety of bespoke scripts associated with different ICO companies and high-risk gambling products that are bespoke logic and act independently of existing community standards and practices.

How many citations and references did the authors provide for each of the claims? Zero. That which is presented without evidence can be dismissed without evidence.

Maybe they are right on all accounts, but they need to bring evidence for each claim.

Furthermore, how do the authors reconcile the handful of categories they state as fact are where “the vast majority of code” can be bucketed as, versus the wider set of categories tracked by Coin Gecko and DeFi Llama?

On p. 153 they write:

The most common script is an ERC20 token, a contract that allows users to issue custom token crowd sales on top of the ethereum blockchain.

And exactly how common is it? What percentage were ERC20 token “scripts” (as they call them) in a specific year. Maybe they are right.

A quick google finds that according to Alex Vikati, in May 2018, that half of the top 100 contracts (by transaction count) were ERC20. The top non-ERC20 contract was Idex, a decentralized exchange.

Fast forward to 2022, according to Cryptoslate, Uniswap V3 was by a wide margin, the most widely used contract in terms of gas used. We should charge the authors for finding relevant citations.

On p. 154 they write about ERC20 tokens:

The total supply of these tokens in any one of these contracts was a custom fixed amount, and by interacting with the ERC20 contract, the buyers’ tokens were instantly liquid and could be exchanged with other users according to the rules of the contract. This is the standard mechanism that drove the ICO bubble and related speculation, and this token sale contract is overwhelmingly the most common use case for smart contracts.

They could be right but a citation needed for that last claim.

Later on the same page they write:

Another class of projects is the digital collectibles and digital pets genre. One of the most popular is CryptoKitties: a game in which users can buy, sell, and breed cartoon kittens.

The authors might want to rethink using CryptoKitties as an example because even in 2022 and definitely 2023 the project was a thing of the past.

It is too bad the authors eschewed any use of charts because they could have used public price charts such as the one above. As we can see, over the past three months trading activity CryptoKitties is pretty much for the birds, like the rest of the art and collectible NFT market.

On p. 154 they write:

Gambling products overwhelmingly dominate the remaining set of contracts.

What is their source? Citation needed.

On p. 155 they write:

The ICO bubble marked a significant increase in the interest in smart contracts arising from outlandish claims of how cryptocurrency ventures would disintermediate and decentralize everything from the legal profession and electricity grid to food supply chains. In reality, we have seen none of these visions manifest, and the technology is primitive, architecturally dubious, and lacking in any clear applications of benefit to the economy at large. The ecosystem of dApps is a veritable wasteland of dead projects, with none having more than a few hundred active users at best.

Oh?

I actually agree with at least half of what they said above but they do not provide any citations at all.

Where do they get the dapp users numbers? Maybe they are correct, but what is the source of information?

For example:

A quick googling found an article from last year from DappRadar. The colored lines (above) shows the Number of Unique Active Wallets interacting with dapps. According to DappRadar, in Q1 2022, 2.38 million daily Unique Active Wallets connected to blockchain dapps on average.

You might disagree with DappRadar but the authors of the book did not present any source at all. Do better next time.

On p. 155 they write:

The very design of a smart contract is to run on an unregulated network which prevents it from interfacing with external systems in any meaningful fashion. This confusion around the namesake of smart contracts has been exploited by many parties to sell products and services.

Surely since it has been “exploited by many parties” the authors would be able to provide a citation or reference? Nope.

Maybe they are right but they also seem to be making up things as they go along. Don’t trust, verify is the motto, right?

Also, what exactly did Adjoint do with smart contracts in 2017-2018 time frame? Were they one of the entities trying to sell products and services around smart contracts via Uplink?

On p. 155 there is a pullquote:

Smart contracts claim to not trust external central authorities, but they cannot function without them. Thus the idea is doomed by its own philosophy.

I think there is some merit to the arguments they make around oracles in this chapter but the pullquote itself is just too sweeping and lacks nuance.

For instance, AMMs such as Uniswap use a TWAP oracle which is not an external oracle. The authors are wrong.

On p. 156 they write:

Within the domain of permissioned blockchains, the terminology has been co-opted to refer to an existing set of tools that would traditionally be called process automation. In 2018 so-called enterprise “smart contracts” were the buzzword du jour for consultants to sell enterprise projects.

Are Diehl et al., speaking from first hand experience? See also Evolving language: Decentralized Financial Market Infrastructure.

Continuing they write:

These so-called enterprise smart contracts had very little to do with their counterparts in public blockchains and were existing programming tools such as Javascript, Java, and Python rebranded or packaged in a way that would supposedly impart the “value of the blockchain” through undefined and indeterminate means. Indeed one of the popular enterprise blockchain platforms, IBM Hyperledger, provides a rather expansive definition of smart contracts.

There are a couple issues with this:

(1) The authors are describing “chainwashing” a term I coined more than six years ago. Thanks for the credit guys!

(2) The authors lack attention to detail. There was no such thing as “IBM Hyperledger” and the sole citation they provide confirms that.47 In the end notes for Chapter 14 they cite Hyperledger Fabric Documentation.

IBM is not the same thing as Hyperledger.

The umbrella Hyperledger Project is a branch of the Linux Foundation. IBM is a contributor and sponsor of some of the projects. The fact that the authors conflate the two does not help their credibility.

In fact, there is more than one base-layer blockchain currently incubated within the Hyperledger umbrella including Iroha and Besu. Besu is an independent implementation of Ethereum based on code contributed from ConsenSys called Pantheon.

Continuing on p. 157 they write about Dfinity:

Both these meaningless paragraphs are the embodiment of the blockchain meme. It is an extension of the terminology to include “infinite use cases” through a meaningless slurry of buzzwords. Smart contracts simply are not useful for any real-world applications. To the extent they are used on blockchain networks, smart contracts strictly inferior services or are part of gambling or money laundering operations that are forced to use this flawed system because it is the only platform that allows for illicit financing, arbitrage securities regulation, or avoids law enforcement.

Oh?

Again, even though I may personally agree with some of their opinions, that is all they are, opinions. They need to provide citations otherwise their claims can be dismissed.

Surely the rants will stop now?

Continuing on p. 157 they write:

The insane software assumptions of smart contracts can only give rise to a digital wild west that effectively turns all possible decentralized applications into an all-ports-open honeypot for hackers to exploit and manifests the terrible idea that smart contracts are just a form of self-service bug bounty. These assumptions give rise to an absurd level of platform risk that could never provide financial services to the general public given the level of fraud and risk management required to interact with it.

Oh?

Getting a lot of mileage out of the meme template generator and we still have 90 pages to go. And yes, still no citations.

Their concluding paragraph to the chapter states:

Append-only public data structures, permissionless consensus algorithms, and smart contracts are all exciting ideas; however, combining all three is a nightmare that could never be a foundation for a financial system or for handling personal data. The technology is not fit for purpose and cannot be fixed. To put it simply, smart contracts are a profoundly dumb idea.

They did provide a citation – for ‘nightmare’ – to a paper by Ryan Clements. But it is about algorithmic stablecoins and not about smart contracts.

We have nine chapters left and at this pace, may run out of meme templates.

Also, what is an “append-only public data structure”? The authors throw in a new term without defining or describing it in the very last paragraph of the chapter.

As we all remember from writing class: thou shall not introduce new concepts in the conclusion.

Okay, so two can play that game!

In September 2016, Adjoint put out a press release discussing how it was great honor to be selected for EY’s blockchain challenge.

A quote from Diehl:

So at what point was working on smart contracts bad? Just not during the time Adjoint was involved?

Chapter 15: Blockchainism

This is another chapter I should have liked because it describes chainwashing. But it is five pages long and lacks many examples.

On p. 160 they write:

The alchemy of blockchainism is a concept rooted in the mystique and misunderstanding of the nature of bitcoin’s original approach to establishing trust between otherwise unrelated parties over an untrusted network. Bitcoin has a partial answer to this problem for a specific data structure of a particular application. The core fallacy of blockchainism is extrapolating that cryptocurrency has solved trust in generality rather than specificity. What “solving trust” means will depend on context, but this is central to many books, including Real Business of Blockchain, Blockchain Revolution, The Trust Machine, The Infinite Machine and dozens more books.

I agree. I wholeheartedly agree with this paragraph.

In fact, I wrote two lengthy book reviews of both Blockchain Revolution as well as The Trust Machine. Both were not good but for different reasons than why this book is not good. At least the other two books had an editor go through and sync up the bibliography with the book chapters.

For instance, at the bottom of p. 160 they write:

Professor at Stanford Roy Amara once said of the software field that “we overestimate the impact of technology in the short-term and underestimate the effect in the long run.”

I believe the authors need to add at least one comma before and/or after Roy Amara.

On p. 161 they write:

In this “game-changing” paradigm shift, any existing process that requires a single authoritative source of truth has now found the ultimate vehicle for storing that single source of truth without the authority component. The blockchain (often referred to in singular form) will decentralize power and disintermediate the global economy unlocking new opportunities and building international reciprocity and trust. The seductive marketing around this cliché is that without cryptocurrency, the blockchain itself could convey the same disruptive power as bitcoin for any domain.

The last sentence references an op-ed from Bruce Schneier.

I have re-read this paragraph multiple times. In the margins of the book I wrote “What does this mean?” Is the last sentence a compliment to blockchains? Or were they saying, you could make a blockchain without bitcoin?

Also, there was a “movement” in mid-2015, led by Bitcoin maximalists (and lobbyists and VCs who only invested in or lobbied for Bitcoin) to use a singular form of “blockchain” with the explicit connotation that they were referring to the Bitcoin blockchain, the only one that mattered (to them).

For example, here is one of my all time favorite (now deleted) tweets from a coin lobbyist:

They continue on about clichés but it is all too tiring to address so let us move on to the next page.

On p. 162 they write about the blockchain meme. The section overall is good but there is something problematic with the first sentence, writing:

The form of technology that many of these ventures may build is not novel at all; cryptographic ledgers and databases that maintain audit logs have been used since the early 1980s.

This is the type of cherry-picking that maximalists such as Chris DeRose frequently used in 2015-2017. And it was wrong then and it was wrong in 2022 and it is wrong now.

Why? Because “cryptographic ledgers and databases” have not stayed stagnate since the year the Sega Genesis hit toystore shoelves. It is like saying, what is the big deal about SpaceX, Wernher von Braun launched a V-2 into space in 1944.

This type of criticism is lazy cynicism because it assumes the readers are incapable of remembering anything after the Berlin Wall came down.

For example: not all blockchains are identical to Bitcoin and even Bitcoin has moving parts invented between the time David Hasselhoff serenaded East Berlin and Lehman Brothers collapsed.

On p. 163 they write:

Considering trade journalism and press releases from 2018, we see blockchain proposed by many seemingly sensible people as the solution to everything from human trafficking, refugee crises, blood diamonds, and famines to global climate change. This despite most technologists having minimal experience working with vulnerable groups or understanding the political complexities.

100% agree with this point. Unfortunately we still see marginalized groups used for “pulling on the heartstrings” marketing efforts today.

Continuing in the same paragraph they write:

This kind of thinking that blockchain somehow has the answers to our problems has infected consultants, executives, and now even politicians. The one group of people who are not asked about the efficacy of blockchain is programmers themselves, for whom the answer is simple: just use a normal database.

The authors cite a short related blog post from Leif Gensert.

But the authors do not any kind of survey of programmers. We see this same kind of claim in Chapter 25 at the end of the book too. The authors could be correct, but they do not provide any source, it is just their opinion.

The reoccurring problem is Diehl et al. forgot that there are empirical ways to test their thesis.

For example, the line chart (above) shows three types of developers tracked by Electric Capital based on commits to public repos for public chains. In their words: “Only original code authors count toward developer numbers. Developers who merge pull requests, developers from forked commits, and bots are not counted as active developers.”

When the book was published, roughly 8,000 full-time active developers were working on public chains. Is that a lot or a little?

Has anyone asked these developers about the efficacy of a blockchain? Do they have views about whether a project or organization should use “a normal database”? I do not know but it would be disingenuous for me to reject the developers Agency.

On p. 163-164 they write:

The charitable interpretation of this phenomenon is that this is simply an inefficiency in human language that results from civilization collectively defining new terminology and expanding its understanding of technology. However, the terminology itself lends credibility to a domain that primarily consists of gambling, illicit financing, and financial frauds.

This is a bad faith argument. And it is identical to the argument that a Financial Times reporter – the same one who frequently quotes Diehl – recently made regarding central bank digital currencies (CBDC).

We have not even gotten to the CBDC section yet, but the FT article brings an a priori argument to a empirical-based debate. How dare anyone provide nuance and evidence that contradicts your priors!

A disappointing chapter overall, and we still have 80 pages.

Chapter 16: Frauds & Scams

This chapter was eight pages long but could have been a few hundred considering just how many fraudulent projects and scammy endeavors have occurred over the past decade.

On p. 166 they write:

In advanced economies, fraud is always a possibility, but it is usually a tail risk that occurs with a low probability compared to the bulk of routine transactions. Fraud controls and rigorous due diligence are expensive relative to the likelihood of the fraud and, unless other required by law, are many times discard for the sake of saving cost.

Do the authors provide a citation about how common or uncommon fraud is?

Or how often due diligence is discarded or glossed over? Nope.

A typo on p. 166: “tech” should probably be fully written out to “technology.”

A missing letter on p. 167 “onsidering” should be “Considering”

On p. 168 they write the concluding paragraph to the fraud triangle subsection:

The opportunity for cryptocurrency fraud is pervasive simply because the lack of regulatory checks and controls on these ventures is relatively lax or non-existent. In an environment where a single user can abscond or run away with large amounts of investor money, seemingly with little risk to themselves, it will create an environment that will attract less scrupulous individuals. Cryptocurrency businesses are the perfect storm in the fraud triangle, and crypto fraud is today’s most straightforward and widespread form of securities fraud.

