Book Review: “Popping the Crypto Bubble”

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

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

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

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

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

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

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

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

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

WBB of Adjoint’s now deleted Press Release from October 2017 regarding Uplink.

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

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

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

Chapter 1: Introduction

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

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

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

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

Source: Amazon review

On the same page the authors write:

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

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

The concluding sentence of that same paragraph concludes:

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

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

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

Chapter 2: The History of Crypto

On p. 3 the authors put in a pullquote:

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

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

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

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

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

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

On p. 5 the authors write:

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

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

Continuing on p. 5 they write:

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

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

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

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

Source: Twitter

On p.7 they write:

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

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

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

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

For instance on p. 8 they write:

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

A couple of nitpicks:

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

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

On p. 8 they write:

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

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

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

A typo occurs on the last sentence of that paragraph:

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

This has a typo: off –> of

On p. 8 the authors write:

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

While reading this it was:

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

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

On p. 9 they discuss difficulty adjustments:

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

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

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

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

On p.9 they discuss censorship resistance:

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

There are a few issues with this:

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

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

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

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

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

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

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

Couple of issues:

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

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

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

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

Several issues with this:

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

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

In the same paragraph they note that:

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

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

The next sentence is a little quizzical:

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

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

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

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

Two sentences later the authors change the capitalization again:

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

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

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

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

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

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

A few sentences later they dive into mining pools:

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

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

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

On p. 12 they write:

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

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

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

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

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

On p. 12 they write:

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

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

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

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

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

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

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

Chapter 3 Historical Market Manias

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

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

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

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

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

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

Source: Wikipedia

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

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

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

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

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

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

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

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

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

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

Two issues with this sentence:

(1) Grammar or typo with “was is”

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

On the final sentence of p. 24 they write:

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

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

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

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

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

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

Source: Twitter

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

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

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

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

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

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

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

Source: Bloomberg

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

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

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

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

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

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

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

Chapter 4 Economic Problems

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

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

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

The book is full of these opinions stated as facts.

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

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

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

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

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

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

On p. 53 they write:

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

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

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

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

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

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

On p. 55 they write:

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

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

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

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

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

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

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

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

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

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

On p. 58 they write:

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

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

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

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

Source: J.P. Koning

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

Chapter 5 Technical Problems

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

For instance, on p. 59 they write:

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

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

Continuing, on p. 59 they write:

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

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

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

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

Continuing on p. 60 they write:

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

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

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

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

On p. 61 they write:

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

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

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

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

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

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

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

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

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

On p. 61 they write:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: The Block

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

Source: DeFi Llama

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

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

On p. 63 they write:

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

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

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

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

For instance, on p. 63 they write:

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

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

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

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

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

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

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

On p. 64 they write:

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

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

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

On p. 64 they write:

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

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

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

On p. 64 they write:

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

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

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

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

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

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

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

On p. 64 they write:

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

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

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

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

On p. 64 they conclude:

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

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

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

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

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

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

On p. 66 they write:

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

Couple of issues:

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

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

On p. 67 they discuss traditional banking, writing:

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

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

On p. 69 they write about security:

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

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

On p. 69 they write:

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

Couple of questions:

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

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

On p. 70 they write:

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

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

On p. 70 they conclude with:

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

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

(1) Typo “thee” should be “the”

(2) What jurisdictions are they writing about?

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

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

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

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

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

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

On p. 70 they start discussing compliance, writing:

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

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

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

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

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

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

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

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

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

Source: Twitter

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

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

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

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

On p. 73 they conclude, stating:

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

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

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

Chapter 6: Valuation Problems

On p. 76 they discuss asset classification, writing:

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

There is a bit to digest here:

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

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

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

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

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

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

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

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

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

There are at least six problems with this passage:

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

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

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

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

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

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

Source: Wikipedia

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

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

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

On p. 80 they conclude, writing:

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

There are three issues with this:

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

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

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

Chapter 7: Environmental Problems

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

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

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

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

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

What nuance is needed?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Chapter 8: Cryptocurrency Culture

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

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

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

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

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

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

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

Source: Twitter

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

On p. 93 they write about technoliberarianism, stating:

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

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

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

On p. 95 they write:

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

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

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

Source: Twitter

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

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

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

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

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

For instance, they write on p. 96:

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

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

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

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

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

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

And:

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

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

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

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

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

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

On p. 101 they mention in passing that:

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

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

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

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

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

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

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

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

Chapter 9: Ethical Problems

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

For example, on p. 103 they write:

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

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

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

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

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

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

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

On p. 107 they discuss illicit activity, stating:

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

A few issues with this statement:

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

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

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

On p. 107 they write:

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

There are a couple of inaccuracies in this paragraph:

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

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

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

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

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

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

On p. 109 they wrote:

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

There are a couple of issues with this:

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

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

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

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

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

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

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

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

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

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

Chapter 10: The Cult of Crypto

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

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

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

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

Squid Game, but on a blockchain!

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

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

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

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

For instance:

Source: Twitter

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

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

For example:

Source: reddit

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

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

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

On p. 117 they write:

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

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

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

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

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

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

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

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

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

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

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

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

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

Chapter 11: Casino Capitalism

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

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

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

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

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

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

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

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

Chapter 12: Crypto Exchanges

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

On the first paragraph of p.131 they write:

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

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

At the bottom of p. 131 they write:

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

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

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

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

On p. 132 they write:

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

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

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

Continuing on p. 132:

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

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

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

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

On p. 133 they write:

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

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

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

On p. 134, they write:

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

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

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

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

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

On p. 135 they write:

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

There are at least two issues with this:

(1) Typo: “over” should be “offer”

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

On p. 135 they write:

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

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

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

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

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

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

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

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

Chapter 13: Digital Gold

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

Writing on p. 139 they state:

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

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

Source: Twitter

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

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

On p. 139 they write about fools gold:

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

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

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

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

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

On p. 141 they write:

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

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

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

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

On p. 141 they write:

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

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

On p. 141 they write:

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

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

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

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

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

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

On p. 142 they discuss bugs:

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

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

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

On p. 143 they write this whammy:

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

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

Source: CoinMarketCap

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

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

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

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

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

There a few issues with this passage:

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

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

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

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

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

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

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

On p. 144 they write:

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

At least two issues with this:

(1) What are “standard consensus algorithms”?

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

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

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

On p. 144 they write:

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

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

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

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

On p. 145 they discuss potential attack vectors:

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

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

On p. 146 they write:

Source: Breaking Bad

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

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

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

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

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

Who is this rant directed at?

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

Chapter 14: Smart Contracts

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

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

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

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

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

On p. 148 this is the pullquote:

Smart contracts have absolutely nothing to do with legal contracts.

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

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

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

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

On p. 151 they write:

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

A couple of issues with this:

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

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

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

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

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

On p. 152 they write:

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

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

Zilch. It is just their opinion.

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

The rant continues on the next paragraph:

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

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

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

On p. 152 they write:

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

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

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

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

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

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

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

On p. 153 they write:

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

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

Continuing in the same paragraph:

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

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

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

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

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

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

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

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

The authors continue on p. 153:

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

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

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

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

On p. 153 they write:

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

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

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

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

On p. 154 they write about ERC20 tokens:

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

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

Later on the same page they write:

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

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

Source: NFT Stats

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

On p. 154 they write:

Gambling products overwhelmingly dominate the remaining set of contracts.

What is their source? Citation needed.

On p. 155 they write:

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

Oh?

The authors of the book on a road trip

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

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

For example:

Source: DappRadar

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

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

On p. 155 they write:

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

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

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

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

On p. 155 there is a pullquote:

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

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

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

On p. 156 they write:

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

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

Continuing they write:

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

There are a couple issues with this:

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

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

IBM is not the same thing as Hyperledger.

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

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

Continuing on p. 157 they write about Dfinity:

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

Oh?

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

Surely the rants will stop now?

Continuing on p. 157 they write:

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

Oh?

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

Their concluding paragraph to the chapter states:

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

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

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

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

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

Okay, so two can play that game!

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

A quote from Diehl:

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

Chapter 15: Blockchainism

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

On p. 160 they write:

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

I agree. I wholeheartedly agree with this paragraph.

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

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

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

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

On p. 161 they write:

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

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

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

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

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

Source: Twitter

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

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

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

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

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

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

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

On p. 163 they write:

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

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

Continuing in the same paragraph they write:

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

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

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

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

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

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

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

On p. 163-164 they write:

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

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

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

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

Chapter 16: Frauds & Scams

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

On p. 166 they write:

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

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

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

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

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

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

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

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

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

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

On p. 170 they write:

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

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

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

On p. 170 they write:

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

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

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

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

From the abstract of Li et al.:

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

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

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

At least the authors are finally citing, right?

On p. 173 they are concluding the chapter:

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

Possibly two issues with this paragraph:

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

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

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

Chapter 17: Web3

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

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

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

On p. 175 they write:

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

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

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

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

Continuing on p. 175 they write:

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

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

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

On p. 176 they write about NFTs:

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

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

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

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

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

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

Source: ChainLeftist

On p. 176 they write:

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

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

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

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

On p. 176 they continue:

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

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

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

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

Peter van Valkenburg has something in common with Lionel Hutz

On p. 176 they write:

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

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

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

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

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

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

On p. 177 they write about the duplication problem:

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

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

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

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

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

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

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

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

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

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

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

On p. 179 they write about market manipulation:

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

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

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

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

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

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

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

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

Source: Google Cloud

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

On p. 181 they write about DAOs:

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

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

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

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

The authors write on p. 181:

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

Couple of things:

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

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

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

On p. 182 they write about DeFi

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

A few issues:

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

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

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

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

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

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

On p. 182 they write:

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

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

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

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

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

On p. 183 they dive into the Metaverse:

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

A couple of issues with this passage:

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

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

The next sentence is missing punctuation, as they write:

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

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

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

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

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

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

Source: Newzoo

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

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

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

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

Chapter 18: Stablecoins

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

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

Source: The Block

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

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

On p. 185, their introductory paragraph states:

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

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

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

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

There are a few errors:

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

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

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

On p. 187 they write:

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

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

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

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

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

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

On p. 188 they write:

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

This is incorrect in a few areas:

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

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

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

On p. 188 they write:

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

Oh?

The authors ranted about HotStuff and were wrong.

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

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

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

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

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

On p. 189 they write:

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

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

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

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

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

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

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

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

There are multiple problems with this:

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

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

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

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

A second edition should pay closer attention to these examples.

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

Source: CBDC Tracker

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

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

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

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

On p. 190 they write:

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

There are at least five problems in this passage:

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

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

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

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

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

On p. 190 they continue in their concluding paragraph:

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

Every single sentence in this paragraph has an issue:

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

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

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

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

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

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

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

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

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

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

Chapter 19: Crypto Journalism

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

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

On p. 192 they write:

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

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

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

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

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

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

On p. 193 they write:

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

Can we get an example? A reference?

In the same paragraph they write:

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

Can we get an example? A reference?

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

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

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

They cite a relevant article from Reuters regarding Venezuela. But it is worth highlighting that once again, in the last part of the final sentence, the authors cannot stop talking about bitcoin. It lives rent-free in their minds.

Yet the world of cryptocurrencies and blockchains is much larger than the orange memecoin.

On p. 194 they write:

During the height of the ICO bubble, investigative journalists looked into the price for journalists to promote a given ICO project at various cryptocurrency outlets. Shockingly the investigation found the prices of an article from a low of $240 to a high of $4500.

Hurray, they finally provided a relevant citation! This is what the chapter should have included, similar stories.

Throughout this chapter – and in particular this section – I kept wondering what were you guys doing in 2017-2018?

Did you warn the public about what you perceived as scammy ICOs? This would have been a good spot for the authors to provide some bonafides.

Chapter 20: Initial Coin Offerings

This chapter has one of their strongest sections and also has some of their worst prose and arguments. at 16 pages it could definitely serve as the foundation for a new edition.

On p. 197 they write:

During 2017-2019 there was a massive secondary bubble on top of the cryptocurrency bubble in which fledgling blockchain companies used the ethereum blockchain as part of crowd sale activities to sell custom tokens representing alleged ownership in new enterprises.

This is not 100% accurate. Not every ICO during that time frame only used Ethereum.

For instance, in July 2017, Binance conducted its ICO that raised $15 million, split between BTC and ETH. That same month Tezos raised around $232 million from approximately 66,000 BTC and 361,000 ETH. The authors do not provide any examples. Also, not every ICO claimed the tokens represented ownership in new enterprises. That is something the authors made up.

On p. 197 they write:

The simple fact remains that no company that raised funds under an ICO model has taken any profitable product to market.

That is probably true, but they do not provide a reference. An outlier for sure, but an example of one company that did was Binance, which operates the largest centralized exchange by spot volume. 52

On p. 197 they write:

The first ICO was in 2013 for a small project called Mastercoin. The project raised $2.3 million by selling a custom digital token for a specific exchange amount of bitcoin and ethereum per new token issued.

While Mastercoin (later rebranded as Omni) is widely considered to have conducted the “first” public ICO, the authors are incorrect on at least one detail: Ethereum did not even exist at this time.53

Nor did anyone participating in the Mastercoin ICO ever exchange ETH for the new token because Mastercoin lived on top of Bitcoin (it was similar to other “colored coin” projects at the time). I wrote a paper on this topic nearly eight years ago, feel free to use the works cited.

On p. 198 they write:

For ICO exit scams, the strategy is straightforward. You construct a fantastical prospectus that makes wild claims about a product or business imply or outright state that investment will increase in value over time and incur massive returns for early investors. Then you raise the money and then hop on a plane to a country without an extradition treaty and launder the money into the local currency. This is known as a exit scam or rug pull.

This was an enjoyable paragraph to read. To their credit they did cite a New York Times article that provides some examples. Yet a second edition should clarify that it is “an extradition treaty with the U.S.” (or a relevant jurisdiction) Also, probably need to use “an” instead of “a” in front of exit scam.

On p. 198 they write:

This is the simplest and most common form of ICO business model. The best example of this is the April 2018 Vietnamese scam for two companies named Ifan and Pincoin. The two firms are alleged to have misled approximately 32,000 investors and stolen upwards of $660 million.

I recall that sad story, even mentioned it in the private newsletter (mentioned earlier):

Source: Post Oak Labs newsletter

The authors say it is the most common form of ICO business model. Do the authors have a percentage or other figure to determine how common it is?

On p. 199 they discuss the Telegram ICO involving the The Open Network (TON) token. The authors use the date of 2020 but the references they cited actually refer to the year 2019. The authors should revise the language because the lawsuit was in October 2019.

On p. 199 they write:

The secondary economic question pertains to the fact that the overwhelming majority of these companies have produced nothing of value. The lack of any marketable blockchain artifacts raises some existential questions about the utility of this sector.

That may be the case but the authors are trying to have it both ways. On the one hand they demand evidence, on the other hand they a priori dismiss all blockchains and cryptocurrencies as utility-free. They need to be consistent.

On p. 200 they write:

The question remains where did all this money go? Not all of it was spent on Lamborghinis, parties, and cocaine (although a fair amount was).

There is no citation, so how do the authors know “a fair amount was”?

Continuing in the same paragraph:

While it is true that these companies have created jobs, however, this kind of job creations is the equivalent to paying employees to dig ditches and then fill it back up again. The parable of the broken window is an economic thought experiment regarding whether a child breaking a window is a net win for the economy simply due to the window having to be replaced. The activity of replacing the window has unseen costs that, when netted over all of the participants, are in aggregate negative over the opportunity costs of other productive activities. ICOs, simply put, are a society-level misallocation of capital that incurs a massive opportunity cost in the number of productive things and companies that could be built with said capital.

That is probably true – in fact I agree with the thrust of this passage – but they do not provide any example to strengthen their position. Frédéric Bastiat’s parable that they dutifully summarize can be explored in a second edition; the authors could explain what the ICO funds could have been spent on instead. Although this is tangential to the broader issues around consumer (and investor) protections.

On p. 200 they write:

For coins that are neither exit scams nor thinly-veiled pump and dump schemes, there is another class of projects with slow-burn failures. This class of ventures stems from the inability to deliver on unrealistic business defined by the whitepaper. These whitepapers typically involved appeals to vague buzzword and aspirations to build software built around “decentralization” memes and vague terms such as: Immutable, Decentralized, Trustless, Secure, Tamper-proof, Disintermediated, Open/Transparent, Neutral, Direct transfer of value.

I agree with the authors because what they are basically describing is chainwashing. But the problem is they are throwing rocks at glass houses because Adjacent did something similar back in 2016-2018. Just look through the direct quotes from Diehl and his colleagues during that time frame.

For what it is worth, I think it would have been consistent for them to criticize using these phrases all while explaining they have first hand experience in the industry (which Diehl has removed from his online biography).

On p. 200 they write:

Several jurisdictions became ICO-friendly to encourage innovation and job growth, to collect taxes, and to expand the possibilities of having homegrown domestic startup success stories. The most popular choices for jurisdictions were the Swiss canton of Zug and the island of Malta. The Swiss banking culture of client confidentiality encouraged many ICO companies to incorporate in the Zug region and then use the Swiss or Lichtenstein banking system to convert their bitcoin and ethereum into Francs and enter the traditional financial system. These funds could then be distributed to British offshore trusts, often set up in Gibraltar, to hide the funds from taxation and lawsuits.

The authors provide a reference to a note by Julianna Debler. While it discusses jurisdictional issues, it does not mention anything about Switzerland, Malta, or Lichtenstein.

How do we know these were the most popular jurisdictions? How do we know the funds were setup in Gibraltar? The authors may know something but did not provide a citation for it.

On p. 202 they write:

The average Series A for an American startup is around $13 million. However, these ICO funds raised capital 10-100 times that of a typical Series A round.

There is definitely a lot of blame to go around, but there is no reason to make up anything when publicly known facts seem incriminating.

For instance, what source do the authors derive the average Series A figure? When I lived in the Bay area the average Series A was typically between $2m – $5 million. According to Carta, in Q1 2023 the median cash raised for a Series A was $6.4 million.

But let us assume that the authors are correct, that the figure is closer to $13 million. They are also saying that “these ICO funds” raised $130m – $1.3 billion. Which funds were they referring to? Only a couple dozen ICOs raised more than $100m. A few outliers, like EOS, raised more than $1 billion.

On p. 202 they write:

There was an unusual pattern of ICO-backed tech ventures founded entirely by lawyers and social media influencers with no technical leadership. From a technical perspective, many of these slow-burn companies attempted to build the software proposed in their initial whitepaper only to find that the underlying technology stack they initially proposed was simply too slow, immature, or impossible to support their product pitched. Many companies overpromised the capacity of so-called smart contracts to build arbitrarily complex financial products and were quickly hit by the hard limitations shortly after investigating the technology. In the absence of experienced technical leadership, many of these companies attempted to remedy the immaturity of the software themselves and hired repeated iterations of teams unsuccessfully to build what they had initially promised.

Anecdotally I have heard similar stories but the authors should provide examples or a reference.

On p. 203 they write about Crazy Coins. This is one of the most interesting sections in the book. However it is worth pointing out that very few of them were actual ICOs.

On p. 207 they discuss celebrity endorsements, writing:

On the back of the speculative bubble of coin offerings, many entrepreneurs recruited a variety of people to promote these investments. These included many celebrities such as rappers and Hollywood actors who used their influence and social media presence to tout unregistered securities.

The authors do not mention if they are licensed lawyers or consulted lawyers yet many chapters are littered with accusations such as “tout unregistered securities.”

That may true but the accusation has to be proven in a court. So a future edition should add hedging words like “alleged” or “possible.” Or they could quote a securities attorney.

On p. 208 they discuss court cases, starting with the SEC lawsuit with Telegram. While the authors seem to do a good job summarizing the case, they miss one minor detail: The Open Network eventually launched. Telegram users can transfer Toncoin (the token) to other users on the app itself.

On p. 210 they write:

This model appeals to entrepreneurs as it increase the addressable investor pool to include international and unaccredited individuals who may not otherwise be able to participate.

This may or may not be true. Either way, the authors never explain what an accredited versus unaccredited individual is or what jurisdiction they are referring to (likely the U.S.).

On p. 210 they write:

Companies that engage in this sale often create a Theranos-style long firm whose premise is based on increasingly large token sales on top of a company that is either empty or fraudulent. For these companies, statement is simple: the token is the product.

There are a couple of grammatical issues. What is a “Theranos-style long firm”? What does “statement is simple” mean?

The authors reference an interesting and relevant paper from Paul Momtaz. However the Momtaz paper does not mention Theranos at all.

At the top of p. 211 they write:

Regulars are given many additional political tools to enforce rulings, however, the primary mechanism of action is to bring suits against the worst violations after the fact. Under-resourced regulators will simply often go after the top 20% of worst cases that will result in clear legal precedence and prevent future violations, but on the whole, the system lacks the resources to pursue every case.

There are a couple of issues:

(1) They misspell “regulators” in the first sentence (“Regulars” -> “Regulators”)

(2) Where do they refer the “top 20%” of worst cases? Where does that figure come from?

On p. 211 they write about tokens as illegal securities, writing:

The economic crises of the 1920s and 1930s led to a new variety of laws to curb the excesses of wild speculation that had created the crises.

Which crises were the authors referring to in the 1920s? The Great Depression? Was the Great Depression caused by speculative excesses or were there other contributors?

The authors should probably refine their statement to say something like, “In the U.S., the fallout from speculative excesses and mania that came to a head in late 1929 paved way for the passage of laws such as the Securities Act of 1933.”

On p. 212 they write about the Howey test:

A product is considered a security under US law when it shares the following three characteristics.

Yet later on p. 234 they mention Howey test has four characteristics. They should probably talk to a licensed lawyer to reconcile the wording. For instance, the authors should chat with Todd Phillips, who recently wrote a relevant op-ed in their favorite periodical, the Financial Times.

On p. 212 they say “During the 2016-2018 ICO bubble…” yet in the ICO section on p. 203 they mention “the 2017-2020 bubble.” Are these dates referring to different bubbles?

On p. 213 they write:

The other method around the securities laws is the use of dual-purpose tokens, which can be redeemed for services within a network and traded speculatively. In many of these dual-use token cases, the smoking gun is the presence of prominent venture capital investors where the expressed purpose of their investment vehicle is to return on the investment on their fund. If a messaging app offered a token that granted the alleged “utility” of being able to purchase in-app stickers, it is implausible that a fund of this size’s intent is to buy hundreds of millions of dollars of stickers for its own use. Instead, they intend to use their capital and information asymmetry to gain an advantage in trading the tokens for a return after the presale. The alleged utility is simply a very thin legal cover to hide their real intent.

A couple of issues with this statement:

(1) Which jurisdiction are the authors referring to? The U.S.? Which specific securities laws are they referring to?

(2) That could all be true – and I a sympathetic to their general argument during the ICO bubble years – but the authors do not provide any examples of a specific fund that did this. They basically sound like self-deputized prosecutors.

Overall this chapter has a number of areas the authors can build a strong foundation from, specifically the areas of “crazy coins.”

But even the title of that subsection makes you wonder: how do the authors determine what are crazy and non-crazy coins? They definitely should include direct quotes from actual licensed attorneys because some of their arguments probably have merit but right now it comes across as opinions of news clippings.

Chapter 21: Ransomware

This is a four page chapter that abruptly ends. It could have been much stronger if it included the history of “data kidnapping” in the 1990s. With that said, the authors do provide several specific examples and even a timeline, so that is a good start.

On p. 215 they write:

Most bitcoin use outside of speculation is not in payments but in financial black market activities and malware.

Source? Citation?

Surely just a little googling can help back-up the argument. For instance, according to Chainalysis, illicit use of cryptocurrencies hit a record $20.1 billion during 2022. Yet earlier this month an expert with CipherTrace says: Chainalysis data contributed to ‘wrongful arrest’ of alleged Bitcoin Fog founder. That seems like something readers might like to learn about.

On p. 217 they write:

In late 2019 there was an attack on the University of California San Francisco research department performing COVID-19 vaccine development, which locked servers by epidemiology and biostatistics departments.

The authors do not provide a reference to that UCSF story and a quick googling shows the date is incorrect. The hacking event – and subsequent ransomware demand – was in June 2020.

On p. 217 they write:

With cryptocurrency enabling ransomers, it allows these criminals to proliferate behind the scenes with very little chance of getting caught.

I sympathize and mostly agree with this statement. However it is missing a very important word – liquid cryptocurrency.

Why? Illiquid cryptocurrencies can be difficult and expensive to quickly move in and out of.

For instance, if Diehl issued his own token – Diehlcoin – its mere existence does not a priori enable ransomers. Rather, a deep and liquid cryptocurrency is necessary to expedite the process at scale. That is one of the reason that J.P. Koning recommended focusing on the payments leg of ransomware.

On p. 218 they provide eight dates that are not ordered chronologically, a new edition should order them by-date or at least explain that the ordering is done by ransomware amount.

Lastly, the very final sentence includes “a $5.2B/year industry” — the authors should spell out “billion” instead of abbreviating it.

Chapter 22: Financial Populism

This six page chapter should have been longer or at least spent longer discussing the fall-out of the 2007-2009 financial crisis.

It only plays lip services to the frustrations and concerns highlighted by protestors within the Occupy Wall Street movement.

For instance on p. 220 they write:

However, the genuine grievances percolating about the American zeitgeist were not bracketed purely to leftists groups; the events of the global financial crisis were indiscriminate and universal in the damage they caused the public, regardless of political affiliation. Movements on the right, such as the Tea Party, also adopted financial populist language as a reaction against the perceived injustice of the Obama administration’s bailout package and recovery plans. It was a rare moment in America where both the left and the right were, for equally legitimate reasons, furious at the fact that the public had been swindled by reckless Wall Street speculation – much of which was entirely based on crimes that would be later uncovered by post-crisis financial journalism.

Any specifics about the bailout packages and recovery plans? Wasn’t TARP legislation passed in the final months of the previous (Bush) administration?

Either way, the authors moved on without mentioning anything about the existence of systemically important financial institutions (SIFIs) during that time period which is a big omission; nor do they mention important legislation like Dodd-Frank.

Instead, they say these folks were naïve simpletons, writing on p. 221:

A valid criticism of the Occupy movement was that, in hindsight, the campaign had no clear goals or vision of what success or positive change would entail. Occupy was primarily a youth movement made up of individuals who overwhelmingly did not understand the complexity of the global financial system, regulation, or the principal causes of the financial crisis but were personally impacted by all these factors. The campaign was a reactionary movement against a not-well-understood injustice that had been exacted against them but which almost none of them could articulate the actual problem or proposed solution. The exposition of the movement’s ideas led to many misconceptions and debatably amounted to little tangible change in regulation or policy.

Perhaps this is all true but up until this point, apart from two pages in chapter 3, the authors do not spend any time discussing the GFC; nor the tangible changes in regulation and policy (such as Dodd-Frank).

Later in the chapter they mentioned TARP but do not mention how – in the U.S. – are still left with a highly concentrated financial system that privatizes profits and socializes losses.

Perhaps the youthful participants in the Occupy movement were ignorant, but the patronizing tone of this paragraph and the book seems like projection.

A reader could substitute “Occupy” with “anti-coiners” and arrive at the same conclusion as the authors did about the veracity of anti-coiners inability to articulate the actual problems facing the financial system. For example, in this book the authors show they do not understand how PayPal actually operates (e.g., as a shadow bank).

On p. 221 they discuss WallStreetBets and Bitcoin

The political imagination of Satoshi – and many crypto apostles who followed his vision – was that the financial system could not be reformed. Nothing less than the wholesale destruction of corrupt financial institutions would achieve their goals.

That may or may not be true, is there a citation or source for that?

The sole reference is to a paper from Carola Binder. The paper does not mention anything about cryptocurrencies, including bitcoin. Is this another strawman by the authors?

On p. 222 they write:

The American public’s rage toward Wall Street and the elected officials are, in many ways, highly justified. In response to the financial crisis, the American government created the Trouble Asset Relief Program (TARP) in the form of a $7000 billion government bailout to purchase toxic assets from financial institutions to stabilize the economy. While, in hindsight, the package may have been necessary, it only reaffirmed the notion that the financial sector plays by a different set of rules than the public; rules that encourage risk-taking because public taxpayer money is always available whenever the situation becomes too dire. Economists use the term moral hazard to describe conditions where a party will take risks because the cost incurred will not be felt by the party taking the risk. The clearest example of these excesses was when in 2009, a year after the bank rescue program, Goldman Sachs paid out $16.7 billion in bonuses to bank employees, seemingly as compensation for their extreme risk-taking leading up to the crisis. These bonuses paid out, seemingly on the back of the taxpayer, enraged the public. Despite all the public anger, the Obama administration did not prosecute any of the high-level executives involved in the events leading up to 2008. Instead the courts prosecuted a single executive, Kareem Serageldin, who was sentenced to 30 months in prison for conspiracy to falsify books and records at Credit Suisse. In what many perceive to be an affront to justice, the rest of the sector was graciously given a bailout and a slap on the write despite the public outcry for the Obama administration to collect banker scalps.

While the authors pay some lipservice to injustice that carries on to today, their 270 word exposition contains no mention of market structure, specifically how single points of failure (SPOF), single points of trust (SPOT), and systemically important financial infrastructures are still hanging over our heads.

Will blockchains or cryptocurrencies “solve” SIFIs? Maybe, maybe not. But the authors do not even attempt to discuss a scenario of decentralized financial market infrastructures (dFMI). Yup, I co-authored a paper on that topic too.

A couple of other quibbles about that passage:

(1) They do not explain why TARP was necessary. At the time, others argued for alternatives and even no bailouts at all. A second edition should explain the pro-TARP position.

(2) Courts are venues where litigation occurs and as such do not ‘prosecute,’ it is prosecutors who prosecute entities. Worth revising the wording the sentence about Kareem Serageldin.

On p. 223 they discuss the Reddit forum WallStreetBets, writing:

Despite the narrative of a populist uprising, the so-called Gamestop Revolution had little effect on the broader market. Instead, the vast majority of retail investors who chose to participate in the Gamestop bubble ended up losing money, as is characteristic of other historical bubbles. In the aftermath of the bubble popping, the Wall Street Journal report that many of the brokers and market makers made outsized profits off the increased volume in trades; the Journal wrote that “Citadel Securities executed 7.4 billion shares of trades for retail investors. That was more than the average daily volume of the entire U.S. stock market in 2019”. It also reported that Wall Street investment bank Morgan Stanley “doubled its net profit in the first quarter of 2021 to $41. billion” At the end of the day, the real winners of the GameStop bubble were the same entrenched institutions as before, and the public learned the hard lesson that day trading is not an effective means of protest against the financial establishment.

Several issues with this:

(1) This is the first – and only – time that the authors acknowledge “entrenched institutions.” Up until this point we have highlighted how the authors implicitly carry water for incumbents and legacy institutions. A second edition should build beyond the single reference they provide, to a paper from Jonchul Kim.

(2) A second edition could also discuss the role Robinhood played in this faux populism. And specifically, the constraints in the financial plumbing.

For instance, Robinhood had to raise $1 billion and throttle trades at one point due to clearing and settlement bottlenecks with the DTCC.54

(3) The authors should be consistent with how they write “Gamestop” or “GameStop” because they use both.

On p. 224 they write:

Financial populism is a reaction to this fundamental economic shift that can be framed in terms of six key components of the ideology.

The authors only list five components, where is the sixth?

Chapter 23: Financial nihilism

What expectations do you have for five pages in a chapter called financial nihilism?

On p. 227 they write:

Crypto is a symptom of the problems of our era, of a post-truth world awash in crackpottery, and a breakdown of trust in our institutions. For the first time in a generation, Americans feel the economic crunch like never before. Now well into their thirties, the millennial generation has been hammered by both the 2008 financial crisis and the coronavirus pandemic. Study after study confirms that Americans are more atomized, lonely, depressed, and desperate. At a certain level, the psychological state of market participants also begins to alter the markets and the fabric of the financial landscape itself.

Which studies? Any example? And what is threshold for “a certain level”?

On p. 228 they write about alienation:

Nihilism is an anti-philosophy, an intellectual dead-end from which no other observations can be derived. The financial form of nihilism takes these ideas and applies them to the concept of value and markets.

Hey, I think I know where their story might be headed…

Source: Twitter

Thanks for the credit guys! Don’t forget to cite Colin Platt too.

On p. 229 they write about the subjective theory of value:

A radical reading of the subjective theory of value asserts that any objective measure of value cannot exist, and the subjective preferences of the buyer entirely determine that market value and the seller, revealed through the autonomous operation of the free market. Dogecoin, diamonds, and dollars all have the same intrinsic value of zero because everything has zero intrinsic value. Markets simply trade in memes, some more popular than others, but none having any objective status or corresponding to any truth. Any investment scheme is thus assumed to be a grift a priori. After all, it is an attempt to get others to believe in some collective delusion which is assumed to be a Ponzi structure because everything is a Ponzi. The entire economy is thus nothing more than a Keynesian beauty contest for collective delusions. The role of the individual in late capitalism is to be nothing more than a maggot eating the corpse of civilizations while the world boils itself to death in an orgy of greed and corruption.

Oh?

In re-reading the passage above, while the authors were purposefully exaggerating the bleak worldview of the “nihilist” it is clear that the two camps share at least one common cudgel: the grift of a priorism.

We have documented around two dozen examples – so far – of the authors eschewing empiricism for an a priori approach.

Their argument immediately falls apart because prosecutors (which the authors have deputized themselves as) must use facts-and-circumstances, evidence, to prosecute a case. Not oration.

On p. 229 they mention there “in a world of zero interest rates” but the world of ZIRP – at least in the U.S. – ended several months before this book was published. The Fed began hiking rates in March 2022.

On p. 230 they write about how everything is a Ponzi:

Instead of a 401k, a diversified portfolio of mutual funds, and a mortgage, for a nihilist it is an entirely natural alternative to constructing a portfolio of CumRocket, Shibu Inu, SafeMoon, and a hundred other blatant scams in the hope that one of the scams works out.

Let us be pedantic: while some readers may know what a 401k is, not everyone might, so a future edition should probably explain what a 401k is or what a diversified portfolio of mutual funds are.

The authors should probably also explain why an investor pays management fees that mutual funds charges (versus an index fund that might not). Also, the authors might want to explain what type of mortgage they are thinking of too (they are not all the same in every country).

Also, since they do not provide any evidence for why CumRocket, Shibu Inu, or Safemoon are scams, then we can dismiss their claim without any evidence.

In the concluding paragraph of this chapter they write:

The world has a structure to it, and through the capacities of reason and science, we can understand both the world and the human condition, and through reason, we can improve our condition to build a better future. While democracy is not perfect, it is perfectible. Even if none of this were true, it is still better to labor under a delusion of misplaced hope and optimism than to wallow in aimless despair. Financial nihilism is a worldview that, although understandable, can be outright rejected.

Like most concluding paragraphs in the book, this is just rhetoric and polemics. The chapter does not actually cite anything about despair, is there a study on the level of despair of degen coin nihilists?

Chapter 24: Regulation

We have mentioned this before but it bears repeating: an editor would have helped consolidate similar topics together. This nine page chapter has some new ideas and concepts but it also regurgitates a number of topics that have already been semi-addressed elsewhere. It is also filled with more rants which are tiring to hear over and over again.

On p. 233 they write:

We live in a new golden age of fraud. Never since the 1920s has financial fraud and grifting been so ingrained in public as today. Yet, the cryptocurrency bubble is entirely built on a single foundation: securities fraud. The investment narrative of cryptoassets derives from an uncomfortable truth; selling unregulated financial assets to unsophisticated investors is a great way to raise large amounts of money quickly and with little overhead and oversight. In the 1920s, people raised money from the public on the back of promises of “easy money” from non-existent oil wells, distant gold mines in foreign countries, and snake oil cure-alls. And yet nothing has changed. Today, we have promises of investments to build financial perpetual motion machines created on the back of promises of decentralized networks, a new digital economy, and blockchain snake oil cures for whatever problem one sees in the world.