I think most of this paragraph is correct, though they cited a book from 1953 that appears to be more about social psychology than cryptocurrencies.

Either way, they showed their hand in the very last two words of the final sentence: everything is securities fraud to these authors, they say so at least a dozen times.

On p. 168 there is a spelling mistake: “swidler” should be “swindler”

On p. 170 they write:

Pump and dump schemes were rampant leading up to the Great Depression and became illegal in the United States in the 1930s after the passing of the Securities Act.

This may be true, but that is a lot of inside baseball for readers outside the U.S.

For instance, what is the Securities Act? What section of the (1933) Securities Act deals or discusses pump and dumps? Since pump and dumps were rampant prior to 1933, any rough figures on how common they were?

On p. 170 they write:

A study of pump and dump schemes has found that 30% of all cryptocurrencies are used in 80% of pump and dump schemes. Once used on a particular crypto successfully, it is very likely that another pump and dump will be done on that same coin again. More importantly, studies show that pump and dump crypto schemes occur with low volume coins with significant wealth transfers from outsiders to insiders, and resulting in detrimental effects on market integrity and price formation.

Good news and bad news. Good news is, they cite six relevant papers. The bad news, they barely paraphrased two of them.

For example, from a blog post from Kamps and Kleinberg:

We found that similarly to the traditional penny-stock market variant, the cryptocurrencies most vulnerable to this type of attack were the less popular ones with a low-market cap. This is due to their low liquidity making them easier to manipulate. We also found that around 30% of the cryptocurrency pairs we analyzed accounted for about 80% of the exhibited pump-and-dump activity.

From the abstract of Li et al.:

The evidence we document, including price run-ups before P&Ds start, implies that significant wealth transfers between insiders and outsiders occur.

The authors did not even paraphrase Kamps and Kleinberg correctly. Notice that K&K said that “around 30% of the cryptocurrency pairs we analyzed” whereas Diehl et al., write “30% of all cryptocurrencies.”

That is not a minor difference. Maybe next edition should just use the actual quotes?

At least the authors are finally citing, right?

On p. 173 they are concluding the chapter:

In many jurisdictions, directors of the company are explicitly banned from touting the expected returns of the investment. However, if one constructs an anonymous community in which others (outside the company) market the token’s investment opportunity, this can be sufficient to drum up market interest in the security. A digital pyramid scheme structure can be encoded indirectly into the computer pogram that dictates the network’s payouts, and this can create indirect kickbacks and incentives for early promoters. This decentralized and self-organizing fraud leaves the directors’ hand completely clean as low-level employees and outside actors purely perform the actions.

Possibly two issues with this paragraph:

(1) Did the authors mean to write “encoded directly” or “indirectly.” The context reads as if they meant to say “directly.”

(2) What they seem to describe here and on the previous page (regarding “distributed control”) might be pursuable via RICO statutes. Five years ago I mentioned that angle in an op-ed. To-date it does not appear that – at least in the U.S. – any RICO-related lawsuits or charges have been filed.

This chapter should have been an amazing slam dunk – it could have included a hundred different scams and/or fraudulent efforts but instead the authors could not even properly paraphrase from a couple papers they cited. A disappointment.

Chapter 17: Web3

I did not fully appreciate how good the authors – and Diehl in particular – were at marketing until I read this book.

I will mention more in the Final remarks later below, but recall that two weeks before this book was published, a gaggle of vocal anti-coiners got a variety of mainstream publications to cover their anti-web 3.0 letter?

Unsurprisingly, there is a lot of overlap between this chapter and the 741-word page letter. To their credit, the authors of the book at least spent 9 pages brewing the soup, let us see how it tastes.

On p. 175 they write:

In recent years, the cryptocurrency project experience something of a public relations problem; leading various actors to choose to refer to cryptocurrency under a different name, “web3”. The narrative of web3 is somewhat intentionally amorphous and open to a wide variety of interpretations. Therein lies the rhetorical power of ambiguous buzzwords in that it acts like an aspirational Rorschach test where everyone will see something different, but everyone assumes it means something positive.

So in 2014 I wrote how “Bitcoin’s PR challenges” and then a year later “The great pivot, or just this years froth?” In the latter I pointed out how VCs such as Adam Draper were telling their Bitcoin-related portfolio to rebrand as “blockchain” companies. This is chainwashing.

The same can definitely be said about the “web3” rebrand to some extent. But. And hear me out: Gavin Wood write up a definition and narrative for “Web 3.0” back in 2014.

You may think Wood was naïve but that specific point is one the authors are incorrect on.

Continuing on p. 175 they write:

While web3 may not be well-defined, five technology categories loosely correspond to some new crypto products that are being marketed under the web3 umbrella term: NFTs, DAOs, Play-To-Earn, DeFi, and the Metaverse.

In the margins of the book I wrote: “What is your definition of web3? And unsurprisingly the authors did not provide one.

They also did not provide a definition of “web3” in the anti-web3 letter last year. Surely it can be done in a nine page chapter?

On p. 176 they write about NFTs:

A significant pat of the web3 ecosystem is creating digital assets known as NFTs. Unlike cryptocurrencies, which are fungible, any individual assets are interchangeable with other digital assets. NFTs are a specific type of smart contract which lives on one of the ethereum or other blockchains that allow programmable blockchain logic.

You might not believe me but not once in this entire chapter or book do they ever write out what the full acronym stands for: non-fungible tokens.

And this omission is important because NFTs existed before CryptoKitties. They existed before the construction of Ethereum.

NFTs first existed as “colored coin” frameworks on Bitcoin but have evolved onto other blockchains, including permissioned chains. The conventional term for all of these efforts is “tokenization.”

The authors can throw shade all day long regarding tokenization efforts of real estate or precious medals, but these are technically “NFTs” — a world that is much broader than the strawman they concoct in this chapter.

This notable omission hurts their credibility, especially since they do not bother explaining the history of the concept.

On p. 176 they write:

An NFT is a tradable cryptoasset that internally contains a URL, like those typed into a browser (e.g., https://www.google.com), which points to an external piece of data. This external piece of data could be a document, a file, or an image, but it is stored externally to the NFT itself. Since the image or data associated with an NFT is stored on a public server, any member of the public can “right-click” on the data to access the information independent of the blockchain.

The “right click and save” critique of art and collectible-related NFTs is partially valid.

For example, Cryptopunks and Bored Ape Yacht Club (BAYC) are examples of collections reliant on off-chain 3rd parties, for what the authors describe.

But the authors fail to recognize that there are exists art and collectible NFTs that are generated and live fully on-chain. A non-exhaustive list includes: ArtBlocks, Autoglyphs, Avastars, Chain Runners, Anonymice, and OnChainMonkey (see Slide 7).

On p. 176 they continue:

Some NFTs are even purely conceptual and do not link to any data. In these situations, abstract notions and contextual narratives about the NFT are the products being sold to investors. This setup may be done as a piece of performance art or as a thinly veiled way of raising money on an unregistered secruity investment as a proxy for illegal equity raise in a common enterprise by disguising it as an “NFT project.”

The authors cite the cringey Dan Olsen video published last year. Are the authors lawyers? Not sure. Are they specialists in securities laws? Not sure.

Did they quote or cite a lawyer specialized in securities laws? Nope.

Therefore, what is presented without evidence can be dismissed without evidence.

On p. 176 they write:

Buying an NFT is conceptually similar to Name-A-Star registries in which a person pays another person to record their name in a registry, allegedly associating their name to an unnamed star in the sky. The registry conveys no rights, obligations, or rewards, but it is an artificially scarce commodity based on a collective belief in the supposed value of the registry. It is like a tradable receipt with no physical good or rights attached, which only signifies a proof of purchase based on some bizarre and logically self-inconsistent redefinition of ownership or to signal sign value or class status as a form of conspicuous consumption within the crypto community. Many people who sell NFTs are willing to make the conceptual leap that this registry with a smart contract somehow conveys some abstract digital notion of “ownership.” However, this premise has several technical, legal, and philosophical problems.

The authors cite two papers, one from Joshua Fairfield and the other from Aksoy and Üner.

While they both highlight some of the same problems the authors do, neither paper comes to the same conclusions that the authors of the book do. These are real issues but not insurmountable problems.

In fact, companies such as Mintangible have been attempting to help NFT issuers utilize existing copyright licenses to protect their users.

Another edition should not leave the readers under the impression that actual I.P. lawyers are sitting on the sidelines, this is gaslighting.

Also, what does “logically self-inconsistent redefinition” mean? Did the authors add an errant “self” in there?

On p. 177 they write about the duplication problem:

NFTs have been criticized for having no way of guaranteeing the uniqueness of the datum or hyperlink. Since multiple NFTs can be created that reference the same artwork, there is no canonical guarantee of uniqueness that an NFT purchased is “authentic”. It remains unclear what “authentic” would mean regarding infinitely reproducible hyperlinks.

Apart from its polemical zealotry, one of the books core weaknesses is that the authors clearly did not conduct much market research, they certainly did not canvas outside experts to solicit answers some of their questions. It is often tedious to do, but even asking an open question about this on Twitter (now X) would probably have helped their misunderstandings.

For example, marketplaces like OpenSea and Magic Eden allow NFT issuers to become “verified” which help reduce some of the counterfeiting that takes place. Block explorers such as Etherscan allow the general public to inspect all transactions to determine the veracity of provenance; the public can look at the metadata and track the transaction history. You could even do a reverse-image lookup on Google.

On p. 178 they write about the multiple chain problem:

The NFT definition of “ownership” has been criticized as having no single source of trust since multiple blockchain networks can be created and operated in parallel, all of which can give rise to independent and potentially conflicting suppositions of ownership for the same piece of data. The same NFT can be minted on the Tezos blockchain and the Ethereum blockchain, with the same content but with two competition definitions of “ownership.” Give this contradiction in the design, there is no canonical way to say a priori which blockchain network represents the base concept of ownership. This premise presents an intractable logical contradiction a the heart of the definition of NFT redefinition of “ownership”. Having something multiply-owned in different contexts with different sources of truth introduces an irreconcilable multiplicity to the idea of ownership, which results in a philosophical contradiction.

The authors are either straight up lying – or more likely – have never interacted with counterfeit collectibles before.

For instance, my wife and I own a Frederic Remington “Mountain Man” bronze sculpture we got at a garage sale. On the bottom it says it is unique, one of 97 made. But we all know someone who owns one. Ebay is filled with replicas. And Remington himself clearly did not make a million busts during his lifetime.

Yet according to the hyperbolic authors of this book, this replica situation results in a ‘philosophical contradiction.’

The hypothetical scenario that the authors concoct is presents their superficial understanding of how provenance can be traced on a chain.

For instance, auction houses such as Sotheby’s and Christie’s are able to quickly determine which digital collectible is the “real” one simply by using a block explorer such as Etherscan.

Lastly, it is worth repeating that the authors use a strawman at the very beginning of this paragraph. They do not provide a single reference or citation for which definition. All around tomfoolery on their part.

On p. 179 they write about market manipulation:

Finally, NFTs have been criticized for excessive amounts of market manipulation and, in particular, significant cases of wash trading that are now expected and normalized in the market. These phenomena make it challenging to ascertain what (if any) of the price formation is organic versus the work of a coordinated cartel attempting to create asymmetric information.

I agree with most of this. I was even quoted saying it was hypothetically possible. But the authors mention that there are “significant cases of wash trading.” What is their reference?

On p. 179 they write about play to earn games:

Some video game company executives saw the popularity of play-to-earn game startups, and announced that they would be creating copycat games or incorporating NFTs into their titles. Major game publishers such as Ubisoft, EA, Square Enix, and others have expressed interest in including such NFT items in their games. The backlash has been tremendous, as serious gamers see it as a shameless unethical money grab. With graphics cards pricing spiking due to crypto miners’ demand, this only added fuel to the flames. The backlash from gamers has been swift with publicly announcing their contempt for NFT and NFT-based games, which led to many apologies and reversals from these gaming companies’ executives.

How many citations and references did the authors provide? Zero.

It is hard to know how much of the public feedback was real versus manufactured anger from anti-coiners who went out of their way to tell reporters the same sort of half-truths he does in this book.

I should know, because I was quoted in a few of the articles. Which articles? Oh now you want references. Too bad, you will need to comb through my archives and google my name and scroll through my tweets.

Note: two months after the book was published the Ethereum Name Service (ENS) was at one point the most popularly traded NFT, surpassing BAYC. A year later, ENS reached the official Google cloud blog:

On p. 181 they write “Democratic Republic of North Korea” but the formal name is “Democratic People’s Republic of Korea” — the government in North Korea does not use the word “North” just like the South Korean government does not use the word “South” to describe itself.

On p. 181 they write about DAOs:

DAOs are a form of regulatory avoidance which attempt to recreate the regulation of creating voting shares in corporations. DAOs place this practice outside the regulatory perimeter and have no recourse for shareholders in the case of embezzlement or fraud. They are best understood as shares in a common enterprise run by potentially anonymous entities and with no restrictions on the provenance of funds held by the “corporation.” However, they may be attached to an enterprise attempting to solve a complicated public goods problem such as fixing climate change or providing universal basic income.

This is one of the few times in the entire book when the authors write something with hedged language.

With that said, the very first sentence is confusingly written. What does “recreate the regulation of creating voting shares” mean?

Did the authors mean to say that DAOs recreate the trappings of a corporation, such as voting shares? Any other examples or references?

The authors write on p. 181:

The notion that we should create unregistered corporate structures whose assets can be transferred to anonymous entities with no corporate reporting obligations is somewhat challenging from a fraud mitigation perspective, especially in a post-Enron world. It remains unclear what the killer use case is for anonymously controlled governance structures around slush funds, other than crime or projects that need avoid regulation.

Couple of things:

(1) There is a missing word in the last sentence, likely needs to insert “to” between need and avoid. Also add an “s” at the end of need.