The authors cite a relevant paper from Boreiko and Ferrarini and a book from Michèle Finck. Both primarily focus on blockchain-related regulations in Europe.

But as they have in previous chapters: the authors also keep interchangeably using “securities fraud” with the sale of “unregulated financial assets.”

I am not a lawyer, are the authors? Who is being defrauded in their mind? Are they sure they do not mean “financial assets that should be regulated” or “financial assets that have been regulated in different ways depending on the jurisdiction”?

A second edition should clarify what exactly they mean when they use these words and more importantly what jurisdiction(s) they had in mind.

On p. 233 they write:

The Securities Framework put in place by our grandparents following the Market Crash of 1929 is based on universal truths about the nature of capitalism.

Look we all probably agree with the thrust of this particular page but it comes across heavy-handed in places. And more importantly, the argument presents “The Securities Framework” as if it was handed down by Moses and cannot be changed.

Apart from having semi-endorsed the STABLE Act and e-Cash Act, I do not currently have a strong view about any of the proposed legislation on the docket in the U.S. at the state or federal level. But that is not why you came to read this book review either.

On p. 234 they mention “the initial coin offering bubble of 2018” which is yet another date format. Previously they have said 2016-2018 and 2017-2020. A second edition should reconcile and harmonize these.

This full paragraph is enjoyable:

The initial coin offering bubble of 2018 gave us the most unambiguous evidence of how crypto creates a criminogenic environment for fraud. By allowing potentially anonymous entrepreneurs to raise crypto-denominated capital, from all manner of international investors, with no due diligence, reporting obligations, registration requirements, or fiduciary obligations to their investors, we saw exactly what one might expect: a giant bubble of outright scams. Some studies put the number of outright ICO scams at 80%. These companies had no pretense of any economic activity, and the founders simply wanted to abscond with investor money. The rest of the 20% merely fall under the category of illegal securities offerings, companies that sold digital shares as a proxy for equity in a common venture to American investors.

I actually agree with some of what they wrote, but it is how they wrote it – hyperbolic! – that is problematic. With the amount of alleged fraud and scams that took place in that era, there is no reason to exaggerate or get sloppy or lazy about references.

Where do the get the 80% and 20%? There are no citations.

Did they make it up? A quick googling found a 2018 report from Satis Group which claims that: Over 70% of ICO funding (by $ volume) to-date went to higher quality projects, although over 80% of projects (by # share) were identified as scams.

Is this what the authors had in mind? Do the authors agree with Satis’s methodology? If so, add it to the bibliography in the next edition.

How do we know the remaining 20% are “illegal securities offerings”? The authors do not explain why there are only two categories. What about ICOs that did not solicit Americans?

The remaining portion of this subsection is hard to take seriously since, as mentioned previously, they do not have a consistent view on how many prongs the Howey test is.

On p. 235 they write about shadow equity and securities fraud, specifically around venture capital firms. They do not provide any citations yet state that: “The venture investing model is an integral part of the United States tech economy and an engine for enormous prosperity and growth.”

Maybe it is, what is the reference?

Continuing on the same page:

However, in the post-2018 era, the outsized venture returns seen in the previous era have largely fallen by the wayside. The unicorns-companies valued at over $1 billion – that were once darlings of Silicon Valley, Peleton, WeWork, Uber, and Lyft have not performed like the giants of the dot-com era when IPOing; the unicorn stampede has become a bloodbath in the public markets.

A few issues with this:

(1) They probably should add a colon after “Silicon Valley”

(2) They misspelled Peloton (not Peleton)

(3) While we all probably understand the gist of what the authors are trying to say – that recently listed unicorns have underperformed since they IPO’ed – the comparison with “dot-com era giants” is not the best one.

In fact, in Chapter 3 they specifically highlighted the “The Dot-Com Bubble”. What are we supposed to do with this conflicting information?

For example, the authors do not mention specific “dot-com era giants” but we can probably assume they would include Amazon since it was mentioned in Chapter 3. Its first five years after listing were pretty dicey.

(AMZN) Source: Yahoo Finance

A future edition could simply say something like, some high-profile unicorns have underperformed since being publicly listed.

Continuing in the same paragraph they write:

Venture capitalists chasing the double-digit yields of the past have turned into increasingly more bizarre, risky, and unsustainable business models as part of their portfolio building. For venture capitalists dipping their toes into crypto investing, this has increasingly meant not investing in equity in their portfolio companies but instead investing in crypto tokens as a proxy for equity, a controversial mechanism known as shadow equity.

What is shadow equity? The authors do not provide a formal definition. What does Google say?

So the authors create a new term – shadow equity – do not provide a definition for the readers and it turns out there is already another working definition that is not the same thing as what the authors were describing.

A second edition should either drop the term “shadow equity” or find another term industry participants use to describe whatever it is the authors had in mind.

Continuing on p. 236 they write:

However, with shadow equity companies are not effectively issuing shares represented by cryptoassets or smart contracts, which are securities yet receive none of the investor protections of regular equity. Instead of a traditional equity raise, venture capital firms approach founders of crypto companies and do backroom deals that exchange capital for a percentage of the tokens that the company will issue in a sale known as a pre-mine. For instance, if a company issues 30 million shadow equity “share” tokens, it might allocate 20% or more of these tokens to its investors before selling them directly to the public.

There are several issues with this, including:

(1) Despite how common this allegedly is, the authors provide no specific examples or citations.

(2) It technically is only a “pre-mine” if there is actual mining taking place (such as a proof-of-work coin). There are other industry terms for non-proof-of-work coins but why should we do all the homework for the authors?

(3) Anecdotally I have heard of different types of retention and compensation models, but the one they describe for “shadow equity share tokens” is new. Where did they hear that?

On p. 237 they use the word “tieing” but the correct spelling is “tying”

On p. 237 they write:

Since the rise of the “web3” marketing campaign, many high-profile venture capital firms, although not all, have engaged in mass securities fraud to juice the returns on their portfolio.

Did the authors provide a single example? Nope. Perhaps they are correct but that which is presented without evidence can be dismissed without evidence.

Continuing in the same paragraph:

Investors’ returns on shadow equity are directly offering these investments to the public far faster than any other traditional form of venture investment. A typical web3 company can have a pre-mine sale, raise $50 million, offer the token to the public in a giant marketing push, and watch the price temporarily soar 10-20x in value in a massive pump while insiders take their profits, and before it all collapses down to peenies on the share; and all this before any pretense of a product is event built.

Did the authors provide a single example? Nope. Perhaps they are correct but that which is presented without evidence can be dismissed without evidence.

On p. 238 they write about industry lobbying efforts. But they do not mention a single lobbying organization which is a real disappointment because lobbying organizations like Coin Center white wash the negative externalities of proof-of-work mining.

For instance, they write:

All the while, the cryptocurrency industry has been lobbying lawmakers left and right, attempting to pass beneficial laws which all them to circumvent securities laws and create loopholes for them to continue the gravy train perpetuated by open and ubiquitous fraud. The revolving door between government agencies and crypto companies has been prolific in the last few years. Currently, the government risks falling into an irreparable state of regulatory capture where agencies are run by the entities they allegedly regulate.

I agree with the general thrust of this but you know what the authors are missing? Specific examples and evidence.

For instance, five years ago Lee Reiners wrote the first long-form article diving into the “revolving door.” A second edition must include that. In addition, Nathaniel Popper was the first mainstream reporter who covered how specific venture firms were actively lobbying specific regulatory agencies in the U.S., asking for “carve outs.”

It is worth pointing out to readers that a number of anti-coiners have shown open disdain with Popper despite the fact that he was covering this space long before the anti-coiners decided to care about it. The fact that Popper’s coverage is not cited reduces the credibility of these authors who have not done diligence.

For instance, where were the authors when Popper was reporting on the misdeeds of Centra?

On p. 239 the authors present a framework for discussion (with regulators) and propose five questions. These are good questions.

On p. 240 they present a “path forward” which includes:

Cryptoassets are clearly securities contracts. They meet both the legal and practical qualifications for being regulated, just like any other investment contract. To investors, they present with much the same presentation of opportunity: to generate a return based on the efforts of others, but with far more extreme risk. The existing securities framework would vastly mitigate these risks and protect the public from harms that have been well-understood by economists and lawyers for 100 years now.

All cryptoassets are “clearly securities”? What supporting evidence to the authors provide to back up this claim? Nothing. That which is presented without evidence can be dismissed without evidence.

Continuing on p. 240 they write:

The amount of pump and dumps and market manipulation present in crypto markets is unprecedented and is primarily created and done by exchange operators themselves. Massive amounts of non-public asymmetric information, economic cartels, and manipulation are not conducive to either capital formation or financial stability.

How unprecedented are the pump and dumps? How do they know these are primarily created by exchange operators?

What supporting evidence to the authors provide to back up this claim? Nothing.

That which is presented without evidence can be dismissed without evidence.

Also, this is the first and only time the authors complain about cartels. They missed the opportunity to discuss them in Chapter 3 regarding the financial industry during and after the 2007-2009 crisis.

On p. 241 they propose to “ban surrogate money schemes derived from sovereign currencies.” This is not a bad idea per se, Rohan Grey has kind of discussed something similar. But this would impact PayPal, is that something the authors are aware of?

Continuing, they write:

As found in many stablecoin projects, surrogate money schemes attempt to create dollar-like products that mimic public money. However, the products are not backed by the full faith and credit of the United States Government, and in many cases not even back by any hard assets. Stablecoins are subject to extreme risk of runs, much like we saw in bank runs in the Great Depression, an event not seen in the United States in 90 years.

It is too bad the authors did not take the opportunity to flesh out their arguments – in full – in the chapter 18. Such as, what is the definition of a “stablecoin”?

In this chapter they still do not provide specific examples of stablecoins that they perceive to be bad actors.

Furthermore, what do the authors mean by “bank runs”? Does this mean customers of banks standing outside the physical branch while the bank goes under?

Source: FDIC

As mentioned in the review of Chapter 18, the authors only discuss Libra (Diem). They do not mention specific banks, which is a big miss because others – including myself – specifically predicted the commercial banks that could collapse.

They need to do better with providing evidence, they had ample space in 247 pages to do so.

Continuing they write about money market mutual funds (MMMF):

The creation of stablecoins in almost precisely the same system, but instead backed by even riskier assets like Chinese commercial paper and other cryptoassets, which take the run risk of MMF and expand it exponentially.

The authors do not provide any evidence or references regarding Chinese commercial paper.

They could strengthen their argument if they – for example – explained how the New York Attorney General sued and settled with Tether Ltd (USDT). And during this investigation the NYAG discovered that Tether Ltd had at one point held securities issued by a couple of Chinese banks including ICBDC and CCB. Why not include these helpful details?

Also, why is it riskier to own these Chinese assets and what makes the run risk exponential? Perhaps both are true, but that which is presented without evidence can be dismissed without evidence.

Continuing in the same paragraph:

On top of this, the proliferation of private money simply weakens the dollar’s strength both domestically and abroad. Stablecoins are the financial product for which the upside is entirely illusory, and the downsides are catastrophic. The proliferation or integration of stablecoins is not in the interest of the United States from both a financial stability and foreign policy perspective.

This is a weird argument. In some ways, it is very similar to pro-pegged stablecoin legislators make:

Source: Twitter

Also, if the authors are actually against the “proliferation of private money” then they should be shaking their fists at the entities responsible for the creation of the vast majority of “private money” in the U.S., commercial banks.

Their next recommendation is to “firewall cryptoassets away from the banking sector and the broader market”

Writing on p. 241:

The Glass-Steagal Act, put in place after the Great Depression, set “firewalls” between different divisions of the banks.

They misspelled Steagal (should be Steagall). While I agree with parts of their proposal they could have mentioned that Glass-Steagall was eventually repealed in 1999. Is that good or bad? Seems like a good future discussion to have in a book.

Their final recommendation is a “complete ban.” Writing on p. 242:

Alternatively, the United States could consider a path similar to what China recently enacted or to the historical American Executive Order 6102, which forbade ownership of gold. Despite the rhetorical claims to “not throw the baby out with the bathwater,” there is, after 13 years of crypto, very little evidence that there is any baby at all.

The authors do cite a relevant article from the WEF regarding the 2021 bans in China. Why they waited until the very end of the book to cite this is unclear. Why not reference it in earlier chapters regarding China? What parts of the bans do the authors agree with? All of them?

Also, it is clear that throughout the book, the authors did not put much effort into finding evidence to even support their own claims, let alone conduct market research that provides evidence that contradicts their a priori cudgel.

It is worth pointing out that the copy/paste Twitter account – Web3 Is Going Great – conducts similar behavior as the authors: they both cherry-pick news that is favorable to their narratives. It is disingenuous and dishonest.

Continuing in the same paragraph:

Introducing completely non-economic digital speculative “playthings” introduces nothing to an economy other than slightly more exotic gambling games. In fact, there is a strong argument that such activities may come at an enormous opportunity cost, in the capital and talent that get diverted to ever-more extravagant ways to financialize digital nothingness. We can create an entire industry speculating on the volatility of nothingness and turn every fictional thing into a tradable token, but should we?

That is a good question! What evidence did the authors provide or refer to to reinforce their strong argument? Nothing.

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

The final paragraph of the chapter reads:

The only overall outcome of this program is the equivalent of digging digital ditches and filling them up again. Perhaps our society has better things to do than digging deeper and deeper ditches and filling them up again. And quite possibly, the Americans should simply ban crypto and play intellectual catchup with what seems like the rather sensible policy the Chinese have concluded on for the same universal common-sense financial and public harm mitigation reasons.

What would a ban entail? That no Americans in America can have a digital wallet on their phone? That no Americans in America can install software that runs a blockchain validator? What is the plan?

Also, the authors do not actually explain what China banned. For instance, private individuals can still own cryptocurrencies in China. Do the authors want to replicate that too?

All-in-all this chapter is a disappointment because it should have come earlier in the book, it should have been more comprehensive, it should have had more citations and references, and most importantly: it should have been vetted by experts in their fields including at least one licensed lawyer.

Chapter 25: Conclusion

The final four pages are basically a long rant, so let us dive in.

On p. 243 they write:

Crypto is a gripping story full of sound and fury, hope and fear, hype and noise, greed and idealism, yet despite all that, it is a tale signifying nothing in the end. Crypto is not just an experiment in anarcho-capitalism that did not work; it is an experiment that can never work and will never work. Crypto was promised as the technology of the future, yet it is a technology that can never escape its negative externalities or its entanglement with the terrible ideas of the past. Crypto is not the future of finance: it is the past of finance synthesized with the age-old cry of the populist strongman, To Make Money Again.

There are a few issues with this:

(1) The authors erect a strawman but empirically we know not all “crypto” projects are attempting to ‘make money again.’ Nor do all blockchains use proof-of-work. In fact, in looking at the current list of Layer 1s on CoinGecko, the majority are based on proof-of-stake. What are the negative environmental externalities of proof-of-stake?

(2) Yet again, the authors use an a priori argument to predict the future: “an experiment that can never work and will never work.” How can they know the future with such certainty? This is soothsaying.

Continuing on p. 243 they write:

While our existing financial system is undeniably profoundly flawed, not optimally inclusive, and sometimes highly rigged in favor of the already wealthy; crypto offers no solution to its problems other than to create an even worse system subject to unquantifiable software risk, profound conflicts of interest, and an incentives structure that would exasperate wealthy inequality to levels not seen since the Dark Ages. Put simply, Wall Street is bad, but crypto is far worse.

When I tried to explain to friends that this book unnecessarily carries water for incumbents, this is the reoccurring meme that came to mind.

There is no reason the authors have to defend incumbents or the a cartel that regularly is fined for the very activities that the authors abhor. Guess who invented all of these criminogenic concepts in the first place?

Rather, it is possible to critique both the coin world and the traditional financial world. You do not have to join one camp or the other.

In fact, real researchers should attempt to be neutral, or at the very least, provide some kind of nuance. There is no nuance in this book. To their credit, they did cite a Bitcoin-specific article from 2013 in referring to the Dark Ages. Too bad for them, the coin world in June 2022 was more than just the orange memecoin.

On p. 244 they write:

At all levels of sophistication and from all walks of life, every type of investor needs to be given truthful, fair, and full information about their investments and protected against fraud and unnecessary risk by our public institutions. Crypto’s very design is entirely antithetical to building or improving any of our existing markets and only serves to add more opaqueness, systemic risk, and fraud.

Oh, now they authors finally care about systemic risk. It only took 244 pages.

To their credit, they do cite a few external sources. The first is Hanley’s paper on Bitcoin (and only Bitcoin). The second reference is to a three-person interview that meanders around, why did the authors add it? The third is a reference to a blog post from Ed Zitron’s whose hyperbolic rant sounds nearly identical to the authors. Opinions are not evidence, they are opinions. Maybe there is some evidence but… what can be presented without evidence can be dismissed without evidence.

On p. 244 they continue:

All scientists and engineers are duty-bound to our profession and our communities that the public good is the central concern during all professional computing work. As a technologist, cryptoassets present our industry with an immense challenge and fundamental questions about the nature of responsible innovation.

Did Diehl – or one of the other authors – just break the fourth wall? Do the authors have a monopoly on who gets to represent “the technologist”? I have worked for tech-related companies for years, are my opinions weighted any differently than theirs?

They do cite two references, one is the same presentation from David Rosenthal and the other is a hyperbolic presentation from Nicholas Weaver. Are these challenges insurmountable? According to the authors and Weaver, that would be an a priori no.

On p. 245 they write:

Despite thirteen years of development, there is widespread debate over the proposed upside of cryptoassets from technical and financial considerations. While the aspirations of technologies may be genuine, the reality of the technology and its applications are vastly overstated and not in line with what is possible. Blockchain-based technologies have severe limitations and design flaws that preclude almost all applications that deal with customer data and regulated financial transactions. Real-worlds applications of blockchain technology within financial services are sparse and ambiguous as to whether they are an improvement on existing non-blockchain solutions. Most senior software engineers now strongly reject the entire premise of a blockchain-based financial system because the idea rests on both economic and technical absurdities.

Let’s walk backwards for a moment. Recall from Chapter 14 that we are all taught in writing class not to introduce new concepts or ideas in the conclusion of a story. The authors not only do it again, but they do not provide any citation.

For example, did the authors conduct a survey to determine that “most senior software engineers now strongly reject.”

Guess what? We all know what the proper response is to this.

The authors also showed their direct contributions as at least one of the co-authors of the anti-Web3 letter that was published two weeks before this book. How do we know?

The letter has a passage that sounds identical to the remark above:

After more than thirteen years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions.

Coincidence. Not at all.

At the time, I pointed out that the first web browser (appropriately called the “WorldWideWeb“) was launched in 1990. It was not until 2004 that Google revealed Ajax-based Gmail followed by Google Maps.

If the authors are trying to make the claim that anything (everything?) useful should have been invented in 13 years then they should hold other tech initiatives to the same standard. Besides, most blockchains themselves are much younger than 13 years too.

For instance, Ethereum’s mainnet launched 8 years ago and has undergone extensive changes over the past several years.

Lastly, what are “existing non-blockchain solutions”? This is the type of argument that Bitcoin maximalists such as Chris DeRose frequently used: just use a database. Okay, which one? Are you a database expert now too? Can other experts have a difference of opinion or is your view the final word?

Continuing on p. 245 they write:

The catastrophes and externalities related to crypto are neither isolated nor are they growing pains of a nascent technology; instead, these are the violent throws of a technology that is not built for its purpose and is forever unsuitable as a foundation for large-scale economic activity.

There is something wrong with the grammar in the middle of this rant: “these are the violent throws of a technology that is not built for its purpose”. What does that mean? On the margin of the book I wrote, “Did the authors meant to say ‘not fit for purpose’?” but even that does not make sense there.

Either way, by claiming “is forever unsuitable” the authors are once again trying to predict the future a prori.

Continuing on p. 245 they write:

Technologies that serve the public must always have mechanisms for fraud mitigation and allow a human-in-the-loop to reverse transactions. Blockchain technology, the foundation of all cryptoassets, cannot, and will not, have transaction reversal or data privacy mechanisms because they are antithetical to its bae design. The software behind crypto is architecturally unsound, and the economics are incoherent.

This is factually untrue. An RTGS such as Fedwire has irreversible transactions. There are no “human-in-the-loop” on purpose. In order to negate one transaction a subsequent transaction must be sent. This is true for cases such as bankruptcy too.

Do not take my word for it, here is what the Federal Reserve actually says:

We see this in other systemically important financial infrastructure too, such as CLS. CLS was setup after the collapse of a German bank giving rise to what we now know as Settlement risk or Herstatt risk.

I have patiently tried explaining these ideas – around SIFIs – to various anticoiners and Bitcoin maximalists and they frequently just pretend that “irreversibility” is a characteristic of blockchains and nothing in traditional finance. 55

Lastly, when the authors say that cryptoassets cannot and will not have “data privacy mechanisms” is there any existing confidentiality or privacy-related effort that they are okay with? They dunked on Tornado Cash earlier in the book, and they singled out both Monero and Zcash as well.

Are the authors okay with developers attempting to create new confidentiality or privacy-related technology or is it just not allowed in the universe the authors live in?

Continuing they write:

The theoretical upsides of every crypto project are entirely illusory. It is a solution in search of a problem. Its very foundations are predicated on logical contradictions and architectural flaws that more technology cannot fix and will never be resolved.

The authors are once again predicting the future with a lot of certainty: Will never be resolved. This is an a priori argument and once again, can be rejected because it does not have any evidence. The only thing they cite is another op-ed by Ed Zitron. A scientist should sit down and explain to the authors – and many of the people they cite – and explain the difference between a priori arguments and a posteriori arguments.

Continuing they write:

The impact of crypto’s externalities is massive and becomes more more pronounced every day it is allowed to continue to exist. Crypto is a project that will always create more net suffering by its very design because its design is antithetical to both the rule of law and the foundations of liberal democracy. Technologies working on cryptoassets and web3 are not building a brighter and more egalitarian future; they are only creating a path back to serfdom, where the landed elite are now tech platforms that control the means of communication, the money supply, and the levers of the state itself.

It took 246 pages but now the authors are finally critics of “tech platforms that control the means of communication.”

Are the authors critical of Big Tech for this type of centralized ownership and control or because “crypto” might be involved in some way? Who knows.

What we do know is that the authors believe that crypto “will always create more net suffering by its very design”.

Lacking any citations this can be classified as an opinion.

The final paragraph of the chapter, states:

A tech-led plutocracy is not a future we want to build, and despite the inevitability rhetoric of its supporters, crypto does not have to be part of our future. Crypto has no physical existence; it is a meme, an idea-and an incoherent one at that-which is no more eternal or permanent than the notion of the divine right of kings to rule once was. Crypto is an idea that is as senseless and ephemeral as every other collective delusion throughout history that has since passed into the intellectual dustbin of history, and this time is not different.

Can we talk about “inevitability rhetoric” for just a moment? The authors use this exact rhetoric over and over in each chapter. It is tiring. And it is not an adequate substitute for an evidence.

Obviously coin promoters should also be held to the same standard and if you read my other book reviews, I point out the same sorts of issues.

That is their conclusion, were we expecting something less polemical and more substantive?

Chapter 26: Acknowledgements

This is not an actual chapter but it now helps sync up the out-of-sync bibliography. It is worth looking at really quickly:

Many thanks to all those who helped with editing, citations, and research. Adam Wespeiser, Brian Goetz, Ravi Mohan, Neil Turkewitz, James King, Alan Graham, Geoffrey Huntley, Rufus Pollock, Paul Hattori, Grady Booch, and Dave Troy. And to the many other crypto critics who laid the intellectual foundation myself and others to follow.

Did Diehl – or one of his co-authors – break the fourth wall again? Who is “myself”? The same person who was referring to themselves in the Conclusion as “a technologist”?

It is not a huge coincidence that many of the people the authors acknowledge also happen to be co-signers of the anti-web3 letter that was published two weeks prior to the books publication.

Overlapping names include: Adam Wespeiser, Alan Graham, Geoffrey Huntley, Rufus Pollock, Grady Booch, and Dave Troy. Two of the co-authors of the book – Darren Tseng and Stephen Diehl – also sign the letter.

Nearly all of the works cited overlap as well. Guess who probably had a heavy hand in drafting that totally-organic-anti-web3 letter?

Book review final remarks

This is probably the worst book I have reviewedBlockchain Revolution and both of Michael Casey’s books are pretty close to the bottom of the barrel however Popping the Crypto Bubble is basically a long winded blog post filled with evidence-free assertions.  The authors fail at providing a modicum of supporting references beyond endless rants.

What makes this particular book extra cringy is how much playtime the Financial Times has given it.56 Not only do some of its reporters seem to have a direct line to Stephen Diehl, they even did a softball interview with him without having read the book.

Where did it go wrong?

The best illustration: Chapter 18 is entitled “Stablecoins.”  It is six pages long.  Five pages discuss Libra – a project that was never launched – and the final page briefly covers CBDCs without diving into specific CBDC models.  One of the authors – Diehl – spends a great deal of energy on social media regarding “stablecoins” but could not spend a minute discussing the history of pegged stablecoins or what stablecoins exist today.  The authors could not even bother quoting arguments that strengthened their views – such as lawsuits from the CFTC and NYAG.  While they said the word “Tether,” they did not mention USDT or USDC at all. Why the omission? 

What is another example of weaknesses?  In Chapter 24 they have a subsection on “coin lobbying.”  But they do not mention any specific lobbying organizations or shills in congress.  How hard is it to provide supporting details?

Tim, you are just angry they did not cite you!

Undefinied acronyms and undeserved victory laps

The authors do not define NFTs or explain their history.  They repeatedly use a metonym – Sand Hill road – yet the casual reader may not understand it refers to Silicon Valley.

The authors could have but did not interview anyone inside or outside the industry. They could have done some original first-hand reporting. Instead we are served with a compilation of a stories from third parties. This is the same laziness that the copy/paste Twitter account – Web3 Is Going Great – suffers from; a lack of authentic research.

Anti-coiners should hold themselves to the same standard they frequently criticize the coin industry with, and that includes providing evidence and citations. For all of their claims around “fraud” and “scams,” the authors only made generalized forecasts and did not make any specific predictions around say, FTX or Terra. They missed out on describing the implosion of centralized lenders altogether. 

After all the pump and rah-rah books, the world needs a solid detox. The market needs a book about blockchains and cryptocurrencies with a critical, yet nuanced, eye. This is not that book.  

Endnotes

  1. As described in The Tribes of maximalism, the etymology of “no-coiner” comes from three vocal Bitcoin maximalists, Michael Goldstein, Elaine Ou, and Pierre Rochard who used it as a smear. []
  2. For instance, Chapter 9 covers “Ethical Problems” but in the Bibliography “Ethical Problems” is Chapter 10. The root problem is the authors skip Chapter 1 altogether in the Bibliography: in the book, Chapter 1 is a two page introduction and Chapter 2 is a ten page History of Crypto. The bibliography mislabels Chapter 1 as Chapter 2 and it has a knock-on effect for the remainder of the bibliography. []
  3. While at R3 I was introduced to Diehl via Simon Taylor, one of their advisors. []
  4. At the time of its publication, one of my popular (older) posts was: Archy and Anarchic Chains. I attended and participated in dozens of formal meetings with regulated financial institutions between 2015-2019, the word “anarchy” may have been mentioned in jest a couple of times. []
  5. PayPal is mentioned 67 times in Dan Awrey’s law review paper: “Bad Money.” []
  6. This dovetails into the motivations behind why Bitcoin was created, with some arguing it was built following the challenges facing the online gambling industry which had difficulties maintaining persistent banking access; Caribbean-based ones were frequently debanked. []
  7. There have been a wide-range and wide-variety of tokenization efforts unrelated to the euphoria around digital art collectibles. Coincidentally I wrote a paper on this topic in 2015: Watermarked tokens and pseudonymity on public blockchains. []
  8. In 2017, while at R3 I helped co-edit a relevant paper with experts from Blockseer and the Zero Electric Coin company (creators of Zcash): Survey of Confidentiality and Privacy Preserving Technologies for Blockchains (pdf). []
  9. I wrote about Bitcoin mining in China in May 2014. []
  10. Decades ago, the Supreme Court exempted Major League Baseball from antitrust laws. []
  11. This is a topic I wrote about at length in a newsletter several years ago; it discussed the sub-industry of collectible trading conventions and even price guides (such as Beckett). []
  12. Contra anti-coiner insistence: it is not a scalable business model for a one-person studio, expecting an artist – that wants to use NFTs as a distribution and royalty collection mechanism – to start suing perceived violators en masse. []
  13. While writing this review, WeWork warned it had “substantial doubt” that it could continue as a business. []
  14. After a decade, Uber finally did finally post a profitable quarter, but that was a year after the book was published. []
  15. I have previously argued that proof-of-work-based networks actually can be negative sum since the mining activity introduces negative environmental externalities. []
  16. One reviewer of this review commented: I don’t agree that JP is calling crypto an early bird game. It doesn’t have to generate returns for the earlier entrants. What is wrong with viewing it as a superficial commodity like gold or diamonds? []
  17. This is unlikely to occur due in part to the implicit control that Bitcoin miners and their maximalist enablers have on the BTC ticker symbol. Previously, several prominent maximalists such as Samson Mow and Adam Back have used their sway via Blockstream, to push miners in specific directions. []
  18. Perhaps the hooks will be underutilized but several of the vendors for core banking software – including Fiserv and Jack Henry – have production-ready hooks with blockchain-related integrations for clients. []
  19. Early efforts towards creating “clearing” or “settling” networks between exchanges eventually led to now defunct SEN and Signet (Silvergate Exchange Network and Signature Network). This relatively centralized infrastructure allowed participants (such as exchanges) to settle trades around the clock irrespective of weekends or holidays. And they could do so without trades having to be transferred on-chain, forgoing the fees and time delays. Note: according to Fortune, Signet was a white-label version of TassatPay, a private, blockchain-based solution currently operational at five other banks. []
  20. I was a formal advisor to Blockseer which provided similar on-chain analytics services before its acquisition by DMG Blockchain. Both Elliptic and Chainalysis typically post quarterly and annual reports that includes this type of information for public consumption. []
  21. Luke-Jr is a prominent Bitcoin Core developer who was a central propagandist for smaller blocks during the “block size civil war” primarily between 2015-2017. One of the hurdles he personally faced was that his internet connection in Florida was relatively slow and he used it as a barometer for how home validators should be able to upload and download a block. In the past he has voiced disdain for developers attempting to use OP_Return and recently threatened to spam the network to ban Ordinals. []
  22. Also, there is no reason to carry water for any of these chains but if you are going to critique them at least use consistent verbiage. []
  23. Visa was an investor in Chain.com back in September 2015 when the startup pivoted from Bitcoin API services to enterprise blockchain infrastructure. []
  24. A quick googling revealed a couple of papers published before the book was made public: DQ: Two approaches to measure the degree of decentralization of blockchain by Lee et al., and The Importance of Decentralization by Muzzy and Anderson. []
  25. Several of the large data and analytics providers have service contracts with trading entities that can flag events, e.g., when specific addresses become active. A recent example is when Arkham, an analytics firm, mistakenly reported that bitcoins connected to Mt. Gox and the U.S. government were on the move, the errant news temporarily resulted in a large selloff. []
  26. I have pointed this out to maximalists and anti-coiners over the years and the response is deafening. For example, nearly two years ago I did an interview with Aviv Milner who is podcaster. For some reason he would twist any criticism of the traditional financial industry – specifically concentration risk – as… not a valid criticism. Anti-coiners such as the authors of this book and several podcast series seem uninterested in holding traditional financial organizations to the same standard as the coin world they attempt to investigate. It is okay to find warts in both of them! []
  27. I have written about them several times, primarily in the 2014-2016 era. []
  28. The germination of ISO 20022 arose from some of those early blockchain-related conversations as well. Worth pointing out that in this case, it was specifically unrelated to cryptocurrencies; although a number of cryptocurrency efforts currently market themselves as “ISO 20022 compliant.” []
  29. The banking lobby in Europe is opposed to interest-bearing stablecoins in part because in theory it could dent their deposit base, just as narrow banks could. []
  30. In fact, I liked the Bergstra and Weijland paper so much that in 2014 I used the title for a short book I wrote on the same topic. []
  31. Put it another way, how many bitcoins does it cost to create a bitcoin? For miners to be profitable, the aspiration is less than 1 bitcoin. []
  32. Credit to Kevin Zhou who first pointed this out in 2014 while at Buttercoin. Yes, the same Kevin Zhou who accurately predicted the demise of Terra. []
  33. While Carter tries to place himself front-and-center of this specific topic, it was Andreas Antonopoulos who first prominently used the holiday lighting example. []
  34. It was not a coincidence that Dilley would later join Blockstream as their first chief strategy officer. []
  35. In fact, Coinbase would not list any other asset besides Bitcoin until 2016 because the executive team and early investors were prominent Bitcoin bulls. Listing Ethereum Classic (ETC) was a “newsworthy” event in 2018. []
  36. Michael Goldstein, Elaine Ou, and Pierre Rochard – are prominent Bitcoin maximalists and were co-creators of the term “no-coiner” and “pre-coiner” in late 2017-early 2018. The term “no-coiner” was intended to be an insult, a slur. []
  37. I have some bona fides in this as I authored the most widely cited paper on the topic back in 2015: Consensus-as-a-service: a brief report on the emergence of permissioned, distributed ledger systems []
  38. I have mentioned these specific examples to both Bitcoin maximalists and anti-coiners alike, and again, the goal posts shift. For instance, Jorge Stolfi, a computer science professor and Aviv Milner, the podcaster mentioned above, both ignored the existence of such projects or dismissed them out of hand. I even tried to help introduce Stolfi to a director at the DTCC so he could ask specific questions, which he did not. []
  39. Eight years ago I corresponded with a reporter at Fusion regarding the possibility of litecoin (LTC) being used for illicit activity (regarding chain hopping). []
  40. There is a clear insular clique that only engages with one another, much like certain coin tribes do (such as IOTA). []
  41. Early touchscreen-based personal data assistants (PDAs) included Palm Pilot, Apple Newton, and Blackberry from RIM. []
  42. Maybe as RWAs are deployed to Ethereum less attention will be paid to an ossified chain like Bitcoin, lowering Bitcoin’s marketcap below 30%. Who knows, maybe the opposite occurs. Being a cheerleader on specific price points based on ideology seems foolish. []
  43. This question initially stumped Libra / Diem managers. Anecdotally, one of the managers I spoke to early on in that project assumed that the custody bank would decide which fork to recognize. []
  44. A simple googling resulted in numerous papers including: Smart Contracts and the Cost of Inflexibility by Sklaroff, Towards user-centered and legally relevant smart-contract development: A systematic literature review by Dixit et al., and Smart Contracts, Blockchain, and the Next Frontier of Transactional Law by McKinney et al. Were those authors wrong? Sounds like the job for Diehl et al. to read and determine. []
  45. If you scroll back to the top of this book review and click on Diehl’s presentation and talks in 2017 and 2018, his thinking does not seem to incorporate or recognize what has gone on. []
  46. For instance, a variety of enterprises including regulated financial institutions have built and deployed smart contracts for a bevy of experiments, some that are still in pilot mode. Maybe these enterprises should be laughed out of the room but this is an empirical, evidence-based activity, the conclusions are not predetermined beforehand. []
  47. There is a lot of confusion over the origins of “Hyperledger,” here is a brief backstory. []
  48. This was a weakness in Hilary Allen’s own writings, specifically the DeFi Shadow Banking paper they cite in Chapter 12. Allen’s paper incorrectly states that lending protocols will accept any collateral, it was one of many technical inaccuracies in that paper. []
  49. Coincidentally, in the process of writing this review Lamina1 – a new layer-1 blockchain advised by Neal Stephenson – launched a beta of the metaverse-focused network. []
  50. The cited Gerarad’s book – Libra Shrugged – as reference number 2 in the bibliography for that chapter. []
  51. As part of a literature review the authors could look at the Bank of England’s new RTGS. Section 6 of the roadmap specifically mentions DLT and Section 3 of their Consultation paper discusses CBDCs. []
  52. At the time of this writing the management team is under investigation by the U.S. Department of Justice. []
  53. While not usually categorized as “ICOs,” there were some Bitcoin-related projects that did crowdsale / crowdfunding raises in 2012-2013 coordinated on the BitcoinTalk forum. []
  54. Coincidentally, Nathaniel Popper, a former reporter with The New York Times left the newpaper to write a book on the topic of financial populism. He had a good command of how cryptocurrencies and blockchains worked, yet anti-coiners attacked him for the cardinal sin of recommending nuance. []
  55. The authors also cite Hilary Allen who is not a credible authority on this particular topic. Rosen uses identical techniques and opinion-filled arguments in her writings, and frequently cites Diehl. Demand evidence from them. []
  56. It is not fair to blame the entire team at the Financial Times, some of their reporters did a stellar job chronicling the FTX collapse. []

Presentation: 8 areas for PMF and IMF with blockchains*

This past week I gave a new presentation at the 2nd annual Soranomics event (last year I presented on a related topic: pegged coins aka “stablecoins”). It includes a number of illustrations to discuss product market fit and infrastructure market fit.

Below is a copy of the deck as well as the A/V. Note: there are citations and references in the speaker notes. Note: I am to publish a long-form version based on this content.

Mini book review: “The Billionaire’s Folly”

I’ve previously reviewed at least seven blockchain-specific books in the past number of years. No one has paid me to review them, although I have received a couple copies for free. Unfortunately more than half of the books have been pretty bad… both technically wrong and often very polemical.

Fortunately, a page turner appeared in my inbox about a month ago: “The Billionaire’s Folly” by Faisal Khan. I’ve already posted a couple of short comments on the bird app and an usual for me – do not have a lot more to add. Mostly because it lacked many errors. Sure, it had a couple of typos here and there and a couple of debatable points but overall it was well-written and informative.

It also didn’t try to stray far away from what it aimed to do: discuss Khan’s perspective working at ConsenSys, an Ethereum-focused company, during what turned out to be the heady days of the ICO era. So in some ways, it is closer to Nathaniel Popper’s Digital Gold (which was equally well-written) than most of the other b-word books.

I didn’t mention this in the thread above but a number of anecdotes that Khan shares in the book were either relayed to myself (often through co-workers) or by actually witnessing it first hand. So it is interesting to see some of them independently confirmed.

One that did not (because Khan had yet to join the company) but definitely could have fit right in, involved an event held in the spring of 2016 near Seattle. About 60ish employees of this Fortune 100 tech company hosted a day-long powwow about “blockchains” and only three external companies were allowed to send representatives:

  • A well-known, large consulting company
  • ConsenSys, who sent several executives
  • R3 (my then-employer) sent myself

After presentations were given, the floor was opened for questions and a senior architect in the back questioned the urgency and immediacy that one of the promoters had claimed. And during the ensuing war-of-words, a partner at the consulting firm literally stood on the table at this closed-room event, crooning to everyone that “blockchain was the biggest thing in his career and that it would dramatically impact this tech company.” One of Khan’s future colleagues from the table over made eye contact with me and we just shook our heads. Although in retrospect, he was probably shaking his head for very different reasons than I was. I’m ngmi, right?

Either way, Khan has oodles of stories packed into a book that isn’t polemical. Check it out.

Book review: The Truth Machine

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

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

Overall: I do not recommend the first edition. For comparison, here are several other reviews.

This book seemed overly political with an Occupy Wall Street tone that doesn’t mesh well with what at times is a highly technical topic.

I think a fundamental challenge for anyone trying to write book-length content on this topic is that as of 2018, there really aren’t many measurable ‘success’ stories – aside from speculation and illicit activities – so you end up having to fill a couple hundred pages based on hypotheticals that you (as an author) probably don’t have the best optics in.

Also, I am a villain in the book. Can’t wait?  Scroll down to Chapter 6 and also view these specific tweets for what that means.

Note: all transcription errors are my own. See my other book reviews on this topic.

Preface

on p. x they write:

The second impact is the book you are reading. In The Age of Cryptocurrency, we focused primarily on a single application of Bitcoin’s core technology, on its potential to upend currency and payments.

Would encourage readers to peruse my previous review of their previous book. I don’t think they made the case, empirically, that Bitcoin will upend either currency or payments. Bitcoin itself will likely exist in some form or fashion, but “upending” seems like a stretch at this time.

On p. xi they write in a footnote:

We mostly avoid the construct of “blockchain” as a non-countable noun.

This is good. And they were consistent throughout the book too.

Introduction

They spent several pages discussing ways to use a blockchain for humanitarian purposes (and later have a whole chapter on it), however, it is unclear why a blockchain alone is the solution when there are likely other additional ways to help refugees.

For instance, on p. 3 they write:

Just as the blockchain-distributed ledger is used to assure bitcoin users that others aren’t “double-spending” their currency holdings – in other words, to prevent what would otherwise be rampant digital counterfeiting – the Azraq blockchain pilot ensures that people aren’t double-spending their food entitlements.

But why can’t these food entitlements be digitized and use something like SNAP cards? Sure you can technically use a blockchain to track this kind of thing, but you could also use existing on-premise or cloud solutions too, right?  Can centralized or non-blockchain solutions fundamentally not provide an adequate solution?

On p. 4 they write:

Under this new pilot, all that’s needed to institute a payment with a food merchant is a scan of a refugee’s iris. In effect, the eye becomes a kind of digital wallet, obviating the need for cash, vouchers, debit cards, or smartphones, which reduces the danger of theft (You may have some privacy concerns related to that iris scan – we’ll get to that below.) For the WFP, making these transfers digital results in millions of dollars in saved fees as they cut out middlemen such as money transmitter and the bankers that formerly processed the overall payments system.

Get used to the “bankers” comments because this book is filled with a dozen of them. Intermediaries such as MSBs and banks do take cuts, however they don’t really dive into the fee structure. This is important because lots of “cryptocurrency”-focused startups have tried to use cryptocurrencies to supposedly disrupt remittances and most basically failed because there are a lot of unseen costs that aren’t taken into account for.

Another unseen cost that this book really didn’t dive into was: the fee to miners that users must pay to get included into a block.  They mention it in passing but typically hand-waved it saying something like Lightning would lower those costs.  That’s not really a good line of reasoning at this stage in development, but we’ll look at it again later.

On p. 6 they write:

That’s an especially appealing idea for many underdeveloped countries as it would enable their economies to function more like those of developed countries – low-income homeowners could get mortgages, for example; street vendors could get insurance. It could give billions of people their first opening into the economic opportunities that the rest of us take for granted.

That sounds amazing, who wouldn’t want that?  Unfortunately this is a pretty superficial bit of speculation.  For example, how do street vendors get insurance just because of the invention of a blockchain?  That is never answered in the book.

On p. 7 they write:

The problem is that these fee-charging institutions, which act as gatekeepers, dictating who can and cannot engage in commercial interactions, add cost and friction to our economic activities.

Sure, this is true and there are efforts to reduce and remove this intermediation. The book also ignores that every cryptocurrency right now also charges some kind of fee to miners and/or stakers. And with nearly all coins, in order to obtain it, a user typically must buy it through a trusted third party (an exchange) who will also charge a markup fee… often simultaneously requiring you to go through some kind of KYC / AML process (or at least connect to a bank that does).

Thus if fee-charging gatekeepers are considered a problem in the traditional world, perhaps this can be modified in the next edition because these type of gatekeepers exist throughout the coin world too.

On p. 8 they list a bunch of use-cases, some of which they go into additional detail later in the book. But even then the details are pretty vague and superficial, recommend updating this in the next edition with more concrete examples.

On p. 9 they write:

Silicon Valley’s anti-establishment coders hadn’t reckoned with the challenge of trust and how society traditionally turns to centralized institutions to deal with that.

There may have been a time in which the majority of coders in the Bay area were “anti-establishment” but from the nearly 5 years of living out here, I don’t think that is necessarily the case across the board. Recommend providing a citation for that in the future.

On p. 10 they write:

R3 CEV, a New York-based technology developer, for one, raised $107 million from more than a hundred of the world’s biggest financial institutions and tech companies to develop a proprietary distributed ledger technology. Inspired by blockchains but eschewing that lable, R3’s Corda platform is built to comply with banks’ business and regulatory models while streamlining trillions of dollars in daily interbank securities transfers.

This whole paragraph should be updated (later in Chapter 6 as well):

  • The Series A funding included over 40 investors, not 100+.
  • The ‘community’ version of Corda is open sourced and available on github, so anyone can download, use, and modify it. There is also a Corda Enterprise version that requires a license and is proprietary.
  • While initially eschewing the term “blockchain,” Corda is now actively marketed as a “blockchain” and even uses the handle @cordablockchain on Twitter, on podcast advertisements, and in public presentations.1
  • I am unaware of any current publicly announced project that involves streamlining trillions of dollars in daily interbank securities transfers. Citation?

On p. 10 they briefly mention the Hyperledger Project.  Recommend tweaking it because of its own evolution over the years.

For example, here is my early contribution: what is the difference between Hyperledger and Hyperledger.

On p. 11 they write:

While it’s quite possible that many ICOs will fall afoul of securities regulations and that a bursting of this bubble will burn innocent investors, there’s something refreshingly democratic about this boom. Hordes of retail investors are entering into early stage investment rounds typically reserved for venture capitalists and other professional.

This paragraph aged horribly since the book was published in February.

All of the signs were there: we knew even last year that many, if not all, ICOs involved overpromising features and not disclosing much of anything to investors. As a result, virtually every week and month in 2018 we have learned just how much fraud and outright scams took place under the guise and pretext of the “democratization of fund raising.”

For instance, one study published this summer found that about 80% of the ICOs in 2017 were “identified scams.” Another study from EY found that about 1/3 of all ICOs in 2017 have lost “substantially all value” and most trade below their listing price.

Future versions of this book should remove this paragraph and also look into where all of that money went, especially since there wasn’t – arguably – a single cryptocurrency application with a real user base that arose from that funding method (yet).

On p. 11 they write:

Not to be outdone, Bitcoin, the grandaddy of the cryptocurrency world, has continued to reveal strengths — and this has been reflected in its price.

This is an asinine metric. How exactly does price reflect strength? They never really explain that yet repeat roughly the same type of explanation in other places in this book.

Interestingly, both bitcoin’s price and on-chain transaction volume have dramatically fallen since this book was first published. Does that mean that Bitcoin weakened somehow?

On p. 12 they write:

Such results give credence to crypto-asset analysts Chris Burniske and Jack Tatar’s description of bitcoin as “the most exciting alternative investment of the 21st century.”

Firstly, the Burniske and Tatar book was poorly written and wrong in many places: see my review

Secondly, bitcoin is a volatile investment that is arguably driven by a Keynesian beauty contest, not for the reasons that either book describes (e.g., not because of remittance activity).

On p. 12 they write:

The blockchain achieves this with a special algorithm embedded into a common piece of software run by all the computers in the network.

To be clear: neither PoW nor PoS are consensus protocols which is implied elsewhere on page 12.

On p. 12 they write:

Once new ledger entries are introduced, special cryptographic protections make it virtually impossible to go back and change them.

This is not really true. For coins like Bitcoin, it is proof-of-work that makes it resource intensive to do a block reorganization. Given enough hashrate, participants can and do fork the network. We have seen it occur many times this year alone. There is no cryptography in Bitcoin or Ethereum that prevents this reorg from happening because PoW is separate from block validation.2

On p. 13 they write:

Essentially, it should let people share more. And with the positive, multiplier effects that this kind of open sharing has on networks of economic activity, more engagement should in turn create more business opportunities.

These statement should be backed up with supporting evidence in the next edition because as it stands right now, this sounds more like a long-term goal or vision statement than something that currently exists today in the cryptocurrency world.

On p. 13 they mention “disintermediation” but throughout the book, many of the cryptocurrency-related companies they explore are new intermediaries. This is not a consistent narrative.

On p. 14 they write:

If I can trust another person’s claims – about their educational credentials, for example, or their assets, or their professional reputation – because they’ve been objectively verified by a decentralized system, then I can go into direct business with them.

This is a non sequitur. Garbage in, garbage out (GIGO) — in fact, the authors make that point later on in the book in Chapter 7.

On p. 15 they write:

Blockchains are a social technology, a new blueprint for how to govern communities, whether we’re talking about frightened refugees in a desolate Jordanian output or an interbank market in which the world’s biggest financial institutions exchange trillions of dollars daily.

This is vague and lacks nuance because there is no consensus on what a blockchain is today. Many different organizations and companies define it differently (see the Corda example above).

Either way, what does it mean to call a blockchain “social technology”? Databases are also being used by refugee camp organizers and financial infrastructure providers… are databases “social technology” too?

Chapter 1

On p. 17 they write:

Its blockchain promised a new way around processes that had become at best controlled by middlemen who insisted on taking their cut of every transaction, and at worst the cause of some man-made economic disasters.

This is true and problematic and unfortunately Bitcoin itself doesn’t solve that because it also has middlemen that take a cut of every transaction in the form of a fee to miners. Future editions should add more nuance such as the “moral hazard” of bailing out SIFIs and TBTF and separate that from payment processors… which technically speaking is what most cryptocurrencies strive to be (a network to pay unidentified participants).

On p. 18 they write:

Problems arise when communities view them with absolute faith, especially when the ledger is under control of self-interested actors who can manipulate them. This is what happened in 2008 when insufficient scrutiny of Lehman Brother’s and other’s actions left society exposed and contributed to the financial crisis.

This seems to be a bit revisionist history. This seems to conflate two separate things: the type of assets that Lehman owned and stated on its books… and the integrity of the ledgers themselves. Are the authors claiming that Lehman Brother’s ledgers were being maliciously modified and manipulated? If so, what citation do they have?

Also a couple pages ago, the authors wrote that blockchains were social technology… but we know that from Deadcoins.com that they can die and anything relying on them can be impacted.

Either way, in this chapter the authors don’t really explain how something Bitcoin itself would have prevented Lehman’s collapse. See also my new article on this topic.

On p. 19 they write:

A decentralized network of computers, one that no single entity controlled, would thus supplant the banks and other centralized ledger-keepers that Nakamoto identified as “trusted third parties.”

Fun fact: the word “ledger” does not appear in the Bitcoin white paper or other initial emails or posts by Nakamoto.

Secondly, perhaps an industry wide or commonly used blockchain of some kind does eventually displace and remove the role some banks have in maintaining certain ledgers, but their statement, as it is currently worded, seems a lot like of speculation (projection?).

We know this because throughout the book it is pretty clear they do not like banks, and that is fine, but future editions need to back up these types of opinions with evidence that banks are no longer maintaining a specific ledger because of a blockchain.

On p. 20 they write:

With Bitcoin’s network of independent computers verifying everything collectively, transactions could now be instituted peer to peer, that is, from person to person. That’s a big change from our convoluted credit and debit card payment systems, for example, which routes transactions through a long sequence of intermediaries – at least two banks, one or two payment processors, a card network manager (such as Visa or Mastercard), and a variety of other institutions, depending on where the transaction take place.

If we look back too 2009, this is factually correct of Bitcoin at a high level.3 The nuance that is missing is that today in 2018, the majority of bitcoin transactions route through a third party, some kind of intermediary like a deposit-taking exchange or custodial wallet.4 There are still folks who prefer to use Bitcoin as a P2P network, but according to Chainalysis, last year more than 80% of transactions went through a third party.5

On p. 20 they write:

Whereas you might think that money is being instantly transferred when you swipe your card at a clothing store, in reality the whole process takes several days for the funds to make all those hops and finally settle in the storeowner’s account, a delay that create risks and costs. With Bitcoin, the idea is that your transaction should take only ten to sixty minutes to fully clear (not withstanding some current capacity bottlenecks that Bitcoin developers are working tor resolve). You don’t have to rely on all those separate, trusted third parties to process it on your behalf.

This is mostly incorrect and there is also a false comparison.

In the first sentence they gloss over how credit card payment systems confirm and approve transactions in a matter of seconds.6 Instead they focus on settlement finality: when the actual cash is delivered to the merchant… which can take up to 30+ days depending on the system and jurisdiction.

The second half they glowingly say how much faster bitcoin is… but all they do is describe the “seen” activity with a cryptocurrency: the “six block” confirmations everyone is advised to wait before transferring coins again. This part does not mention that there is no settlement finality in Bitcoin, at most you get probabilistic finality (because there is always chance there may be a fork / reorg).

In addition, with cryptocurrencies like Bitcoin you are only transferring the coins. The cash leg on either side of the transaction still must transfer through the same intermediated system they describe above. We will discuss this further below when discussing remittances.

On p. 20 they write:

It does so in a way that makes it virtually impossible for anyone to change the historical record once it has been accepted.

For proof-of-work chains this is untrue in theory and empirically. In the next edition this should be modified to “resource intensive” or “economically expensive.”

On p. 20 they write:

The result is something remarkable: a record-keeping method that brings us to a commonly accepted version of the truth that’s more reliable than any truth we’ve ever seen. We’re calling the blockchain a Truth Machine, and its applications go far beyond just money.

It is not a “truth machine” because garbage in, garbage out.

In addition, while they do discuss some historical stone tablets, they don’t really provide a metric for how quantitatively more (or less) precise a blockchain is versus other methods of recording and witnessing information. Might be worth adding a comparison table in the next edition.

On p. 21 they write:

A lion of Wall Street, the firm was revealed to be little more than a debt-ravaged shell kept alive only by shady accounting – in other words, the bank was manipulating its ledgers. Sometimes, that manipulation involved moving debt off the books come reporting season. Other times, it involved assigning arbitrarily high values to “hard-to-value” assets – when the great selloff came, the shocking reality hit home: the assets had no value.

The crash of 2008 revealed most of what we know about Wall Street’s confidence game at that time. It entailed a vast manipulation of ledgers.

This was going well until that last sentence. Blockchains do not solve the garbage in, garbage out problem. If the CFO or accountant or book keeper or internal counsel puts numbers into blocks that do not accurately reflect or represent what the “real value” actually is, blockchains do not fix that. Bitcoin does not fix that.

Inappropriate oversight, rubber stamp valuations, inaccurate risk models… these are off-chain issues that afflicted Lehman and other banks. Note: they continue making this connection on pages 24, 28, and elsewhere but again, they do not detail how a blockchain of some kind would have explicitly prevented the collapse of Lehman other other investment banks.

See also: Systemically important cryptocurrency networks

On p. 22 they write:

The real problem was never really about liquidity, or a breakdown of the market. It was a failure of trust. When that trust was broken, the impact on society – including on our political culture – was devastating.

How about all of the above? Pinning it on just one thing seems a little dismissive of the multitude of other interconnecting problems / culprits.

On p. 22 they write:

By various measures, the U.S. economy has recovered – at the time of writing, unemployment was near record lows and the Dow Jones Industrial Average was at record highs. But those gains are not evenly distributed; wage growth at the top is six times what it is for those in the middle, and even more compared to those at the bottom.

If the goal of the authors is to rectify wealth inequalities then there are probably better comparisons than using cryptocurrencies.

Why? Because – while it is hard to full quantify, it appears that on cursory examination most (if not all) cryptocurrencies including Bitcoin have Gini coefficients that trends towards 1 (perfectly unequal).

On p. 23 they write about disinformation in the US and elsewhere.  And discuss how trust is a “vital social resource” and then mention hyperinflation in Venezuela. These are all worthy topics to discuss, but it is not really clear how any of these real or perceived problems are somehow solved because of a blockchain, especially when Venezuela is used as the example. The next edition should make this more clear.

On p. 29 they write:

On October 31, 2008, whil the world was drowning in the financial crisis, a little-noticed “white paper” was released by somebody using the pen name “Satoshi Nakamoto,” and describing something called “Bitcoin,” an electronic version of cash that didn’t need state backing. At the heart of Nakamoto’s electronic cash was a public ledger that could be viewed by anybody but was virtually impossible to alter.

One pedantic note: it wasn’t broadly marketed beyond a niche mailing list on purpose… a future edition might want to change ” a little-noticed” because it doesn’t seem like the goal by Nakamoto was to get Techcrunch or Slashdot to cover it (even though eventually they both did).

Also, it is not virtually impossible to alter.7 As shown by links above, proof-of-work networks can and do get forked which may include a block reorganization. There is nothing that technically prevents this from happening.

See also: Interview with Ray Dillinger

On p. 31 they write:

Szabo, Grigg, and others pioneered an approach with the potential to create a record of history that cannot be changed – a record that someone like Madoff, or Lehman’s bankers, could not have meddled with.

I still think that the authors are being a little too liberal with what a blockchain can do. What Madoff did and Lehman did were different from one another too.

Either way, a blockchain would not have prevented data – representing fraudulent claims – from being inserted into blocks. Theoretically a blockchain may have allowed auditors to detect tampering of blocks, but if the information in the blocks are “garbage” then it is kind of besides the point.

On p. 32 they write:

Consider that Bitcoin is now the most powerful computing network in the world, one whose combined “hashing” rate as of August 2017 enabled all its computers to collectively pore through 7 million trillion different number guesses per second.

[…]

Let the record show that period of time is 36,264 trillion trillion times longer than the current best-estimate age of the universe. Bitcoin’s cryptography is pretty secure.

This should be scrapped for several reasons.

The authors conflate the cryptography used by digital signatures with generating proofs-of-work.8 There are not the same thing. Digital signatures are considered “immutable” for the reasons they describe in the second part, not because of the hashes that are generated in the first.9

Another problem is that the activity in the first part — the hash generation process — is not an apples-to-apples comparison with other general computing efforts. Bitcoin mining is a narrowly specific activity and consequently ASICs have been built and deployed to generate these hashes. The single-use machines used to generate these hashes cannot even verify transactions or construct blocks. In contrast, CPUs and GPUs can process a much wider selection of general purpose applications… including serialize transactions and produce blocks.

For example: it would be like comparing a Falcon 9 rocket launch vehicle with a Toyota Prius. Sure they are nominally both “modes of transportation” but built for entirely different purposes and uses.

An additional point is that again, proof-of-work chains can and have been forked over the years. Bitcoin is not special or unique or impervious to forks either (here’s a history of the times Bitcoin has forked). And there are other ways to create forks, beyond the singular Maginot Line attack that the authors describe on this page.10

On p. 33 they write:

Whether the solution requires these extreme privacy measures or not, the broad model of a new ledger system that we laid out above – distributed, cryptographically secure, public yet private – may be just what’s needed to restore people’s confidence in society’s record-keeping systems. And to encourage people to re-engage in economic exchange and risk-taking.

This comes across as speculation and projecting. We will see later that the authors have a dim view of anything that is not a public blockchain. Why is this specific layout the best?

Either way, future versions should include a citation for how people’s confidence level increase because of the use of some kind of blockchain. At this time, I am unaware of any such survey.

On p. 34 they quote Tomicah Tilleman from the Global Blockchain Business Council, a lobbying organization:

Blockchain has the potential to push back against that erosion and it has the potential to create a new dynamic in which everyone can come to agree on a core set of facts but also ensure the privacy of facts that should not be in the public domain.

This seems like a non sequitur. How does a blockchain itself push back on anything directly? Just replace the word “blockchain” with “database” and see if it makes sense.

Furthermore, as we have empirically observed, there are fractures and special interest groups within each of these little coin ecosystems. Each has their own desired roadmap and in some cases, they cannot agree with one another about facts such as the impact larger block sizes may have on node operators.

On p. 35 they write:

If it can foster consensus in the way it has been shown to with Bitcon, it’s best understood as a Truth Machine.

This is a non sequitur. Just because Nakamoto consensus exists does not mean it that blockchains are machines of truth. They can replicate falsehoods if the blocks are filled with the incorrect information.

Chapter 2

On p. 38 they write:

Consider how Facebook’s secret algorithm choose the news to suit your ideological bent, creating echo chambers of like-minded angry or delighted readers who are ripe to consume and share dubious information that confirms their pre-existing political biases.

There are some really valid points in this first part of the chapter. As it relates to cryptocurrencies, a second edition should also include the astroturfing and censoring of alternative views that take place on cryptocurency-related subreddits which in turn prevent people from learning about alternative implementations.

We saw this front-and-center in 2015 with the block size debate in which moderators of /r/bitcoin (specifically, theymos and BashCo) banned any discussion from one camp, those that wanted to discuss ways of increasing the block size via a hardfork (e.g., Bitcoin XT, Bitcoin Classic).

This wasn’t the first or last time that cryptocurrency-related topics on social media have resulted in the creation of echo chambers.

On p. 43 they write:

The potential power of this concept starts with the example of Bitcoin. Even though that particular blockchain may not provide the ultimate solution in this use case, it’s worth recalling that without any of the classic, centrally deployed cybersecurity tools such as firewalls, and with a tempting “bounty” of more than $160 billion in market cap value at the time we went to print, Bitcoin’s core ledger has thus far proven to be unhackable.

There is a lot to unpack here but I think a future edition should explain in more detail how Bitcoin is a type of cybersecurity tool. Do they mean that because the information is replicated to thousands of nodes around the world, it is more resilient or redundant?

Either way, saying that “Bitcoin’s core ledger” is “unhackable” is a trope that should be removed from the next edition as well.

Why? Because when speaking about BTC or BCH or any variant of Bitcoin, there is only one “ledger” per chain… the word ‘core’ is superfluous. And as described above, the word “unhackable” should be changed to “resource intensive to fork” or something along those lines. “Unhackable” is anarchronistic because what the authors are probably trying to describe is malicious network partitions… and not something from a ’90s film like The Net.

Continuing on p. 43 they write:

Based on the ledger’s own standards for integrity, Bitcoin’s nine-year experience of survival provides pretty solid proof of the resiliency of its core mechanism for providing decentralized trust between users. It suggest that one of the most important non-currency applications of Bitcoin’s blockchain could be security itself.

This last sentence makes no sense and they do not expand on it in the book. What is the security they are talking about? And how is that particularly helpful to “non-currency applications of Bitcoin’s blockchain”? Do they mean piggy-backing like colored coins try to do?

On p. 44 they write:

The public ledger contains no identifying information about the system’s users. Even more important, no one owns or controls that ledger.

Well technically speaking, miners via mining pools control the chain. They can and do upgrade / downgrade / sidegrade the software. And they can (and do) fork and reorg a chain. Is that defined as “control”? Unclear but we’ll probably see some court cases if real large loses take place due to forks.

On p. 44 they write:

As such there is no central vector of attack.

In theory, yes. In practice though, many chains are highly centralized: both in terms of block creation and in terms of development. Thus in theory it is possible to compromise and successfully “attack” a blockchain under the right circumstances. Could be worth rephrasing this in the next edition.

On p. 44 they write:

As we’ll discuss further in the book, there are varying degrees of security in different blockchain designs, including those known as “private” or “permissioned” blockchains, which rely on central authorities to approve participants. In contrast, Bitcoin is based on a decentralized model that eschews approvals and instead banks on the participants caring enough about their money in the system to protect it.

This is a bit of a strawman because there are different types of “permissioned” blockchains designed for different purposes… they’re not all alike. In general, the main commonality is that the validators are known via a legal identity. How these networks are setup or run does not necessarily need to rely on a centralized authority, that would be a single point of trust (and failure). But we’ll discuss this later below.

On p. 44 they write:

On stage at the time, Adam Ludwin, the CEO of blockchain / distributed ledger services company Chain Inc., took advantage of the results to call out Wall Street firms for failing to see how this technology offers a different paradigm. Ludwin, whose clients include household names like Visa and Nasdaq, said he could understand why people saw a continued market for cybersecurity services, since his audience was full of people paid to worry about data breaches constantly. But their answers suggested they didn’t understand that the blockchain offered a solution. Unlike other system-design software, for which cybersecurity is an add-on, this technology “incorporates security by design,” he said.

It is unclear from the comments above exactly how a blockchain solves problems in the world of cybersecurity. Maybe it does. If so, then it should be explored in more detail than what is provided in this area of the book.

As an aside, I’m not sure how credible Ludwin’s comments on this matter are because of the multiple pivots that his companies have done over the past five years.11

On p. 45 they write:

A more radical solution is to embrace open, “permissionless” blockchains like Bitcoin and Ethereum, where there’s no central authority keeping track of who’s using the network.

This is very much a prescriptive pitch and not a descriptive analysis. Recommend changing some of the language in the next edition. Also, they should define what “open” means because there basically every mining pool doxxes themselves.

Furthermore, some exchanges that attempt to enforce their terms-of-service around KYC / AML / CTF do try to keep track of who is doing what on the network via tools from Chainalysis, Blockseer, Elliptic and others. Violating the ToS may result in account closures. Thus, ironically, the largest “permissioned” platforms are actually those on the edges of all cryptocurrencies.

See: What is Permissioned-on-Permissionless

On p. 45 they write:

It’s not about building a firewall up around a centralized pool of valuable data controlled by a trusted third party; rather the focus is on pushing control over information out to the edges of the network, to the people themselves, and on limiting the amount of identifying information that’s communicated publicly. Importantly, it’s also about making it prohibitively expensive for someone to try to steal valuable information.

This sounds all well and good, definitely noble goals. However in the cryptocurrency world, many exchanges and custodial wallets have been compromised and the victims have had very little recourse. Despite the fact that everyone is continually told not to store their private keys (coins) with an intermediary, Chainalysis found that in 2017 more than 80% of all transactions involved a third-party service.

On p. 45 they write:

Bitcoin’s core ledger has never been successfully attacked.

They should define what they mean by “attacked” because it has forked a number of times in its history. And a huge civil war took place resulting in multiple groups waging off-chain social media campaigns to promote their positions, resulting in one discrete group divorcing and another discrete group trying to prevent them from divorcing. Since there is only de facto and not de jure governance, who attacked who? Who were the victims?

On p. 45 they write:

Now, it will undoubtedly be a major challenge to get the institutions that until now have been entrusted with securing our data systems to let go and defer security to some decentralized network in which there is no identifiable authority to sue if something goes wrong. But doing so might just be the most important step they can take to improve data security. It will require them to think about security not as a function of superior encryption and other external protections, but in terms of economics, of making attacks so expensive that they’re not worth the effort.

This seems a bit repetitive with the previous couple of page, recommend slimming this down in the next edition. Also, there are several class action lawsuits underway (e.g., Ripple, Tezos) which do in fact attempt to identify specific individuals and corporations as being “authorities.” The Nano lawsuit also attempted to sue “core developers.”

On p. 46 they write:

A hacker could go after each device, try to steal the private key that’s used to initiate transactions on the decentralized network, and, if they’re lucky, get away with a few thousand dollars in bitcoin. But it’s far less lucrative and far more time-consuming than going after the rich target of a central server.

The ironic part of this is that generally speaking, the private keys controlling millions of bitcoins are being housed in trusted third parties / intermediaries right now. In some cases these are stored on a centralized server. In other cases, the cold wallet managed by hosting providers such as Xapo (which is rumored to secure $10 billion of bitcoin) does geographically split the keys apart into bunkers. Yet at some point those handling the mutli-sig do come together in order to move the coins to a hot wallet.12

On p. 47 they write:

It seems clear to us that the digital economy would benefit greatly from embracing the distributed trust architecture allowed by blockchains – whether it’s simply the data backups that a distributed system offers, or the more radical of an open system that’s protected by a high cost-to-payout ratio.

What does this mean? Are they saying to add proof-of-work to all types of distributed systems? It is only useful in the Bitcoin context in order to make it expensive to Sybil attack the network… because participants were originally unknown. Does that same problem exist in other environments that they are thinking of? More clarity should be added in the next edition.

On p. 48 they write:

The idea, one that’s also being pursued in different forms by startups such as Gem of Los Angeles and Blockchain Health of San Francisco, is that the patient has control over who sees their records.

This is one of the difficulties in writing a long-form book on this general topic right now: projects and companies frequently pivot.

For instance, a couple months after the book was published, Gem announced its “Universal Token Wallet,” a product which currently dominates its front page and social media accounts of the company. There have been no health care-related announcements from the company in over a year.

Similarly, Blockchain Health no longer exists. Its CEO left and joined Chia as a co-founder and the COO has joined the Neighborly team.

On p. 50 they write:

It was a jury-rigged solution that meant that the banking system, the centralized ledger-keeping solution with which society had solved the double-spend problem for five hundred years, would be awkwardly bolted onto the ostensibly decentralized Internet as its core trust infrastructure.

I think there are some legitimate complaints to made towards how online commerce evolved and currently exists but this seems a tad petty. As backwards as financial institutions are (rightly and wrongly) portrayed, it’s not like their decision makers sat around in the early ’90s trying to figure out how to make integrating the Web an awkward process.

On p. 50 they write:

Under this model, the banks charged merchants an interchange fee of around 3 percent to cover their anti-fraud costs, adding a hidden tax to the digital economy we all pay in the form of higher prices.

Again, like their statement above: there are some very legitimate gripes to be had regarding the existing oligopolistic payment systems, but this specific gripe is kind of petty.

Fraud exists and as a result someone has to pay for it. In the cryptocurrency world, there is no recourse because it is caveat emptor. In the world of courts and legal recourse, fees are levied to cover customer service including fraud and insurance. It may be possible to build a payment system in which there is legal recourse and simultaneously no oligopolistic rent seeking but this is not explored in the book. Also, for some reason the fee to miners is not brought up in this section, yet it is a real fee users must pay… yet they do not receive customer service as part of it.

Lastly, the Federal Reserve (and other central banks) monitor historical interchange fees. Not all users are charged the ~3% as mentioned in the book.

For instance (see below): Average Debit Card Interchange Fee by Payment Card Network

Source: Statista

On pages 52 and 53 they write uncritically about Marc Andresseen and VCs who have invested in Bitcoin and cryptocurrencies.

a16z, the venture firm co-founded by Andresseen, arguably has a few areas that may be conflicts-of-interest with the various coin-related projects it has invested in and/or promoted the past several years (e.g., investing in coins which are listed on an exchange they also are an investor and board member of such as 0x). Those ties are not scrutinized in a chapter that attempts to create a black and white narrative: that the legacy players are centralized rent-seekers and the VCs are not. When we know empirically that some VCs, including a16z, have invested in what they believe will become monopolies of some kind.

On page 54 and 55 they write about “Code is not law,” a topic that I have likewise publicly presented on.

Specifically they state:

One risk is that regulators, confused by all these outside-the-box concepts, will overreact to some bad news – potentially triggered by large-scale investors losses if and when the ICO bubble bursts and exposes a host of scams. The fear is that a new set of draconian catchall measures would suck the life out of innovation in this space or drive it offshore or underground. To be sure, institutions like the Washington-based Coin Center and the Digital Chamber of Commerce are doing their best to keep officials aware of the importance of keeping their respective jurisdictions competitive in what is now a global race to lead the world in financial technology.

This is word for word what coin lobbyists have been pitching to policy makers around the world for years. Both Coin Center and Digital Chamber of Commerce lobby on behalf of their sponsors and donors to prevent certain oversight on the cryptocurrency market.13 An entire book could probably be written about how specific people within coin lobbying organizations have attempted to white wash and spin the narrative around illicit usage, using carefully worded talking points. And they have been effective because these authors do not question the motivations and agenda these special interest groups have.