(2) A second edition should incorporate some of the criticisms of DAOs from legal practitioners such as Gabriel Shapiro. Shapiro has written extensively on this topic.

Note: the authors cite Angela Walch’s novel paper, Software Developers as Fiduciaries in Public Blockchains. I have previously cited Walch’s works, including this paper. But it does not really back-up what the authors are asserting here. They cited it after “fraud mitigation perspective” — what part of Walch’s paper do they think helps their argument?

On p. 182 they write about DeFi

Defi is a broad category of smart contracts that loosely correspond to digital investment schemes running on a blockchain that allows users to create loans out of stablecoin and have side payouts in so-called governance tokens.

A few issues:

(1) They need to capitalize the “f” of DeFi in the first sentence (the use ‘DeFi’ throughout the remainder of this section)

(2) While there may be various definitions for “DeFi” even back in mid-2022 the authors could have easily found several overlapping definitions, maybe in the next edition they can provide one as an example.

(3) The authors probably should add an “s” to the end of “stablecoin”

(4) Not every DeFi project uses “stablecoins” for collateral. In fact, it is possible to collateralize a project in a non-pegged coin.

Lending protocols such as Aave and Compound have white-listed collateral, most of which – even in mid-2022 – is not a pegged coin. 48

(5) What are governance tokens? Who knows. They only mention it here in passing and never return to it.

On p. 182 they write:

DeFi generally refers to a collection of services that offer lending products offered by non-banks and which exist outside the regulatory perimeter as a form of regulatory arbitrage and to fund margin trading activities to speculate on cryptoassets.

The authors cite a relevant paper from Barbereau et al. In a second edition the authors could build from this foundation, because one of the weakest areas is highlighted in this specific paper: failure to achieve political decentralization (e.g., end up with a plutocracy run by a handful of venture capitalists).

On p. 182 they discuss an interview with Sam Bankman-Fried on Odd Lots, but without mentioning his name.

One of the strangest phenomenon from anti-coiners this past year is the victory laps they take when some scam is revealed, as if they helped take down the fraudsters. “See I told you so!” they type out victoriously on Twitter.

Actually, no you did not. The authors of this book – like the rest of the industry – were completely oblivious to the actual crimes committed by SBF. If they make this claim, be sure to ask for receipts.

On p. 183 they dive into the Metaverse:

The metaverse is another intentionally ambiguous term for an alleged new technology. On October 21, 2011 Facebook after having been mired in whistleblower leaks, scandals, and a near-constant press cycle of relentless adverse reporting, decided to pivot away from its controversial social media business and build what they called The Metaverse.

A couple of issues with this passage:

(1) The authors got the year wrong, it was 2021 not 2011.

(2) While Facebook did rebrand to “Meta” and allegedly went all-in on “the metaverse” — they never actually did a full pivot: the did not close down their major products (such as Instagram and Facebook). That is not really a quibble with the authors, as Mark Zuckerberg himself has mentioned a pivot (which they did again). Rather, the audience should be informed of what a pivot typically is.

The next sentence is missing punctuation, as they write:

The metaverse itself is an idea first postulated in the science fiction novel Snow Crash by In the novel, the metaverse refers to a virtual world sperate from the physical one, which is accessible through virtual reality terminals. Stephenson describes a bleak cyberpunk…”

Grammar issue: the authors should add “Neal Stephenson” after “by” and then a period.49

In the concluding paragraph of this chapter, the authors write on p. 184:

The post hoc myth-making that has emerged around the metaverse and crypto synthesis is that somehow digital assets such as NFTs will become tradable assets in Facebook’s virtual worlds and that their alleged utility in virtual reality will become a way to generate income in the metaverse, which supposedly and necessarily, needs to be denominated in crypto. The myth of the metaverse has captivated the media, who have written no end of vapid think pieces feeding the vaguely colonialist rhetoric of a new virtual frontier for a new generation to colonize and capitalize. Many tech startups have since spun up companies based purely around virtual land grabs, in which plots of land in digital spaces are auctioned based on some narrative about their perceived utility in some distant future. The irony of this premise is that virtual worlds do not suffer from any concept of scarcity, except the ones their developers artificially introduce. Even if we accept the far-fetched premise of the existence of new virtual worlds, why should those worlds inherit the same hypercapitalist excesses as our present world?

Working backward, that is a fantastic question guys! Where were your hot takes during Second Life’s heyday? Or any MMO for that matter?

Are you aware that developers still create artificial scarcity in a host of games in order to sell power ups of all kinds?

Are the authors against digital wares by video game developers? Or only against the sale of digital wares if the acronym NFT is involved? Their inconsistency is tiring.

I personally agree with some of their skepticism of user adoption of token-based economies in future games, but they do not give a lot of reasoning as to why readers should be up in arms about it.

The two references they provide – one by Paris Marx and the other from Alice Zhang – do not add much to the authors unwavering bravado.

For instance, six months before publishing this book, Paris Marx interviews Diehl in a podcast entitled: Web3 is a Scam, Not a Revolution. It all comes across as being strong opinions, yelled loudly.

Chapter 18: Stablecoins

This six page chapter was disappointing because apart from a blurb on CBDCs at the end, it only discussed Facebook’s Libra project. It did not explain the history of pegged stabelcoins and it did not mention who other centralized issuers were.

This is strange because Libra never launched. Yet today at the time of this writing both USDT and USDC – the largest issuers of USD-pegged stablecoins – account for around 90% of all USD-pegged stablecoin supply.

You would think the authors might write about how Tether Ltd – and its parent company iFinex – had been sued and settled with both the CFTC and the New York Attorney General. And how during those investigations the prosecutors learned that Tether LTD – and iFinex – executives publicly lied about their reserves. Easy slam dunk, no?

Who knows why they focused on a project that never launched, perhaps it is because David Gerard – one of their fellow anti-coiners – wrote a book about Libra during this time frame too? 50 It is an enigma!

On p. 185, their introductory paragraph states:

In the digital age, whoever owns the world’s data owns the future. To that end, in 2018, American social media company Facebook announced it was launching a cryptocurrency project known as Libra, which would form the basis of the singularly most extensive surveillance system outside of government.

The paragraph continues but they even got the timeline wrong. While there had been rumors – for months – that Facebook was doing something with cryptocurrencies and blockchains – the formal announcement did not take place until June 18, 2019.

On p. 186 they discuss “the idea of stablecoins” without mentioning the elephant in the room (Tether / USDT). Instead they state:

Facebook is its core advertising company, and its advertising business is enormously lucrative. The microtargeting of ads to consumers generated $70.7 billion in 2019. However, as a public company there are only so many sectors that would satiate the company’s expected growth. The company’s expansion into the financial services sector was the natural choice given the relative stagnation of the social media market.

There are a few errors:

(1) The authors need to include “at” between is and its in the first sentence.

(2) How do we know it was the “natural choice”? Is this speculation on the part of the authors? Are financial services the terminus for all technology companies?

(3) The authors should be clearer that Facebook generated $69.6 billion of revenue from ads in 2019. The current wording is only correct insomuch as they are detailing total revenue.

On p. 187 they write:

The degree of public scrutiny came in full force after the company announced its intentions with Libra. The project was widely criticized for its overreach, lack of compliance with existing regulations, and threads to the sovereignty of existing nations to control their currencies. European representatives nearly universally denounced the project, and several United States senators issued veiled threats to the Libra consortium members to withdraw from the project. The consortium members caved to these demands, and the more respectable companies such as PayPal, Visa, and Mastercard all withdrew from the project.

Most of the information is true but the authors do not provide any citations. In fact, David Marcus – then head of the Libra team – testified in front of a Senate committee a month after Libra was announced. And Mark Zuckerberg – the CEO and co-founder of Facebook – appeared before a congressional hearing four months after Libra was announced.

Both Marcus and Zuckerberg were publicly questioned about Libra and that is not mentioned in the book.

While that omission is strange, unsurprisingly the authors call “PayPal, Visa, and Mastercard” more respectable companies. That seems consistent with their earlier views.

As we have pointed out in this review: PayPal has operated like a centralized stablecoin issuer since it was created. And both Visa and Mastercard operate a rent-seeking duopoly in the U.S.

Speaking of which, Raj Dhamodharan EVP of Blockchain at Mastercard recently did a podcast explaining how Mastercard regarding stablecoins, bank deposits and CBDCs. Is this a scam – because it involves cryptocurrencies – or is it okay since Mastercard is working on it?

On p. 188 they write:

The mechanism proposed for maintaining consensus of the Libra ledger state was significantly revising the models found in public cryptocurrency projects. Bitcoin allows any user running the protocol to connect and participate in the consensus state and submit transactions. However, Libra being run as a business created a context in which only large corporations would be invited to maintain the consensus state and run the servers to maintain the network. These corporations would all maintain legal contracts with the Libra entity and theoretically run individual nodes of software that Facebook provided them. The governance model of the Libra consortium was a performative farce, and the engineering behind the protocol reflected the same level of theatricality.

This is incorrect in a few areas:

(1) There comment regarding Bitcoin needs clarification; in practice “participate in the consensus state” is distinct from “submit transactions.”

For example, while anyone can run a Bitcoin “mining client” on their computer at home, they will likely not generate the correct value to build a block (e.g., ‘solo’ mining is not typically profitable). While a user can run a full node at home – and certainly submit transactions – it is not really the same thing as building a block which “pools” do today.

(2) It is unclear how the authors evaluated the engineering talent and protocol itself since they do not provide any citations. Labeling everything a scam or fraud is not an argument, it is an opinion.

On p. 188 they write:

Instead of a consensus model like proof-of-work, which would have been unsuited and inefficient for the Libra case, Facebook invested in a not-invented-here form of a classical consensus algorithm known as Paxos; and named their derived implementation HotStuff. The goal of this setup served no purpose other than giving the appearance of decentralization. A closed network in which a fixed set of corporate validators maintained a faux-decentralized state was, for all intents and purposes, equivalent to a centralized setup of replicated servers. This performative decentralization permeates all levels of the Libra codebase and the project. In all aspects, the codebase is trying very hard to convince you it is like other public blockchain projects when it bears little similarity in practice.

Oh?

The authors ranted about HotStuff and were wrong.

HotStuff was created by engineers at VMware in March 2018. See the paper from Yin et al.

HotStuff is not based on Paxos but instead is based on PBFT. Some of the VMware team were hired by Facebook and others hired away by other blockchain teams, such as ChainLink and Ava Labs (the group behind Avalanche).

The authors also fail to produce a single reference for what part of the codebase was trying hard to convince you it was not a public blockchain. Perhaps the github repository was acting weird, but readers are left in the dark about what it was.

Also worth pointing out that the Sui and Aptos public blockchain projects absorbed some of the talent from the Libra / Diem team that disbanded after it was shutdown in January 2022. And Silicon Valley Bank purchased some of Diem’s (Libra) I.P. assets. All of this was concluded before the publication of the book.

Lastly, the authors still do not explain what Paxos is or what “not-invented-here” means. A second edition needs to explain what these “classical” consensus mechanisms are, at least at a high level.

On p. 189 they write:

Facebook Libra was a project of paradoxes, contradictions, and gross mismanagement, which ultimately led to its failure. However, if the project had launched, it would have enabled Facebook to engage in predatory pricing, self-dealing, and the capacity to annex adjacent markets, all while not subject to Bank Holding and Secrecy acts that protect consumers deposits by virtue of being a technology company dealing in its own allegedly “sovereign” currency. Nevertheless, Facebook remains a deeply unethical company that attracts the most deranged and opportunistic employees with no regard for the integrity of democracy or public well-being. Facebook is a company that is the very embodiment of corporate irresponsibility and depravity at every level.

I am sure there are many readers who would like to dance on Facebook (Meta’s) grave too, but at least get the facts straight.

For instance, what ultimately led to Libra (Diem’s) failure was that its banking partners (specifically the custody banks) were pressured to not support its launch.

For example, Diem had deployed a public testnet during its lifetime and the throughput numbers were considerably higher than other public blockchains, yet politically in the U.S. it was unpalatable. Which is part of the reason why some of those engineers went on to build Sui and Aptos, which are high-throughput chains.

Moving along, what is the “Bank Holding and Secrecy acts”? Do the authors mean the Bank Holding Company Act of 1956 and the Bank Secrecy Act of 1970? Which parts of the act(s) was Libra (Diem) subject to?

Lastly, the authors should probably add an “s” to the end of Facebook in the first sentence. And a second edition should briefly explain the name changes (Facebook -> Meta and Libra -> Diem) all of which occurred prior to the publication of the first edition.

Over a mere three paragraphs the authors write about Central Bank Digital Currencies, starting on p. 190:

The Facebook project and its implication as a threat to countries’ national sovereignty has given rise to a recent digital transformation trend for central banks to explore similar ideas. These projects are known as central bank digital currencies. The proposition is simple and based on the fact that central banks typically have enormous balance sheets of their lending activities and hold the accounts for many entities that interact with the Federal Reserve or the European Central Bank. Several central banks, including the People’s Bank of China and the Boston Federal Reserve, are exploring projects to this end.

There are multiple problems with this:

(1) The history is completely incorrect. Experiments and pilots with CBDCs occurred long before Libra existed.

For example, Project Jasper was a project involving the Bank of Canada and R3; phase 1 was accidentally leaked to the public in 2016. As I mentioned previously, Project Argent (another R3-led effort) partially spun-off into World Wire.

The Utility Settlement Coin consortium was launched by UBS and Clearmatics in 2015; it grew to over a dozen commercial banks and multiple central bank participants before spinning off into Fnality International in May 2019 (formalized just before the Libra announcement).

There were other separate, independent efforts taking place simultaneously around the globe. In fact, the term “Fedcoin” (created by J.P. Koning) pre-dates all of these ideas by multiple years.

A second edition should pay closer attention to these examples.

(2) The authors do not mention that there are multiple different CBDC models, some focused specifically on “retail” uses and some on “wholesale” uses.

For instance, the map (above) comes from CBDC Tracker. Each dot represents a pilot, trial, or even production implementation of a CBDC. In some cases they use a blockchain, in others, they do not.

The authors could peruse the literature from the Bank for International Settlement (BIS) as well as the Bank of England, both of which have produced research on this topic prior to the advent of Libra.

For instance, the “Money Flower Diagram” was published in a BIS publication in 2017:

Note: CADcoin was the name given to the digital asset used in Project Jasper; this was about three years before Libra was announced.

On p. 190 they write:

Advocates have generally embraced Libra and CBDCs as an “on-ramp to cryptocurrency” and praised the project for its illusory legitimacy to unrelated projects like bitcoin. However, Facebook and central banks are not building cryptocurrencies, and at best, digitizing existing accounting and payments systems. These proposed solutions bear no resemblance to bitcoin or any cryptocurrencies although and use this confusion is used as part of the blockchain meme to confuse the public.

There are at least five problems in this passage:

(1) Can the authors give us an example of an advocate who embraced both Libra and CBDCs who did not also work for Libra?

(2) Facebook’s Libra (Diem) project had closed its doors about five months before this book was published, so they should have at least put the second sentence it in past tense.

(3) Since the authors do not define or provide any model for what a CBDC is, it is clear in their 2nd sentence they are making it all up. Claiming that “at best” it is “digitizing existing accounting and payments systems” is wrong. They should consult an actual expert next edition.

(4) The last sentence is wrong because there are dozens of CBDCs proposals and implementations, some of which do share and use Ethereum-related infrastructure. The only people confused are the authors, and the Financial Times who for some reason quotes them.

(5) Lastly, there is some grammatical issues with the final sentence. Do they mean to use “although” or “use”?

On p. 190 they continue in their concluding paragraph:

Digital currencies are not synonymous with cryptocurrency, especially when a central issuer offers it. Digital currencies and payment rails are an essential part of public infrastructure that – especially in the United States – needs to transition from slow legacy batch systems that operate 3-4 times a week to real-time payment systems that other developed economies regularly use. These efforts are separate and entirely unrelated to cryptocurrency. Distributed ledger technology has nothing to offer central bank digital currencies as a central bank by definition, centralizes the architecture.

Every single sentence in this paragraph has an issue:

(1) Why is it “especially” when a central issuer offers it? The authors had the chance to explore centralized pegged-coins in this chapter but only focused on a project that never launched, Libra.

Are USDC and USDT not considered part of the “cryptocurrency” world because they are centrally issued? Maybe that is the case, but they did not bother to spell it out.

(2) FedNow was publicly announced August 5, 2019. Six weeks later there were congressional hearings about real-time payments on September 25-26 2019. That is nearly three years before the publication of this book. The authors did not fully describe how often “batch systems” operated in the U.S. during that time or why that aspect was important.

(3) Some of the efforts, such as FedNow, are indeed unrelated to CBDCs, but not every RTP and CBDC project around the world are mutually exclusive.51

(4) This is the first time the authors mentioned “distributed ledger technology” and they do not define it for the audience. And just two paragraphs above they mention the Boston Federal Reserve is exploring projects (Project Hamilton) and guess what the Boston Fed is using? A derivative of Bitcoin.

Overall everything in this subsection is wrong. Yet, strangely enough the authors (twice!) cite a solid paper from Kiff et al. That paper mentions “blockchain” 22 times and “smart contracts” 25 times. Did the authors even read it?

Lastly, the authors had a big miss, not predicting at least one of the problems facing centralized pegged-coin reliant on commercial banks as custodians: a credit event for the custody bank.

For example, two years ago I explained potential credit events with Signature Bank and Silvergate Bank (which Circle used as custodians to hold reserves backing USDC):

Where is Diehl et al. prediction? Nothing specific was mentioned in this chapter or book. They also missed the opportunity to discuss collateral-backed assets such as Dai and Rai.

If you are still reading this review it is worth taking a break because we still have more than fifty pages to go and the errors continue.

Chapter 19: Crypto Journalism

This chapter could have easily been filled with public antics from coin reporters who have gone out of their way to promote specific cryptocurrencies or even acted as sycophants to coin personalities, like SBF.

Instead readers are provided less than five pages of content, and only one that mentions disclosures.

On p. 192 they write:

The confusion about trade journalism as a reliable source is unfortunately common in the absence of authoritative mainstream reporting on cryptocurrency. Government bodies and financial institutions such as the International Monetary Fund, United States Securities and Exchange Commission, and FinCEN regularly cite cryptocurrency trade journalism as the basis for public policy.

If by “regularly cite” the authors mean, the IMF, SEC, and FinCEN will refer to a coin zine in the footnotes, then yes they do. Is that good or bad? It depends on the facts-and-circumstances.

Unfortunately the authors do not provide a single example so we have no idea what they think.

Continuing on the next page they write about the ICO bubble:

This process of credibility purchasing, exploitation of transitive trust, and stoking a “fear of missing out” was a core part of the engine that drove the ICO bubble and was a lucrative enterprise for those participating in it. Several unethical publications silently pulled their articles touting tokens that were later the subject of lawsuits or criminal investigations.

Which publications? Which tokens? What lawsuits and criminal investigations? We have no idea because there is no citation.

On p. 193 they write:

The articles pushed by these outlets vary from the mundane to the bizarre, but several trends are apparent headline trends across most outlets. The first narrative is an almost pending corporate adoption of bitcoin or blockchain technology.

Can we get an example? A reference?

In the same paragraph they write:

The content of the articles will cherry-pick quotes from seemingly mundane internal report on emerging trends in financial services to support whatever position the outlet is looking to promote. The contents of these reports rarely ever support any research and hesitation.

Can we get an example? A reference?

The only citation for the whole paragraph (which is even longer than what was quoted above) is to a very short Financial Times blog post about Terra.

At the bottom of p. 193 they discuss news about Venezuela and Zimbabwe, stating:

The narrative pushed by cryptocurrency outlets is that the citizens of these nations are fleeing their domestic currencies in favor of digital currencies as a flight to safety. While it is true that there are some users of cryptocurrencies in these nations, as there are in most internet-connected countries, there is absolutely no macro trend of citizens towards bitcoin as a means of exchange.

They cite a relevant article from Reuters regarding Venezuela. But it is worth highlighting that once again, in the last part of the final sentence, the authors cannot stop talking about bitcoin. It lives rent-free in their minds.

Yet the world of cryptocurrencies and blockchains is much larger than the orange memecoin.

On p. 194 they write:

During the height of the ICO bubble, investigative journalists looked into the price for journalists to promote a given ICO project at various cryptocurrency outlets. Shockingly the investigation found the prices of an article from a low of $240 to a high of $4500.

Hurray, they finally provided a relevant citation! This is what the chapter should have included, similar stories.

Throughout this chapter – and in particular this section – I kept wondering what were you guys doing in 2017-2018?

Did you warn the public about what you perceived as scammy ICOs? This would have been a good spot for the authors to provide some bonafides.

Chapter 20: Initial Coin Offerings

This chapter has one of their strongest sections and also has some of their worst prose and arguments. at 16 pages it could definitely serve as the foundation for a new edition.

On p. 197 they write:

During 2017-2019 there was a massive secondary bubble on top of the cryptocurrency bubble in which fledgling blockchain companies used the ethereum blockchain as part of crowd sale activities to sell custom tokens representing alleged ownership in new enterprises.

This is not 100% accurate. Not every ICO during that time frame only used Ethereum.

For instance, in July 2017, Binance conducted its ICO that raised $15 million, split between BTC and ETH. That same month Tezos raised around $232 million from approximately 66,000 BTC and 361,000 ETH. The authors do not provide any examples. Also, not every ICO claimed the tokens represented ownership in new enterprises. That is something the authors made up.

On p. 197 they write:

The simple fact remains that no company that raised funds under an ICO model has taken any profitable product to market.

That is probably true, but they do not provide a reference. An outlier for sure, but an example of one company that did was Binance, which operates the largest centralized exchange by spot volume. 52

On p. 197 they write:

The first ICO was in 2013 for a small project called Mastercoin. The project raised $2.3 million by selling a custom digital token for a specific exchange amount of bitcoin and ethereum per new token issued.

While Mastercoin (later rebranded as Omni) is widely considered to have conducted the “first” public ICO, the authors are incorrect on at least one detail: Ethereum did not even exist at this time.53

Nor did anyone participating in the Mastercoin ICO ever exchange ETH for the new token because Mastercoin lived on top of Bitcoin (it was similar to other “colored coin” projects at the time). I wrote a paper on this topic nearly eight years ago, feel free to use the works cited.

On p. 198 they write:

For ICO exit scams, the strategy is straightforward. You construct a fantastical prospectus that makes wild claims about a product or business imply or outright state that investment will increase in value over time and incur massive returns for early investors. Then you raise the money and then hop on a plane to a country without an extradition treaty and launder the money into the local currency. This is known as a exit scam or rug pull.

This was an enjoyable paragraph to read. To their credit they did cite a New York Times article that provides some examples. Yet a second edition should clarify that it is “an extradition treaty with the U.S.” (or a relevant jurisdiction) Also, probably need to use “an” instead of “a” in front of exit scam.

On p. 198 they write:

This is the simplest and most common form of ICO business model. The best example of this is the April 2018 Vietnamese scam for two companies named Ifan and Pincoin. The two firms are alleged to have misled approximately 32,000 investors and stolen upwards of $660 million.

I recall that sad story, even mentioned it in the private newsletter (mentioned earlier):

The authors say it is the most common form of ICO business model. Do the authors have a percentage or other figure to determine how common it is?

On p. 199 they discuss the Telegram ICO involving the The Open Network (TON) token. The authors use the date of 2020 but the references they cited actually refer to the year 2019. The authors should revise the language because the lawsuit was in October 2019.

On p. 199 they write:

The secondary economic question pertains to the fact that the overwhelming majority of these companies have produced nothing of value. The lack of any marketable blockchain artifacts raises some existential questions about the utility of this sector.

That may be the case but the authors are trying to have it both ways. On the one hand they demand evidence, on the other hand they a priori dismiss all blockchains and cryptocurrencies as utility-free. They need to be consistent.

On p. 200 they write:

The question remains where did all this money go? Not all of it was spent on Lamborghinis, parties, and cocaine (although a fair amount was).

There is no citation, so how do the authors know “a fair amount was”?

Continuing in the same paragraph:

While it is true that these companies have created jobs, however, this kind of job creations is the equivalent to paying employees to dig ditches and then fill it back up again. The parable of the broken window is an economic thought experiment regarding whether a child breaking a window is a net win for the economy simply due to the window having to be replaced. The activity of replacing the window has unseen costs that, when netted over all of the participants, are in aggregate negative over the opportunity costs of other productive activities. ICOs, simply put, are a society-level misallocation of capital that incurs a massive opportunity cost in the number of productive things and companies that could be built with said capital.

That is probably true – in fact I agree with the thrust of this passage – but they do not provide any example to strengthen their position. Frédéric Bastiat’s parable that they dutifully summarize can be explored in a second edition; the authors could explain what the ICO funds could have been spent on instead. Although this is tangential to the broader issues around consumer (and investor) protections.

On p. 200 they write:

For coins that are neither exit scams nor thinly-veiled pump and dump schemes, there is another class of projects with slow-burn failures. This class of ventures stems from the inability to deliver on unrealistic business defined by the whitepaper. These whitepapers typically involved appeals to vague buzzword and aspirations to build software built around “decentralization” memes and vague terms such as: Immutable, Decentralized, Trustless, Secure, Tamper-proof, Disintermediated, Open/Transparent, Neutral, Direct transfer of value.

I agree with the authors because what they are basically describing is chainwashing. But the problem is they are throwing rocks at glass houses because Adjacent did something similar back in 2016-2018. Just look through the direct quotes from Diehl and his colleagues during that time frame.

For what it is worth, I think it would have been consistent for them to criticize using these phrases all while explaining they have first hand experience in the industry (which Diehl has removed from his online biography).

On p. 200 they write:

Several jurisdictions became ICO-friendly to encourage innovation and job growth, to collect taxes, and to expand the possibilities of having homegrown domestic startup success stories. The most popular choices for jurisdictions were the Swiss canton of Zug and the island of Malta. The Swiss banking culture of client confidentiality encouraged many ICO companies to incorporate in the Zug region and then use the Swiss or Lichtenstein banking system to convert their bitcoin and ethereum into Francs and enter the traditional financial system. These funds could then be distributed to British offshore trusts, often set up in Gibraltar, to hide the funds from taxation and lawsuits.

The authors provide a reference to a note by Julianna Debler. While it discusses jurisdictional issues, it does not mention anything about Switzerland, Malta, or Lichtenstein.

How do we know these were the most popular jurisdictions? How do we know the funds were setup in Gibraltar? The authors may know something but did not provide a citation for it.

On p. 202 they write:

The average Series A for an American startup is around $13 million. However, these ICO funds raised capital 10-100 times that of a typical Series A round.

There is definitely a lot of blame to go around, but there is no reason to make up anything when publicly known facts seem incriminating.

For instance, what source do the authors derive the average Series A figure? When I lived in the Bay area the average Series A was typically between $2m – $5 million. According to Carta, in Q1 2023 the median cash raised for a Series A was $6.4 million.

But let us assume that the authors are correct, that the figure is closer to $13 million. They are also saying that “these ICO funds” raised $130m – $1.3 billion. Which funds were they referring to? Only a couple dozen ICOs raised more than $100m. A few outliers, like EOS, raised more than $1 billion.