Either way, Bitcoin and many other cryptocurrencies were born in the “underground” and even “offshore.” It is unclear what the authors are trying to excuse because if anything, regulators and law enforcement have arguably been very light handed in the US and most regions abroad.

If anything, once a foreign registered ICO or coin is created, often the parent company and/or foundation opens an office to recruit developers in San Francisco, New York, and other US cities. I know this because all the multiple “blockchain” events I have attended overseas the past two years in which organizers explain their strategy. The next edition of this book could explore this phenomenon.

On p. 57 they write:

By The DAO founders’ own terms, the attacker had done nothing wrong, in other words. He or she had simply exploited one of its features.

Excellent point that should be explored in further detail in the next edition. For instance, in Bitcoin there have been multiple CVEs which if exploited (at least one was) could have resulted in changes in the money supply. Is that a feature or a bug?

And the most recent one, found in pre-0.16.3, was partially downplayed and hidden to prevent others from knowing the extent of potential damage that could have been done.

On p. 59 they write:

The dependence on a trusted middleman, some cryptocurrency purists would argue, overly compromises a blockchain’s security function, rending it unreliable. For that reason, some of them say, a blockchain is inappropriate for many non-currency applications. We, however, view it as a trade-off and believe there’s still plenty of value in recording ownership rights and transfers to digitally represented real-world assets in blockchains.

I think this whole section should be reworded to describe:

  1. what types of blockchains they had in mind?
  2. how the legal hooks into certain blockchains behave versus anarchic chains?
  3. being more precise with the term purist… do they mean maximalists or do they mean someone who points out that most proposed use-cases are chainwashing?

On pages 59 and 60 they write:

Permissioned blockchains – those which require some authorized entity to approve the computers that validate the blockchain – by definition more prone to gatekeeping controls, and therefore to the emergence monopoly or oligopoly powers, than the persmissionless ideal that Bitcoin represents. (We say “ideal” because, as we’ll discuss in the next chapter, there are also concerns that aspects of Bitcoin’s software program have encouraged an unwelcome concentration of ownership – flaws that developers are working to overcome.)

It would be beneficial in the next edition to at least walk through two different “permissioned blockchains” so the reader can get an idea of how validators become validators in these chains. By not including them, each platform is painted in the same light.

And because they are still comparing it with Bitcoin (which was designed for a completely different type of use-case than ‘permissioned chains’ are), keep in mind that the way mining (block making) is done in 2018 is very different than when it was first proposed in the 2008 paper. Back then, mining included a machine that did two things: validated blocks and also generate proofs-of-work. Today, those two functions are completely separate and because of the relatively fierce competition at generating hashes, there are real exit and entry costs to the market.

In many cases, this means that both the mining pool operators and hash generators end up connecting their real world government-issued identities with their on-chain activity (e.g., block validation). It may be a stretch to say that there is an outright monopoly in mining today, but there is a definite trend towards oligopoly in manufacturing, block producing, and hash generation the past several years. This is not explored beyond a superficial level in the book.

On p. 60 they write:

Until law changes, banks would face insurmountable legal and regulatory opposition, for example, to using a system like Bitcoin that relies on an algorithm randomly assigning responsibility at different stages of the bookkeeping process to different, unidentifiable computers around the world.

This is another asinine comment because they don’t explicitly say which laws they would like changed. The authors make it sound like the PFMIs are holding the world back when the opposite is completely true. These principals and best practices arose over time because of the systemic impact important financial market infrastructures could have on society as a whole.

Proof-of-work chains, the ones that are continually promoted in this book, have no ability to prevent forks, by design. Anarchic chains like Bitcoin and Ethereum can only provide probabilistic finality. Yet commercial best practices and courts around the world demands definitive settlement finality. Why should commerce be captured by pseudonymous, unaccountable validators maintained in jurisdictions in which legal recourse is difficult if not impossible?

On p. 60 they continue:

But that doesn’t mean that other companies don’t have a clear interest in reviewing how these permissioned networks are set up. Would a distributed ledger system that’s controlled by a consortium of the world’s biggest banking institutions be incentivized to act in the interest of the general public it serves? One can imagine the dangers of a “too-big-to-fail blockchain” massive institutions could once again hold us hostage to bailouts because of failures in the combined accounting system.

This has been one of Michael Casey’s talking points for the past three years. I was even on a panel with him in January 2016 in which he called R3 a “cartelchain,” months before Corda even existed. His justified disdain towards traditional financial institutions — and those involved with technology being developed in the “permissioned” world — pops up throughout this book. I do think there are some valid critiques of consortia and permissioned chains and even Corda, but those aren’t presented in this edition of the book.

He does make two valid observations here as well: regulated commerce should have oversight. That is one of the reasons why many of the organizations developing “permissioned blockchains” have plans to or already have created separate legal entities to be regulated as some type of FMI.

The other point is that we should attempt to move away from recreating TBTF and SIFI scenarios. Unfortunately in some cases, “permissioned chains” are being pitched as re-enabler of that very scenario. In contrast, dFMI is a model that attempts to move away from these highly intermediated infrastructures. See also my new article on SICNs.

On p. 60 they write:

Either way, it’s incumbent upon us to ensure that the control over the blockchains of the future is sufficiently representative of broad-based interests and needs so that they don’t just become vehicles for collusion and oligpolistic power by the old guard of finance.

The ironic part of this statement is — while well-intended — because of economies of scale there is an oligopoly or even monopoly in most PoW-mined coins. It is unclear how or why that would change in the future. In addition, with the entrance of Bakkt, ErisX, Fidelity and other large traditional financial organizations (e.g., the old guard) into the cryptocurrency world, it is hard to see how “permissionless ecosystems” can prevent them from participating.

On p. 61 they write:

As we stated in The Age of Cryptocurrency, Bitcoin was merely the first crack at using a distributed computing and decentralized ledger-keeping system to resolve the age-old problem of trust and achieve this open, low-cost architecture for intermediary-free global transactions.

But as the authors have stated elsewhere: proof-of-work chains are inherently costly. If they were cheap to maintain then they would be cheap to fork and reorg. You cannot simultaneously have a cheap (“efficient”) and secure PoW network… that’s a contradiction.

See:

Chapter 3

On pages 64 and 65 they provide a definition of a blockchain. I think this could be more helpful more earlier on in the book for newer audiences.

A few other citations readers may be interested in:

On p. 66 they write:

That way, no authorizing entity could block, retract, or decide what gest entered into the ledger, making it censorship resistant.

Could be worth referencing Eligius, a pool run by Luke-Jr. that would not allow Satoshi Dice transactions because its owners religious views.14

On p. 67 they write:

These computers are known as “miners,” because in seeking to win the ten-minute payout, they engage in a kind of computational treasure hunt for digital gold.

I understand the need to make simple analogies but the digital gold one isn’t quite right because gold does not have an inflexible supply whereas bitcoin does. I’ve pointed this out in other book reviews and it bears repeating because of how the narrative of e-cash to HODLing has changed over the last few years.1516

Readers may be interested of a few real life examples of perfectly inelastic supplies.

On p. 67 they write:

Proof of work is expensive, because it chews up both electricity and processing power. That means that if a miner wants to seize majority control of the consensus system by adding more computing power, they would have to spend a lot of money doing so.

This is correct. Yet six pages earlier they say it is a “low-cost” infrastructure. Needs to be a little more consistent in this book. Either PoW is resource intensive or it is not, it cannot be both.

On p. 68 they write:

Over time, bitcoin mining has evolved into an industrial undertaking, with gigantic mining “farms” now dominating the network. Might those big players collude and undermine the ledger by combining resources? Perhaps, but there are also overwhelming disincentives for doing so. Among other considerations, a successful attack would significantly undermine the value of all the bitcoins the attacking miner owns. Either way, no one has managed to attack Bitcoin’s ledger in nine years. That unbroken record continues to reinforce belief in Bitcoin’s cost-and-incentive security system.

It’s worth pointing out that there are ways to fork Bitcoin beyond the singular Maginot Line attack. As mentioned above, Bitcoin and many other coins have forked; see this history. Hundreds of coins have died due to lack of interest by miners and developers.

It could also be argued that between 2015-2017, Bitcoin underwent a social, off-chain attack by multiple different groups attempting to exert their own influence and ideology onto the ecosystem. The end result was a permanent fracture, a divorce which the principal participants still lob social media bombs at one another. There isn’t enough room to discuss it here, but the astroturfing actions by specific people and companies in order to influence others is worth looking into as well. And it worked.

On p. 71 they write:

The caveat, of course, is that if bad actors do control more than 50 percent of the computing power they can produce the longest chain and so incorporate fraudulent transactions, which other miners will unwittingly treat as legitimate. Still, as we’ve explained, achieving that level of computing power is prohibitively expensive. It’s this combination of math and money that keeps Bitcoin secure.

I probably would change some of the wording because with proof-of-work chains (and basically any cryptocurrency), there are no terms of service or end user license agreement or SLA. At most there is only de facto governance and certainly not de jure.

What does that mean? It means that we really can’t say who the “bad actors” are since there is no service agreement. Barring an administrator, who is the legitimate authority in the anarchic world of cryptocurrencies? The original pitch was: if miners want to choose to build on another tree or fork, it’s their decision to do so… they don’t need anyone’s permission to validate blocks and attempt to update the chain as they want to. The next edition should explicitly say who or what is an attacker or what a fraudulent transaction is… these are points I’ve raised in other posts and book reviews.

Also, the authors mention that computational resources involved in PoW are “prohibitively expensive” here. So again, to be consistent they likely should remove “low-cost” in other places.

On p. 71 and 72 they write:

In solving the double-spend problem, Bitcoin did something else important: it magically created the concept of a “digital asset.” Previously, anything digital was too easily replicated to be regarded as a distinct piece of property, which is why digital products such as music and movies are typically sold with licensing and access rights rather than ownership. By making it impossible to replicate something of value – in this case bitcoins – Bitcoin broke this conventional wisdom. It created digital scarcity.

No it did not. This whole passage is wrong. As we have seen with forks and clones, there really is no such thing as this DRM-for-money narrative. This should be removed in the next edition.

Scarcity effectively means rivalrous, yet anyone can copy and clone any of these anarchic chains. PoW might make it relatively expensive to do a block reorg on one specific chain, but it does not really prevent someone from doing what they want with an identically cloned chain.

For instance, here is a list of 44 Bitcoin forked tokens that arose between August 2017 and May 2018. In light of the Bitcoin and Bitcoin Cash divorce, lobbying exchanges to recognize ticker symbols is also worth looking into in a future edition.

On p. 73 they write:

Many startups that were trying to build a business on top of Bitcoin, such as wallet providers and exchanges, were frustrated by an inability to process their customers’ transactions in a timely manner. “I’ve become a trusted third party,” complained Wences Casares, CEO of bitcoin wallet and custodial service Xapo. Casares was referring to the fact that too many of his firms’ transactions with its customers had to be processed “off-chain” on faith that Xapo would later settle the transaction on the Bitcoin blockchain.

This is one of the most honest statements in the book. The entire cryptocurrency ecosystem is now dominated by intermediaries.

Interestingly, Xapo moved its main office from Palo Alto to Switzerland days after Ripple was fined by FinCEN for violating the BSA. Was this just a coincidence?

On p. 73 they wrote:

Making blocks bigger would require more memory, which would make it even more expensive to operate a miner, critics pointed out. That could drive other prospective miners away, and leave Bitcoin mining even more concentrated among a few centralized players, raising the existential threat of collusion to undermine the ledger.

This wasn’t really the argument being made by the “small blockers.” Rather, it was disk space (not memory) that was — at the time — perceived as a limitation for retail (home) users in the long run. Yet it has been a moot point for both Bitcoin and Bitcoin Cash as the price per gigabyte for a hard drive continues to decline over time… and because in the past year, on-chain transactions on both chains have fallen from their peak in December 2017.

In practice, the “miners” that that authors refer to are the roughly 15 to 20 or so mining pools that in a given day, create the blocks that others build on. Nearly all of them maintain these nodes at a cloud provider. So there is already a lot of trust that takes place (e.g., AWS and Alibaba are trusted third parties). Because of economies of scale, spinning up a node (computer) in AWS is relatively inexpensive.

It really isn’t discussed much in the book, but the main argument throughout the 2nd half of 2017 was about UASF — a populist message which basically said miners (mining pools) didn’t really matter. Followers of this philosophy emphasized the need to run a node at home. For instance, if a UASF supporter based in rural Florida is attempting to run a node from his home, there could be a stark difference between the uptime and bandwidth capacity he has at home versus what AWS provides.

On p. 74 they write:

Without a tally of who’s who and who owns what, there was no way to gauge what the majority of the Bitcoin community, composed of users, businesses, investors, developers, and miners, wanted. And so, it all devolved into shouting matches on social media.

I wrote about this phenomenon in Appendix A in a paper published in November 2015. And what eventually happened was a series of off-chain Sybil attacks by several different tribes, but especially by promoters of UASF who spun up hundreds — thousands of nodes — and acted as if those mattered.

Future editions should also include a discussion on what took place at the Hong Kong roundtable, New York agreement, and other multilateral governance-related talks prior to the Bitcoin Cash fork.

On p. 74 they write:

A hard-fork-based software change thus poses a do-or-die decision for users on whether to upgrade or not. That’s bad enough for, say, word processing software, but for a currency it’s downright problematic. A bitcoin based on the old version could not be transferred to someone running software that support the new version. Two Bitcoins. Two versions of the truth.

The authors actually accidentally proved my earlier point: that public chains, specifically, proof-of-work chains, cannot prevent duplication or forks. Proof-of-work only makes it resource intensive to do double-spend on one specific chain.

This is one of the reasons why regulated financial organizations likely will continue to not issue long lifecycle instruments directly onto an anarchic chain like Bitcoin: because by design, PoW chains are forkable.

Also, future editions may want to modify this language because there are some counterarguments from folks like Vitalik Buterin that state: because hard forks are opt-in and thus lead to cleaner long-term outcomes (e.g., less technical debt).

On p. 75 they write a lot about Lightning Network, stating:

So, there are no miners’ fees to pay and no limit on how many transaction can be done at any time. The smart contracts prevent users from defrauding each other while the Bitcoin blockchain is used solely as a settlement layer, recording new balance transactions whenever a channel is opened or closed. It persists as the ultimate source of proof, a guarantee that all the “off-chain” Lightning transactions are legitimate.

What is not discussed in this edition is that:

  1. Lightning has been massively hyped with still relatively subdued traction
  2. Lightning is a separate network – it is not Bitcoin – and thus must be protected and secured through other non-mining means
  3. Lightning arguably distorts the potential transition to a fee-based Bitcoin network in much the same way that intermediaries like Coinbase do. That is to say, users are paying intermediaries the fees instead of miners thus prolonging the time that miners rely on block rewards (as a subsidy) instead of user fees.

Also, it bears mentioning that Bitcoin cannot in its current form act as a legal “settlement layer” as it cannot provide definitive settlement finality as outlined in the PFMIs (principle #8).

On p. 75 they write:

The SegWit/Lightning combination was in their minds the responsible way to make changes. They had a duty, they believed, to avoid big, disruptive codebase alterations and instead wanted to encourage innovators to develop applications that would augment the powers of the limited foundational code. It’s a classic, security-minded approach to protocol development: keep the core system at the bottom layer of the system simple, robust, and hard to change – some of the words “deliberately dumb” – and thus force innovation “up the stack” to the “application layer.” When it works you get the best of both worlds: security and innovation.

The authors should revise this because this is just repeating the talking points of specific Core developers, especially the last line.

Empirically it is possible to create a secure and “innovative” platform… and do so with multiple implementations of a specification. We see that in other cryptocurrencies and blockchain-related development efforts including Ethereum. The Bitcoin Core participants do not have a monopoly on what is or is not “security minded” and several of them are vocally opposed to supporting multiple implementations, in part, because of the politics around who controls the BIP process.

In fact, it could be argued that by insisting on the SegWit/Lightning approach, they caused a disruption because in point of fact, the amount of code that needed to be changed to increase the block size is arguably less than what was needed to build, verify, and release SegWit.

It’s not worth wading deep into these waters in this review, but the next edition of this book should be more even handed towards this schism.

On p. 76 they write:

But a group of miners with real clout was having none of it. Led by a Chinese company that both mined bitcoin and produced some of the most widely used mining equipment, this group was adamantly opposed to SegWit and Lightning. It’s not entirely clear what upset Jihan Wu, CEO of Bitmain, but after lining up with early Bitcoin investor and prominent libertarian Roger Ver, he launched a series of lobbying efforts to promote bigger blocks. One theory was that Bitmain worried that an “off-chain” Lightning solution would siphon away transaction fees that should be rightly going to miners; another was that because such payment channel transactions weren’t traceable as on-chain transactions, Chinese miners were worried that their government might shut them down. Bitmain’s reputation suffered a blow when revelations emerged that its popular Ant-miner mining rigs were being shipped to third-party miners with a “backdoor” that allowed the manufacturer-cum-miner to shut its opponents’ equipment down. Conspiracy theories abounded: Bitmain was planning to subvert SegWit. The company denied this and vowed to disable the feature. But trust was destroyed.

There is a lot of revisionism here.

But to start with, in the process of writing this review I reached out and contacted both Roger Ver and separately an advisor at Bitmain. Both told me that neither of the authors of this book had reached out to them for any comment. Why would the authors freely quote Bitcoin Core / SegWit developers to get their side of this debate but not reach out to speak with two prominent individuals from the other side to get their specific views? The next edition should either include these views and/or heavily revise this section of the book.

There are a few other problems with this passage.

Multiple different groups were actively lobbying and petitioning various influential figures (such as exchange operators) during this time period, not just Jihan and Roger. For instance, as mentioned above, the Hong Kong roundtable and New York agreement were two such examples. Conversely, SegWit and UASF was heavily promoted and lobbied by executives and affiliates at Blockstream and a handful of other organizations.

Regarding this “backdoor,” let’s rewind the clock and look at the overt / covert tempest in a teapot.

Last April Bitmain was alleged by Greg Maxwell (and the Antbleed campaign) of having maybe kinda sorta engaged in something called covert mining via Asicboost. Jimmy Song and others looked into it and said that there was no evidence covert was happening. At the time, some of the vocal self-identified “small block” supporters backing UASF, used this as evidence that Bitmain was a malicious Byzantine actor that must be purged from Bitcoinland. At the time, Greg proposed changing the PoW function in Bitcoin in order to prevent covert Asicboost from working.

In its defense, Bitmain stated that while Asicboost had been integrated into the mining equipment, it was never activated… partly because of the uncertain international IP / patent claims surrounding Asicboost. Recently, they announced a firmware upgrade that miners could activate overt Asicboost… a few days after another organization did (called “braiins”).

So why revisit this?

Two months ago Sia released code which specifically blocked mining equipment from Bitmain and Innosilicon. How and why this action is perceived as being fair or non-political is very confusing… they are definitely picking favorites (their own hardware). Certainly can’t claim to be sufficiently decentralized, right?

Yet in this section of the book, they don’t really touch on how key participants within the tribes and factions, represented at the time. Peruse both lists and look at all of the individuals at the roundtable that claim to represent “Bitcoin Core” in the governance process versus (the non-existent) reps from other implementations.

Even though the divorce is considered over, the tribes still fling mud at one another.

For example, one of the signatories of the HK roundtable, Adam Back, is still heckling Bitmain for supposedly not being involved in the BIP process. Wasn’t participation supposed to be “voluntary” and “permissionless”? Adam is also now fine with “overt” Asicboost today but wasn’t okay with it 18 months ago. What changed? Why was it supposedly bad for Bitmain to potentially use it back then but now it’s kosher because “braiins” (Slush) is doing it? That seems like favoritism.

Either way, the book passage above needs to be rewritten to include views from other camps and also to remove the still unproven conspiracy theories.

On p. 76 they write:

Meanwhile, original bitcoin went on a tear, rallying by more than 50 percent to a new high above $4,400 over a two-week period. The comparative performance of the pair suggested that small-block BTC and the SegWit reformers had won.

The next edition should change the wording because this comes across one-sided.

While an imperfect comparison, a more likely explanation is that of a Keynesian beauty contest. Most unsophisticated retail investors had heard of Bitcoin and hadn’t heard of Bitcoin Cash. Bitcoin (BTC) has brand recognition while Bitcoin Cash and the dozens of other Bitcoin-named forks and clones, did not.

Based on anecdotes, most coin speculators do not seem to care about the technical specifications of the coins they buy and typically keep the coins stored on an intermediary (such as an exchange) with the view that they can sell the coins later to someone else (e.g., “a greater fool“).

On p. 77 they write:

Bitcoin had gone through a ridiculous circus, one that many outsiders naturally assumed would hurt its reputation and undermine its support. Who wants such an ungovernable currency? Yet here was the original bitcoin surging to new heights and registering a staggering 650 percent gain in less than twelve months.

The problem with cherry picking price action dates is that, as seen in the passage above, it may not age well.17

For example, during the write-up of this review, the price of bitcoin declined from where it was a year ago (from over $10,000 then down to around $4,000). What does that mean? We can all guess what happened during this most recent bubble, but to act like non-tech savvy retail buyers bought bitcoin (BTC) because of SegWit is a non sequitur. No one but the tribalists in the civil war really cared.

On p. 77 they write:

Why? Well, for one, Bitcoin had proven itself resilient. Despite its civil war, its blockchain ledger remained intact. And, while it’s hard to see how the acrimony and bitterness was an advantage, the fact that it had proven so difficult to alter the code, to introduce a change to its monetary system, was seen by many as an important test of Bitcoin’s immutability.

There are a few issues here.

What do the authors mean by the “blockchain ledger remained intact”? I don’t think it was ever a question over whether or not copies of the Bitcoin blockchain (and/or forks thereof) would somehow be deleted. Might want to reword this in the future.

Segwit2x / Bitcoin Cash proponents were not trying to introduce a change to Bitcoin’s monetary system. The supply schedule of bitcoins would have stayed the same. The main issue was: a permanent block size increase from 1 MB to at least 2 MB. That proposal, if enacted, would not have changed the money supply.

What do the authors mean by “Bitcoin’s immutability”? The digital signatures are not being reversed or changed and that is what provides transactions the characteristic of “immutability.”

It is likely that the authors believe that a “hard fork” means that Bitcoin is not immutable. That seems to conflate “immutability” of a digital signature with finality (meaning irreversibility). By design, no proof-of-work coin can guarantee finality or irreversibility.

Also, Bitcoin had more than a dozen forks prior to the block size civil war.

On p. 77 and 78 they write:

Solid censorship resistance was, after all, a defining selling point for Bitcoin, the reason why some see the digital currency becoming a world reserve asset to replace the outdated, mutable, fiat-currency systems that still run the world. In fact, it could be argued that this failure to compromise and move forward, seen by outsiders as Bitcoin’s biggest flaw, might actually be its biggest feature. Like the simple, unchanging codebase of TCP/IP, the gridlocked politics of the Bitcoin protocol were imposing secure rigidity on the system and forcing innovation up the stack.

This is not what “censorship resistance” means in the context of Bitcoin. Censorship resistance is narrow and specific to what operators of miners could do. Specifically, the game theory behind Nakamoto Consensus is that it would be costly (resource intensive) for a malicious (Byzantine) actor to try and attempt to permanently censor transactions due to the amount of hashrate (proof-of-work) a Byzantine actor would need to control (e.g., more than 50%).

In contrast, what the authors described in this book was off-chain censorship, such as lobbying by various special interest groups at events, flamewars on Twitter, removing alternative views and voices on reddit, and via several other forms.

The “world reserve asset” is a loaded phrase that should be clarified in the next edition because the passage above comes across a bit like an Occupy Wall Street speech. It needs more of an explanation beyond the colorful one sentence it was given. Furthermore, as I predicted last year, cryptocurrencies continue to rely on the unit-of-account of “fiat systems” and shows no signs of letting up in this new era of “stablecoins.”

The authors definitely need to remove the part that says “unchanging codebase of TCP/IP” because this is not true. TCP/IP is a suite of protocol standards and its constituent implementations continue to evolve over time. There is no single monolithic codebase that lies unchanged since 1974 which is basically the takeaway from the passage above.18

In fact, several governing bodies such as IFTF and IAB continue to issue RFCs in order to help improve the quality-of-service of what we call the internet. It is also worth pointing out that their analogy is flawed for other reasons discussed in: Intranets and the Internet. In addition, the next version of HTTP won’t be using TCP.

As far as whether innovation will move “up the stack” remains to be seen but this seems to be an argument that the ends justify the means. If that is the case, that appears to open up a can of worms beyond the space for this review.

On p. 78 there is a typo: “BTH” instead of “BCH”

On p. 78 they write:

That’s what BTC, the original Bitcoin, promises with its depth of talent at Core and elsewhere. BTH can’t access such rich inventiveness because the community of money-focused bitcoin miners can’t attract the same kinds of passionate developers.

Strongly recommend removing this passage because it comes across as a one-sided marketing message rather than a balanced or neutral explanation using metrics. For instance, how active are the various code repositories for Bitcoin Core, Unlimited, and others? The next edition should attempt to measure how to measure “depth.”

For example, Bitmain has invested $50 million into a new fund focused on Bitcoin Cash called “Permissionless Ventures.” 2-3 years from now, what are the outcomes of that portfolio?

On p. 78 they write about permissioned blockchains:

Under these arrangements, some authority, such as a consortium of banks, choose which entities get to participate in the validation process. It is, in many respects, a step backward from Nakamoto’s achievement, since it makes the users of that permissioned system dependent once again, on the say-so of some trusted third party.

This is a common refrain throughout the book: that the true innovation was Bitcoin.

But it’s an apples-to-oranges comparison. Both worlds can and will co-exist because they were designed for different operating environments. Bitcoin cannot provide the same finality guarantees that “permissioned chains” attempt to do… because it was designed to be forkable. That’s not necessarily a flaw because Satoshi wasn’t trying to create a solution to a problem banks had. It’s okay to be different.

On p. 79 they write:

Most importantly, permissioned blockchains are more scalable than Bitcoin’s, at least for now, since their governance doesn’t depend upon the agreement of thousands of unidentified actors around the world; their members can simply agree to increase computing power whenever processing needs rise.

This doesn’t make sense at all. “Permissioned chains” in the broadest sense, do not use proof-of-work. As a result, there is no computational arms race. Not once have I been in a governance-related meeting involving banks in which they thought the solution to a governance-related issue was increasing or decreasing computational power. It is a non sequitur and should be removed in the next edition.

Also, there are plenty of governance issues involving “permissioned chains” — but those are typically tangential to the technical challenges and limitations around scaling a blockchain.

On p. 79 they write:

To us, permissionless systems pose the greatest opportunity. While there may well be great value in developing permissioned blockchains as an interim step toward a more open system, we believe permissionlessness and open access are ideals that we should strive for – notwithstanding the challenges exposed by Bitcoin’s “civil war.”

The authors repeat this statement in a couple other areas in the book and it doesn’t really make sense. Why? Because it is possible for both operating environments to co-exist. It doesn’t have to be us versus them. This is a false dichotomy.

Also, if any of these “permissioned chains” are actually put into production, it could be the case that end users could have “open access” to the platform, with the exception of participating in the validation of blocks. That’s pretty much how most coin users experience a cryptocurrency network today (e.g., via permissioned endpoints on Coinbase).19

On p. 80 they write:

The problem was that Bitcoin’s single-purpose currency design wasn’t ideally suited for these non-currency applications.

A side note maybe worth mentioning in a footnote is that Satoshi did attempt to build a marketplace early on but gave up.

On p. 81 they mention Nick Szabo with respect to smart contracts. Could be worth exploring the work of Martín Abadi which predates Szabo (the idea of distributed programs that perform authorizations predates Szabo’s “smart contracts”).  Mark S Miller has also done work in this area.

On p. 82 they write about Ethereum:

“Android for decentralized apps.” It would be an open platform much like Google’s smartphone operating system, on which people could design any new application they wanted and run it, not on a single company-owned server but in a decentralized manner across Ethereum’s ownerless network of computers.

This is probably not the best analogy because there is a difference between Google Android and Android Open Source Project. One of them includes proprietary tech. Also, Google can and does add and remove applications from the Play store on a regular basis based on its terms and conditions.

Lastly, someone does in fact own each of the computers that constitute the Ethereum blockchain… mining farms are owned by someone, mining pools are owned by someone, validating nodes are owned by someone. And so forth.

On p. 82 they write about Vitalik Buterin:

Now he was building a universally accessible, decentralized global supercomputer.

The next edition should drop the “supercomputer” verbiage because the Ethereum chain is only as powerful as the least powerful mining pool node… which in practice is typically a common computer located in a cloud provider such as AWS. This isn’t something like Summit over at Oak Ridge.

On p. 82 they write:

Now, with more than six hundred decentralized applications, or Dapps, running on Ethereum, he is looking vindicated. In just the first eleven months of 2017, the system’s internal currency, ether, rose from just over $8 to more than $400. By then the entire market cap for ether stood at $39 billion, a quarter that of Bitcoin’s. The success has made the wunderkind Buterin an instant multi-millionaire and turned him into a cultlike figure for the holders of ether and related tokens who’ve become rich.

The next version of the book should explicitly spell out what are the metrics for success. If it is solely price of a coin going up, what happens when the price of the coins goes down like it has in the past year?

For instance, ether (ETH), peaked in mid-January at around $1,400 and has been hovering near $100 the past several weeks. Does that mean Vitalik is no longer vindicated? Also, what is he vindicated from?

Lastly, it would be worth exploring in the next edition what Dapps are currently being used on a regular basis. As of this writing, the most popular Dapps are gambling apps (like proof-of-weak-hands / FOMO3D) and a few “decentralized exchanges” (DEX).

On p. 82 they write:

Ethereum co-founder Joseph Lubin only added to the complexity when he setup ConsenSys, a Brooklyn-based think tank-like business development unit tasked with developing new use cases and applications of the technology.

ConsenSys markets itself as a “venture studio” — a bit like YCombinator which incubates projects and provides some seed financing to get it off the ground. These projects are typically referred to as “spokes” (like a hub-and-spoke model).  As of this writing there are over 1,100 employees spread across several dozen spokes.  There is more to it than that and it would be interesting to see it explored in the next edition.

On p. 83 they write:

For example, the Parity Wallet, which was designed by Ethereum co-founder and lead architect Gavin Wood as a way to seamlessly engage, via a browser, with Ethereum smart contracts, lost $30 million in a hack.

Actually, Parity had a couple issues in 2017 and it is likely that the book may have been sent to publication around the same time the bigger problem occurred on November 13, 2017. The second one involved a Parity-developed multisig wallet… and $150 million in ether that is now locked away and cannot be accessed (barring a hardfork). Most developers — including those at Parity — characterize this instance as a “bug” that was accidentally exploited by a developer.

On p. 84 they write:

These kinds of dynamics, with large amounts of money at stake, can foster concerns that founders’ interests are misaligned with other users. Ethereum’s answer was the not-for-profit Ethereum Foundation, which was tasked with managing the pool of ether and other assets from the pre-mine and pre-sale- a model since used by many of the ICO token sales.

It would be interesting to explore how this foundation was created and how it evolved and who manages it today. For instance, at one point in 2014 there were conversations around creating a commercial, for-profit entity led in part by Charles Hoskinson who later left and founded Cardano.

On p. 85 they write about The DAO:

After a few modest coding changes failed, they settled on a drastic fix: Ethereum’s core developers “hard-forked” the Ethereum blockchain, implementing a backward-incompatible software update that invalidated all of the attacker’s transactions from a certain date forward. It was a radical move. To many in the cryptocurrency community, it threw into question Ethereum’s all-important claim to immutability. If a group of developers can force a change in the ledger to override the actions of a user, however unsavory those actions are, how can you trust that ledger won’t be tampered with or manipulated again in the interest of one group over another? Does that not destroy the whole value proposition?

This passage should probably be revised because of the usage of the word immutable.

Also, it could be argued that Bitcoin Core and other “core” groups act as gate keepers to the BIP process (or its equivalent) could lobby on behalf of special interest groups to push specific code changes and/or favor certain outcomes on behalf of specific stakeholders.

In either case, it is the miners that ultimately install and use the code. While some developers (like Bitcoin Core) are highly influential, without miners installing and running software, the rules on the network cannot be changed.

See Sufficiently Decentralized Howeycoins.

On p. 85 they write:

Well, in many respects, the Ethereum team operated as policymakers do during real-world crises. They made hard decisions that hurt some but were ultimately taken in the interests of the greater good — determined, hopefully, through as democratic a process as possible. The organizers went to great lengths to explain and gain support for the hard fork.

The next edition should strive to be more specific here: what exactly made the decision making around the hard fork democratic. Who participated, who didn’t participate. And so forth.

Continuing on p. 85:

And, much like the Segwit2x and other Bitcoin reform pro-miners didn’t accept it. For all intents and purposes, the fix was democratic – arguably, much more so than non-participatory democratic models through which crisis policymaking is enacted by national governments. And since Ethereum is more of a community of software engineers than of cryptocurrency investors, it was less contentious than Bitcoin’s struggle over hard-fork proposals.

This makes very little sense as it is written because the authors don’t define or specify what exactly made any of the decision making democratic. Who was enfranchised? Who got to vote and make decision? Also, how do the authors know that Ethereum is “more of a community of software engineers than of cryptocurrency investors.” Is there any hard numbers to back that assertion up?

And lastly how do we measure the level of contentiousness? Is there an objective measure out there?

On p. 85 they write about Ethereum Classic:

This created much confusion and some interesting arbitrage opportunities – as well as some lessons for bitcoin traders when their own currency split two years later – but it can also be viewed as the actions of a dissenting group non-violently exercising their right to secede. More than a year later, Ethereum Classic is still around, though it trades at a small fraction of Ethereum’s value, which means The DAO attacker’s funds – whose movements on the public Ethereum blockchain have been closely watched – are of lower value than if they’d been preserved in ETH.

I don’t think we can really say for sure how much the The DAO fund (and child DAO fundss) would be worth since that is an alternative timeline.

Also, there are some vocal maximalists that have created various Ethereum-branded tribes which are okay with The DAO attacker having access to those funds. Will be interesting to see if there are any sociological studies to reference in a new edition.

On p. 86 they write:

These hacks, and the scrambles to fix them, seem nuts, right? But let’s put them in perspective. First, is this monetary chaos anything less unsettling than the financial crisis of 2008? Or the audacity of the subsequent Wall Street trading scandals?

This is a whataboutism. Also, strangely the authors are saying the bar for judgement is as low as the financial engineering and socialized loses of the GFC. Isn’t the narrative that cryptocurrencies are supposed to be held to a higher standard because the coin creators seek to architect a world that doesn’t have arbitrary decision making?

On p. 87 and 88 they write:

When the FBI auctioned the 144,000 bitcoins (worth $1.4 billion as of late November 2017) that it seized from Ross Ulbricht, the convicted mastermind of the Silk Road illicit goods marketplace, those coins fetched a significantly higher price than others in the market. The notion was that hey had now been “whitewashed” by the U.S. government. In comparison, other bitcoins with a potentially shady past should be worth less because of the risk of future seizure. That’s hardly fair: imagine if the dollar notes in your wallet were hit with a 10 percent tax because the merchant knew that five years ago, unbeknownst to you, they had been handled by a drug dealer. To avoid these distortions and create a cryptocurrency that works more like fungible cash, Wilcox’s Zcash uses sophisticated “zero-knowledge proofs” to allow miners to prove that holders of the currency aren’t’ double-spending without being able to trace the addresses.

What the authors likely mean by “whitewashed” is probably “cleansed.” In the US there have been discussions on how this could take place via the existing Uniform Commercial Code (see Section 3.3). To date, there hasn’t been a specific update to the UCC regarding this issue (yet) but it has been discussed in multiple places such as Bitcoin’s lien problem.