On p. 202 they write:

There was an unusual pattern of ICO-backed tech ventures founded entirely by lawyers and social media influencers with no technical leadership. From a technical perspective, many of these slow-burn companies attempted to build the software proposed in their initial whitepaper only to find that the underlying technology stack they initially proposed was simply too slow, immature, or impossible to support their product pitched. Many companies overpromised the capacity of so-called smart contracts to build arbitrarily complex financial products and were quickly hit by the hard limitations shortly after investigating the technology. In the absence of experienced technical leadership, many of these companies attempted to remedy the immaturity of the software themselves and hired repeated iterations of teams unsuccessfully to build what they had initially promised.

Anecdotally I have heard similar stories but the authors should provide examples or a reference.

On p. 203 they write about Crazy Coins. This is one of the most interesting sections in the book. However it is worth pointing out that very few of them were actual ICOs.

On p. 207 they discuss celebrity endorsements, writing:

On the back of the speculative bubble of coin offerings, many entrepreneurs recruited a variety of people to promote these investments. These included many celebrities such as rappers and Hollywood actors who used their influence and social media presence to tout unregistered securities.

The authors do not mention if they are licensed lawyers or consulted lawyers yet many chapters are littered with accusations such as “tout unregistered securities.”

That may true but the accusation has to be proven in a court. So a future edition should add hedging words like “alleged” or “possible.” Or they could quote a securities attorney.

On p. 208 they discuss court cases, starting with the SEC lawsuit with Telegram. While the authors seem to do a good job summarizing the case, they miss one minor detail: The Open Network eventually launched. Telegram users can transfer Toncoin (the token) to other users on the app itself.

On p. 210 they write:

This model appeals to entrepreneurs as it increase the addressable investor pool to include international and unaccredited individuals who may not otherwise be able to participate.

This may or may not be true. Either way, the authors never explain what an accredited versus unaccredited individual is or what jurisdiction they are referring to (likely the U.S.).

On p. 210 they write:

Companies that engage in this sale often create a Theranos-style long firm whose premise is based on increasingly large token sales on top of a company that is either empty or fraudulent. For these companies, statement is simple: the token is the product.

There are a couple of grammatical issues. What is a “Theranos-style long firm”? What does “statement is simple” mean?

The authors reference an interesting and relevant paper from Paul Momtaz. However the Momtaz paper does not mention Theranos at all.

At the top of p. 211 they write:

Regulars are given many additional political tools to enforce rulings, however, the primary mechanism of action is to bring suits against the worst violations after the fact. Under-resourced regulators will simply often go after the top 20% of worst cases that will result in clear legal precedence and prevent future violations, but on the whole, the system lacks the resources to pursue every case.

There are a couple of issues:

(1) They misspell “regulators” in the first sentence (“Regulars” -> “Regulators”)

(2) Where do they refer the “top 20%” of worst cases? Where does that figure come from?

On p. 211 they write about tokens as illegal securities, writing:

The economic crises of the 1920s and 1930s led to a new variety of laws to curb the excesses of wild speculation that had created the crises.

Which crises were the authors referring to in the 1920s? The Great Depression? Was the Great Depression caused by speculative excesses or were there other contributors?

The authors should probably refine their statement to say something like, “In the U.S., the fallout from speculative excesses and mania that came to a head in late 1929 paved way for the passage of laws such as the Securities Act of 1933.”

On p. 212 they write about the Howey test:

A product is considered a security under US law when it shares the following three characteristics.

Yet later on p. 234 they mention Howey test has four characteristics. They should probably talk to a licensed lawyer to reconcile the wording. For instance, the authors should chat with Todd Phillips, who recently wrote a relevant op-ed in their favorite periodical, the Financial Times.

On p. 212 they say “During the 2016-2018 ICO bubble…” yet in the ICO section on p. 203 they mention “the 2017-2020 bubble.” Are these dates referring to different bubbles?

On p. 213 they write:

The other method around the securities laws is the use of dual-purpose tokens, which can be redeemed for services within a network and traded speculatively. In many of these dual-use token cases, the smoking gun is the presence of prominent venture capital investors where the expressed purpose of their investment vehicle is to return on the investment on their fund. If a messaging app offered a token that granted the alleged “utility” of being able to purchase in-app stickers, it is implausible that a fund of this size’s intent is to buy hundreds of millions of dollars of stickers for its own use. Instead, they intend to use their capital and information asymmetry to gain an advantage in trading the tokens for a return after the presale. The alleged utility is simply a very thin legal cover to hide their real intent.

A couple of issues with this statement:

(1) Which jurisdiction are the authors referring to? The U.S.? Which specific securities laws are they referring to?

(2) That could all be true – and I a sympathetic to their general argument during the ICO bubble years – but the authors do not provide any examples of a specific fund that did this. They basically sound like self-deputized prosecutors.

Overall this chapter has a number of areas the authors can build a strong foundation from, specifically the areas of “crazy coins.”

But even the title of that subsection makes you wonder: how do the authors determine what are crazy and non-crazy coins? They definitely should include direct quotes from actual licensed attorneys because some of their arguments probably have merit but right now it comes across as opinions of news clippings.

Chapter 21: Ransomware

This is a four page chapter that abruptly ends. It could have been much stronger if it included the history of “data kidnapping” in the 1990s. With that said, the authors do provide several specific examples and even a timeline, so that is a good start.

On p. 215 they write:

Most bitcoin use outside of speculation is not in payments but in financial black market activities and malware.

Source? Citation?

Surely just a little googling can help back-up the argument. For instance, according to Chainalysis, illicit use of cryptocurrencies hit a record $20.1 billion during 2022. Yet earlier this month an expert with CipherTrace says: Chainalysis data contributed to ‘wrongful arrest’ of alleged Bitcoin Fog founder. That seems like something readers might like to learn about.

On p. 217 they write:

In late 2019 there was an attack on the University of California San Francisco research department performing COVID-19 vaccine development, which locked servers by epidemiology and biostatistics departments.

The authors do not provide a reference to that UCSF story and a quick googling shows the date is incorrect. The hacking event – and subsequent ransomware demand – was in June 2020.

On p. 217 they write:

With cryptocurrency enabling ransomers, it allows these criminals to proliferate behind the scenes with very little chance of getting caught.

I sympathize and mostly agree with this statement. However it is missing a very important word – liquid cryptocurrency.

Why? Illiquid cryptocurrencies can be difficult and expensive to quickly move in and out of.

For instance, if Diehl issued his own token – Diehlcoin – its mere existence does not a priori enable ransomers. Rather, a deep and liquid cryptocurrency is necessary to expedite the process at scale. That is one of the reason that J.P. Koning recommended focusing on the payments leg of ransomware.

On p. 218 they provide eight dates that are not ordered chronologically, a new edition should order them by-date or at least explain that the ordering is done by ransomware amount.

Lastly, the very final sentence includes “a $5.2B/year industry” — the authors should spell out “billion” instead of abbreviating it.

Chapter 22: Financial Populism

This six page chapter should have been longer or at least spent longer discussing the fall-out of the 2007-2009 financial crisis.

It only plays lip services to the frustrations and concerns highlighted by protestors within the Occupy Wall Street movement.

For instance on p. 220 they write:

However, the genuine grievances percolating about the American zeitgeist were not bracketed purely to leftists groups; the events of the global financial crisis were indiscriminate and universal in the damage they caused the public, regardless of political affiliation. Movements on the right, such as the Tea Party, also adopted financial populist language as a reaction against the perceived injustice of the Obama administration’s bailout package and recovery plans. It was a rare moment in America where both the left and the right were, for equally legitimate reasons, furious at the fact that the public had been swindled by reckless Wall Street speculation – much of which was entirely based on crimes that would be later uncovered by post-crisis financial journalism.

Any specifics about the bailout packages and recovery plans? Wasn’t TARP legislation passed in the final months of the previous (Bush) administration?

Either way, the authors moved on without mentioning anything about the existence of systemically important financial institutions (SIFIs) during that time period which is a big omission; nor do they mention important legislation like Dodd-Frank.

Instead, they say these folks were naïve simpletons, writing on p. 221:

A valid criticism of the Occupy movement was that, in hindsight, the campaign had no clear goals or vision of what success or positive change would entail. Occupy was primarily a youth movement made up of individuals who overwhelmingly did not understand the complexity of the global financial system, regulation, or the principal causes of the financial crisis but were personally impacted by all these factors. The campaign was a reactionary movement against a not-well-understood injustice that had been exacted against them but which almost none of them could articulate the actual problem or proposed solution. The exposition of the movement’s ideas led to many misconceptions and debatably amounted to little tangible change in regulation or policy.

Perhaps this is all true but up until this point, apart from two pages in chapter 3, the authors do not spend any time discussing the GFC; nor the tangible changes in regulation and policy (such as Dodd-Frank).

Later in the chapter they mentioned TARP but do not mention how – in the U.S. – are still left with a highly concentrated financial system that privatizes profits and socializes losses.

Perhaps the youthful participants in the Occupy movement were ignorant, but the patronizing tone of this paragraph and the book seems like projection.

A reader could substitute “Occupy” with “anti-coiners” and arrive at the same conclusion as the authors did about the veracity of anti-coiners inability to articulate the actual problems facing the financial system. For example, in this book the authors show they do not understand how PayPal actually operates (e.g., as a shadow bank).

On p. 221 they discuss WallStreetBets and Bitcoin

The political imagination of Satoshi – and many crypto apostles who followed his vision – was that the financial system could not be reformed. Nothing less than the wholesale destruction of corrupt financial institutions would achieve their goals.

That may or may not be true, is there a citation or source for that?

The sole reference is to a paper from Carola Binder. The paper does not mention anything about cryptocurrencies, including bitcoin. Is this another strawman by the authors?

On p. 222 they write:

The American public’s rage toward Wall Street and the elected officials are, in many ways, highly justified. In response to the financial crisis, the American government created the Trouble Asset Relief Program (TARP) in the form of a $7000 billion government bailout to purchase toxic assets from financial institutions to stabilize the economy. While, in hindsight, the package may have been necessary, it only reaffirmed the notion that the financial sector plays by a different set of rules than the public; rules that encourage risk-taking because public taxpayer money is always available whenever the situation becomes too dire. Economists use the term moral hazard to describe conditions where a party will take risks because the cost incurred will not be felt by the party taking the risk. The clearest example of these excesses was when in 2009, a year after the bank rescue program, Goldman Sachs paid out $16.7 billion in bonuses to bank employees, seemingly as compensation for their extreme risk-taking leading up to the crisis. These bonuses paid out, seemingly on the back of the taxpayer, enraged the public. Despite all the public anger, the Obama administration did not prosecute any of the high-level executives involved in the events leading up to 2008. Instead the courts prosecuted a single executive, Kareem Serageldin, who was sentenced to 30 months in prison for conspiracy to falsify books and records at Credit Suisse. In what many perceive to be an affront to justice, the rest of the sector was graciously given a bailout and a slap on the write despite the public outcry for the Obama administration to collect banker scalps.

While the authors pay some lipservice to injustice that carries on to today, their 270 word exposition contains no mention of market structure, specifically how single points of failure (SPOF), single points of trust (SPOT), and systemically important financial infrastructures are still hanging over our heads.

Will blockchains or cryptocurrencies “solve” SIFIs? Maybe, maybe not. But the authors do not even attempt to discuss a scenario of decentralized financial market infrastructures (dFMI). Yup, I co-authored a paper on that topic too.

A couple of other quibbles about that passage:

(1) They do not explain why TARP was necessary. At the time, others argued for alternatives and even no bailouts at all. A second edition should explain the pro-TARP position.

(2) Courts are venues where litigation occurs and as such do not ‘prosecute,’ it is prosecutors who prosecute entities. Worth revising the wording the sentence about Kareem Serageldin.

On p. 223 they discuss the Reddit forum WallStreetBets, writing:

Despite the narrative of a populist uprising, the so-called Gamestop Revolution had little effect on the broader market. Instead, the vast majority of retail investors who chose to participate in the Gamestop bubble ended up losing money, as is characteristic of other historical bubbles. In the aftermath of the bubble popping, the Wall Street Journal report that many of the brokers and market makers made outsized profits off the increased volume in trades; the Journal wrote that “Citadel Securities executed 7.4 billion shares of trades for retail investors. That was more than the average daily volume of the entire U.S. stock market in 2019”. It also reported that Wall Street investment bank Morgan Stanley “doubled its net profit in the first quarter of 2021 to $41. billion” At the end of the day, the real winners of the GameStop bubble were the same entrenched institutions as before, and the public learned the hard lesson that day trading is not an effective means of protest against the financial establishment.

Several issues with this:

(1) This is the first – and only – time that the authors acknowledge “entrenched institutions.” Up until this point we have highlighted how the authors implicitly carry water for incumbents and legacy institutions. A second edition should build beyond the single reference they provide, to a paper from Jonchul Kim.

(2) A second edition could also discuss the role Robinhood played in this faux populism. And specifically, the constraints in the financial plumbing.

For instance, Robinhood had to raise $1 billion and throttle trades at one point due to clearing and settlement bottlenecks with the DTCC.54

(3) The authors should be consistent with how they write “Gamestop” or “GameStop” because they use both.

On p. 224 they write:

Financial populism is a reaction to this fundamental economic shift that can be framed in terms of six key components of the ideology.

The authors only list five components, where is the sixth?

Chapter 23: Financial nihilism

What expectations do you have for five pages in a chapter called financial nihilism?

On p. 227 they write:

Crypto is a symptom of the problems of our era, of a post-truth world awash in crackpottery, and a breakdown of trust in our institutions. For the first time in a generation, Americans feel the economic crunch like never before. Now well into their thirties, the millennial generation has been hammered by both the 2008 financial crisis and the coronavirus pandemic. Study after study confirms that Americans are more atomized, lonely, depressed, and desperate. At a certain level, the psychological state of market participants also begins to alter the markets and the fabric of the financial landscape itself.

Which studies? Any example? And what is threshold for “a certain level”?