As far as the “fairness” claim goes, it could be worth revising the passage to include a discussion around nemo dat quod non habet and bona fide purchasers. Legal tender is explicitly exempt because of the very scenario the authors describe. But cryptocurrencies aren’t legal tender, so that exemption doesn’t exist (yet).

Lastly, only “shielded” transactions in Zcash provide the functionality described in the passage above… not all transactions on Zcash utilize and opt-in to this mode.

On p. 89 they describe EOS. Worth updating this section because to-date, they have not achieved the 50,000 transactions per second on mainnet that is stated in the book. There has also been a bit of churn in the organizations as Ian Grigg (named in the book) is no longer at the organization, nor are employees 2 through 5.

On p. 90 they write about proof-of-stake:

One criticism of the model has been that without the electricity consumption costs of proof of work, attackers in a proof-of-stake system would simply mine multiple blocks to boost their chances of inserting a fraudulent one into the ledger.

This “nothing at stake” scenario is a valid criticism of some early attempts at building a proof-of-stake mechanism but isn’t valid for some other proposals (such as, theoretically, “Slasher“).

Chapter 4

On p. 91 they write:

It was clear that investors bought into Brave’s promise of a token that could fundamentally change the broken online advertising industry.

How do we know this was clear to investors? Anecdotally it appears that at least some investors participated as speculators, with the view that the token price would increase. A future edition should probably change the wording unless there is a reference that breaks down the motivation of the investors.

What about Civil?

On p. 96 they write about StorJ

Other models include that of the decentralized computer storage platform Storj, which allows hard-drive-starved users to access other’s excess space in exchange for storj tokens.

Could be worth pointing out that Storj had two public ICOs and it is still unclear if that will result in legal or regulatory issues. Putting that aside, currently Storj has just under 3,000 users. This stat is worth looking at again in future versions, especially in light of less-than-favorable reviews.

On p. 98 they talk about BAT:

The point is that it’s all on the community – the society of BATs users – not on external investors, to bear the risk of that happening

[…]

Once the 1 billion tokens had sold out in twenty-four seconds, it was revelead that only 130 accounts got them and that the biggest twenty holdings covered more than two-thirds of the total. Those distortions left many investors angry.

There is currently a debate around whether these types of ICOs in 2017 (and earlier) were investment contracts (e.g., securities). In the US, this has led to more than a hundred subpoenas with some quiet (and not so quiet) enforcement action.

The language used in this chapter (and elsewhere in the book) suggests that the participants involved in the ICO were investing with the expectation of profit in a common enterprise managed by the Brave team. Worth revisiting in a future edition.

On p. 102 they write about ERC20 tokens:

But because of the ERC-20 solution, they didn’t need to develop their own blockchain with all the independent computing power that would require. Instead, Ethereum’s existing computing network would do the validation for them.

This piggybacking may be initially helpful to token issuers but:

  1. it is a form of centralization which could have legal and regulatory consequences with respect to being viewed as not sufficiently decentralized
  2. in the long run this could create a top-heavy issue as miners are not being compensated in proportion to the amount of value they are trying to secure (see Section 2.1)

On p. 102 they write:

This low-cost solution to the double-spending challenge launched a factory of ICOs as issuers found an easy way to tap a global investing community. No painful negotiations with venture capitalists over dilution and control of the board. No wining and dining of Wall Street investment banks to get them to put their clients on the order book. No wait for SEC approval. Just straight to the general public: here are more tokens; they’re cool, buy them. It was a simple, low-cost formula and it lowered the barrier to entry for some brilliant innovators to bring potentially world-changing ideas to market. Unfortunately, it was also a magnet for scammers.

Could be worth updating this section to include more details on the scams and fraud that took place throughout 2017. Many of the tokens that raised capital from outside investors during this time not only have not delivered a working product, but in most cases, the token underperformed both ether and bitcoin.

Also bears mentioning that beginning in late 2017 through the time of this writing, there was a clear divergence between public sale ICOs and private sale of tokens… the latter of which basically involves a private placement to accredited investors, including the same type of funds that the passage above eschewed.

On p. 104 they write about Gnosis:

With the other 95 percent controlled by the founders, those prices meant that the implied valuation of the entire enterprise stood at $300 million – a figure that soon rose above $1 billion as the Gnosis token promptly quadrupled in price in the secondary market. By Silicon Valley standards, it meant we had the first ICO “unicorn.”

Actually, Ethereum did an ICO back in 2014 — and as the price of ether (measured in USD) increased, it is likely that ETH could be seen as the first ICO “unicorn.” But that’s not really an apples-to-apples comparison though because ETH (or Gnosis) holders do not have say, voting rights, which equity holders of a traditional company would.  Plus, “marketcap” is a poorly defined metric in the coin world (see Section 6).

On p. 104 and 105 they write:

One day, Paul received a call from a businessman who’d read one of his stories in The Wall Street Journal and wanted more information about how to get started and where to get legal advice. The man said he’d tried to reach the lawyer Marco Santori, a partner at the law firm Cooley who’d been quoted in the story, but couldn’t get through. Santori later told us that he was getting so many calls about ICOs, he simply couldn’t answer them all.

In January 2018, the SEC Chairman gave a public speech in which he singled out the “gatekeepers” (legal professionals) regarding the advice they gave clients. Could be worth revisiting who the main ICO-focused lawyers and lawfirms were during this time period and where they are now and if there were any enforcement actions undertaken.

On p. 105 they write:

“Most of these will fail,” said Olaf Carlson-Wee, the CEO of Polychain Capital, citing poorly conceived ideas and a lack of coding development. “Most of these are bad ideas from the beginning.” That said, Polychain is an investment firm that Carlson-Wee founded expressly to invest in these new projects. In fact, most of the people investing seemed to be taking a very VC-like approach to it. They understood that most of the projects would fail. They just hoped to have a few chips down on the one winner.

Carlson-Wee’s comments seem accurate insofar as the inability of many projects to execute and deliver based on the narratives each pitched investors. However, it could be worth digging into Polychain itself, which among other drama, may have “flipped” tokens due to a lack of lock-up periods.20 21

On p. 108 and 109 they compare Blue Apron and block.one (EOS). Even though it’s not an apples-to-apples comparison could be worth revisiting this in the future because of the churn and drama with both organizations.

Pages 110 and 111 aged quickly as most of the ICO rating websites and newsletters have fallen to the wayside due to payola scandals and inability to trust the motivations behind the ratings.

Similarly, the authors describe accredited investors and SAFTs. There is a typo here as the authors likely mean that an individual needs to have an income of $200,000 not $200 million. The SAFT model has fallen out of favor for several reasons that could be explored in a future version.22

On p. 112 they write about ASICs:

But developers of Vertcoin have shown that it’s also possible to create a permanent commitment to ASIC-resistance by introducing something from the real, non-digital world of social organizations: a pact. If the platform’s governing principles include a re-existing commitment from all users of the coin to accept a fork – a change to the code – that would add new, ASIC-resistant elements as soon as someone develops such a chip, the coin’s community can protect the distributed, democratic structure of a GPU-led mining network.

Putting aside the fanciful ASIC-resistance utopia that is peddled by some coin issuers, the passage above raises a couple flags.

Who gets to decide what the governing principles are? Do these principles get to change overtime? If the answer is yes to either, who are those decision makers and how are they chosen? So far, there has not really been any “democratic” way of participating in that decision making process for any cryptocurrency. How can that change in the future?

Why is a GPU-led mining network considered more democratic? In practice, most of these farms are located in basically the same type of structure and geography as ASIC-based equipment… in some cases they are swapped out over time. In light of the Sia coin fork… which clearly shows favoritism at play, a future edition of the book could include a chart or spectrum explaining how the mining of one coin more or less democratic versus another.

On p. 113 there is more discussion of ICOs and token sales as it relates to “open protocols” but in practice it has largely been reinventing the same intermediated system we have to do, but with fewer check and balances or even recourse for retail investors.

On p. 114 they speculate that:

This speaks to our broader notion that tokens, by incentivizing the preservation of public goods, might help humanity solve the Tragedy of the Commons, a centuries-in-the-making shift in economic reality.

That’s a big claim that requires evidence to back it. Let’s revisit next time.

On p. 115 they write:

Much like Wall Street bond traders, these will “make markets” to bring financial liquidity to every countervailing pair of tokens – buying some here and selling other there – so that if anyone wants to trade 100 BATs for a third of a Jackson Pollock, they can be assured of a reasonable market price.

But how does a blockchain actually do this? They mention Lykke as an startup that could help match tokens at a fair price… but to-date there is nothing listed on Lykke that really stands out as different than what you could fine at other cryptocurrency exchanges. Perhaps a future version of the book could walk the reader step-by-step through how a blockchain can enable this type of “fairness” whereas previous technology could not.

On p. 116 they discuss several projects they label as “interoperability” initiatives including Interledger, Cosmos, sidechains, and Lightning. It may be helpful for the reader to see a definition for what “interoperability” means because each of these projects — and its supporters — may be using the term in a different way. Perhaps a comparison chart showing the similarities and differences?

On p. 117 they write:

In an age where U.S. presidents peddle “alternative facts” and pundits talk openly about our “post-truth society,” using the truth machine to put a value on honesty sounds appealing.

On the face of it, that end goal seems like more than a stretch because it’s unclear how a blockchain (today) controls off-chain behavior. The example they go on to use is Augur. But Augur is a futures market and there are many of those already in existence. How would Augur or a futures market “with a blockchain” prevent politicians from lying? Walking through this process could be helpful to the reader.

On p. 118 they mention Erick Miller’s investment fund called CoinCircle… and a couple of “special value tokens” called Ocean Health Coin and Climate Coin.

Maybe worth following up in the next edition because neither has launched and each of the pitches sounds very handwavy, lacking in substance. Also, one of the ICOs CoinCircle advised – Unikrn – is part of a class action lawsuit.

Most of p. 119 and 120 come across as more political discourse, which is fine… but unclear how a blockchain in some form or fashion could directly impact the various issues raised. Perhaps the next edition could include a chart with a roadmap in how they see various projects achieving different milestones?

Chapter 5

If the reader is unfamiliar with IoT then the first 1/3 of chapter five is pretty helpful and informative.

Then there are some speedbumps.

On p. 130 they write about authenticating and verifying transactions involving self-driving cars:

The question, though, is: would this transaction be easily processed if it were based on a private blockchain? What are the chances, in a country of more than 230 million cars, that both vehicles would belong to the same closed network run by a group of permissioned validating computers? If they weren’t part of the same network, the payment couldn’t go through as the respective software would not be interoperable.

This is a red herring. Both “permissioned” and “permissionless” blockchains have similar (though not identical) scaling challenges. And interoperability is a separate issue which has been a known hurdle for years.

In fact, recently the Hyperledger Fabric team announced that it now supports the EVM. This comes a couple weeks after Hyperledger joined EEA as a member and vice-versa. Maybe none of these immediate efforts and experiments amount to many tangible outputs in the short-run but it does show that several ecosystems are attempting to be less tribal and more collaborative.

Also, the issue of payments is also separate from a blockchain-related infrastructure. Payments is a broad term and can include, for instance, a proposed central bank digital currency (e.g., “cash on ledger”)… or it can involve plugging into existing external payment systems (like Visa or ACH). It would be helpful if the next edition was more specific.

Continuing on p. 130 they write:

Other car manufacturers might not want to use a permissioned verification system for which, say GM, or Ford, is the gatekeeper. And if they instead formed a consortium of carmakers to run the system, would their collective control over this all-important data network create a barrier to entry for newer, startup carmakers? Would it effectively become a competition-killing oligopoly?

These are possible scenarios and good questions but this is kind of an unfair characterization of consortia. Let’s flip it around: why shouldn’t carmakers be allowed to build their own blockchains or collaborate with others who do? Do they need someones permission to do so? Depending on local regulations, maybe they do need permission or oversight in a specific jurisdiction. That could be worth exploring in another version.

On this topic they conclude that:

A truly decentralized, permissionless system could be a way around this “walled-garden” problem of siloed technology. A decentralized, permissionless system means any device can participate in the network yet still give everyone confidence in the integrity of the data, of the devices, and of the value being transacted. A permissionless system would create a much more fluid, expansive Internet of Things that’s not beholden to the say-so and fees of powerful gatekeepers.

That sounds well and good and a bit repetitive from earlier passages which said something similar. The passage aboves seems to be redefining what make something “permissioned” and “permissionless.” What does it mean for every device participate on a ‘decentralized, permissionless system’? Does that mean that each device is capable of building and/or creating a new block? If so, how do they choose which chain to build on?

And why is it so hard to imagine a world in which open-sourced platforms are also permissioned (e.g., validation is run by known, identifiable participants)… and these platforms are interoperable. Could be worth exploring because that scenario may be just as likely as the ones presented in this chapter.

Lastly, how does a “permissionless system” create a more fluid IoT world? These claims should be explored in more detail next time.

On p. 131 and 132 they write about IOTA, a specific project that markets itself as a purpose-built blockchain for IoT devices. But that project is beset by all kinds of drama that is beyond the scope of this review. Suffice to say that the February software build of IOTA cannot be run on most resource constrained IoT devices.

On p. 138 they mention in passing:

Exergy is a vital concept for measuring energy efficiency and containing wasteful practices; it doesn’t just measure the amount of energy generated but also the amount of useful work produced per each given amount of energy produced.

Fun fact: back in May 2014 I wrote an in-depth paper on Bitcoin mining that utilized the concept of “exergy.”

On pages 139-145 they talk about a number of vendors, use-cases, and platforms typically centered around the supply chain management world. Would be interesting to see which of these gained traction.

On p. 147 they write:

Blockchain-proven digital tokens point to what blockchain consultant and entrepreneurs Pindar Wong calls the “packetization of risk.” This radical idea introduces a negotiable structure to different phases of the chain. Intermediate goods that would otherwise be encumbered by a pre-established chain of unsettled commitments can instead be put out to bid to see if other buyers want to take on the rights and obligations associated with them.

It would be useful in this explanation to have a diagram or two to explain what Pindar proposes because it is a bit hard to follow.

On p. 147 they write:

This is why many people believe that the concept of a “circular economy” – where there is as much recycling as possible of the energy sources and materials in production – will hinge on the transparency and information flows that blockchain systems allow.

Does this mean that other “non-blockchain” systems do not allow transparency and information flows?

On p. 147 they write:

The principal challenge remains scaling. Open-to-all, permissionless blockcahins such as Bitcoin’s and Ethereum’s simply aren’t ready for the prime time of global trade. If all of the world’s supply chains were to pass their transactions through a permissionless blockchain, there would need to be a gargantuan increase in scalability, either off-chain or on-chain. Solutions may come from innovations such as the Lightning Network, discussed in chapter three, but they are far from ready at this stage.

Can we propose a moratorium on additional usages of “Lightning” in the next edition unless there is significant adoption and usage of it? Also, it is unclear why the worlds supply chains should for some reason be connected onto an anarchic chain: what is the benefit of putting this information onto a chain whose operators are unaccountable if a fork occurs?

On p. 148 they write:

Instead, companies are looking at permissioned blockchains, which we’ll discuss in more detail in chapter six. That makes sense because many big manufacturers think of their supply chains as static concepts, with defined members who have been certified to supply this or that component to a finished product. But in the rapidly changing world of the Fourth Industrial Revolution, this might not be the most competitive option. Emerging technologies such as additive manufacturing, where production can be called up anywhere and delivered by anyone with access to the right software files and a sufficiently configured 3D printer, are pointing to a much more fluid, dynamic supply-chain world, where suppliers come and go more easily. In that environment, a permissionless system would seem necessary. Once scaling challenges are resolved, and with robust encryption and reliable monitoring systems for proving the quality of suppliers work, permissionless blockchain-based supply chains could end up being a big leveler of the playing field for global manufacturing.

There are way too many assumptions in this paragraph to not have somewhere written that there are many assumptions.

Is a blockchain really needed in this environment? If so, a future edition should explain how a 3D printer would be more useful connected to a blockchain than some other network. Also, this seems to be a misuse of the term “permissionless” — why does the network need to be anarchic? How would the supply chain benefit from validators who are unknown?

On p. 148 they write:

It will be difficult to marry that old-world body of law, and the human-led institutions that manage it, with the digital, dematerailized, automated, and de-nationalized nature of blockchains and smart contracts.

How are blockchains “de-nationalized”? As of this writing there are probably a couple dozen publicly announced state-sponsored blockchain platforms of some kind (including various cryptocurrency-related initiatives). This phrase should probably be removed.

On p. 150 they write about the Belt and Road Blockchain Consortium:

Hence the opportunity for blockchain technologies to function as an international governance system. Hong Kong’s role will be important: the territory’s British legal traditions and reputation for respecting property rights have made it a respected safehouse for managing intellectual property and other contractual obligations within international trade. If the blockchain is to be inserted into global trade flows, the region’s bridging function may offer the fastest and most impactful route. For Hong Kong residents who want the territory to retain its British legal traditions, that role could be a vital protection against Beijing undermining them.

From publicly available information it is unclear if the Belt and Road Blockchain Consortium has seen much traction. In contrast, the Ping An-led HKMA trade finance group has turned on its “blockchain” platform.

Chapter 6

On p. 151 they wrote about a public event held on August 5, 2015:

As far as bankers were concerned, Bitcoin had no role to play in the existing financial system. Banking institutions thrive on a system of opacity in which our inability to trust each other leaves us dependent on their intermediation of our transactions. Bankers might give lip service to reforming the inner workings of their system, but the thought of turning it over to something as uncontrollable as Bitcoin was beyond heresy. It wasn’t even conceivable.

This is a bit of a red herring. I’ve been in dozens of meetings with banks and financial institutions over the past four years and in general there is consensus that Bitcoin – the network – is not fit for purpose as financial market infrastructure to handle regulated financial instruments. Why should banks process, say payments, on a network in which the validators are neither accountable if a problem occurs nor directly reachable in case users want to change or upgrade the software? Satoshi wasn’t trying to solve interbank-related issues between known participants so this description shouldn’t be seen as a slight against Bitcoin.

Now, bitcoin, the coin, may become more widespread in its usage and/or ownership at banks. In fact, as of this writing, nearly every large commercial bank owns at least a handful of cryptocurrencies in order to pay off ransomware issues. But the passage above seems to conflate the two.

See also: Systemically important cryptocurrency networks

On p. 151 they write:

At the same time, committed Bitcoin fans weren’t much interested in Wall Street, either. Bitcoin, after all, was designed as an alternative to the existing banking system. An improvement.

This is a bit revisionist. For instance, the original whitepaper uses the term “payment” twelve times. It doesn’t discuss banking or specific product lines at banks. Banks do a lot more than just handle payments too. Satoshi attempted to create an alternative payment system… the “be your own bank” narrative is something that other Bitcoin promoters later added.

On p. 152 they discuss the August 2015 event:

In essence, Symbiont was promising “blockchain without bitcoin” – it would maintain the fast, secure, and cheap distributed network model, and a truth machine at its center that validated transactions, but it was not leaderless, permissionless, and open to all. It was a blockchain that Wall Street could control.

This has some hyperbole in it (does “Wall Street” really control it?) but there is a kernel that the authors could expand on in the next version: vendor-dependence and implementation monopoly. In the example above, the authors could have pointed out that the same market structure still exists, so what benefit does a blockchain provide that couldn’t already be used? In addition to, what do the authors mean by “cheap distributed network model” when they have (rightly) mentioned that proof-of-work is resource intensive? As of this writing, Symbiont uses BFT-SMaRt and doesn’t use PoW.

Also, the authors seem to conflate “open to all” with blockchains that they prefer. Yet nearly all of the blockchains they seem to favor (like Bitcoin) involve relatively centralized gatekeeping (BIP process) and permissioned edges via exchanges.

Again, when I wrote the paper that created this distinction in 2015, the “permissionless’ness” is solely an attribute of mining not on sending or receiving coins.

On p. 153 they write:

But these permissioned systems are less open to experiments by computer engineers, and access rights to the data and software are subject to the whim of the official gatekeeper. That inherently constrains innovation. A private blockchain, some say, is an oxymoron. The whole point of this technology is to build a system that is open, accessible, and public. Many describe them with the generic phrase “distributed ledger technology” instead of “blockchain.”

This is why it would be important for the authors to explicitly mention what “blockchain” they are referring to. In many cases their point is valid: what is the point of using a blockchain if a single entity runs the network and/or monopolizes the implementation?

Yet their argument is diminished by insisting on using loaded phrases like “open” and “public.” What does it mean to be open or public here? For instance, in order to use Bitcoin today, you need to acquire it or mine it. There can be substantial entry and exit costs to mining so most individuals typically acquire bitcoins via a trusted, permissioned gateway (an exchange). How is that open?

Lastly, the euphemism of using the term “blockchain” instead of using the term “bitcoin” dates back to late 2015 with investors like Adam Draper explicitly stating that was his agenda. See: The great pivot?

On p. 156 they write:

Though Bitcoin fans frowned upon permissioned blockchains, Wall Street continued to build them. These tweaked versions of Bitcoin shared various elements of the cryptocurrency’s powerful cryptography and network rules. However, instead of its electricity-hungry “proof-of-work” consensus model, they drew upon older, pre-Bitcoin protocols that were more efficient but which couldn’t achieve the same level of security without putting a centralized entity in charge of identifying and authorizing participants.

There is a few issues with this:

  1. Which Bitcoin fans are the authors referring to, the maximalists?
  2. Proof-of-work is not an actual consensus model
  3. There are newer Byzantine fault tolerant protocols such as HoneybadgerBFT which are also being used by different platforms

Their last sentence uses a false dichotomy because there are different security assumptions based on the targeted operating environment that result in tradeoffs. To say that Bitcoin is more or less secure versus say, an instance of Fabric is a bit meaningless because the users have different expectations that the system is built around.

On p. 157 they write about R3:

The biggest winner in this hiring spree was the research and development company R3 CEV, which focused on the financial industry. It sought to build a distributed ledger that could, on the one hand, reap the benefits of real-time securities settlement and cross-industry harmonization but, on the other, would comply with a vast array of banking regulations and meet its members’ proprietary interest in keeping their books private.

This seems like a dated pitch from a couple use cases from mid-2015 because by the time I departed in September 2017, real-time securities settlement wasn’t the primary use (for Corda) being discussed externally.

Also, the “CEV” was formally removed from the name about two years ago. See: A brief history of R3 – the Distributed Ledger Group

By the spring of 2017, R3 CEV had grown its membership to more than one hundred. Each member firm paid annual dues of $250,000 in return for access to the insights being developed inside the R3 lab. Its founders also raised $107 million in venture funding in 2017, mostly from financial institutions.

I don’t think the full details are public but the description of the funding – and what was exchanged for it – is not quite correct. The original DLG members got equity stakes as part of their initial investment. Also, as far as the Series A that was announced in May 2017, all but one of the investors was a financial institution of some kind.

On p. 157 they write:

Some of that money went to hire people like Mike Hearn, a once prominent Bitcoin developer who dramatically turned his back on the cryptocurrency community with an “I quit” blog post complaining about the bitter in fighting. R3 also hired Ian Grigg – who later left to join EOS – another prominent onetime rebel from the cryptocurrency space.

To be clear on the timing: Mike Hearn began working at R3 in October 2015 (along with James Carlyle).23 Several months later he published a widely discussed post about Bitcoin itself. Based on his public talks since January 2016, he still seems to have some passing interest in cryptocurrencies; he did a reddit AMA on /r/btc this past spring.

Also, Ian Grigg has since left EOS and launched a new startup, Chamapesa.

On p. 157 they write about me:

Before their arrival, R3 had also signed on Tim Swanson as research director. Swanson was a distributed ledger/blockchain analyst who was briefly enthused by Bitcoin but who later became disillusioned with the cryptocurrency’s ideologues. He became a vocal, anti-Bitcoin gadfly who seemed to delight in mocking its travails.

This is also revisionist history.

Not to dive too much into the weeds here – and ignoring everything pre-2014 – a quick chronology that could be added if the authors are looking to be balanced is the following:

Over the course of under four months, after doing market research covering a few dozen projects, I published Great Chain of Numbers in March 2014… which was a brief report that quickly became outdated.

Some of the feedback I received – including from Bob, an expert at a data analytics startup – was that I was too charitable towards the claims of cryptocurrency promoters at payment processors and exchanges.24 That is to say, Bob thought that based on analytics, the actual usage of a payment processor was a lot lower than what the executives from that processor told me. In retrospect, Bob was absolutely correct.

A couple months later I ended up – by accident – doing an interview on Let’s Talk Bitcoin. The original guest did not show up and while we (the co-hosts) were waiting, I ended up getting into a small debate with another co-host about the adoption and usage of cryptocurrencies like Bitcoin. You can listen to it here and read the corresponding long-read that provides more citations and supporting links to back up the comments I made in the podcast.

From this moment forward (June 2014) – because I fact-checked the claims and did not blindly promote cryptocurrencies – I quickly became labeled as a pariah by several of the vocal cryptotwitter personalities. Or as the authors of this book unfairly label me: “anti-Bitcoin gadfly.” To call this order of events “disillusionment” is also unfair.

Lastly, a quick fix to the passage in the book: I technically became a formal advisor to R3 at the end of 2014 (after their second roundtable in Palo Alto)… and then later in August 2015 came on full-time as director of market research (although I subsequently wore several different hats).

On p. 158 they write:

Of a similar breed was Preston Byrne, the general counsel of Eris Ltd., later called Monax which designed private blockchains for banks and a variety of other companies. When Byrne’s Twitter feed wasn’t conveying his eclectic mix of political positions – pro-Trump, anti-Brexit, pro-Second Amendment, pro-encryption, anti-software utopianism – or constant references to marmots (the Eris brand’s mascot), it poured scorn on Bitcoin’s fanatic followers. For guys like Swanson and Byrne, Bitcoin’s dysfunctional governance was a godsend.

Again, chronologically I met Preston online in early 2014. He helped edit and contributed to Great Chain of Numbers. Note: he left Eris last year and recently joined a US law firm.

This is an unfair description: “For guys like Swanson and Byrne, Bitcoin’s dysfunctional governance was a godsend.”

This is unfair for several reasons:

  • We were hardly the first people to spend time writing about the governance problems and frictions involved in cryptocurrencies. For instance this includes: Ray Dillinger, Ben Laurie, and likely dozens of others. Nor were we the only ones discussing it in 2014 and 2015.
  • Preston and I have also – separately – written and discussed issues with other cryptocurrencies and blockchains during that time frame… not just Bitcoin.

Thus to single us out and simultaneously not mention others who had similar views, paints us as some type of cartoonish villains in this narrative. Plus, the authors could have reached out to us for comment. Either way, the next version should attempt to fix the word choices and chronology.

I reached out to Preston Byrne and he provided a response that he asked to have included in a footnote.25

On p. 159 they write more about R3:

On the one hand, regulators were comfortable with the familiar membership of R3’s consortium: they were more accustomed to working with bankers than with T-shirt-and-jeans-wearing crypto-investors. But on the other, the idea of a consortium of the world’s biggest banks having say-so over who and what gets included within the financial system’s single and only distributed ledger conjured up fears of excessive banking power and of the politically unpopular bailouts that happened after the crisis. Might Wall Street be building a “too-big-to-fail” blockchain?

This is some strange criticism because many of the developers of Corda (and other pieces of software) wore casual and business casual attire while working in the offices.

Corda is not the “single and only distributed ledger” being used by enterprises. Nearly all of the banks that invested in R3 also invested in other competing entities and organizations including Axoni and Digital Asset. Thus the statement in the middle should be updated to reflect that R3 does not have some kind of exclusivity over banking or enterprise relationships.

Michael Casey has said multiple times in public (even prior to the existence of Corda) that R3 was a “cartel coin” or “cartel chain” — including on at least one panel I was on with him in January 2016.  This is during a time in which R3 did not have or sell any type of product, it was strictly a services-focused company.  Maybe the organization evolves in the future – there may even be some valid criticism of a mono-implementation or a centrally run notary – but even as of this writing there is no Corda Enterprise network up and running.26

Lastly, all of these banks are members of many different types of consortia and multilateral bodies. Simply belonging to or participating in organizations such as IOSCO does not mean something nefarious is afoot.

On p. 160 they write:

The settlement time is also a factor in a financial crisis, and it contributed to the global panic of 2008.

This is a good point and it would be great to go into further details and examples in the next edition.

On p. 160 they write:

This systemic risk problem is what drew Blythe Masters, one of the key figures behind blockchain innovation on Wall Street, into digital ledger technology; she joined Digital Asset Holdings, a blockchain service provider for the financial system’s back-office processing tasks, as CEO in 2014.

Two small quibbles:

  1. Pretty sure the authors meant to say “distributed” not “digital”
  2. Blythe Masters joined as CEO in March 2015, not in 2014

On p. 162 they write:

It’s just that to address such breakdowns, this new wave of distributed ledger system designers have cherry-picked the features of Nakamoto’s invention that are least threatening to the players in the banking system, such as its cryptographic integrity, and left aside its more radical, and arguably more powerful, features, especially the decentralized, permissionless consensus system.

This is revisionist history. Satoshi bundled together existing ideas and libraries to create a blockchain. He or she did not invent cryptography from the ground up. For more details, readers are encouraged to read “Bitcoin is worse is better” from Gwern Branwen. IT systems at financial institutions were (and are) already using various bits of cryptography, encryption, permissioning, data lakes, and distributed storage methods.

Furthermore, because the participants in the financial system are known, there is no reason to use proof-of-work, which is used in Bitcoin because the participants (miners) are unknown.

Lastly, the authors touch on it and do have a valid point about market structure being changed (or unchanged) and should try to expand that in the next edition.

On p. 162 they write:

The DTCC, which settles and clears the vast majority of US stock and bond trades, handles 10,000 transactions per second; Bitcoin, at the time of this writing, could process just seven. And as strong as Bitcoin’s value – and incentive-based security model has proven to be, it’s not at all clear that a few hundred million dollars in bitcoin mining costs would deter rogue traders in New York or London when government bond markets offer billion dollar fraud opportunities.

Firstly, at the time of this writing, on-chain capacity for Bitcoin (even with Segwit activated) is still less than seven transaction per second.

Second, it is not clear how “rogue traders” in New York or London would be able to directly subvert the mining process of Bitcoin. Are the authors thinking about the potential security delta caused by watermarked tokens and colored coins?27

On p. 162 they write:

Either way, for the firms that R3 and Digital Asset serve – managers of the world’s retirement funds, corporate payrolls, government bond issuances, and so forth -these are not security risks they can afford. For now – at least until solutions as Lightning provide large-scale transaction abilities – Bitcoin isn’t anywhere near ready to service Wall Street’s back-office needs.

But Bitcoin is not fit for purpose for regulated financial institutions. Satoshi wasn’t trying to solve back-office problems that enterprises had, why are the authors intent on fitting a round peg in a square hole?

Also, Lightning isn’t being designed with institutions in mind either. Even if one or more of its implementations becomes widely adopted and used by Bitcoin users, it still doesn’t (currently) meet the functional and non-functional requirements that regulated institutions have. Why market it as if it does?

On p. 162 they write:

There are also legal concerns. R3’s Swanson has argued that the mere possibility of a 51 percent attack – that scenario in which a minder gains majority control of a cryptocurrency network’s computing power and fraudulently changes transactions – means that there can never be “settlement finality” in a cryptocurrency transaction. That of perpetual limbo is a scenario that Wall Street lawyers can’t live with, he said. We might retort that the bailouts and various other deals which banks reversed their losses during the crisis make a mockery of “finality,” and that Bitcoin’s track record of irreversibility is many magnitudes better than Wall Street’s. Nonetheless, Swanson’s catchy critique caught on among bankers. After all, he was preaching to the choir.

So there are a few issues with this statement.

I did not invent the concept of “settlement finality” nor did ‘Wall Street lawyers.’  The term dates back decades if not centuries and in its most recent incarnation is the product of international regulatory bodies such as BIS and IOSCO. Regulated financial institutions – starting with financial market infrastructures – are tasked with reducing risk by making sure the payment systems, for instance, are irreversible. Readers should peruse the PFMIs published in 2012.

The next issue is, they make it sound like I lobbied banks using some ‘gotcha’ loophole to scare banks from using Bitcoin. Nowhere in my presentations or speeches have I justified or handwaved away the (criminally?) negligent behavior of individuals at banks that may have benefited from bailouts. This is another unfair characterization that they have painted me as.

To that point, they need to be more specific about what banks got specific transactions reversed. Name and shame the organizations and explain how it would not be possible in a blockchain-based world. Comparing Bitcoin with ‘Wall Street’ doesn’t make much sense because Bitcoin just handles transfers of bitcoin, nothing else. ‘Wall Street’ encompasses many different product lines and processes many other types of transactions beyond payments.

All in all, painting me as a villain is weak criticism and they should remove it in their next edition.

On p. 163 they write about permissioned ledgers:

They’re not racing each other to win currency rewards, which also means they’re not constantly building a wasteful computing infrastructure a la Bitcoin.

They say that as if it is a good thing. Encourage readers to look through the energy costs of maintaining several different proof-of-work networks that handle almost no commerce.

On p. 163 they write:

That’s why we argue that individuals, businesses, and governments really need to support the various hard-core technical solutions that developers are pursuing to help permissionless ledgers like Bitcoin and Ethereum overcome their scaling, security, and political challenges.

This agenda has been pretty clear throughout the book, though it may be more transparent to the reader if it comes earlier in chapter 1 or 2.

From a historical perspective this argument doesn’t make much sense. If Karl Benz had said the same thing in the 19th century about getting engineers to build around his car and not others. Or the Wright Brothers had been ‘more successful’ at suing aerospace competitors. Why not let the market – and its participants – chose to work on platforms they find of interest?

On p. 165 they write about the MIT Digital Currency Inititative but do not disclose that they solicit financial support from organizations such as central banks, some of whom pay up to $1 million a year to collaborate on research projects. Ironically, the details of this program are not public.

On p. 167 they write:

A broad corporate consortium dedicated to a mostly open-source collaborative approach, Hyperledger is seeking to develop nothing less than a common blockchain / distributed ledger infrastructure for the global economy, one that’s targeted not only at finance and banking but also at the Internet of Things, supply chains, and manufacturing.

The next edition should update that passage. All of the projects incubated by the Hyperledger Project are open sourced, there is no “mostly.” And not all of these projects involve a blockchain, some involve identity-related efforts.28

On p. 169 and again on p. 172 the authors quote Joi Ito who compares TCP/IP with “walled gardens” such as AOL and Prodigy.

That is comparing apples-and-oranges. TCP/IP is a suite of protocols, not a business. AOL and Prodigy are businesses, not protocols. AOL used a proprietary protocol and you could use TCP/IP via a gateway. Today, there are thousands of ‘walled gardens’ called ISPs that allow packets to jump across boundaries via handshake agreements. There is no singular ‘Internet’ but instead there are thousands of intranets tied together using common standards.

Readers may be interested in: Intranets and the Internet

On p. 173 they write:

Permissionless systems like those of Bitcoin and Ethereum inherently facilitate more creativity and innovation, because it’s just understood that no authorizing company or group of companies can ever say this or that thing cannot be built.

How are they measuring this? Also, while each platform has its own terms of service, it cannot be said that you need explicit permission to build an application on top of a specific permissioned platform. The permissioning has to do with how validation is handled.

On p. 173 they write:

It’s the guarantee of open access that fosters enthusiasm and passion for “permissionlessness” networks That’s already evident in the caliber and rapid expansion in the number of developers working on public blockchain applications. Permissioned systems will have their place, if nothing else because they can be more easily programmed at this early stage of the technology’s life to handle heavier transaction loads. But the overarching objective for all of us should be to encourage the evolution of an open, interoperable permissionless network.

This is just word salad that lacks supporting evidence. For the next edition the authors should tabulate or provide a source for how many developers are working on public blockchain applications.

The passage above also continues to repeat a false dichotomy of “us versus them.” Why can’t both of these types of ‘platforms’ live in co-existence? Why does it have to be just one since neither platform can fulfill the requirements of the other?

It’s like saying only helicopters provide the freedom to navigate and that folks working on airplanes are only doing so because they are less restricted with distances. Specialization is a real.

On p. 173 they conclude with:

There’s a reason we want a world of open, public blockchains and distributed trust models that gives everybody a seat at the table. Let’s keep our eyes on that ball.

This whole chapter and this specific statement alone comes across as preachy and a bit paternalistic. If the message is ‘permissionlessness’ then we should be allowed to pursue our own goals and paths on this topic.

Also, there are real entry and exit costs to be a miner on these public chains so from an infrastructure point of view, it is not really accurate to say everybody gets a seat at the table.

Chapter 7

This is probably their strongest chapter. They do a good job story telling here. Though there were few areas that were not clear.

On p. 179 they write:

But as Bitcoin and the blockchain have shown, the peer-to-peer system of digital exchange, which avoids the cumbersome, expensive, and inherently exclusionary banking system, may offer a better way.

The authors have said 5-6 times already that proof-of-work networks like Bitcoin can be very costly and wasteful to maintain. It would be helpful to the reader for the authors to expand on what areas the banking system is expensive.

And if a bank or group of banks used a permissioned blockchain, would that reduce their expenses?

On p. 181 they write about time stamps:

The stamp, though, is incredibly powerful. And that, essentially, is the service that blockchains provide to people. This public, recognizable open ledger, which can be checked by any time by anybody, acts in much the same way as the notary stamp: it codified that certain action took place at a certain time, with certain particulars attached to it, and it does this in a way that the record of that transaction cannot be altered by private parties, whether they be individuals or governments.

In the next edition the authors should differentiate time stamps and all the functions a notary does. Time stamps may empower notaries but simply stamping something doesn’t necessarily make it notarized. We see this with electronic signatures from Hello Sign and Docusign.

Also, these blockchains have to be funded or subsidized in some manner otherwise they could join the graveyard of hundreds of dead coins.

On p. 181 they write about Factom and Stampery. It would be good to get an update on these types of companies because the founder of Stampery who they single out – Luis Ivan Cuende – has moved on to join and found Aragon.

On p. 183 they discuss data anchoring: taking a hash of data (hash of a document) and placing that into a blockchain so that it can be witnessed. This goes back to the proof-of-existence discussion earlier on. Its function has probably been overstated and is discussed in Anchor’s Aweigh.

On p. 184 they discuss Chromaway. This section should be updated because they have come out with their own private blockchain, Chromapolis funded via a SAFT.

On p. 185 they write:

The easier thing to do, then, for a reform-minded government, is to hire a startup that’s willing to go through the process of converting all of an existing registry, if one exists, into a digital format that can be recorded in a blockchain.

Why? Why does this information have to be put onto a blockchain? And why is a startup the right entity to do this?

On p. 186 they mention several companies such as Bitfury, BitLand, and Ubiquity. It would be good to update these in the next edition to see if any traction occurred.

On p. 187 they write:

They key reason for that is the “garbage-in/garbage-out” conundrum: when beginning records are unreliable, there’s a risk of creating an indisputable permanence to information that enshrines some abuse of a person’s property rights.

This GIGO conundrum doesn’t stop and isn’t limited to just the beginning of record keeping. It is an ongoing challenge, potentially in every country.

On p. 188-192 they describe several other use cases and projects but it is unclear why they can’t just use a database.

On p. 193 they write:

Part of the problem is that cryptocurrencies continue to sustain a reptutation among the general public for criminality. This was intensified by the massive “WannaCry” ransomware attacks of 2017 in which attackers broke into hospitals’ and other institutions’ databases, encrypted their vital files and then extorted payments in bitcoin to have the data decrypted. (In response to the calls to ban bitcoin that inevitably arose in the wake of this episode, we like to point that far more illegal activity and money laundering occurs in dollar notes, which are much harder to trace than bitcoin transactions. Still, when it comes to perception, that’s beside the point – none of these incidents help Bitcoin’s reputation.)

This is a whataboutism. Both actions can be unethical and criminal, there is no need to downplay one versus the other. And the reason why bitcoin and other cryptocurrencies are used by ransomware authors is because they are genuinely useful in their operating environment. Data kidnapping is a good use case for anarchic networks… and cryptocurrencies, by design, continue to enable this activity. The authors can attempt to downplay the criminal element, but it hasn’t gone away and in fact, has been aided by additional liquidity to coins that provide additional privacy and confidentiality (like Monero).

On p. 193 they write about volatility:

This is a massive barrier to Bitcoin achieving its great promise as a tool to achieve financial inclusion. A Jamaican immigrant in Miami might find the near-zero fees on a bitcoin transaction more appealing than the 9 percent it costs to use a Western Union agent to send money home to his mother.

This financial inclusion narrative is something that Bitcoin promoters created after Satoshi disappeared. The goal of Bitcoin — according to the whitepaper and announcement threads – wasn’t to be a new rail for remittance corridors. Maybe it becomes used that way, but the wording in the passage above as a “great promise” is misleading.

Also, the remittance costs above should be fact-checked at the very handy Save On Send site.

On p. 194 they write about BitPesa. Until we see real numbers in Companies House filings, it means their revenue is tiny. Yet the authors make it sound like they have “succeeded”:

The approach is paying dividends as evident in the recent success of BitPesa, which was established in 2013 and was profiled in The Age of Cryptocurrency. The company, which offers cross-border payments and foreign-exchange transactions in and out of Kenya, Nigeria, Tanzania, and Uganda, reported 25 percent month-on-month growth, taking its transaction volume midway through 2017, up from $1 million in 2016.

They also cited some remittance figures from South Korea to the Philippines which were never independently verified and are old.

On p. 194 they dive into Abra a company they described as a remittance company but earlier this year they pivoted into the investment app category as a Robinhood-wannabe, with a coin index.

On p. 196 they discuss the “Somalia dilemma” in which the entire country is effectively unable to access external financial systems and somehow a blockhain would solve their KYC woes. The authors then describe young companies such as Chainalysis and Elliptic which work with law enforcement to identify suspicious transactions. Yet they do not close the loop on the narrative as to how the companies would help the average person in Somalia.

On p. 198 they discuss a startup called WeTrust and mention that one of the authors – Michael – is an advisor. But don’t disclose if he received any compensation for being an advisor. WeTrust did an ICO last year. This is important because the SEC just announced it has fined and settled with Floyd Mayweather and DJ Khaled for violating anti-touting regulations.

Chapter 8

Chapter 8 dives into self-sovereign identity which is genuinely an interesting topic. It is probably the shortest chapter and perhaps in the next edition can be updated to reflect any adoption that took place.

On p. 209 they write about physical identification cards:

Already, in the age of powerful big data and network analytics – now enhanced with blockchain-based distributed trust systems to assure data integrity – our digital records are more reliable indicators of the behavior that defines who we are than are the error-prone attestations that go into easily forged passports and laminated cards.

How common and how easily forged are passports? Would be interesting to see that reference and specifically how a blockchain would actually stop that from happening.

On p. 212 they write about single-sign ons:

A group of banks including BBVA, CIBC, ING, Societe Generale, and UBS has already developed such a proof of concept in conjunction with blockchain research outfit R3 CEV.

Earlier they described R3 differently. Would be good to see more consistency and also an update on this project (did it go anywhere?).

On p. 213 they describe ConsenSys as a “think tank” but it is actually a ‘venture studio’ similar to an incubator (like 500 Startups). Later on p. 233 they describe ConsenSys as an “Ethereum-based lab”.

On p. 216 they write about Andreas Antonopoulos:

What we should be doing, instead of acting as judge and executioner and making assumptions “that past behavior will give me some insight into future behavior,” Antonpolous argues, is building systems that better manage default risk within lenders’ portfolios. Bitcoin, he sustains, has the tolls to do so. There’s a lot of power in this technology to protect against risk: smart contracts, multi-signature controls that ensure that neither of the two parties can run off with the funds without the other also signing a transaction, automated escrow arrangements, and more broadly, the superior transparency and granularity of information on the public ledger.

There are at least two issues with this:

Nowhere in this section do the authors – or Antonopolous – provide specific details for how someone could build a system that manages default risk on top of Bitcoin. It would be helpful if this was added in the next edition.
And recently, Antonopoulos claims to have been simply educating people about “blockchain technology” and not promoting financial products.

If you have followed his affinity marketing over the past 4-5 years he has clearly promoted Bitcoin usage as a type of ‘self-sovereign bank‘ — and you can’t use Bitcoin without bitcoins.29 He seems to be trying to have his cake and eat it too and as a result got called out by both Nouriel and Buttcoin.

On p. 219 they write:

If an attestation of identifying information is locked into an immutable blockchain environment, it can’t be revoked, not without both parties agreeing ot the reversal of the transaction. That’s how we get to self-sovereignty. It’s why, for example, the folks at Learning Machine are developing a product to prove people’s educational bona fides on Blockcerts, an MIT Media Lab-initiated open-source code for notarizing university transcripts that hashes those documents to the bitcoin blockchain. Note the deliberate choice of the most secure, permissionless blockchain, Bitcoin’s. A permissioned blockchain would fall short of the ideal because there, too, the central authority controlling the network could always override the private keys of the individual and could revoke their educational certificates. A permissionless blockchain is the only way to give real control/ownership of the document to the graduate, so that he/she can disclose this particularly important attribute at will to anyone who demands it.

This disdain for ‘permissioned blockchains’ is a red herring and another example of the “us versus them” language that is used throughout the book. If a blockchain has a central authority that can do what the authors describe, it would be rightly described as a single point of failure and trust. And this is why it is important to ask what ‘permissioned’ chain they had in mind, because they are not all the same.

They also need to explain how they measure ‘most secure’ because Bitcoin – as described throughout this review – has several areas of centralization include mining and those who control the BIP process.

On p. 219 they quote Chris Allen. Could be worth updating this because he left Blockstream last year.

Chapter 9

This chapter seemed light on details and a bit polemical.

For instance, on p. 223 they write:

Many of our politicians seem to have no ideas this is coming. In the United States, Donald Trump pushes a “Buy America First” campaign (complete with that slogan’s echoes of past fascism), backed by threats to raise tariffs, tear up trade deals, boot undocumented immigrants out of the country, and “do good deals for America.” None of this addresses the looming juggernaut of decentralized software systems. IoT systems and 3D printing, all connected via blockchains and smart-contract-triggered, on-demand service agreements, will render each presidential attempt to strong-arm a company into retaining a few hundred jobs in this or that factory town even more meaningless.

Putting the politics aside for a moment, this book does not provide a detailed blue print for how any of the technology listed will prevent a US president from strong-arming a company to do any specific task. How does a 3D printer connected to a blockchain prevent a president from executing on their agenda?

On p. 224 they write about universal basic income:

This idea, first floated by Thomas Paine in the eighteenth century, has enjoyed a resurgence on the left as people have contemplated how robotics, artificial intelligence, and other technologies would hit working-class jobs such as truck driving. But it may gain wider traction as decentralizing force based on blockchain models start destroying middle-class jobs.

This speculation seems like a non sequitur. Nowhere in the chapter do they detail how a “blockchain-based model” will destroy middle class jobs. What is an example?

On p. 227 they write:

In case you’re a little snobbish about such lowbrow art, we should also point out that a similar mind-set of collaborative creation now drives the world of science and innovation. Most prominently, this occurs within the world of open-source software development; Bitcoin and Ethereum are the most important examples of that.

If readers were unfamiliar with the long history of the free open source software movement, they might believe that. But this ignores the contributions of BSD, Linux, Apache, and many other projects that are regularly used each and every day by enterprises of all shapes and sizes.

Also, during the writing of this review, an open source library was compromised — potentially impacting the Copay wallet from Bitpay — and no one noticed (at first). Eric Diehl, a security expert at Sony, has a succinct post up on the topic:

In other words, this is an example of a software supply chain attack. One element in the supply chain (here a library) has been compromised. Such an attack is not a surprise. Nevertheless, it raises a question about the security of open source components.

Many years ago, the motto was “Open source is more secure than proprietary solutions.” The primary rationale was that many eyes reviewed the code and we all know that code review is key for secure software. In the early days of open source, this motto may have been mostly true, under some specific trust models ( see https://eric-diehl.com/is-open-source-more-secure/, Chapter 12 of Securing Digital Video…). Is it still true in our days?

How often do these types of compromises take place in open-source software?

On p. 232 they write:

Undaunted, an unofficial alliance of technologists, entrepreneurs, artists, musicians, lawyers, and disruption-wary music executives is now exploring a blockchain-led approach to the entire enterprise of human expression.

What does that even mean?

On p. 232 they write about taking a hash of their first book and inserting it into a block on the Bitcoin blockchain. They then quote Dan Ardle from the Digital Currency Council who says:

“This hash is unique to the book, and therefore could not have been generated before the book existed. By embedding this hash in a bitcoin transaction, the existence of the book on that transaction date is logged in the most secure and irrefutable recordkeeping system humanity has ever devised.”

These plattitudes are everywhere in the book and should be toned down in the next edition especially since Ardle – at least in the quote – doesn’t explain how he measures secure or irrefutable. Especially in light of hundreds of dead coins that were not sustainable.

On p. 233 they write:

The hope now is that blockchains could fulfill the same function that photographers carry out when they put a limited number of tags and signatures on reproduced photo prints: it turns an otherwise replicable piece of content into a unique asset, in this case a digital asset.

This seems to be solutionism because blockchains are not some new form of DRM.

Continuing on this topic, they write:

Copying a digital file of text, music, or vidoe has always been trivial. Now, with blockchain-based models, Koonce says, “we are seeing systems develop that can unequivocally ensure that a particular digital ‘edition’ of a creative work is the only one that can be legitimately transferred or sold.” Recall that the blockchain, as we explained in chapter three, made the concept of a digital asset possible for the first time.

This is empirically untrue. It is still trivially possible to download and clone a blockchain, nothing currently prevents that from happening. It’s why there are more than 2,000 cryptocurrencies at the time of this writing and why there are dozens of forks of Bitcoin: blockchains did not make the concept of a digital asset possible. Digital assets existed prior to the creation of Bitcoin and attempting to build a DRM system to prevent unauthorized copies does not necessarily require a blockchain to do.

On p. 238 they write:

Yet, given the amssive, multitudinous, and hetergeneous state of the world’s content, with hundreds of millions of would-be creators spread all over the world and no way to organize themselves as a common interest, there’s likely a need for a permissionless, decentralized system in which the data can’t be restricted and manipulated by a centralized institution such as a recording studio.

Maybe, but who maintains the decentralized system? They don’t run themselves and are often quite expensive (as even the authors have mentioned multiple times). How does a decentralized system fix this issue? And don’t some artists already coordinate via different interest groups like the RIAA and MPAA?

On p. 240 they discuss Mediachain’s acquisition by Spotify:

On the other hand, this could result in a private company taking a technology that could have been used publicly, broadly for the general good, and hiding it, along with its innovative ideas for tokens and other solutions, behind a for-profit wall. Let’s hope it’s not the latter.

This chapter would have been a bit more interesting if the authors weren’t as heavy handed and opinionated about how economic activities (like M&A) should or should not occur. To improve their argument, they could include links or citations for why this type of acquisition has historically harmed the general public.

Chapter 10

On p. 243 they write:

Bitcoin, with its new model of decentralized governance for the digital economy, did not spring out of nowhere, either. Some of the elements – cryptography, for instance – are thousands of years old. Others, like the idea of electronic money, are decades old. And, as should be evident in Bitcoin’s block-size debate, Bitcoin is still very much a work in progress.

This statement is strange because it is inconsistent with what they wrote on p. 162 regarding permissioned chains: “… cherry-picked the features of Nakamoto’s invention that are least threatening to the players in the banking system, such as its cryptographic integrity…”

In this section they are saying that the ideas are old, but in the passage above in chapter 6, they make it sound like it was all from Nakamoto. The authors should edit it to be one way or the other.

Also, Bitcoin’s governance now basically consists of off-chain shouting matches on social media. Massive influence and lobbying campaigns on reddit and Twitter is effectively how the UASF / no2x movement took control of the direction of the BIP process last year.

On p. 245 they write:

That can be found in the individual freedom principles that guide the best elements of Europe’s new General Data Protection Regulation, or GDPR.

All blockchains that involve cross-jurisdictional movement of data will likely face challenges regarding compliance with data privacy laws such as GDPR. Michele Finck published a relevant paper on this topic a year ago.

See also: Clouds and Chains

On p. 247 they write about if you need to use a blockchain:

Since a community must spend significant resources to prove transactions on a blockchain, that type of record-keeping system is most valuable when a high degree of mutual mistrust means that managing agreements comes at a prohibitively high price. (That price can be measured in various ways: in fees paid to middlemen, for instance, in the time it takes to reconcile and settle transactions, or in the fact that it’s impossible to conduct certain business processes, such as sharing information across a supply chain.) When a bank won’t issue a mortgage to a perfectly legitimate and creditworthy homeowner, except at some usurious rate, because it doesn’t trust the registry of deeds and liens, we can argue that the price of trust is too high and that a blockchain might be a good solution.

Not all blockchains utilize proof-of-work as an anti-Sybil attack mechanism, so it cannot be said that “a community must spend significant resources”.

In the next edition it would be interesting to see a cost / benefit analysis for when someone should use a blockchain as it relates the mortgage use case they describe above.

On p. 248 they talk about voting:

Every centralized system should be open for evaluation – even those of government and the political process. Already, startups such as Procivis are working on e-voting systems that would hand the business of vote-counting to a blockchain-based backend. And some adventurous governments are open to the idea. By piloting a shareholder voting program on top of Nasdaq’s Linq blockchain service, Estonia is leading the way. The idea is that the blockchain, by ensuring that no vote can be double-counted – just as no bitcoin can be double-spent – could for the first time enable reliable mobile voting via smartphones. Arguably it would both reduce discrimination against those who can’t make it to the ballot box on time and create a more transparent, accountable electoral system that can be independently audited and which engenders the public’s trust.

A month ago Alex Tapscott made a similar argument.

He managed to temporarily unite some of the warring blockchain tribes because he penned a NYT op-ed about how the future is online voting… powered by blockchains. Below is a short selection of some Twitter threads:

  • Arvind Narayanan, a CS professor at Princeton said this is a bad idea
  • Angela Walch, a law professor at St. Mary’s said this is a bad idea
  • Philip Daian, a grad student at Cornell said this is a bad idea.
  • Luis Saiz, a security researcher at BBVA said this is a bad idea
  • Joseph Hall, the Chief Technologist at the Center for Democracy & Technology said this a bad idea
  • Preston Byrne, a transatlantic attorney and father of marmotology said this is a bad idea
  • Matt Blaze, a CS professor at UPenn, said this is a bad idea

NBC News covered the reaction to Tapscott’s op-ed.  Suffice to say, the next edition should either remove this proposal or provide more citations and references detailing why this is a good idea.

Throughout this chapter projects like BitNation and the Economic Space Agency are used as examples of projects that are “doing something” — but none of these have gotten much traction likely because it’s doing-something-theater.

On p. 252 – 255 they uncritically mention various special interest groups that are attempting to influence decision makers via lobbying. It would be good to see some balance added to this section because many of the vocal promoters at lobbying organizations do not disclose their vested interests (e.g., coin positions).

On p. 255 they talk about “Crypto Valley” in Switzerland:

One reason they’ve done so is because Swiss law makes it easier to set up the foundations needed to launch coin offerings and issue digital tokens.

MME – the Swiss law firm that arguably popularized the approach described in this section – set up more than a dozen of these foundations (Stiftung) before stopping. And its creator, Luke Mueller, now says that:

“The Swiss foundation actually is a very old, inflexible, stupid model,” he said. “The foundation is not designed for operations.”

Could be worth updating this section to reflect what happened over the past year with lawsuits as well.

On p. 255 they write:

The next question is: what will it take for U.S. policymakers to worry that America’s financial and IT hubs are losing out to these foreign competitors in this vital new field.

This is FOMO. The authors should tabulate all of the companies that have left the US – or claim to leave – and look at how many jobs they actually set up overseas because of these laws. Based on many anecdotes it appears what happens in practice is that a company will register or hold an ICO overseas in say, Singapore or Panama, but then open up a development arm in San Francisco and New York. They effectively practice regulatory arbitrage whereby they bypass securities laws in one country (e.g., the US) and then turn around and remit the proceeds to the same country (the US).

On p. 263 they conclude the chapter with:

No state or corporation can put bricks around the Bitcoin blockchain or whitewash its record. They can’t shut down the truth machine, which is exactly why it’s a valuable place to record the voices of human experience, whether it’s our love poems or our cries for help. This, at its core, is why the blockchain matters.

Their description basically anthropromorphizes a data structure. It also comes across as polemical as well as favoritism towards one specific chain, Bitcoin. Furthermore, as discussed throughout this review, there are clear special interest groups – including VC-backed Bitcoin companies — that have successfully pushes Bitcoin and other cyrptocurrencies – into roadmaps that benefit their organizations.

Conclusion

Like their previous book (AoC), The Truth Machine touches on many topics but only superficially.  It makes a lot of broad sweeping claims but curious readers – even after looking at the references – are left wanting specifics: how to get from point A to point B.

There also seems to be an anti-private enterprise streak within the book wherein the authors condescendingly talk down efforts to build chains that are not anarchic. That becomes tiring because – as discussed on this blog many times – it is not a “us versus them” proposition.  Both types of blockchains can and do exist because they are built around different expectations, requirements, and operating environments.

In terms of one-sided narratives: they also did not reach out to several of the people they villify, such as both myself and Preston Byrne as well as coin proponents such as Roger Ver and Jihan Wu.  The next edition should rectify this by either dropping the passages cited above, or in which the authors reach out to get an on-the-record comment from.

Lastly, while some churn is expect, many of the phrases throughout the book did not age well because it relied on price bubbles and legal interpretations that went a different direction (e.g., SAFTs are no longer popular).  If you are still looking for other books to read on the topic, here are several other reviews.

Endnotes

  1. See A brief history of R3 — the Distributed Ledger Group []
  2. Developers of various coins will include “check points” which do make it virtually impossible to roll back to a specific state. Both Bitcoin and Bitcoin Cash have done this. []
  3. See Why the payment card system works the way it does – and why Bitcoin isn’t going to replace it any time soon by Richard Brown []
  4. See Learning from the past to build an improved future of fintech and Distributed Oversight: Custodians and Intermediaries []
  5. Unsurprisingly users want to be able to hold someone accountable for their lack of care and/or difficulty in safely and securely backing up their keys. []
  6. Ibid []
  7. Technically every orphaned block alters the blockchain, because you thought one thing and now you are asked to think another. []
  8. Readers may be interested in The Path of the Blockchain Lexicon by Angela Walch []
  9. Recall that generating hashes is a means to an end: to make Sybil attacks costly on a network with no “real” identities. []
  10. For instance, Selfish Mining []
  11. Albumatic -> Koala -> Chain.com the Bitcoin API company -> Chain.com the enterprise company, etc. []
  12. This is slightly reminiscent of Dr. Strangelove in which General Turgidson says, “I admit the human element seems to have failed us here.” []
  13. See The Revolving Door Comes to Cryptocurrency by Lee Reiners and Is Bitcoin Secretly Messing with the Midterms? from Politico []
  14. See also his role in attacks on CoiledCoin and BBQcoin []
  15. David Andolfatto, from the St. Louis Fed, also pointed this out back in May 2015, skip to the 28 min mark []
  16. See the “no” side of the debate: Can Bitcoin Become a Dominant Currency? []
  17. Ironically in his most recent op-ed published today, he asks people to “quit this ugly obsession with price.”  There are at least 3-4 instances of the co-authors using price as a metric for “strength” in this book. []
  18. See also this related thread from Don Bailey []
  19. Some exchanges, such as Gemini, want proof of mining activity. See also: What is Permissioned-on-Permissionless []
  20. See also the Polly Pocket Investor Day []
  21. Ryan Zurrer, second-in-command at Polychain, was recently fired from Polychain amid weak performance this year. []
  22. The whole public sale thing is problematic from a MSB perspective. The colorability of the position taken by Cooley in that section was questionable at the time and possibly indefensible now. []
  23. Mike wrote the first line of code for Corda over three years ago. []
  24. The initial conversation with Bob took place in San Francisco during Coin Summit. Bob later became a key person at Chainalysis. []
  25. According to Preston:

    Eris, now Monax, was the first company to look at the combination of cryptographic primitives that make up Bitcoin and attempt to use them to make business processes more efficient. In shorthand, the company invented “blockchains without coins” or “permissioned blockchains.”

    Bitcoin’s dysfunctional governance wasn’t a “godsend” for our business, as we weren’t competing with Bitcoin. Rather we were trying to dramatically expand the usecases for database software that had peer to peer networking and elliptic curve cryptography at its core, in recognition of the fact that business counterparties reconcile shared data extremely inefficiently and their information security could benefit from a little more cryptography.

    In exchange for our efforts, Bitcoiners of all shapes and sizes heaped scorn on the idea that any successor technology could utilize their technology’s components more efficiently. We responded with pictures of marmots to defuse some of the really quite vitriolic attacks on our company and because I like marmots; these little critters became the company’s mascot through that process.

    Subsequent developments vindicated my approach. Cryptographically-secure digital cash being trialled by Circle, Gemini, and Paxos utilizes permissioning, a concept that Circle’s Jeremy Allaire said was impossible in 2015 – “they’re not possible separately” – and I predict that as those USD coins seek to add throughput capacity and functionality they will migrate off of the Ethereum chain and onto their own public, permissioned chains which are direct conceptual descendants of Eris’ work.

    They will compete with Bitcoin in some respects, much as a AAA-rated bond or USD compete with Bitcoin now, but they will not compete with Bitcoin in others, as they will cater to different users who don’t use Bitcoin today and are unlikely to use it in the future.

    Ultimately, whether Eris’ original vision was right is a question of how many permissioned chains there are, operating as secure open financial services APIs as Circle and Gemini are using them now. I predict there will be rather a lot of those in production sooner rather than later. []

  26. Oddly the authors of the book do not name “Corda” in this book… they use the phrase: “R3’s distributed ledger” instead. []
  27. Readers may also be interested in reading the 2016 whitepaper from the DTCC []
  28. At the time of this writing there are: 5 incubated “Frameworks” and 6 incubated “Tools.” []
  29. Antonopolous recently gave a talk in Seattle where he promoted the usage of cryptocurrencies to exit the banking system.  Again, a user cannot use a cryptocurrency without absorbing the exposure and risks attached to the underlying coins of those anarchic networks. []

Interview with Ray Dillinger

[Note: the 10th anniversary of the Bitcoin whitepaper is this month.  Below is a detailed interview with one of the first individuals to have interacted with Satoshi both in public and private: Ray Dillinger.

All of the written responses are directly from Ray with no contributions from others.]

Logo from 2010: Source

Q1: Tell us about yourself, what is your background?

A1: I am originally from Kansas.  At about the same time I entered high school I became interested in computers as a hobbyist, although hobby computers were still mostly useless at that time.  I got involved in early BBS systems when DOS hadn’t been released yet, modems were acoustically coupled and ran at 300 bits per second or slower, and software was stored mostly either on notebook paper or cassette tapes.

The early interest in computers is part of my lifelong tendency to become deeply involved in technology and ideas that are sufficiently interesting. This has led me to develop interests, obsessions, and expertise in a huge variety of things most of which the public does not discover reasons to care about until much later.

I graduated from KU with a degree in Computer Science in December of 1995 after spending far too long alternating between semesters of attending classes and semesters of working to pay for classes.

After graduation I moved to the San Francisco Bay area.  I worked for several AI startups in the next seven years and hold a couple of patents in natural-language applications from that work.  After that, I worked the night shift for FedEx for some years while doing occasional security consulting gigs during daytime hours.  I am currently doing AI algorithm research and implementation (and some cryptographic protocol/document design) at a FinTech startup.  I work on General AI projects on my own time.

I am somewhat pessimistic by nature and tend to assume until given reason to believe otherwise that anyone trying to sell me something or convince me of something is a scammer.  I know that’s irrational, but knowing doesn’t make the belief stop.  I have an abiding hatred of scammers and find them viscerally disgusting.

I consider making noise to be rude, avoid crowds and public appearances, and distrust anyone speaking faster than they can think.  Although I write a great deal, I rarely speak and strongly dislike talking on the phone.

In spite of my peculiar interests and asocial tendencies, I somehow managed to get married to a wonderful woman who tolerates an unbelievable degree of geekdom in an unbelievable variety of subjects, ranging from mild interest to full-on mad scientist levels in scope. I am tremendously thankful to have her in my life, and to whatever degree
I might be considered social, she deserves most of the credit.

I became marginally involved with Bitcoin in its early development because cryptocurrency, and the application of block chains to cryptocurrency in particular, are interesting.  I ceased to be involved in Bitcoin when the next steps would necessarily involve salesmanship, frequent talking, and social interaction, because those things are not interesting.

Q2: Perry Metzger created the now infamous Cryptography mailing list years ago.  When did you join and what made you interested in cryptography?

A2: I joined so many years ago it’s hard to remember.  It was pretty much as soon as I became aware of the list, but I’m sure it was more than fifteen years ago. It may have been late 2001 or early 2002.

I think I may even have been one of the first twenty or thirty posters on that list – it was still very young.

I remember being vaguely annoyed that it hadn’t been available when I was actually still in college and doing a crypto project in a grad-level networking course – I’d been a member of the even-earlier ‘cypherpunks’ list back when I was in school, but its strident political ideologues (including a guy named Hal Finney, whom you’ve probably heard of)
annoyed me, even back then.

‘cypherpunks’ was where I became aware of and started corresponding with Hal.  Although, way back then, I think we were both mostly annoying to each other.  And possibly to others as well.  Hal had been stridently political all the way from those days (and probably before) to the day he died, and in retrospect, I think I really needed some ‘remedial human-being lessons’ and some wider education at the time.  I’ve learned a lot since then – and perspective outside the narrow specialties we studied in school really does matter.

Q3: There were a lot of other non-cryptocurrency related discussions taking place simultaneously in November 2008 and many of the frequent posters didn’t comment on Bitcoin when it was first announced.  What interested you in it?  How involved would you say you were with providing coding suggestions prior to the genesis block that following January?

A3: I was interested in it for several reasons.  First, Bitcoin was a digital cash protocol, and digital cash protocols have some significant challenges to overcome, and I’d been interested in them for a long time already.  I’d even designed a couple by then.  The first I designed was unsound. The second, which is the only one worth talking about, which I’ll talk more about below.

Second, Bitcoin used a central proof chain (which we now call a block chain) as means of securing the history of each note, and I had known for a long time that any successful digital cash protocol had to use proof chains in some form or it couldn’t circulate (couldn’t be spent onward by someone who’d been paid in it).  And I was very, very much interested in proof chains, especially for a digital cash protocol.  I had already used proof chains (very differently) for a digital cash protocol when I extended Chaum’s e-cash protocol in 1995.

(see Digression #1 below to understand the differences between my protocol and Satoshi’s, and their effect on protocol design.)

Third, Satoshi eventually convinced me that he wasn’t a scammer.  I’m sort of a natural pessimist at heart, and digital cash protocols have a long history of scammers, so at first I had assumed the worst.  I think a lot of others also assumed the worst, which would be why few of them responded.  I made my first couple of replies without even having read it yet, to see how he responded before I wasted mental effort on something that would probably turn out to be a scam.

When I finally bothered to actually read the white paper, and spent the mental effort to understand it, I realized that (A) it wasn’t the usual incompetent bullshit we’d seen in far too many earlier digital-cash proposals, and (B) Its structure really and truly contained no Trusted Roles – meaning the opportunity to scam people was NOT built into the structure of it the way it had been with e-gold, e-cash, etc.

Fourth, and absolutely the clincher for me; it was very very INTERESTING!  It was an entirely new paradigm for a digital cash protocol, and had no Trusted Roles!  Nobody had EVER come up with a digital cash protocol having no Trusted Roles before!

Of course it wasn’t a “serious” proposal, I thought. It wouldn’t work for any kind of widespread adoption (I thought at the time) because of course people would conclude that spent hashes which absolutely couldn’t be redeemed for the electricity or computer power that had been used to create them were valueless.  And it would never scale beyond small communities or specialized applications of course because of its completely stupid bandwidth requirements.

But it was INTERESTING!

I could never have come up with Bitcoin because of the tremendous bandwidth.  Without Satoshi’s proposal, the idea of transmitting every transaction to every user would just have bounced off my mind as inconceivable.  Hell, I didn’t even understand it the first couple of times through the white paper because I was looking for ANY WAY AT ALL to parse those sentences and ‘transmitting every transaction to every user wasn’t even a POSSIBLE parse for me until Satoshi explicitly told me yes, that really was what he meant.

When I finally understood, I started doing math to prove to him that it was impossible, tried to relate bandwidth to rate of adoption and got a largest possible answer that’s only about one-eighth of today’s number of nodes.   I was assuming transaction volume proportional to userbase, which would be at least three times the transactions that today’s blocksize-limited block chain handles, and looking at a version of the protocol which doubled it by transmitting every transaction twice.  So,GIGO, I was wrong – but for good reasons and in the correct order of magnitude anyway.

But that was a couple orders of magnitude larger than the highest answer I had expected to get!  And that meant Satoshi’s idea actually seemed…. surprisingly plausible, if people really didn’t care about bandwidth.

The fact that bandwidth seemed to be available enough for the proposal to be technically plausible was sort of mind-boggling.  So was the idea that so many people did not care, at all, about bandwidth costs.

(See digression #2 to understand why it was hard for me to accept that
people now consider bandwidth to be valueless.)

Anyway, problems aside, it was INTERESTING! If the proof-of-concept actually sort-of worked at least on scales like for a campus or community merchandise token or something it would extend our understanding of protocol design!

What I had done back in 1995 had been INTERESTING for a different reason. At that time nobody had ever come up with a digital cash protocol that allowed people who’d been paid digital coins to respend them if they wanted instead of taking them right back to the issuer.  Of course it wouldn’t work for general adoption because of its own problems, but it had extended our understanding of protocol design back then, so back then that had been INTERESTING!

And before that, Chaum had demonstrated a digital cash protocol that worked at all, and at the time that was INTERESTING!

And in between a whole bunch of people had demonstrated ways to cooperate with bankers etc to have different kinds of access to your checking account or whatever.  Some of those had had privacy features v. the other users, which were also INTERESTING!

And so on.  I was very much looking at things that improved our understanding of digital cash protocols, and had no idea that Bitcoin was intended for widespread release.

Anyway, Satoshi and I talked offlist about the problems, and possible solutions, and use of proof chains for digital cash, and my old protocol, and several previous types of digital cash, and finally he sent me the proof chain code for review.

And the proof chain code was solid, but I freaked out when I saw that it used a Floating Point type rather than an Integer type for any kind of accounting. Accounting requirements vs. floating point types have a long and horrible history.

So that prompted some more discussion. He was designing specifically so that it would be possible to implement compatible clients in languages (*cough* Javascript *cough*) in which no other numeric type is available, so he wanted to squish rounding-error bugs in advance to ensure compatibility.  If anybody gets different answers from doing the same calculation the chain forks, so it’s sort of important for everybody to get the same answer.  Because Javascript clients were going to use double float, and he wanted them to get the same answer, he was going to make sure he got correct answers using double floats.