On p. 228 they write about alienation:

Nihilism is an anti-philosophy, an intellectual dead-end from which no other observations can be derived. The financial form of nihilism takes these ideas and applies them to the concept of value and markets.

Hey, I think I know where their story might be headed…

Thanks for the credit guys! Don’t forget to cite Colin Platt too.

On p. 229 they write about the subjective theory of value:

A radical reading of the subjective theory of value asserts that any objective measure of value cannot exist, and the subjective preferences of the buyer entirely determine that market value and the seller, revealed through the autonomous operation of the free market. Dogecoin, diamonds, and dollars all have the same intrinsic value of zero because everything has zero intrinsic value. Markets simply trade in memes, some more popular than others, but none having any objective status or corresponding to any truth. Any investment scheme is thus assumed to be a grift a priori. After all, it is an attempt to get others to believe in some collective delusion which is assumed to be a Ponzi structure because everything is a Ponzi. The entire economy is thus nothing more than a Keynesian beauty contest for collective delusions. The role of the individual in late capitalism is to be nothing more than a maggot eating the corpse of civilizations while the world boils itself to death in an orgy of greed and corruption.

Oh?

In re-reading the passage above, while the authors were purposefully exaggerating the bleak worldview of the “nihilist” it is clear that the two camps share at least one common cudgel: the grift of a priorism.

We have documented around two dozen examples – so far – of the authors eschewing empiricism for an a priori approach.

Their argument immediately falls apart because prosecutors (which the authors have deputized themselves as) must use facts-and-circumstances, evidence, to prosecute a case. Not oration.

On p. 229 they mention there “in a world of zero interest rates” but the world of ZIRP – at least in the U.S. – ended several months before this book was published. The Fed began hiking rates in March 2022.

On p. 230 they write about how everything is a Ponzi:

Instead of a 401k, a diversified portfolio of mutual funds, and a mortgage, for a nihilist it is an entirely natural alternative to constructing a portfolio of CumRocket, Shibu Inu, SafeMoon, and a hundred other blatant scams in the hope that one of the scams works out.

Let us be pedantic: while some readers may know what a 401k is, not everyone might, so a future edition should probably explain what a 401k is or what a diversified portfolio of mutual funds are.

The authors should probably also explain why an investor pays management fees that mutual funds charges (versus an index fund that might not). Also, the authors might want to explain what type of mortgage they are thinking of too (they are not all the same in every country).

Also, since they do not provide any evidence for why CumRocket, Shibu Inu, or Safemoon are scams, then we can dismiss their claim without any evidence.

In the concluding paragraph of this chapter they write:

The world has a structure to it, and through the capacities of reason and science, we can understand both the world and the human condition, and through reason, we can improve our condition to build a better future. While democracy is not perfect, it is perfectible. Even if none of this were true, it is still better to labor under a delusion of misplaced hope and optimism than to wallow in aimless despair. Financial nihilism is a worldview that, although understandable, can be outright rejected.

Like most concluding paragraphs in the book, this is just rhetoric and polemics. The chapter does not actually cite anything about despair, is there a study on the level of despair of degen coin nihilists?

Chapter 24: Regulation

We have mentioned this before but it bears repeating: an editor would have helped consolidate similar topics together. This nine page chapter has some new ideas and concepts but it also regurgitates a number of topics that have already been semi-addressed elsewhere. It is also filled with more rants which are tiring to hear over and over again.

On p. 233 they write:

We live in a new golden age of fraud. Never since the 1920s has financial fraud and grifting been so ingrained in public as today. Yet, the cryptocurrency bubble is entirely built on a single foundation: securities fraud. The investment narrative of cryptoassets derives from an uncomfortable truth; selling unregulated financial assets to unsophisticated investors is a great way to raise large amounts of money quickly and with little overhead and oversight. In the 1920s, people raised money from the public on the back of promises of “easy money” from non-existent oil wells, distant gold mines in foreign countries, and snake oil cure-alls. And yet nothing has changed. Today, we have promises of investments to build financial perpetual motion machines created on the back of promises of decentralized networks, a new digital economy, and blockchain snake oil cures for whatever problem one sees in the world.

The authors cite a relevant paper from Boreiko and Ferrarini and a book from Michèle Finck. Both primarily focus on blockchain-related regulations in Europe.

But as they have in previous chapters: the authors also keep interchangeably using “securities fraud” with the sale of “unregulated financial assets.”

I am not a lawyer, are the authors? Who is being defrauded in their mind? Are they sure they do not mean “financial assets that should be regulated” or “financial assets that have been regulated in different ways depending on the jurisdiction”?

A second edition should clarify what exactly they mean when they use these words and more importantly what jurisdiction(s) they had in mind.

On p. 233 they write:

The Securities Framework put in place by our grandparents following the Market Crash of 1929 is based on universal truths about the nature of capitalism.

Look we all probably agree with the thrust of this particular page but it comes across heavy-handed in places. And more importantly, the argument presents “The Securities Framework” as if it was handed down by Moses and cannot be changed.

Apart from having semi-endorsed the STABLE Act and e-Cash Act, I do not currently have a strong view about any of the proposed legislation on the docket in the U.S. at the state or federal level. But that is not why you came to read this book review either.

On p. 234 they mention “the initial coin offering bubble of 2018” which is yet another date format. Previously they have said 2016-2018 and 2017-2020. A second edition should reconcile and harmonize these.

This full paragraph is enjoyable:

The initial coin offering bubble of 2018 gave us the most unambiguous evidence of how crypto creates a criminogenic environment for fraud. By allowing potentially anonymous entrepreneurs to raise crypto-denominated capital, from all manner of international investors, with no due diligence, reporting obligations, registration requirements, or fiduciary obligations to their investors, we saw exactly what one might expect: a giant bubble of outright scams. Some studies put the number of outright ICO scams at 80%. These companies had no pretense of any economic activity, and the founders simply wanted to abscond with investor money. The rest of the 20% merely fall under the category of illegal securities offerings, companies that sold digital shares as a proxy for equity in a common venture to American investors.

I actually agree with some of what they wrote, but it is how they wrote it – hyperbolic! – that is problematic. With the amount of alleged fraud and scams that took place in that era, there is no reason to exaggerate or get sloppy or lazy about references.

Where do the get the 80% and 20%? There are no citations.

Did they make it up? A quick googling found a 2018 report from Satis Group which claims that: Over 70% of ICO funding (by $ volume) to-date went to higher quality projects, although over 80% of projects (by # share) were identified as scams.

Is this what the authors had in mind? Do the authors agree with Satis’s methodology? If so, add it to the bibliography in the next edition.

How do we know the remaining 20% are “illegal securities offerings”? The authors do not explain why there are only two categories. What about ICOs that did not solicit Americans?

The remaining portion of this subsection is hard to take seriously since, as mentioned previously, they do not have a consistent view on how many prongs the Howey test is.

On p. 235 they write about shadow equity and securities fraud, specifically around venture capital firms. They do not provide any citations yet state that: “The venture investing model is an integral part of the United States tech economy and an engine for enormous prosperity and growth.”

Maybe it is, what is the reference?

Continuing on the same page:

However, in the post-2018 era, the outsized venture returns seen in the previous era have largely fallen by the wayside. The unicorns-companies valued at over $1 billion – that were once darlings of Silicon Valley, Peleton, WeWork, Uber, and Lyft have not performed like the giants of the dot-com era when IPOing; the unicorn stampede has become a bloodbath in the public markets.

A few issues with this:

(1) They probably should add a colon after “Silicon Valley”

(2) They misspelled Peloton (not Peleton)

(3) While we all probably understand the gist of what the authors are trying to say – that recently listed unicorns have underperformed since they IPO’ed – the comparison with “dot-com era giants” is not the best one.

In fact, in Chapter 3 they specifically highlighted the “The Dot-Com Bubble”. What are we supposed to do with this conflicting information?

For example, the authors do not mention specific “dot-com era giants” but we can probably assume they would include Amazon since it was mentioned in Chapter 3. Its first five years after listing were pretty dicey.

A future edition could simply say something like, some high-profile unicorns have underperformed since being publicly listed.

Continuing in the same paragraph they write:

Venture capitalists chasing the double-digit yields of the past have turned into increasingly more bizarre, risky, and unsustainable business models as part of their portfolio building. For venture capitalists dipping their toes into crypto investing, this has increasingly meant not investing in equity in their portfolio companies but instead investing in crypto tokens as a proxy for equity, a controversial mechanism known as shadow equity.

What is shadow equity? The authors do not provide a formal definition. What does Google say?

So the authors create a new term – shadow equity – do not provide a definition for the readers and it turns out there is already another working definition that is not the same thing as what the authors were describing.

A second edition should either drop the term “shadow equity” or find another term industry participants use to describe whatever it is the authors had in mind.

Continuing on p. 236 they write:

However, with shadow equity companies are not effectively issuing shares represented by cryptoassets or smart contracts, which are securities yet receive none of the investor protections of regular equity. Instead of a traditional equity raise, venture capital firms approach founders of crypto companies and do backroom deals that exchange capital for a percentage of the tokens that the company will issue in a sale known as a pre-mine. For instance, if a company issues 30 million shadow equity “share” tokens, it might allocate 20% or more of these tokens to its investors before selling them directly to the public.

There are several issues with this, including:

(1) Despite how common this allegedly is, the authors provide no specific examples or citations.

(2) It technically is only a “pre-mine” if there is actual mining taking place (such as a proof-of-work coin). There are other industry terms for non-proof-of-work coins but why should we do all the homework for the authors?

(3) Anecdotally I have heard of different types of retention and compensation models, but the one they describe for “shadow equity share tokens” is new. Where did they hear that?

On p. 237 they use the word “tieing” but the correct spelling is “tying”

On p. 237 they write:

Since the rise of the “web3” marketing campaign, many high-profile venture capital firms, although not all, have engaged in mass securities fraud to juice the returns on their portfolio.

Did the authors provide a single example? Nope. Perhaps they are correct but that which is presented without evidence can be dismissed without evidence.

Continuing in the same paragraph:

Investors’ returns on shadow equity are directly offering these investments to the public far faster than any other traditional form of venture investment. A typical web3 company can have a pre-mine sale, raise $50 million, offer the token to the public in a giant marketing push, and watch the price temporarily soar 10-20x in value in a massive pump while insiders take their profits, and before it all collapses down to peenies on the share; and all this before any pretense of a product is event built.

Did the authors provide a single example? Nope. Perhaps they are correct but that which is presented without evidence can be dismissed without evidence.

On p. 238 they write about industry lobbying efforts. But they do not mention a single lobbying organization which is a real disappointment because lobbying organizations like Coin Center white wash the negative externalities of proof-of-work mining.

For instance, they write:

All the while, the cryptocurrency industry has been lobbying lawmakers left and right, attempting to pass beneficial laws which all them to circumvent securities laws and create loopholes for them to continue the gravy train perpetuated by open and ubiquitous fraud. The revolving door between government agencies and crypto companies has been prolific in the last few years. Currently, the government risks falling into an irreparable state of regulatory capture where agencies are run by the entities they allegedly regulate.

I agree with the general thrust of this but you know what the authors are missing? Specific examples and evidence.

For instance, five years ago Lee Reiners wrote the first long-form article diving into the “revolving door.” A second edition must include that. In addition, Nathaniel Popper was the first mainstream reporter who covered how specific venture firms were actively lobbying specific regulatory agencies in the U.S., asking for “carve outs.”

It is worth pointing out to readers that a number of anti-coiners have shown open disdain with Popper despite the fact that he was covering this space long before the anti-coiners decided to care about it. The fact that Popper’s coverage is not cited reduces the credibility of these authors who have not done diligence.

For instance, where were the authors when Popper was reporting on the misdeeds of Centra?

On p. 239 the authors present a framework for discussion (with regulators) and propose five questions. These are good questions.

On p. 240 they present a “path forward” which includes:

Cryptoassets are clearly securities contracts. They meet both the legal and practical qualifications for being regulated, just like any other investment contract. To investors, they present with much the same presentation of opportunity: to generate a return based on the efforts of others, but with far more extreme risk. The existing securities framework would vastly mitigate these risks and protect the public from harms that have been well-understood by economists and lawyers for 100 years now.

All cryptoassets are “clearly securities”? What supporting evidence to the authors provide to back up this claim? Nothing. That which is presented without evidence can be dismissed without evidence.

Continuing on p. 240 they write:

The amount of pump and dumps and market manipulation present in crypto markets is unprecedented and is primarily created and done by exchange operators themselves. Massive amounts of non-public asymmetric information, economic cartels, and manipulation are not conducive to either capital formation or financial stability.

How unprecedented are the pump and dumps? How do they know these are primarily created by exchange operators?

What supporting evidence to the authors provide to back up this claim? Nothing.

That which is presented without evidence can be dismissed without evidence.

Also, this is the first and only time the authors complain about cartels. They missed the opportunity to discuss them in Chapter 3 regarding the financial industry during and after the 2007-2009 crisis.

On p. 241 they propose to “ban surrogate money schemes derived from sovereign currencies.” This is not a bad idea per se, Rohan Grey has kind of discussed something similar. But this would impact PayPal, is that something the authors are aware of?

Continuing, they write:

As found in many stablecoin projects, surrogate money schemes attempt to create dollar-like products that mimic public money. However, the products are not backed by the full faith and credit of the United States Government, and in many cases not even back by any hard assets. Stablecoins are subject to extreme risk of runs, much like we saw in bank runs in the Great Depression, an event not seen in the United States in 90 years.

It is too bad the authors did not take the opportunity to flesh out their arguments – in full – in the chapter 18. Such as, what is the definition of a “stablecoin”?

In this chapter they still do not provide specific examples of stablecoins that they perceive to be bad actors.

Furthermore, what do the authors mean by “bank runs”? Does this mean customers of banks standing outside the physical branch while the bank goes under?