He was trying to avoid rounding errors as a way of future-proofing: making it completely consistent so clients with higher-precision representations wouldn’t reject the blocks of the old chain – but on the ground he wanted to be damn sure that the answers from Javascript clients, which *would* by necessity use double float, could be compatible with checking the block chain.

The worst that could happen from a rounding error, as long as everybody gets the *SAME* rounding error, is that the miner (whose output is unspecified in the block and defined as “the rest of the TxIn values input”) gets a few satoshis more or less than if the rounding error hadn’t happened, and no satoshis would be created or destroyed.

But if people on different clients get *DIFFERENT* rounding errors, because of different representation or differently implemented operations, the chain forks. And That Would Be Bad.

I would have said *screw* Javascript, I want rounding errors to be impossible, and used integers.  If the Javascripters want to write a float client, they’d better accept accurate answers, even if they have to allow for answers different than their code generates.  And if they make transactions containing rounding errors, let everybody in the universe reject them and not allow them into blocks.  But that’s me.

It was when we started talking about floating-point types in accounting code that I learned Hal was involved in the effort. Hal was reviewing the transaction scripting language, and both the code he had, and the code I had, interacted with the accounting code. So Satoshi brought him in for the discussion on floating point, and both of us reviewed the accounting code. Hal had a lot of experience doing exact math in floating point formats – some of his crypto code in PGP even used float types for binary operations. So he wasn’t as freaked-out about long doubles for money as I was. We talked a lot about how much divisibility Bitcoins ought to have; whether to make ‘Satoshis’ an order of magnitude bigger just to have three more bits of cushion against rounding errors, or keep them near the limit of precision at 10e-8 bitcoins in order to assure that rounding errors would always fail. Failing, immediately, detectably, and hard, at the slightest error, is key to writing reliable software.

So I went over the accounting code with a fine-toothed comb looking for possible rounding errors.  And I didn’t find any.

Which is more than a little bit astonishing.  Numeric-methods errors are so ubiquitous nobody even notices them.  Inevitably someone multiplies and divides in the wrong order, or combines floats at different magnitudes causing rounding, or divides by something too small, or makes equality comparisons on real numbers that are only equal 65535 times out of 65536, or does too many operations between sequence points so that they can be optimized differently in different builds, or uses a compiler setting that allows it to do operations in a different sequence, or checks for an overflow/rounding in a way that the compiler ignores because it can prove algebraically that it’s “dead code” because it will never be activated except in case of undefined behavior (like eg, the roundoff or overflow that someone is checking for)!  Or SOMETHING.  I mean, in most environments you absolutely have to FIGHT both your language semantics and your compiler to make code without rounding errors.

Clearly I hadn’t been the first pessimistic screaming hair-triggered paranoid aware of those issues to go over that accounting code; I could not find a single methods error.  The ‘satoshi’ unit which is the smallest unit of accounting, is selected right above the bit precision that can be handled with NO rounding in the double float format, and every last operation as far as I could find was implemented in ways that admit no rounding of any bits that would affect a unit as large as a satoshi.

To cause rounding of satoshis in the Bitcoin code, someone would have to be adding or subtracting more than 21 million Bitcoins (I think it’s actually 26 million, in fact…).  So, the Bitcoin chain is, I believe, rounding-free and will continue to check regardless of whether clients use any higher floating point precision.

For comparison Doge, which has so many coins in circulation that amounts larger than 26 million Doge are actually transacted, has rounding errors recorded in its block chain.  If a new client ever uses a higher-precision float format, their old chain won’t check on that client.  Which would be seen as a bug in the new client, and “corrected” there (by deliberately crippling its accuracy when checking old blocks). In fact it’s a bug in the Doge coin design which will never be fixed because they’ve already committed too much to it.

Integers.  Even with code that is meticulously maintained and tested for consistency, even where methods errors have been boiled out by somebody’s maniacal obsessive dedication, Integers would have been so much cleaner and easier to check.

Digression #1:
Why I was VERY interested in proof chains and digital cash protocols.

When I extended Chaum’s protocol in 1995, I had used proof chains attached to each ‘coin’, which grew longer by one ‘link’ (nowadays we say ‘block’) every time the coin changed hands. That allowed coins to circulate offline because all the information you needed to make another transaction was in the chains attached to the individual coins.  In order to make it possible to catch double spenders, the ‘links’ contained secret splits which, if two or more contradictory links were combined, would reveal the identity of the spender.

So, it could circulate offline and make transfers between users who weren’t even connected to the Internet. It didn’t have the ferocious bandwidth expense and even more ferocious proof-of-work expense of Bitcoin. Double spenders couldn’t be caught until the differently-spent copies of a coin were compared, potentially after going through several more hands which meant you had to have some kind of resolution process. And a resolution process meant you absolutely had to have a Trusted Certificate Authority with a database that could link UserIDs to RealWorld IDs in order to figure out who the RealWorld crook was.

Buyer and seller had to have valid UserIDs issued by the Trusted CA, which were known to each other even if to no one else.  And although not even The Trusted CA could link UserIDs and transactions except in case of a double spend, the parties to each transaction definitely could. Either party could later show and cryptographically prove the details of the transaction including the counterparty’s UserID, so your transactions were “Private”, not “Secret”. Finally, the ‘coins’ were non-divisible meaning you had to have exact change.

It was, at best, clunky compared to Bitcoin, and not being able to identify double spends until unspecified-time-later would probably be a deal-killer for acceptance. But it also had some advantages: It didn’t create a central permanent ledger that everybody can datamine later the way Bitcoin does, so Trusted CA or not it might actually have been better privacy in practice.  It was completely scalable because no transaction needed bandwidth between anybody except buyer and seller. And it had no proof-of-work expense.  But it needed a God-Damned Trusted Certificate Authority built directly into the design, so that CA’s database was open to various kinds of abuse.

Digression #2:

I had no comprehension of modern attitudes toward bandwidth costs.

I mean, I knew it had gotten cheap, but it was still taking me hours, for example, to download a complete Linux distribution. I figured other people noticed big delays like that too, and wide adoption of Bitcoin would mean slowing down EVERYTHING else they (full nodes anyway) did.  I just hadn’t understood that – and still have trouble with – the idea that by 2008, nobody even cared about bandwidth any more.

I got my first computer, because at that time privately owned computers were INTERESTING!  So I had to, even though they were also mostly useless.  (See a pattern here?)

But at that time, computers were not communications devices.  At All. If you hadn’t invested in something called a “LAN”, which anyway could only work inside one building, probably cost more than the building itself, and was useless unless you’d also invested in multiple computers, you moved data back and forth between your machines and your friends’ machines using cassette tapes.  Or, if and your friend were both rich enough to buy drives, or had been lucky enough dumpster diving to get drives you could repair, and had access to the very expensive media through some kind of industrial or business supply place, you might have done it using floppy disks.  Which held eighty kilobytes.

I got my first modem a few years later, and modems at the time were flaky hardware only BARELY supported by single-tasking systems that had never been designed to handle any signal arriving anywhere at a time they did not choose.  If your computer didn’t respond fast enough to interrupts, a modem could crash it.  If you were running anything that didn’t suspend and resume its business correctly (and most things didn’t because they’d never had to before) or anything that was coded to use the same interrupt, the modem would crash it.  If the software on your end ever started taking too long to execute per input character, the modem would fill up the short hardware buffer faster than your software could empty it, and crash it.  If you transmitted characters faster than the software running on the remote system could handle them, you’d crash the remote system.  There were no error correcting protocols because none of us had the compute power to run them fast enough to avoid a crash at the speeds the modems ran.

And that modem couldn’t transmit or receive characters even as fast as I could type. Sometimes you could crash the remote system just by accidentally typing too fast for a minute or two.

Computer security wasn’t a thing. Pretty much anybody you allowed to connect could at least crash your system and probably steal anything on your computer or delete everything on your computer if they really wanted to.   The host programs weren’t *intended* to allow that, but something as simple as transmitting an unexpected EOT signal could often crash them – sometimes crashing the whole machine, sometimes leaving the caller at the all-powerful command-line prompt. Stuff like that happened all the time, just by accident!  So people were understandably reluctant to let strangers connect to their systems.

There was one place in my whole state that I could call with it where I found people who’d leave a modem running on their machine despite the risk of crashes, and would allow a stranger on their system.  That sysop, in an act of sheer grace that he didn’t have to extend and which nobody was paying him for, allowed me to connect to it.  There were no such things as commercial providers; they could not exist until at least some system security actually worked.

There was barely even any commercial software: Every machine came with its own BIOS and Operating System, and the ONLY way to distribute a program that would run on more than a tiny fraction of systems was to distribute it as source code which people could tweak and fix and adapt in order to get it running, and commercial vendors didn’t want to distribute any source code.

So our software was all shared.  It came from fellow hobbyists, and unless we were physically in the same room to exchange media (and had the ability to read and write media compatible with the other’s systems), we could not share it without using bandwidth.

Long distance calls were over a dollar a minute, modems ran at 160 or 300 bits per second, and I could have burned through my entire monthly paper route income in under three hours.

Finally, every second I was connected to that remote system, that phone line was busy and everybody else couldn’t use it. And the other users needed it for reasons FAR more important than I did. They were military veterans, some of them profoundly not okay after Viet Nam, using it as sort of a hobby-mediated support group, and I was a fifteen-year-old kid hobbyist with a paper route.  Hobby in common or not, I had no illusions about the relative value of our access.   So I tried to be a good guest; I took my turns as fast as possible, at times least likely to conflict as possible, using as many pre-recorded scripts (played off a cassette tape deck!) as possible to waste absolutely no time, and got off.  I didn’t want to keep anybody out of something which was that important to them.

That’s the way things were when I started learning about the value of bandwidth.

No matter how much bandwidth I’ve got now, no matter how cheap it becomes, I’m still aware of it and it’s still important to me to not waste it.  I’ve sweated every byte every time I’ve designed a protocol.

And that’s why – to me anyway – universal distribution of a globally writable block chain is still amazing.  Just the fact that it’s now POSSIBLE seems incredible.

Q4: When Satoshi released the white paper, you had many public exchanges with her on that mailing list.  For instance, you asked her about inflation and Satoshi seemed to think that there could be some price stability if the number of people using it increased at the same level as the supply of bitcoins increased.  But, relative to the USD, there has never really been much price stability in its history to date.  Is there a way to re-engineer Bitcoin and/or future cryptocurrencies to do so without having to rely on  external price feeds or trusted third parties?

A4: Whoof…  that’s a hard question.  “Is not Gross Matter Interchangeable with Light?”  was considered impossible until Einstein figured it out. And the people who’d been asking that question didn’t even recognize or care about Einstein’s answer because his answer wasn’t about bodies and souls and the afterlife.  If the answer is ‘yes’ but the re-engineering involved changes the fundamental qualities that make you (or anybody) value cryptocurrencies, then is the answer really yes?

Satoshi tried to do it by anticipating the adoption curve.  We know how that turned out.

I think it’s fundamentally impossible to plot an adoption curve before launch.  I mean, I was the pessimist who assumed that there’d be a small group, formed early, that wasn’t going to be growing at all as these additional millions of coins pumped into that campus or that community economy.  So I figured, some initial value and rapid inflation thereafter.

Satoshi was far less pessimistic in figuring a widespread and fairly gradual adoption, and had picked the logarithmic plot to put coins into the economy at about the rate envisioned for adoption, assuming Bitcoin would follow a logarithmic adoption curve. It wasn’t a bad guess, as it’s a decent approximation to the Bass Diffusion Model, but the
parameters of the curve were completely unknown, and the Bass curve often appears after something’s been around a long time – not just when it’s launched.

Most importantly, nobody anticipated Bitcoin’s primary use as being a vehicle of financial speculation. The Bass Diffusion Model isn’t applicable to speculative commodities, because price changes in speculative commodities are responsive to PREVIOUS price changes in the speculative commodity.  That makes them nonlinear and chaotic.

And that, I think, is what it comes down to.  If people will be using something as a vehicle of speculation, then its price point is chaotic and defies all attempts to stabilize it by predicting and compensating for it.  So I think we need to abandon that notion.

You’ve already ruled out the idea of external price feeds and trusted third parties, because those would change the fundamental qualities that make you value cryptocurrencies.

That leaves internal price feeds:  If a cryptocurrency is used as a medium of exchange in other fungible assets, and those exchanges are recorded in its own block chain, then exchanges of crypto for dollars and exchanges of crypto for, eg, gold bars are visible in the block chain and could at least in theory be used to detect economic conditions and adjust the rate of issue of cryptocoins.

But the fly in that ointment is, again, the fact that the crypto is being used as a speculative asset.  People can read the block chain before the changes are made, anticipate what changes the code is about to make, and will front-run them.  Or, operating as “Sybil and her Sisters”, make a thousand completely bogus transactions in order to fool the software into doing something crazy.  Either way reintroducing positive feedback via market manipulation.

Most schemes aimed at stabilizing the value of a coin via any automatic means assume that the price can be changed by changing the rate of issue.  But the more coins are in circulation, the less possible it becomes for changes in the rate of issue to shift the price, meaning it devolves back to the first case of nonlinear and chaotic feedback.  IOW, the new coins being added represent a much smaller fraction of the available supply, and withholding them will affect almost no one except miners.

Honestly I’m very surprised Tethercoin isn’t dead yet.  What they propose, economically speaking, simply will not work.  They got themselves somehow declared to be the only way to get money OUT of a major wallet, which props up their transaction volume, but if the people haven’t already walked away with most of the money they’re supposedly holding but won’t say where, then I’m very surprised.

Q5: About a year ago you wrote a highly-commented upon, passionate retrospection published on LinkedIn.  You called out a lot of the nonsense going on then, is there anything that has been on your mind since then that you wanted to expand upon?

A5: Um.  Artificial Intelligence, Financial Markets, Human Brains and how they are organized, the nature, origins and mechanisms of consciousness and emotion, a generalization of neuroevolution algorithms intended to scale to recurrent networks of much greater complexity than now possible, scope of political corruption and the politics of divisiveness, gene migration and expression, the way cells control and regulate mutation in different kinds of tissues, directed apoptosis via a multiplicity of P53 genes as a preventive for cancer (happens naturally in elephants; easy to do with CRISPR; engineered humans would probably be radiation-resistant enough for lifetimes in space, or just plain longer-lived, or both), history of the Balkans, history of the Roman Empire, ancient religions, writing a science fiction novel ….

You know, things that are INTERESTING!  I actually _can’t_ turn my brain off.  It’s a problem sometimes.

I have had a few thoughts about cryptocurrencies, however, which is probably what you intended to ask about.

The first:

I have figured out how to redesign the cryptographically secured history database built by cryptocurrencies so that you don’t need any full nodes.  There are other ways to organize the blocks that give the proof property you need; They don’t have to form something that’s only a chain, and you don’t have to have specialized nodes for the purpose of holding them because everybody can hold just the blocks they need to show the validity of their own txOuts.

In order to verify the validity of any txOut, you need three things:  to see the block where it was created, to be sure that block is part of the same database as that proposed for the transaction, and to be sure that no block exists between those two in which that txOut was spent in another transaction.

Call it a “Block Hyperchain”, by reference to the N-dimensional hypercube it’s based on and the block chain it replaces.

I should be clear and say there are things it does and things it doesn’t do.  If your goal is to check all transactions, you’ll download a scattering of blocks for each transaction that soon add up to most of the block database, so someone who wants to check every transaction will rapidly accumulate the whole database.

But most users should be happy with just the few blocks they need to demonstrate the validity of the txOuts they hold, and it’s damn nice to be able to download a client, open it up, and just use it with minimal delay because someone offered to pay you bitcoins one minute ago and you want to be able to make sure the transaction he’s offering is valid RIGHT NOW, instead of waiting to accumulate the whole chain to check anything.

Suppose we pick a base, for convenience, of 10.  This helps make things easy to explain because we work with base-10 numbers, but we could have picked 16 and used hexadecimal for our explanations.

In a base-10 Block Hyperchain, every block that’s published has its own set of transactions, and the hashes of the blocks  10^N blocks ago for every integer value of N from N=0 to N <= log10 of block height.

Every block would record its own transactions, and also one list of destroyed txOuts per integer value N over the same range.

Each destroyed-txOut list would be all txOuts created in blocks whose block numbers match (modulo 10^N) the current block number, that have been destroyed in the last 10^N blocks.

Example:
If someone shows me a transaction seeking to spend a txOut, I want to check and see if it’s valid.  Ie, I want to see the block where it was created, and see evidence that it hasn’t been spent since.

So I can look at that txOut’s ID and know it was created in block 124. If the current block is 7365,  I get block 7365 and 7364 to make sure it hasn’t been spent in those, the same way we can do with a block chain.

Then I have a block whose last digit matches the last digit of the block where the txOut was created.  So I start checking the 10-block txOut-destroyed lists.  I check the list in block 7364 to make sure it wasn’t spent in blocks 7354 to 7363.

Then, jumping back by 10-block increments (relying on the second recorded hash in the header), I can check to make sure it hasn’t been spent in the previous ten blocks to each of blocks 7354, 7344, and 7334.  Then I get block 7324.

Now I’m at a block whose last 2 digits match the block where the txOut was created, so I can start checking the previous hundred blocks using the second txOut-destroyed list, and jumping back by hundred-block increments using the third recorded hash.  So I get blocks 7224 and 7124.

Finally, I’m at a block whose last 3 digits match the block where the txOut was created, so I can start jumping back by thousand-block increments, checking the thousand-block txOut-destroyed lists.  So I get blocks 6124, 5124, 4124, 3124, 2124, 1124, and finally 124.

So finally, I have a txOut created over 7200 blocks previous to the current block, and I have downloaded a total of 15 blocks to make sure that it was created in the same Hyperchain and hasn’t been spent since.

The number of blocks downloaded is proportional to the log base 10 of the number of blocks in the chain.

The blocks I’ve downloaded are larger because of the spent-txOut lists, but the spent-txOut lists have an average length that is the same regardless of the span of blocks they cover.  Lists that report transactions from a set 10x as long, only need to report individual transactions from that set 1/10 as often.

With more efficient access to the history database, it is possible to substantially raise transaction bandwidth.  People who make transactions during the next 7 blocks or so would need to see that block;  Later on, people who accept txOuts created during that block will need to see that block. And there’ll be about 49 blocks worth of txOuts,  scattered through the earlier history, that someone eventually has to traverse this block to verify.

All this means you have drastically smaller bandwidth requirements (remember I obsess on bandwidth costs?) for the same transaction volume but larger data-at-rest requirements (for any weirdo who for whatever reason feels like they need to collect the WHOLE database in one place, and why would anybody do that?) by a factor of seven.

And I keep thinking I’m going to do it, because it’s INTERESTING! And I ought to do it, because it’s VALUABLE!  But then I think about the current state of the cryptocurrency world and the quality of the people it would bring me into contact with and the ways people would try to scam with it and the number of people who’d find reasons to lie to me or about me, and then I get a sour stomach and go on to do something ELSE!

And feel vaguely guilty for not doing it, because it actually would be valuable.

It’s really hard for me to be motivated or enthusiastic about a cryptocurrency project, until the whole field is more full of people I’d be happy to interact and exchange ideas with and less full of ….  um.

The words that come to mind really shouldn’t be printed.  [This is fine meme]  I don’t mind if people know I’m sort of upset with the conditions and business ethics out there, or even that being so upset is literally preventing me from doing something useful.  But I’d rather not have it expressed in terms that are an incitement to violence.

Anyway, moving on;  In order to mine, someone would have to be able to see seven of the previous blocks; a different set of seven every time. But if I thought bandwidth was going to waste, that doesn’t even START to address the costs of hashing!  Deploying something that saves bandwidth without also figuring out a way to save hashing would fail to address a critical point.

So, I’ve had a bunch of thoughts about mining.  Most of which aren’t as interesting or valuable as the thought about how to organize the history database.  In favor of mining, it’s good that someone is able to join the network permissionlessly, help secure it, get paid, and initially get coin into circulation going from “none” to “some”.

My thoughts for securing a chain without proof-of-work are something I suppose I ought to call “Proof-of-Total-Stake.”

Congratulations!  This conversation with you got me to name it!  I had been calling it “proof-of-activity” but I see that name has acquired a much more specific meaning than it had when I started calling this by it, and no longer fits.

I still need to figure out what to call my revised structure for the block history database though.

Proof-of-Total-Stake  means measuring the priority of a fork by the total value of TxOuts that existed BEFORE the fork that have been spent AFTER the fork.  In other words, the total stake: how much of EVERYBODY’s money the blocks formed after the fork represent.  That is a well-founded mechanism for security that doesn’t involve trusted parties nor burning hashes.  It’s the only one I’ve come up with.  In the long run, unless somebody comes up with another fundamentally new idea, or accepts the idea at least of trusted block signers, that’s what I think a proper cryptocurrency would have to wind up with.

But there’s a problem with it.

Proof-of-Total-Stake, by itself, doesn’t provide an obvious way to determine who gets to form the next block – which can be a CRUCIALLY important security concern.

And Proof-of-Stake, including Proof-of-Total-stake, doesn’t handle the initial, permissionless, distribution of coins.  They can’t go from “none” to “some.”  They can only go from “some” to “some more.”

So I think it could only be deployed along with some kind of mining.

Q6: We first started interacting some four years ago when I was doing some research on dead cryptocurrencies, most of which were just direct clones or copies of Bitcoin.  At the time you were doing the heavy lifting categorizing how they died in a BitcoinTalk thread.  Today sites like Deadcoins.com have tried to do something similar.  Even though loud advocates at events like to claim blockchains ” live immutably forever” empirically there are probably just as many dead blockchains than living blockchains.  What do you think the top reason for why so many blockchains lose support to the point of death and do you think those reasons will change much in the future?

A6: By far the vast majority of those people were not doing anything INTERESTING!  A lot of the honest ones discovered that it was a lot of work and had other commitments in life.  A lot of the dishonest ones made their money and walked away leaving the  suckers behind.  A lot of people discovered that maintaining a codebase needed more programming chops than they actually possessed, and quietly withdrew from the field. A fair number ran into scammers and crooks whose utterly disgusting behavior left them convinced they wanted to do something else rather than meeting any more of those guys.

But the most important point? Hardly any of those coins was ever used in any transaction for an actual thing – not even an initial experiment like Laszlo’s Pizza.

Most of them were only ever mined by people who intended absolutely nothing beyond immediately converting them into Bitcoin, and only ever held by people who daily watched their value trying to guess the right time to sell them for Bitcoin.

It’s not so much that most of them *failed* – it’s more the case that the vast majority never even remotely began to *succeed*. There was no economic activity, meaning sales of merchandise or payment for work, that they facilitated.  Put bluntly, they just didn’t do anything beyond providing a temporary and completely discardable medium for speculation and scamming.  And, as surely as atomic decay, they got used, for that purpose only, and discarded.

Q7: Based on the original white paper, the intent of Bitcoin was to be an e-cash  payment system which could be utilized without needing to disclose a real identity to an administrator.  It seems that over time several different tribes have popped up, including those who market Bitcoin as a form of “e-gold.”  What do you think of the visible fracture that has occurred between the various Bitcoin tribes?  Does proof-of-work really act as a type of DRM for coin supply or do all the forks we have seen turn the advertised “digital scarcity” and “digital gold” into an oxymoron?

A7: That endless fight, starting with the block size fight, with everybody yelling and nobody listening, pretty much convinced me that the “community” which had grown around Bitcoin was in deep trouble.

The differences between the various proposed technical changes to the block chain, are far less important to the futures of those forks, than the integrity of the people who support and do business using them.

But the technical merits were never discussed by most. Instead, repetitive sound bites and slogans about them containing absolutely no new information were shouted.  Integrity was seldom displayed either. Instead, the fight was carried forward almost exclusively by partisans who had already decided what was the only possible solution that they would accept, and in many cases using tactics that inspire an absolute refusal to support their interests, or even participate in the communities where they are found.

If someone hires a troll army to attack a community by astroturfing fake support for something, can you respect that person?  If someone drives people who disagree away with personal abuse, is that a reasonable method for coming to an agreement about a protocol?  Is it a valid form of technical reasoning to launch a sabotage against a block chain based consensus mechanism?  What can you say about someone who buys existing accounts of users whom others trust in order to fake trusted support for their agenda? How about when it happens after those users whom others trust have been driven away or left in disgust?  Is it a respectful negotiator interested in the insights of others in solving a problem, whose negotiating skills include locking the damn doors and refusing to let someone leave the room until they get his signature on an “agreement” that they wrote without his knowledge before he even got there?

Is someone who would participate in a fight, on those terms, someone whose agenda or business interests you really want to support?  Hint: You already know that people who fake support for their agenda, or tell lies about other in order to discredit them, or who deliberately deceive others about the merits of their own proposal or others’ proposals, are doing business by means of fraud.  Do you want to carry on until the fraud is financial and the victim is you?

These factions had no interest whatsoever in reaching a consensus.  And nothing prevented each from implementing their idea and launching, with no hard feelings from anybody and no fight.  The only thing they were really fighting over was the name “Bitcoin,”  which was absolutely unrelated to the technical merit of any proposal.  And, to a first approximation, the other merits of having the name is a thing that none of them even mentioned during the fight.

Technically speaking, there is not much wrong with any of these forks. They address certain problems in different ways slightly favoring the interests of different groups, but not seriously to anyone’s disadvantage.  None of them was entirely without technical merit.

On the other hand none of them make more than a tiny amount of difference.  None helped with the bandwidth or transaction volume by anything more than a small constant factor, so the problem they were supposedly about solving was not in fact solved, nor even very much affected.

So while none of the proposed changes were objectionable in themselves, there was really no *very* compelling reason for any of them to be implemented.  Each of those ideas is merely a stopgap that pushes the rock down the road another foot or two without moving it out of the way. If you want to move that rock out of the road, you will need a much more powerful idea.

Q8: You’ve mentioned that limited supplies simply incentivizes hoarding which leads to low economic activity.  You have proposed a type of “proof-of-activity” replacement.  Can you expand more on either of these views?

A8: Suppose you have an economy that’s growing (more value is being created) but has a constant supply of coins.

In that case your coins represent, let’s say, one-millionth or so of the money that’s in circulation.

And, as the economy continues to grow, your coins will continue to represent one-millionth or so of the money that’s in circulation.  But that will be one-millionth or so of a lot more actual wealth.  In fact, your money, just sitting there in your wallet, is GUARANTEED to rise in value by the same fraction that the economy is growing by.  In our terms, this would be exactly the market average, as though you were holding stocks invested in ALL the businesses in your economy in proportion according to their  capitalization.  This is what index funds and IRAs make, mostly, but it’s making it with no risk.

Now, if you offer any investor a risk-free investment that’s guaranteed to make the same return as the market average, that investor would be mad to pass it up.  No investor is confident that she’ll beat the market average in any given year.  That’s why they call it “AVERAGE!”  And volatility – variance in return – is an unqualified bad thing because it will always take an 11% gain to make up for a 10% loss.  That money sitting right there in her wallet is the best investment she could possibly make.  There might be things that would make as much or more money, but all of them involve risk out of proportion to their marginal return.  Let other investors do that; they’re suckers and she’ll make the same money they do.

The problem with that is that the other investors are looking at the same question.  And reaching the same conclusion.  Why invest in companies doing anything productive, and expose yourself to risk, when you can make the same money just by holding your investment in your wallet?

And then who invests in the businesses that, if they were working, would actually create the value these people all intend to have some share in?

… (sound of crickets chirping) …  Suckers.

Suckers who lose more often than they win, because it takes an 11% gain to recover a 10% loss.  And the money the lose? Eventually trickles into the hands of the people who are hoarding it.

With no reason for investors to invest in business, the businesses eventually starve and the economy shrinks.  And all those coins that represent one-millionth of the economy’s wealth start representing one-millionth of less and less actual value.

This is what happened to ancient Rome.  They used metals (gold and silver and bronze) as currency, and their economy collapsed WHILE people had plenty enough money to keep it going!  Everybody stashed all their coins expecting to benefit later from prospering businesses, and the businesses, for want of capital, did not prosper.

Then the death spiral started: everybody stashed their coins waiting for the economy to come back so the coins would be worth their “real” value, and the economy never came back.  The coins were never worth their “real” value, until the people who remembered where the coins were buried had also been buried.

It’s a millennium-and-a-half later and we are STILL finding stashes of Roman coins!  The people who could have gotten their economy moving again, if they had EVER supported a business, instead buried their money in sacks.

The government tried to get it moving again, or pretend for a while that it hadn’t collapsed, making coins with increasingly ridiculous adulterated alloys.  But that didn’t change the underlying dynamic.

The Gold bugs of course have all told each other a different version of this story, where the adulterated coins were the cause of the collapse rather than the increasingly desperate attempt to recover from it.  And it’s pointless to try to convince them otherwise; they believe they already know the only possible truth. But for those actually motivated to investigate, the chronology of the events is reasonably clear.

===============================================================

The next thing is about “Proof-of-Total-Stake”, which I guess is what I’m going to call this idea for securing the chain.

The fundamental idea behind Proof-of-Total-Stake is that the priority of any branch of a fork is the total amount of EVERYBODY’s money which that fork represents.  That means, coins generated in that fork and pre-existing coins brought into the fork by transactions.

Coins generated in a fork are the coinbase transactions; Coins moved into the fork from earlier parts of the chain are TxOuts from earlier in the block chain that have been spent during the fork.

But we have to know which BRANCH of the fork they were spent into. ie, someone trying to create a fork should not be able to stick transactions from the valid branch of the chain into it, or they can match the txOut spending from earlier in the chain.  This is the basic problem with most implementations of proof-of-stake, which some writers have called “nothing at stake.”   Whatever resource you are using to secure the chain is meaningless when it can be used to secure *BOTH* forks of the chain.

In order to prevent the replay attack, each transaction would have to “stake” a recent block, making a commitment to supporting only forks which include that block.  This adds a field to each transaction.

The new field would give the (hash) ID of a block, indicating that this particular transaction is not valid in any branch of the chain which does not include the staked block.

So, let’s say that two transactions “coffee” and “eggs” are made at the same time,  after the chain forks at block 50.  “Coffee” stakes block 48 and “eggs” stakes block 51A.

When “coffee” appears in block 51B, the total stake of fork B is increased by that amount; its weight counts toward that resolution of the fork.

Then “eggs” is added to block 52A, and can’t be placed in chain B because it staked a block doesn’t exist in chain B.  Now “eggs” counts as stake in favor of the A branch and “coffee” counts as stake in favor of the B branch.

But then “coffee” appears in branch 53A, where it is also valid because the same block 48 is behind both branches.  This cancels out its support for branch B, just by being equal – revealing that stake which can be used in favor of both chains counts for nothing.

Security happens because some finite resource (coins created before the branch point and spent in transactions that are staked after the branch point) is committed detectably and irrevocably to the support of one branch (by staking after the branch point), and cannot be used to support any other.

This is exactly what Bitcoin does with hashes:  Hashes per second and number of seconds spent hashing are finite.  Hashes are irrevocably used in support of one branch (because the hash preimage can never be made to match a different block).  And the fact that they are used to support a particular branch is detectable.

Well, strictly speaking there’s only one “detectable” hash in each block. All we know about the others is, on average, how rare that one “detectable” one was and therefore, on average, how many they must have been.

But it’s still the same basic criteria.  Some finite resource, committed detectably and irrevocably to the support of one branch, which cannot be used to support conflicting branches.  And proof-of-total stake says that resource is the amount of EVERYBODY’s coins that branch represents.

With transactions supporting the basic security of the chain, and the idea behind coinbases being that they are payment for providing chain security, we want our “coinbases” to reward the people who make transactions that stake recent blocks.

PoTS is strong in the long run, or when the chain is seeing a high volume of legitimate transactions, but has its own problems.

Transactions in most cryptocurrencies are a very bursty use of something with long latent periods.  Absent heavy transaction volume, you can’t really expect PoTS to definitively reject a branch in such a way that a crook couldn’t resurrect it with a very large spend.  If the crook has more coins than the difference in total-stake between the two forks, the crook could resurrect the “dead” fork.

This is why the “interest” payments (actually per-transaction coinbases of a particular sort) when a transaction staking a recent block are made. To encourage a fairly constant stream of transactions that support one particular version of the chain up to a very recent block.

But the peril with that is that you want to structure it in such a way that you don’t incentivize people to overwhelm your bandwidth by transferring every coin they own from their left pocket to their right every block either.  So the actual design would come down to some compromise between transaction fees, and interest payments on transactions staked in very recent blocks, where the breakevens represent the transaction volume you want.

And there are a couple of final things to address together.  First, PoTS, while it has a workable rule for figuring out which branch of forks is preferred, is pretty silent about who gets to form blocks and how.  Second, Interest on coins spent has the “nothing to something” problem where if you don’t have anything in the system to start with, you won’t have anything ever.  These are both classic problem with PoTS coins.  The final design has to include some additional kind of coin creation that doesn’t depend on previous holdings (even if it gets de-emphasized after a while) and some way to determine who forms the next block.

Q9: ICOs have been around in some form or fashion for about five years now.  What’s your view on these fundraising schemes?

A9: The SEC is bouncing on them pretty hard, and as far as I can see it’s pretty much deserved.  Everybody wants something they can freely trade on secondary markets, and sell on the basis of its future value, but they also want to lie about it by saying it isn’t a security.

It is a security.  If a security is sold by a company to raise money, but does not represent a bond (a promise to buy it back) nor a stock (a share in future earnings) then an investor is getting nothing for her money – except maybe a receipt for having made a donation.

Another investor (a “real” investor who knows and understands a broad market, not a speculator who made a lot of money by a couple of strokes of sheer luck) will not buy it from them, at any price.  Such a thing has only speculative value.

If something’s continued value depends on a company, but the company’s continued existence doesn’t depend on that thing having value, it would be an excellent thing to not buy.

And all of that, we can say without ever touching on ethics and business practices of the people who run them.  But when we do touch on the people who run them, the story gets worse.  Much worse.  Much, much worse.  In this most are following the path trod by Altcoins.  And racking up a very similar ratio of efforts that fail, or which never even start to succeed.

Q10: You have alluded to tokenized securities in the LinkedIn article as well as our correspondence, what is your take on this topic?  What are the advantages versus say, simply doing what Carta (formerly eShares) does?

A10: I would have to answer that admitting to some degree of ignorance about Carta.  As I remember eShares, it was very much a top-down stock and option management tool, in that a private company with (non-traded) shares typically uses it to keep track of who owns what – actually issuing assets or recording changes in their status, making info about them available for the holders but mostly just to view online.

What it does not do, as I understand it, is directly enable the shareholders to trade those shares or options with each other.  Nor does it handle securities involved with or created by more than one company at a time.  It is a management interface, not a market.

I envision a block chain – sigh, now I have to come up with a name again.  Phooey.  I never care about naming anything, and then someone wants me to talk about one of my ideas and I have to come up with a name for it on the spot.  Let’s go for the pun and call it the Stock Trading and Options CryptoAsset Keeper.  I could come up with  something even dumber, but for the sake of exposition, call it STOCK.

The idea is that STOCK would act both as a Transfer Agent (which Carta does) AND a market (which AFAIK Carta does not).   A company could issue securities such as stocks and bonds directly on the STOCK block chain (“cryptoassets”) and the block chain could record trades in those issues against its native cryptocurrency.  The benefit here is the clear record and history to keep track of all trades and the current disposition of all the different cryptoassets – the stocks, the bonds, and the “cash” used to trade in them, would all be on the chain.

As long as no off-chain assets like bushels of wheat or truckloads of sneakers need to be delivered, and dividends/prices/etc accruing to these instruments are paid out (or in) in the cryptocurrency, the block chain could then function directly as market, transfer agent, means of delivery, and payment channel.  The task of converting the cryptocurrency to and from actual fiat, and the heavily regulated business of delivering the fiat currency, could be left to already-established cryptocurrency markets.