As mentioned in the review of Chapter 18, the authors only discuss Libra (Diem). They do not mention specific banks, which is a big miss because others – including myself – specifically predicted the commercial banks that could collapse.

They need to do better with providing evidence, they had ample space in 247 pages to do so.

Continuing they write about money market mutual funds (MMMF):

The creation of stablecoins in almost precisely the same system, but instead backed by even riskier assets like Chinese commercial paper and other cryptoassets, which take the run risk of MMF and expand it exponentially.

The authors do not provide any evidence or references regarding Chinese commercial paper.

They could strengthen their argument if they – for example – explained how the New York Attorney General sued and settled with Tether Ltd (USDT). And during this investigation the NYAG discovered that Tether Ltd had at one point held securities issued by a couple of Chinese banks including ICBDC and CCB. Why not include these helpful details?

Also, why is it riskier to own these Chinese assets and what makes the run risk exponential? Perhaps both are true, but that which is presented without evidence can be dismissed without evidence.

Continuing in the same paragraph:

On top of this, the proliferation of private money simply weakens the dollar’s strength both domestically and abroad. Stablecoins are the financial product for which the upside is entirely illusory, and the downsides are catastrophic. The proliferation or integration of stablecoins is not in the interest of the United States from both a financial stability and foreign policy perspective.

This is a weird argument. In some ways, it is very similar to pro-pegged stablecoin legislators make:

Also, if the authors are actually against the “proliferation of private money” then they should be shaking their fists at the entities responsible for the creation of the vast majority of “private money” in the U.S., commercial banks.

Their next recommendation is to “firewall cryptoassets away from the banking sector and the broader market”

Writing on p. 241:

The Glass-Steagal Act, put in place after the Great Depression, set “firewalls” between different divisions of the banks.

They misspelled Steagal (should be Steagall). While I agree with parts of their proposal they could have mentioned that Glass-Steagall was eventually repealed in 1999. Is that good or bad? Seems like a good future discussion to have in a book.

Their final recommendation is a “complete ban.” Writing on p. 242:

Alternatively, the United States could consider a path similar to what China recently enacted or to the historical American Executive Order 6102, which forbade ownership of gold. Despite the rhetorical claims to “not throw the baby out with the bathwater,” there is, after 13 years of crypto, very little evidence that there is any baby at all.

The authors do cite a relevant article from the WEF regarding the 2021 bans in China. Why they waited until the very end of the book to cite this is unclear. Why not reference it in earlier chapters regarding China? What parts of the bans do the authors agree with? All of them?

Also, it is clear that throughout the book, the authors did not put much effort into finding evidence to even support their own claims, let alone conduct market research that provides evidence that contradicts their a priori cudgel.

It is worth pointing out that the copy/paste Twitter account – Web3 Is Going Great – conducts similar behavior as the authors: they both cherry-pick news that is favorable to their narratives. It is disingenuous and dishonest.

Continuing in the same paragraph:

Introducing completely non-economic digital speculative “playthings” introduces nothing to an economy other than slightly more exotic gambling games. In fact, there is a strong argument that such activities may come at an enormous opportunity cost, in the capital and talent that get diverted to ever-more extravagant ways to financialize digital nothingness. We can create an entire industry speculating on the volatility of nothingness and turn every fictional thing into a tradable token, but should we?

That is a good question! What evidence did the authors provide or refer to to reinforce their strong argument? Nothing.

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

The final paragraph of the chapter reads:

The only overall outcome of this program is the equivalent of digging digital ditches and filling them up again. Perhaps our society has better things to do than digging deeper and deeper ditches and filling them up again. And quite possibly, the Americans should simply ban crypto and play intellectual catchup with what seems like the rather sensible policy the Chinese have concluded on for the same universal common-sense financial and public harm mitigation reasons.

What would a ban entail? That no Americans in America can have a digital wallet on their phone? That no Americans in America can install software that runs a blockchain validator? What is the plan?

Also, the authors do not actually explain what China banned. For instance, private individuals can still own cryptocurrencies in China. Do the authors want to replicate that too?

All-in-all this chapter is a disappointment because it should have come earlier in the book, it should have been more comprehensive, it should have had more citations and references, and most importantly: it should have been vetted by experts in their fields including at least one licensed lawyer.

Chapter 25: Conclusion

The final four pages are basically a long rant, so let us dive in.

On p. 243 they write:

Crypto is a gripping story full of sound and fury, hope and fear, hype and noise, greed and idealism, yet despite all that, it is a tale signifying nothing in the end. Crypto is not just an experiment in anarcho-capitalism that did not work; it is an experiment that can never work and will never work. Crypto was promised as the technology of the future, yet it is a technology that can never escape its negative externalities or its entanglement with the terrible ideas of the past. Crypto is not the future of finance: it is the past of finance synthesized with the age-old cry of the populist strongman, To Make Money Again.

There are a few issues with this:

(1) The authors erect a strawman but empirically we know not all “crypto” projects are attempting to ‘make money again.’ Nor do all blockchains use proof-of-work. In fact, in looking at the current list of Layer 1s on CoinGecko, the majority are based on proof-of-stake. What are the negative environmental externalities of proof-of-stake?

(2) Yet again, the authors use an a priori argument to predict the future: “an experiment that can never work and will never work.” How can they know the future with such certainty? This is soothsaying.

Continuing on p. 243 they write:

While our existing financial system is undeniably profoundly flawed, not optimally inclusive, and sometimes highly rigged in favor of the already wealthy; crypto offers no solution to its problems other than to create an even worse system subject to unquantifiable software risk, profound conflicts of interest, and an incentives structure that would exasperate wealthy inequality to levels not seen since the Dark Ages. Put simply, Wall Street is bad, but crypto is far worse.

When I tried to explain to friends that this book unnecessarily carries water for incumbents, this is the reoccurring meme that came to mind.

There is no reason the authors have to defend incumbents or the a cartel that regularly is fined for the very activities that the authors abhor. Guess who invented all of these criminogenic concepts in the first place?

Rather, it is possible to critique both the coin world and the traditional financial world. You do not have to join one camp or the other.

In fact, real researchers should attempt to be neutral, or at the very least, provide some kind of nuance. There is no nuance in this book. To their credit, they did cite a Bitcoin-specific article from 2013 in referring to the Dark Ages. Too bad for them, the coin world in June 2022 was more than just the orange memecoin.

On p. 244 they write:

At all levels of sophistication and from all walks of life, every type of investor needs to be given truthful, fair, and full information about their investments and protected against fraud and unnecessary risk by our public institutions. Crypto’s very design is entirely antithetical to building or improving any of our existing markets and only serves to add more opaqueness, systemic risk, and fraud.

Oh, now they authors finally care about systemic risk. It only took 244 pages.

To their credit, they do cite a few external sources. The first is Hanley’s paper on Bitcoin (and only Bitcoin). The second reference is to a three-person interview that meanders around, why did the authors add it? The third is a reference to a blog post from Ed Zitron’s whose hyperbolic rant sounds nearly identical to the authors. Opinions are not evidence, they are opinions. Maybe there is some evidence but… what can be presented without evidence can be dismissed without evidence.

On p. 244 they continue:

All scientists and engineers are duty-bound to our profession and our communities that the public good is the central concern during all professional computing work. As a technologist, cryptoassets present our industry with an immense challenge and fundamental questions about the nature of responsible innovation.

Did Diehl – or one of the other authors – just break the fourth wall? Do the authors have a monopoly on who gets to represent “the technologist”? I have worked for tech-related companies for years, are my opinions weighted any differently than theirs?

They do cite two references, one is the same presentation from David Rosenthal and the other is a hyperbolic presentation from Nicholas Weaver. Are these challenges insurmountable? According to the authors and Weaver, that would be an a priori no.

On p. 245 they write:

Despite thirteen years of development, there is widespread debate over the proposed upside of cryptoassets from technical and financial considerations. While the aspirations of technologies may be genuine, the reality of the technology and its applications are vastly overstated and not in line with what is possible. Blockchain-based technologies have severe limitations and design flaws that preclude almost all applications that deal with customer data and regulated financial transactions. Real-worlds applications of blockchain technology within financial services are sparse and ambiguous as to whether they are an improvement on existing non-blockchain solutions. Most senior software engineers now strongly reject the entire premise of a blockchain-based financial system because the idea rests on both economic and technical absurdities.

Let’s walk backwards for a moment. Recall from Chapter 14 that we are all taught in writing class not to introduce new concepts or ideas in the conclusion of a story. The authors not only do it again, but they do not provide any citation.

For example, did the authors conduct a survey to determine that “most senior software engineers now strongly reject.”

Guess what? We all know what the proper response is to this.

The authors also showed their direct contributions as at least one of the co-authors of the anti-Web3 letter that was published two weeks before this book. How do we know?

The letter has a passage that sounds identical to the remark above:

After more than thirteen years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions.

Coincidence. Not at all.

At the time, I pointed out that the first web browser (appropriately called the “WorldWideWeb“) was launched in 1990. It was not until 2004 that Google revealed Ajax-based Gmail followed by Google Maps.

If the authors are trying to make the claim that anything (everything?) useful should have been invented in 13 years then they should hold other tech initiatives to the same standard. Besides, most blockchains themselves are much younger than 13 years too.

For instance, Ethereum’s mainnet launched 8 years ago and has undergone extensive changes over the past several years.

Lastly, what are “existing non-blockchain solutions”? This is the type of argument that Bitcoin maximalists such as Chris DeRose frequently used: just use a database. Okay, which one? Are you a database expert now too? Can other experts have a difference of opinion or is your view the final word?

Continuing on p. 245 they write:

The catastrophes and externalities related to crypto are neither isolated nor are they growing pains of a nascent technology; instead, these are the violent throws of a technology that is not built for its purpose and is forever unsuitable as a foundation for large-scale economic activity.

There is something wrong with the grammar in the middle of this rant: “these are the violent throws of a technology that is not built for its purpose”. What does that mean? On the margin of the book I wrote, “Did the authors meant to say ‘not fit for purpose’?” but even that does not make sense there.

Either way, by claiming “is forever unsuitable” the authors are once again trying to predict the future a prori.

Continuing on p. 245 they write:

Technologies that serve the public must always have mechanisms for fraud mitigation and allow a human-in-the-loop to reverse transactions. Blockchain technology, the foundation of all cryptoassets, cannot, and will not, have transaction reversal or data privacy mechanisms because they are antithetical to its bae design. The software behind crypto is architecturally unsound, and the economics are incoherent.

This is factually untrue. An RTGS such as Fedwire has irreversible transactions. There are no “human-in-the-loop” on purpose. In order to negate one transaction a subsequent transaction must be sent. This is true for cases such as bankruptcy too.

Do not take my word for it, here is what the Federal Reserve actually says:

We see this in other systemically important financial infrastructure too, such as CLS. CLS was setup after the collapse of a German bank giving rise to what we now know as Settlement risk or Herstatt risk.

I have patiently tried explaining these ideas – around SIFIs – to various anticoiners and Bitcoin maximalists and they frequently just pretend that “irreversibility” is a characteristic of blockchains and nothing in traditional finance. 55

Lastly, when the authors say that cryptoassets cannot and will not have “data privacy mechanisms” is there any existing confidentiality or privacy-related effort that they are okay with? They dunked on Tornado Cash earlier in the book, and they singled out both Monero and Zcash as well.

Are the authors okay with developers attempting to create new confidentiality or privacy-related technology or is it just not allowed in the universe the authors live in?

Continuing they write:

The theoretical upsides of every crypto project are entirely illusory. It is a solution in search of a problem. Its very foundations are predicated on logical contradictions and architectural flaws that more technology cannot fix and will never be resolved.

The authors are once again predicting the future with a lot of certainty: Will never be resolved. This is an a priori argument and once again, can be rejected because it does not have any evidence. The only thing they cite is another op-ed by Ed Zitron. A scientist should sit down and explain to the authors – and many of the people they cite – and explain the difference between a priori arguments and a posteriori arguments.

Continuing they write:

The impact of crypto’s externalities is massive and becomes more more pronounced every day it is allowed to continue to exist. Crypto is a project that will always create more net suffering by its very design because its design is antithetical to both the rule of law and the foundations of liberal democracy. Technologies working on cryptoassets and web3 are not building a brighter and more egalitarian future; they are only creating a path back to serfdom, where the landed elite are now tech platforms that control the means of communication, the money supply, and the levers of the state itself.

It took 246 pages but now the authors are finally critics of “tech platforms that control the means of communication.”

Are the authors critical of Big Tech for this type of centralized ownership and control or because “crypto” might be involved in some way? Who knows.

What we do know is that the authors believe that crypto “will always create more net suffering by its very design”.

Lacking any citations this can be classified as an opinion.

The final paragraph of the chapter, states:

A tech-led plutocracy is not a future we want to build, and despite the inevitability rhetoric of its supporters, crypto does not have to be part of our future. Crypto has no physical existence; it is a meme, an idea-and an incoherent one at that-which is no more eternal or permanent than the notion of the divine right of kings to rule once was. Crypto is an idea that is as senseless and ephemeral as every other collective delusion throughout history that has since passed into the intellectual dustbin of history, and this time is not different.

Can we talk about “inevitability rhetoric” for just a moment? The authors use this exact rhetoric over and over in each chapter. It is tiring. And it is not an adequate substitute for an evidence.

Obviously coin promoters should also be held to the same standard and if you read my other book reviews, I point out the same sorts of issues.

That is their conclusion, were we expecting something less polemical and more substantive?

Chapter 26: Acknowledgements

This is not an actual chapter but it now helps sync up the out-of-sync bibliography. It is worth looking at really quickly:

Many thanks to all those who helped with editing, citations, and research. Adam Wespeiser, Brian Goetz, Ravi Mohan, Neil Turkewitz, James King, Alan Graham, Geoffrey Huntley, Rufus Pollock, Paul Hattori, Grady Booch, and Dave Troy. And to the many other crypto critics who laid the intellectual foundation myself and others to follow.

Did Diehl – or one of his co-authors – break the fourth wall again? Who is “myself”? The same person who was referring to themselves in the Conclusion as “a technologist”?

It is not a huge coincidence that many of the people the authors acknowledge also happen to be co-signers of the anti-web3 letter that was published two weeks prior to the books publication.

Overlapping names include: Adam Wespeiser, Alan Graham, Geoffrey Huntley, Rufus Pollock, Grady Booch, and Dave Troy. Two of the co-authors of the book – Darren Tseng and Stephen Diehl – also sign the letter.

Nearly all of the works cited overlap as well. Guess who probably had a heavy hand in drafting that totally-organic-anti-web3 letter?

Book review final remarks

This is probably the worst book I have reviewed.  Blockchain Revolution and both of Michael Casey’s books are pretty close to the bottom of the barrel however Popping the Crypto Bubble is basically a long winded blog post filled with evidence-free assertions.  The authors fail at providing a modicum of supporting references beyond endless rants.

What makes this particular book extra cringy is how much playtime the Financial Times has given it.56 Not only do some of its reporters seem to have a direct line to Stephen Diehl, they even did a softball interview with him without having read the book.

Where did it go wrong?

The best illustration: Chapter 18 is entitled “Stablecoins.”  It is six pages long.  Five pages discuss Libra – a project that was never launched – and the final page briefly covers CBDCs without diving into specific CBDC models.  One of the authors – Diehl – spends a great deal of energy on social media regarding “stablecoins” but could not spend a minute discussing the history of pegged stablecoins or what stablecoins exist today.  The authors could not even bother quoting arguments that strengthened their views – such as lawsuits from the CFTC and NYAG.  While they said the word “Tether,” they did not mention USDT or USDC at all. Why the omission? 

What is another example of weaknesses?  In Chapter 24 they have a subsection on “coin lobbying.”  But they do not mention any specific lobbying organizations or shills in congress.  How hard is it to provide supporting details?

Tim, you are just angry they did not cite you!

Undefinied acronyms and undeserved victory laps

The authors do not define NFTs or explain their history.  They repeatedly use a metonym – Sand Hill road – yet the casual reader may not understand it refers to Silicon Valley.

The authors could have but did not interview anyone inside or outside the industry. They could have done some original first-hand reporting. Instead we are served with a compilation of a stories from third parties. This is the same laziness that the copy/paste Twitter account – Web3 Is Going Great – suffers from; a lack of authentic research.

Anti-coiners should hold themselves to the same standard they frequently criticize the coin industry with, and that includes providing evidence and citations. For all of their claims around “fraud” and “scams,” the authors only made generalized forecasts and did not make any specific predictions around say, FTX or Terra. They missed out on describing the implosion of centralized lenders altogether. 

After all the pump and rah-rah books, the world needs a solid detox. The market needs a book about blockchains and cryptocurrencies with a critical, yet nuanced, eye. This is not that book.  

Endnotes

1. As described in The Tribes of maximalism, the etymology of “no-coiner” comes from three vocal Bitcoin maximalists, Michael Goldstein, Elaine Ou, and Pierre Rochard who used it as a smear. [↩]
2. For instance, Chapter 9 covers “Ethical Problems” but in the Bibliography “Ethical Problems” is Chapter 10. The root problem is the authors skip Chapter 1 altogether in the Bibliography: in the book, Chapter 1 is a two page introduction and Chapter 2 is a ten page History of Crypto. The bibliography mislabels Chapter 1 as Chapter 2 and it has a knock-on effect for the remainder of the bibliography. [↩]
3. While at R3 I was introduced to Diehl via Simon Taylor, one of their advisors. [↩]
4. At the time of its publication, one of my popular (older) posts was: Archy and Anarchic Chains. I attended and participated in dozens of formal meetings with regulated financial institutions between 2015-2019, the word “anarchy” may have been mentioned in jest a couple of times. [↩]
5. PayPal is mentioned 67 times in Dan Awrey’s law review paper: “Bad Money.” [↩]
6. This dovetails into the motivations behind why Bitcoin was created, with some arguing it was built following the challenges facing the online gambling industry which had difficulties maintaining persistent banking access; Caribbean-based ones were frequently debanked. [↩]
7. There have been a wide-range and wide-variety of tokenization efforts unrelated to the euphoria around digital art collectibles. Coincidentally I wrote a paper on this topic in 2015: Watermarked tokens and pseudonymity on public blockchains. [↩]
8. In 2017, while at R3 I helped co-edit a relevant paper with experts from Blockseer and the Zero Electric Coin company (creators of Zcash): Survey of Confidentiality and Privacy Preserving Technologies for Blockchains (pdf). [↩]
9. I wrote about Bitcoin mining in China in May 2014. [↩]
10. Decades ago, the Supreme Court exempted Major League Baseball from antitrust laws. [↩]
11. This is a topic I wrote about at length in a newsletter several years ago; it discussed the sub-industry of collectible trading conventions and even price guides (such as Beckett). [↩]
12. Contra anti-coiner insistence: it is not a scalable business model for a one-person studio, expecting an artist – that wants to use NFTs as a distribution and royalty collection mechanism – to start suing perceived violators en masse. [↩]
13. While writing this review, WeWork warned it had “substantial doubt” that it could continue as a business. [↩]
14. After a decade, Uber finally did finally post a profitable quarter, but that was a year after the book was published. [↩]
15. I have previously argued that proof-of-work-based networks actually can be negative sum since the mining activity introduces negative environmental externalities. [↩]
16. One reviewer of this review commented: I don’t agree that JP is calling crypto an early bird game. It doesn’t have to generate returns for the earlier entrants. What is wrong with viewing it as a superficial commodity like gold or diamonds? [↩]
17. This is unlikely to occur due in part to the implicit control that Bitcoin miners and their maximalist enablers have on the BTC ticker symbol. Previously, several prominent maximalists such as Samson Mow and Adam Back have used their sway via Blockstream, to push miners in specific directions. [↩]
18. Perhaps the hooks will be underutilized but several of the vendors for core banking software – including Fiserv and Jack Henry – have production-ready hooks with blockchain-related integrations for clients. [↩]
19. Early efforts towards creating “clearing” or “settling” networks between exchanges eventually led to now defunct SEN and Signet (Silvergate Exchange Network and Signature Network). This relatively centralized infrastructure allowed participants (such as exchanges) to settle trades around the clock irrespective of weekends or holidays. And they could do so without trades having to be transferred on-chain, forgoing the fees and time delays. Note: according to Fortune, Signet was a white-label version of TassatPay, a private, blockchain-based solution currently operational at five other banks. [↩]
20. I was a formal advisor to Blockseer which provided similar on-chain analytics services before its acquisition by DMG Blockchain. Both Elliptic and Chainalysis typically post quarterly and annual reports that includes this type of information for public consumption. [↩]
21. Luke-Jr is a prominent Bitcoin Core developer who was a central propagandist for smaller blocks during the “block size civil war” primarily between 2015-2017. One of the hurdles he personally faced was that his internet connection in Florida was relatively slow and he used it as a barometer for how home validators should be able to upload and download a block. In the past he has voiced disdain for developers attempting to use OP_Return and recently threatened to spam the network to ban Ordinals. [↩]
22. Also, there is no reason to carry water for any of these chains but if you are going to critique them at least use consistent verbiage. [↩]
23. Visa was an investor in Chain.com back in September 2015 when the startup pivoted from Bitcoin API services to enterprise blockchain infrastructure. [↩]
24. A quick googling revealed a couple of papers published before the book was made public: DQ: Two approaches to measure the degree of decentralization of blockchain by Lee et al., and The Importance of Decentralization by Muzzy and Anderson. [↩]
25. Several of the large data and analytics providers have service contracts with trading entities that can flag events, e.g., when specific addresses become active. A recent example is when Arkham, an analytics firm, mistakenly reported that bitcoins connected to Mt. Gox and the U.S. government were on the move, the errant news temporarily resulted in a large selloff. [↩]
26. I have pointed this out to maximalists and anti-coiners over the years and the response is deafening. For example, nearly two years ago I did an interview with Aviv Milner who is podcaster. For some reason he would twist any criticism of the traditional financial industry – specifically concentration risk – as… not a valid criticism. Anti-coiners such as the authors of this book and several podcast series seem uninterested in holding traditional financial organizations to the same standard as the coin world they attempt to investigate. It is okay to find warts in both of them! [↩]
27. I have written about them several times, primarily in the 2014-2016 era. [↩]
28. The germination of ISO 20022 arose from some of those early blockchain-related conversations as well. Worth pointing out that in this case, it was specifically unrelated to cryptocurrencies; although a number of cryptocurrency efforts currently market themselves as “ISO 20022 compliant.” [↩]
29. The banking lobby in Europe is opposed to interest-bearing stablecoins in part because in theory it could dent their deposit base, just as narrow banks could. [↩]
30. In fact, I liked the Bergstra and Weijland paper so much that in 2014 I used the title for a short book I wrote on the same topic. [↩]
31. Put it another way, how many bitcoins does it cost to create a bitcoin? For miners to be profitable, the aspiration is less than 1 bitcoin. [↩]
32. Credit to Kevin Zhou who first pointed this out in 2014 while at Buttercoin. Yes, the same Kevin Zhou who accurately predicted the demise of Terra. [↩]
33. While Carter tries to place himself front-and-center of this specific topic, it was Andreas Antonopoulos who first prominently used the holiday lighting example. [↩]
34. It was not a coincidence that Dilley would later join Blockstream as their first chief strategy officer. [↩]
35. In fact, Coinbase would not list any other asset besides Bitcoin until 2016 because the executive team and early investors were prominent Bitcoin bulls. Listing Ethereum Classic (ETC) was a “newsworthy” event in 2018. [↩]
36. Michael Goldstein, Elaine Ou, and Pierre Rochard – are prominent Bitcoin maximalists and were co-creators of the term “no-coiner” and “pre-coiner” in late 2017-early 2018. The term “no-coiner” was intended to be an insult, a slur. [↩]
37. I have some bona fides in this as I authored the most widely cited paper on the topic back in 2015: Consensus-as-a-service: a brief report on the emergence of permissioned, distributed ledger systems [↩]
38. I have mentioned these specific examples to both Bitcoin maximalists and anti-coiners alike, and again, the goal posts shift. For instance, Jorge Stolfi, a computer science professor and Aviv Milner, the podcaster mentioned above, both ignored the existence of such projects or dismissed them out of hand. I even tried to help introduce Stolfi to a director at the DTCC so he could ask specific questions, which he did not. [↩]
39. Eight years ago I corresponded with a reporter at Fusion regarding the possibility of litecoin (LTC) being used for illicit activity (regarding chain hopping). [↩]
40. There is a clear insular clique that only engages with one another, much like certain coin tribes do (such as IOTA). [↩]
41. Early touchscreen-based personal data assistants (PDAs) included Palm Pilot, Apple Newton, and Blackberry from RIM. [↩]
42. Maybe as RWAs are deployed to Ethereum less attention will be paid to an ossified chain like Bitcoin, lowering Bitcoin’s marketcap below 30%. Who knows, maybe the opposite occurs. Being a cheerleader on specific price points based on ideology seems foolish. [↩]
43. This question initially stumped Libra / Diem managers. Anecdotally, one of the managers I spoke to early on in that project assumed that the custody bank would decide which fork to recognize. [↩]
44. A simple googling resulted in numerous papers including: Smart Contracts and the Cost of Inflexibility by Sklaroff, Towards user-centered and legally relevant smart-contract development: A systematic literature review by Dixit et al., and Smart Contracts, Blockchain, and the Next Frontier of Transactional Law by McKinney et al. Were those authors wrong? Sounds like the job for Diehl et al. to read and determine. [↩]
45. If you scroll back to the top of this book review and click on Diehl’s presentation and talks in 2017 and 2018, his thinking does not seem to incorporate or recognize what has gone on. [↩]
46. For instance, a variety of enterprises including regulated financial institutions have built and deployed smart contracts for a bevy of experiments, some that are still in pilot mode. Maybe these enterprises should be laughed out of the room but this is an empirical, evidence-based activity, the conclusions are not predetermined beforehand. [↩]
47. There is a lot of confusion over the origins of “Hyperledger,” here is a brief backstory. [↩]
48. This was a weakness in Hilary Allen’s own writings, specifically the DeFi Shadow Banking paper they cite in Chapter 12. Allen’s paper incorrectly states that lending protocols will accept any collateral, it was one of many technical inaccuracies in that paper. [↩]
49. Coincidentally, in the process of writing this review Lamina1 – a new layer-1 blockchain advised by Neal Stephenson – launched a beta of the metaverse-focused network. [↩]
50. The cited Gerarad’s book – Libra Shrugged – as reference number 2 in the bibliography for that chapter. [↩]
51. As part of a literature review the authors could look at the Bank of England’s new RTGS. Section 6 of the roadmap specifically mentions DLT and Section 3 of their Consultation paper discusses CBDCs. [↩]
52. At the time of this writing the management team is under investigation by the U.S. Department of Justice. [↩]
53. While not usually categorized as “ICOs,” there were some Bitcoin-related projects that did crowdsale / crowdfunding raises in 2012-2013 coordinated on the BitcoinTalk forum. [↩]
54. Coincidentally, Nathaniel Popper, a former reporter with The New York Times left the newpaper to write a book on the topic of financial populism. He had a good command of how cryptocurrencies and blockchains worked, yet anti-coiners attacked him for the cardinal sin of recommending nuance. [↩]
55. The authors also cite Hilary Allen who is not a credible authority on this particular topic. Rosen uses identical techniques and opinion-filled arguments in her writings, and frequently cites Diehl. Demand evidence from them. [↩]
56. It is not fair to blame the entire team at the Financial Times, some of their reporters did a stellar job chronicling the FTX collapse. [↩]