Trading in stocks/bonds/etc is highly regulated, and debts (NEGATIVE amounts) can crop up unexpectedly when companies go south or options traders go bust. Stuff gets into the RealWorld quickly when someone has to be found for debt payments, served process, and/or prosecuted for fraud, etc.  So STOCK couldn’t be an  “anonymous/permissionless” chain, at least not for regulated trades.  Each person or entity authorized to actually make securities trades would have to have a vetted, verified ID as specified by KYC laws, and would have to sign each such transaction with a public/private key pair proving Identity.

From the point of view of investors, STOCK would be a very sluggish market – submit your trade, have a completely random execution window averaging ten minutes (or whatever) during which the price might change, then a whole block of transactions all fly past at once and everybody’s waiting for the next completely randomly-timed block.  On the other hand, you don’t need an agent, or a broker, or a company transfer agent, or a registrar, or a clearance period, or ANY of those people who normally collect fees on every trade.  You could actually have a market where the buyer and seller get the exact same price with no ‘float’ whatsoever.  And you don’t have to worry about what time it is.  NASDAQ closes at 5PM new york time, and then a whole bunch of “off-market,” “private,” and “over the counter”  trades that nobody but the insiders can participate in or see happen. But STOCK would go on making blocks twenty-four hours a day seven days a week.  Why should it ever stop?

The SEC would be all over it of course; they’d be sticking a microscope up the butts of everybody involved to make sure that there was absolutely no scamming the investors.  Which is, after all, their job. And they’d require KYC compliance, and a whole lot of other regulatory compliance.  But, y’know, that’s kind of how starting any _legitimate_ business in financial services works.  No need to feel special or particularly victimized about that.

And the regulators would need some privileged keys that could be used to “seize” assets when a court orders them to, as part of a settlement for fraud or theft or something.  And everything else.  There’s a great irony that they’re interested in nobody having the opportunity to scam the investors, but they structurally require, just to be able to do their fundamental mission, builtins to the protocol that if misused would allow somebody to scam the investors.

But once satisfied and functioning within the law, I think they’d welcome STOCK as something that puts down a visible, provable, inalterable, unfakeable history of all trades.

Q11: Is there any cryptocurrency you think could become widely used outside of geeks, cypherpunks, and ideologues?  If not, what would need to change and how?  Has any popular coin ossified to such an extent that it can’t meaningfully evolve?

A11: Homer Husband and Harriet Housewife want convenience and familiarity. Which is mostly about form factor and compatibility.  They do not want to deal with key management in any form.

To do that, you have to make a hardware wallet small enough to fit into a wallet or a purse.  It doesn’t have to be literally credit card sized, but couldn’t be much bigger.  It should be the size of a stack of five credit cards, at most.  Or maybe it gets stuck back-to-back onto their cell phone.  It has to have an end that acts like a chip card, or an edge that acts like a mag stripe, or both, so that it can interact with the grocery stores, auto shops, restaurants, etc that Homer and Harriet already do business with.

That’s very very important, because Homer and Harriet aren’t evangelists.  The mechanic they’ve been going to for fifteen years has never heard of cryptocurrency and is never going to deal with the inconvenience of getting set up to accept it.  He wants people to pay cash or pay with a card, and Homer and Harriet would NEVER consider arguing with him about it, don’t want to go to the effort of explaining it to him, and probably couldn’t explain it very well anyway.  If they have to do any of those things, that’s a deal-breaker.

After that you have to get your cryptocurrency onto the Plus or Cirrus network, using the same interface as a foreign fiat currency.  That would allow Homer and Harriet to automate the sale and exchange to whatever local people think is money, or the purchase and exchange to crypto, when they want to spend or accept stuff from that “card.”  This will mean that they get hit with some extra fees when they use it, but
those fees are both unavoidable if you want to be on those networks, and relatively familiar to them.

Finally, there’s that key management thing.  You could handle most of it by making the wallet do it.  But sooner or later, that hardware wallet is going to fall and bounce of the curb, and go crunch under the tires of a bus.  Or, you know, get dropped into the ocean accidentally, or just get lost.

Homer and Harriet are NOT willing to accept that this is not something they can recover.  The only thing that they accept not being able to recover, when they lose their wallet, is familiar, folding fiat currency.  And that’s why they don’t keep very much of folding fiat actually in their regular wallets.

If you do convince them that losing the wallet makes the funds unrecoverable, they will never want to have more than fifteen dollars on it, which will mean it isn’t useful.  So, your hardware wallet has to interact with SOMETHING that keeps enough information about what’s on it, to enable a new wallet to recover everything that got lost.

Q12: Mining farms, mining pools, and ASICs. Many accounts are that Satoshi did not anticipate the full industrial scale these would reach.  Do you agree with this?  What are your views on mining pools and ASICs as we know them know today (specifically as described by Eric Budish’s paper)?

A12: My first problem with ASICs is that they can be used for exactly two things:  Mining cryptocurrencies, and carrying out attacks on cryptocurrencies.

Every day of every year, people who own those enormous ASIC farms are deciding which is the most profitable use of them, on that day.

And the rewards for mining cryptocurrencies ratchet downward every couple of years.

That seems problematic.  I keep watching to see what emerges each time the reward ratchets down, but I haven’t seen evidence yet that any of the big ASIC farms have turned around on any large scale.

My second problem with ASICs is that they are sucking up ridiculous amounts of energy that can never be recovered or used for anything else. I don’t so much mind this when converting the energy into heat is actually useful – replacing electric heaters in the basement of a building with a bank of Antminers that use the same amount of power is
energy-neutral and helps secure the chain.

But that’s not what happens in huge ASIC farms.  All that heat is just waste. Nobody’s home is made more comfortable, no furnace’s power bill is alleviated, no greenhouses are enabled to grow food in the winter, nobody’s oven gets to bake bread with that heat, and all that energy is just plain gone.

The Bitcoin chain issues the same number of coins per day regardless of how much energy is spent; I’d like to think that spending a whole lot less of it, at least in ways where the heat produced isn’t useful, would be better.

But then we get back to the first problem;  If honest miners start spending a whole lot less on the energy costs of hashing, then there’s a whole lot of ASICs not being used, and the owners of those are going to be looking around making their daily decision about what’s more profitable….

So the logic finally does work out the same. Security requires the vast majority of those ASIC boxes to be in use mining.  It just seems such a colossal expenditure of power, and it might be that a different design could have achieved chain security without that global cost.

My third problem with ASICs is that they have become a way for their owners to steal money from the taxpayers in many nations.  Countries that mean to do a good thing for everybody, create “development zones” with subsidized electricity, paid for by the taxpayers of that country. And then people move in with ASIC farms to suck up that electricity which the public paid for, and convert it into bitcoins in their private possession.  These are business that employ very few people, drive the development of no other resources, and otherwise do pretty much nothing for the development of the local economy.  IOW, the taxpayers who paid for that electricity are definitely not getting their money’s worth in economic development.

My fourth problem with ASICs is that there really is no way to monitor centralization of hashing power.  People keep pretending that they’re tracking whether a 51% attack is underway, but I think most of them probably suspect, as I do, that what they’re really tracking is probably nothing more than whether or not the cabal of ASIC farm owners
remembered to configure that new warehouse full of machinery to use a different identifier.

In all fairness, this last thing results directly from anonymous, permissionless mining, which is something that was a very specific and very much desired part of Satoshi’s vision; he wanted anybody to be able to connect and participate, without any interference of a gatekeeper. But there can never be security from a Sybil attack when you don’t have any way of tracking RealWorld identities, and a “majority” can never be
relied on to be more than the front for some cabal or business interest, as long as a Sybil attack is possible.

And that was what Proof-of-work was supposed to prevent.  In those early days everyone was thinking of hashing power as a side effect of computing infrastructure that was likely to be there, or be useful, for other purposes when it wasn’t hashing.  And EVERYBODY has a use for warehouses full of computers, so it was easy to think that hashing power would remain at least somewhat distributed.  The idea that someone would amass enormous numbers of special-purpose machines which made every other kind of computer in the world utterly useless for mining and which are themselves utterly useless for any other job (except attacking the network), was not, I think, really considered.

Satoshi definitely understood, and planned, that there would probably be server farms devoted to mining and that economies of scale and infrastructure would eventually drive individuals with ordinary desktop machines out of the mining business by being more efficient and making it unprofitable for the less efficient machines.

But I’m pretty sure he didn’t think of miners in places with artificially low subsidized rates for electricity outcompeting all other miners because of that advantage, driving the concentration of the vast majority of hashing power into just one country where it’s subject to the orders and whims of just one government and a few businessmen who
pal around with each other.

So he probably figured, yes, there’d be a few dozen large-ish server farms and a couple hundred small-ish server farms, but I’m pretty sure he envisioned them being scattered around the planet, wherever people find it worthwhile to install server farms for other reasons.

I’m fairly sure Satoshi’s notion of the eventual centralization of hashing power didn’t really encompass todays nearly-complete centralization in a single country, owned by a set of people who are subject to the whims and commands of a single government, who very clearly know each other and work together whenever it’s convenient.

And I find it worrisome.

Those enormous mining farms, and the way economics drove them together, are a structural problem with converting electricity into security.

I am not comfortable with the implication that, for any Proof-of-Work block chain including Bitcoin, economics will eventually devolve to the point where, when Beijing says ‘jump’ the mining and security of that block chain says ‘how high?’

And that is one of the greatest reasons why I look around for a different means of securing block chains.

El Fin

Book Review: Cryptoassets

[Disclaimer: The views expressed below are solely my own and do not necessarily represent the views of my clients.  I currently own no cryptocurrencies.]

As a follow-on to my previous book reviews, an old colleague lent me a copy of Cryptoassets by Chris Burniske and Jack Tatar.

Overall they have several “meta” points that could have legs if they substantially modify the language and structure of multiple sections in the book.  As a whole it’s about on par with the equally inaccurate “Blockchain Revolution” by the Tapscotts.

As I have one in my previous book reviews, I’ll go through and provide specific quotes to backup the view that the authors should have waited for more data and relevant citations as some of their arguments lack definitive supporting evidence.

In short: hold off from buying this edition.

If you’re interested in understanding the basics of cryptocurrencies but without the same level of inaccuracies, check out the new The Basics of Bitcoins and Blockchains by Antony Lewis.  And if you’re interested in the colorful background of some of the first cryptocurrency investors and entrepreneurs, check out Digital Gold by Nathaniel Popper.

Another point worth mentioning at the beginning is that there are no upfront financial disclosures by the authors.  They do casually mention that they have bitcoin once or twice, but that’s about it.

I think this is problematic because it is not being transparent about potential conflicts of interest (e.g., promoting financial products you may own and hope to see financial gain from).

For instance, we learned that Chris Burniske carried around a lot of USD worth of cryptocurrencies on his phone from a NYT article last year:

But a particularly concentrated wave of attacks has hit those with the most obviously valuable online accounts: virtual currency fanatics like Mr. Burniske.

Within minutes of getting control of Mr. Burniske’s phone, his attackers had changed the password on his virtual currency wallet and drained the contents — some $150,000 at today’s values.

Some quick math for those at home.  The NYT article above was published on August 21, 2017 when 1 BTC was worth about $4,050 and 1 ETH was worth about $314.  So Burniske may have had around 37 BTC or 477 ETH or a combination of these two (and other coins).

That is not a trivial amount of money and arguably should have been disclosed in this book and other venues (such as op-eds and analyst reports).1 In the next edition, they should consider adding a disclosure statement.

A final comment is that several reviewers suggested I modify the review below to be (re)structured like a typical book review — comparing broad themes instead of a detailed dissection — after all who is going to read 38,000+ words?

That is a fair point.  Yet because many of the points they attempt to highlight are commonly repeated by promoters of cryptocurrencies, I felt that this review could be a useful resource for readers looking for different perspective to the same topics frequently discussed in media and at events.

Note: all transcription errors are my own.


Authors’ Note

On p. xi, the authors wrote:

When embarking on our literary journey, we recognized the difficulty in documenting arguably the world’s fastest moving markets. These markets can change as much in a day – up or down – as the stock market changes in a year.

It is only mentioned in passing once or twice, but we know that market manipulation is a real on-going phenomenon.  The next edition could include a subsection of cryptocurrencies and ICOs that the CFTC and SEC – among other regulators – have identified and prosecuted for manipulation.  More on that later below.

Foreword

On p. xiv, Brian Kelly wrote in the Foreword

The beauty of this book is that it takes the reader on a journey from bitcoin’s inception in the ashes of the Great Financial Crisis to its role as a diversifier in a traditional investment portfolio.

A small quibble: Satoshi actually began writing the code for Bitcoin sometime in mid-2007, before the GFC took place.  It may be a chronological coincidence that it came out when it did, especially since it was supposed to be a payment system, which is just one small function of a commercial bank.23

On p. xv Kelly writes:

As with any new model, there are questions about legality and sustainability, but the Silicon Valley ethos of “break things first, then ask for forgiveness” has found its way to Wall Street.

There are also two problems with this:

  1. Both the SEC and CFTC – among other federal agencies – were set up in the past because of the behavior that Kelly thinks is good: “break things first, then ask for forgiveness” is arguably a bad ethos to have for any fiduciary and prudential organizations.4
  2. Any organization can do that, that’s not hard.  Some have gotten away with it more than others.  For instance, Coinbase was relatively loose with its KYC / AML requirements in 2012-2014 and has managed to get away with it because it grew fast enough to become an entity that could lobby the government.

On p.xv Kelly writes

“Self-funded, decentralized organizations are a new species in the global economy that are changing everything we know about business.”

In point of fact, virtually all cryptocurrencies are not self-funded.  Even Satoshi had some kind of budget to build Bitcoin with.  And basically all ICOs are capital raises from external parties.  Blockchains don’t run and manage themselves, people do.

On p. xv Kelly writes:

“These so-called fat protocols are self-funding development platforms that create and gain value as applications are built on top.”

The fat protocol thesis has not really born out in reality, more on that in a later chapter below.  While lots of crytpocurrency “thought leaders” love to cite the original USV article, none of the platforms are actually self-funded yet.  They all require external capital to stay afloat because insiders cash out for real money.5 And because there is a coin typically shoehorned at the protocol layer, there is very little incentive for capable developers to actually create apps on top — hence the continual deluge of new protocols each month — few actors want to build apps when they can become rich building protocols that require coins. More on this later.6

Introduction

On p. xxii the authors write:

“… and Marc Andreessen developing the first widely used web browser, which ultimately became Netscape.”

A pedantic point: Marc Andreessen was leader of a team that built Mosaic, not to take away from that accomplishment, but he didn’t single handedly invent the web browser.  Maybe worth rewording in next edition.

On p. xxiii they write:

Interestingly, however, the Internet has become increasingly centralized over time, potentially endangering its original conception as a “highly survivable system.”

This is a valid point however it glosses over the fact that all blockchains use “the internet” and also — in practice — most public blockchains are actually highly centralized as well.  Perhaps that changes in time, but worth looking at “arewedecentralizedyet.”

On p. xxiii they write:

Blockchain technology can now be thought of as a general purpose technology, on par with that of the steam engine, electricity, and machine learning.

This is still debatable.  After all, there is no consensus on what “blockchains” are and furthermore, as we have seen in benchmark comparisons, blockchains (however defined) come in different configurations.  While there are a number of platforms that like to market themselves as “general purpose,” the fact of the matter is that there are trade-offs based on the user requirements: always ask who the end-users and the use-cases a blockchain was built around are.

On p. xxiv they cite Don and Alex Tapscott.  Arguably they aren’t credible people on this specific topic.  For example, their book was riddled with errors and they even inappropriately made-up advisors on their failed bid to launch and fund their NextBlock Global fund.

On p. xxiv the authors write:

Financial incumbents are aware blockchain technology puts on the horizon a world without cash – no need for loose bills, brick-and-mortar banks, or, potentially, centralized monetary policies.  Instead, value is handled virtually through a system that has no central authority figure and is governened in a centralized and democratic manner. Mathematics force order in the operations. Our life savings, and that of our heirs, could be entirely intangible, floating in a soup of secure 1s and 0s, the entire system accessed through computers and smartphones.

This conflates multiple things: digitization with automation.7  Retail banking has and will continue its march towards full digital banking.  You don’t necessarily need a blockchain to accomplish that — we see that with Zelle’s adoption already.8

Also, central banks are well aware that they could have some program adjust interest rates, but discretion is still perceived as superior due to unforeseen incidents and crisis. 9

On p. xxv they write:

The native assets historically have been called cryptocurrencies or altcoins but we prefer the term cryptoassets, which is the term we will use throughout the book.

The term seems to have become a commonly accepted term but to be pedantic: most owners and users do not actually utilize the “cryptography” part — because they house the coins in exchanges and other intermediaries they must trust (e.g., the user doesn’t actually control the coin with a private key).10

And as we continue to see, these coins are easily forkable.  You can’t fork physical assets but you can fork and clone digital / virtual ones.  That’s a separate topic though maybe worth mentioning in the next edition.

On p. xxv they write:

It’s early enough in the life of blockchain technology that no books yet have focused solely on public blockchains and their native cryptoassetss from the investing perspective. We are changing that because investors need to be aware of the opportunity and armed both to take advantage and protect themselves in the fray.

Might be worth rewording because in Amazon there are about 760 books that pop up when “investing in cryptocurrencies” is queried.  And many of those predate the publication of Cryptoassets.  For instance, Brian Kelly, who wrote the Forward, published a fluffy coin promotion book a few years ago.

On p. xv they write:

Inevitably, innovation of such magnitude, fueled by the mania of making money, can lead to overly optimistic investors. Investors who early on saw potential in Internet stock encountered the devastating dot-com bubble. Stock in Books-A-Million saw its price soar by over 1,000 percent in one week simply by announcing it had an updated website. Subsequently, the price crashed and the company has since delisted and gone private. Other Internet-based high flyers that ended up crashing include Pets.com, Worldcom, and WebVan. Today, none of those stocks exist.

So far, so good, right?

Whether specific cryptoassets will survive or go the way of Books-A-Million remains to be seen.  What’s clear, however, is that some will be big winners. Altogether, between the assets native to blockchains and the companies that stand to capitalize on this creative destruction, there needs to be a game plan that investors use to analyze and ultimately profit from this new investment theme of cryptoassets. The goal of this book is not to predict the future – it’s changing too fast for all but the lucky to be right- but rather to prepare investors for a variety of futures.

Even for 2017 when the book was publish, this statement is lagging a bit because there were already several “coin graveyard” sites around.  Late last month Bloomberg ran a story: more than 1,000 coins are dead according to Coinopsy.

It is also unclear, “that some will be big winners.”  Maybe modify this part in the next version.11

On p. xxvi they write:

“One of the keys to Graham’s book was always reminding the investor to focus on the inherent value of an investment without getting caught in the irrational behavior of the markets.”

There is a healthy debate as to whether cryptocurrencies and “cryptoassets” have any inherent value either.12  Arguably most coins traded on a secondary market depend on some level of ‘irrational’ behavior: many coin holders have short time horizons and want someone else to help push up the price so they can eventually cash out.13

Chapter 1

On p. 3 they write:

In 2008, Bitcoin rose like a phoenix from the ashes of near Wall Street collapse.

This a little bit of revisionist history.14

The Bitcoin whitepaper came out on October 31, 2008 and Satoshi later said that he/she had spent the previous 18 months coding it first before writing it up in a paper.  The authors even discuss this later on page 7.  Worth removing in next edition.

On p. 3 they write:

Meanwhile, Bitcoin provided a system of decentralized trust for value transfer, relying not on the ethics of humankind but on the cold calculation of computers and laying the foundation potentially to obviate the need for much of Wall Street.

This is not quite true.  At most, Bitcoin as it was conceived and as it is today — is a relatively expensive payment network that doesn’t provide definitive settlement finality.15 Banks as a whole, do more than just handle payments — they manage many other services and products.  So the comparison isn’t really apples-to-apples.

Note: banks again as a whole spend more on IT-related systems than nearly any other vertical — so there is already lots of “cold calculation” taking place within each of these financial institutions.16

Now, maybe blockchain-related ideas replace or enhance some of these institutions, but it is unlikely that Bitcoin itself as it exists today, will do any of that.

On p. 5 they write:

What people didn’t realize, including Wall Street executives, was how deep and interrelated the risks CMOs posed were. Part of the problem was that CMOs were complex financial instruments supported by outdated financial architecture that blended and analog systems.

That may have been part of a bigger problem.17

There were a dozen plus factors for how and why the GFC arose and evolved, but “outdated financial infrastructure” isn’t typically at the top of the list of culprits.  Would blockchain-like systems have prevented the entire crisis?  There are lots of op-eds that have made the claim, but the authors do not really provide much evidence to support the specific “blended” argument here.  Perhaps worth articulating in its own section next time.

Speaking of which, also on p. 5 they write:

Whether as an individual or an entity, what’s now clear is that Satoshi was designing a technology that if existent would have likely ameliorated the toxic opacity of CMOs. Due of the distributed transparency and immutable audit log of a blockchain, each loan issued and packaged into different CMOs could have been documented on a single blockchain.

This seems to conflate two separate things: Bitcoin as Satoshi originally designed it in 2008 (for payments) and later what many early adopters have since promoted it as: blockchain as FMI.18

Bitcoin was (purposefully) not designed to do anything with regulated financial instruments, it doesn’t meet the PFMI requirements.  He was trying to build e-cash that didn’t require KYC and was difficult to censor… not ways to audit CMOs.  If that was the goal, architecturally Bitcoin would likely look a lot different than it did (for instance, no PoW).

And lastly on p. 5 they write:

This would have allowed any purchaser to view a coherent record of CMO ownership and the status of each mortgage within.  Unfortunately, in 2008 multiple disparate systems – which were expensive and therefore poorly reconciled – held the system together by digital strings.

Interestingly, this is the general pitch for “enterprise” blockchains: that with all of the disparate siloed systems within regulated financial institutions, couldn’t reconciliation be removed if these same systems could share the same record and facts on that ledger?  Hence the creation of more than a dozen enterprise-focused “DLT” platforms now being trialed and piloted by a slew of businesses.

This is briefly discussed later but the next edition could expand on it as the platforms do not need a cryptocurrency involved.19

On p. 7 they write:

By the time he released the paper, he had already coded the entire system.  In his own words, “I had to write all the code before I could convince myself that I could solve every problem, then I wrote the paper.” Based on historical estimates, Satoshi likely started formalizing the Bitcoin concept sometime in late 2006 and started coding around May 2007.

Worth pointing out that Hal Finney and Ray Dillinger — and likely several others – helped audit the code and paper before any of it was publicly released.

On p. 8 they write:

Many years later people would realize that one of the most powerful use cases of blockchain technology was to inscribe immutable and transparent information that could never be wiped from the face of digital history and that was free for all to see.

There appears to be a little hyperbole here.

Immutability has become a nebulous word that basically means many different things to everyone.  In practice, the only thing that is “immutable” on any blockchain is the digital signature — it is a one-way hash.   All something like proof-of-work or proof-of-stake does are decide who gets to vote to append the chain.

Also, as mentioned above, there are well over 1,000 dead coins so it is actually relatively common for ‘digital history’ to effectively be wiped out.

On p. 8 they write:

A dollar invested then would be worth over $1 million by the start of 2017, underscoring the viral growth that the innovation was poised to enjoy.

Hindsight is always 20-20 and the wording above seems to be a little unclear with dates.  As often as the authors say “this is not a book endorsing investments,” other passages seem do just the opposite: by saying how smart you would’ve been if you had bought at a relative low, during certain (cherry picked) dates.

Also, what viral growth?  What are the daily active and monthly active user numbers they think are occurring on these chains?  In later chapters, they do cite some on-chain activity but this version lacks specific DAU / MAU that would strengthen their arguments.20 Worth revisiting in the next edition.

On p. 8 they write:

Diving deeper into Satoshi’s writings around the time, it becomes more apparent that he was fixated on providing an alternative financial system, if not a replacement entirely.

This isn’t quite right.  The very first thing Satoshi tried to build was a marketplace to play poker which was supposed to be integrated with the original wallet itself.

A lot of the talk about “alternative financial system” is arguably revisionist propaganda from folks like Andreas Antonopoulos who have tried to rewrite the history of Bitcoin to conform with their political ideology.

Readers should also check out MojoNation and what that team tried to accomplish.

On p. 9 they write;

While Wall Street as we knew it was experiencing an expensive death, Bitcoin’s birth cost the world nothing.

There are at least two issues that can be modified for the future:

  1.  Wall Street hasn’t died, maybe parts of the financial system are replaced or removed or enhanced, but for better and worse almost 10 years since the collapse of Lehman, the collective financial industry is still around.
  2.  Bitcoin cost somebody something, there were opportunity costs in its creation.  And as we now know: the ongoing environmental impact is enormous.  Yet promoters typically handwave it away as a “cost of doing anarchy.”  Thus worth rewording or removing in the next edition.

On p. 9 they also wrote:

It was born as an open-source technology and quickly abandoned like a motherless babe in the world. Perhaps, if the global financial system had been healthier, there would have been less of a community to support Bitcoin, which ultimately allowed it to grow into the robust and cantankerous toddler that it currently is.

This prose sounds like something from Occupy Wall Street and not something found in literature to describe a computer program.

For example, there are lots of nominally open source blockchains, hundreds or maybe even thousands.21 That’s not very unique (it is kind of expected since there is a financial incentive to clone them).

And again, Satoshi worked on it for at least a couple years.  It’s not like he/she dropped it off at an orphanage after immediate gestation.  This flowery wording acts like a distraction and should be removed in the next edition.

Chapter 2

On p. 12 they write:

Three reputable institutions would not waste their time, nor jeopardize their reputations, on a nefarious currency with no growth potential.

There is a bit of an unnecessary attitude with this statement.  The message also seems to go against the criticism earlier in the book towards banks.  For instance, the first chapter was critical of the risks that banks took leading up to the GFC.  You can’t have it both ways.  In the next edition, should either remove this or explain what level or risk is appropriate.

Also, what is the “growth potential” here?  Do the authors mean the value of a coin as measured in real money?  Or actual usage of the network?

Lastly, the statement above equates the asset value growth (USD value increases) with a bank’s interest. Bank’s do not typically speculate on the price, they usually only care about volumes which make revenues. A cryptocurrency could go to $0.01 for all they care; and if people want to use it then they could consider servicing it provided the bank sees an ability to make money.  For example, UK banks did not abandon the GBP even though it lost 20% of its value in 2016 following the Brexit referendum.

On p. 12 they write:

Certainly, some of the earliest adopters of Bitcoin were criminals. But the same goes for most revolutionary technologies, as new technologies are often useful tools for those looking to outwit the law.

This is a “whataboutism” and is actually wrong.  Satoshi specifically says he/she has designed Bitcoin to route around intermediaries (like governments) and their ability to censor.  It doesn’t take too much of a stretch to get who would be initially interested in that specific set of payment “rails” especially if there is no legal recourse.22

On p. 12 they also write:

We’ll get into the specific risks associated with cryptoassets, including BItcoin, in a later chapter, but it’s clear that the story of bitcoin as a currency has evolved beyond being solely a means of payment for illegal goods and services. Over 100 media articles have jumped at the opportunity to declare bitcoin dead, and each time they have been proven wrong.

The last sentence has nothing to do with the preceding sentence, this is a non sequitur.

Later in the book they do talk about other use cases but the one that they don’t talk about much is how — according to analytics — the majority of network traffic in 2017 was users moving cryptocurrencies from one exchange to another exchange.

For example, about a month ago, Jonathan Levin from Chainalysis did an interview and mentioned that:

So we can identify, it is quite hard to know how many people. I would say that 80% of transactions that occur on these cryptocurrency ledgers have a counterparty that is a 3rd party service. More than 80%.

Maybe mention in the second edition: the unintended ironic evolution of Bitcoin has had… where it was originally designed to route around intermediaries and instead has evolved into an expensive permissioned-on-permissionless network.23

On p. 13 they write:

It operates in a peer-to-peer manner, the same movement that has driven Uber, Airbnb, and LendingClub to be multibillion-dollar companies in their own realms. Bitcoin lets anyone be their own bank, putting control in the hands of a grassroots movement and empowering the globally unbanked.

Not quite.  For starters: Uber, Airbnb, and LendingClub all act as intermediaries to every transaction, that’s how they became multibillion-dollar companies.

Next, Bitcoin doesn’t really let anyone be their own bank because banks offer a lot more products and services beyond just payments.  At most, Bitcoin provides a way of moving bitcoins you control to someone else’s bitcoin address (wallet).  That’s it.24

And there is not much evidence that Bitcoin or any cryptocurrency for that matter, has empowered many beyond relatively wealthy people in developed or developing countries.  There have been a few feel-good stories about marginalized folks in developing countries, but those are typically (unfortunately) one-off theatrics displaying people living in squalor in order to promote a financial product (coins).  It would be good to see more evidence in the next edition.

For more on this topic, recommend listening to LTB episode 133 with Richard Boase.

On p. 13 they write:

Decentralizing a currency, without a top-down authority, requires coordinated global acceptance of a shared means of payment and store of value.

Readers should check out “arewedecentralizedyet” which illustrates that nearly all cryptourrencies in practice have some type of centralized, top-down hierarchy as of July 2018.

On p. 13 they write:

Bitcoin’s blockchain is a distributed, cryptographic, and immutal database that uses proof-of-work to keep the ecosystem in sync.

Worth modifying because the network is not inherently immutable — only digital signatures have “immutability.”25 Also, proof-of-work doesn’t keep any “ecosystem” in sync.  All proof-of-work does is determine who can append the chain.  The “ecosystem” thing is completely unrelated.

On p. 15 they write:

There is no subjectivity as to whether a transaction is confirmed in Bitcoin’s blockchain: it’s just math.

This isn’t quite true.26 Empirically, mining pools have censored transactions for various reasons.  For example, Luke-Jr (who used to run Eligius pool) thinks that SatoshiDice misuses the network; he is also not a fan of what OP_RETURN was being used for by Counterparty.

Also, humans control pools and also manage the code repositories… blockchains don’t fix and run themselves.  So it’s not as simple as: “it’s just math.”

On p. 15 they write an entire paragraph on “immutability”:

The combination of globally distributed computers that can cryptographically verify transactions and the building of Bitcoin’s blockchain leads to an immutable database, meaning the computers building Bitcoin’s blockchain can only do so in an append only fashion. Append only means that information can only be added to Bitcoin’s blockchain over time and cannot be deleted – an audit trail etched in digital granite. Once information is confirmed in Bitcoin’s blockchain, it’s permanent and cannot be erased. Immutability is a rare feature in a digital world where things can easily be erased, and it will likely become an increasingly valuable attribute for Bitcoin over time.

This seems to have a few issues:

  1. As mentioned several times before in this review, “immutability” is only a characteristic of digital signatures, which are just one piece of a blockchain.  Recommend Gwern’s article entitled “Bitcoin-is-worse-is-better” for more details.
  2. Empirically lots of blockchains have had unexpected and expected block reorgs and hard forks, there is nothing fundamental to prevent this from happening to Bitcoin.  See this recent article discussing a spate of attacks on various PoW coins: Blockchain’s Once-Feared 51% Attack Is Now Becoming Regular
  3. The paragraph above ignores the reality that well over 1,000 blockchains are basically dead and Bitcoin itself had a centralized intervention on more than one occasion, such as the accidental hardfork in 2013 and the Bitcoin block size debate from 2015-2018.

On p. 15 they introduce us to the concept of proof-of-work but don’t really explain its own origin as a means of combating spam email in the 1990s.

For instance, while several Bitcoin evangelists frequently (mistakenly) point to Hashcash as the original PoW progenitor, that claim actually legitimately goes to a 1993 paper entitled Pricing via Processing or Combatting Junk Mail by Cynthia Dwork and Moni Naor.  There are others as well, perhaps worth adding in the next edition.27

On p. 16 they write:

Competition for a financial rewad is also what keeps Bitcoin’s blockchain secure.  If any ill-motivated actors wanted to change Bitcoin’s blockchain, they would need to compete with all the other miners distributed globally who have in total invested hundreds of millions of dollars into the machinery necessary to perform PoW.

This is only true for a Maginot Line attack (e.g., attack via hashrate).28 There are  cheaper and more effective out of band attacks, like hacking BGP or DNS.  Or hacking into intermediaries such as exchanges and hosted wallets.  Sure the attacker doesn’t directly change the blocks, but they do set in motion a series of actions that inevitably result in thefts that end up in blocks further down the chain, when the transactions otherwise wouldn’t have taken place.

On p. 17 they write:

The hardware runs an operating system (OS); in the case of Bitcoin, the operating system is the open-source software that facilitates everything described earlier.  This software is developed by a volunteer group of developers, just as Linux, the operating system that underlies much of the cloud, is maintained by a volunteer group of developers.

This isn’t quite right in at least two areas:

  1. Linux is not financial market infrastructure software; Bitcoin originally attempted to be at the very least, a payments network.  There are reasons why building and maintaining FMI is regulated whereas building an operating system typically isn’t.  It has to do with risk and accountability when accidents happen.  That’s why PFMI exists.
  2. At least in the case of Bitcoin (and typically in most other cryptocurrencies), only one group of developers calls the shots via gating the BIP / EIP process.  If you don’t submit your proposals and get it approved through this process, it won’t become part of Bitcoin Core.  For more on this, see: Bitcoin Is Now Just A Ticker Symbol and Stopped Being Permissionless Years Ago

On p. 17 they discuss “private versus public blockchains”:

The difference between public and private blockchains is similar to that between the Internet and intranets.  The internet is a public resource.  Anyone can tap into it; there’s not gate keepers.

This is wrong.  All ISPs gate their customers via KYC.  Not just anyone can set up an account with an ISP, in fact, customers can and do get kicked off for violating Terms of Service.

“The Internet” is just an amalgamation of thousands of ISPs, each of whom have their own Terms of Service.  About a year ago I published an in-depth article about why this analogy is bad and should not be use: Intranets and the Internet.

On p. 18 they write:

Public systems are ones like BItcoin, where anyone with the right hardware and software can connect to the network and access the information therein.  There is no bouncer checking IDs at the door.

This is not quite right.  The “permissionless” characteristic has to do with block making: who has the right to vote on creating/adding a new block… not who has the ability to download a copy of the blockchain.  Theoretically there is no gatekeeper for block making in Bitcoin. Although, there are explicit KYC checks on the edges (primarily at exchanges).

In practice, the capital and knowledge requirements to actually create a new mining pool and aggregate hashpower that is sufficiently capable of generating the right hash and “winning” the scratch-off lottery is very high, such that on a given month just 20 or so block makers are actually involved.29

While there is no strict permissioning of these participants (some come and go over the years), it is arguably a de facto oligopoly based on capital expenditures and not some type of feel-good meritocracy described in this book.30

On p. 18 they write:

Private systems, on the other hand, employ a bouncer at the door. Only entities that have the proper permissions can become part of the network. These private systems came about after Bitcoin did, when enterprises and businesses realized they liked the utility of Bitcoin’s blockchain, but weren’t comfortable or legally allowed to be as open with he information propagated among public entities.

This is not nuanced enough.  What precisely is permissioned on a “permissioned” blockchain is: who gets to do the validation.

While there are likely dozens of “permissioned” blockchain vendors — each of which may have different characteristics — the common one is that the validators are KYC’ed participants.  That way they can be held accountable if there is a problem (like a fork).

For example, many enterprises and businesses tried to use Bitcoin, Ethereum, and other cryptocurrencies but because these blockchains were not built with their use cases in mind, unsurprisingly found that they were not a good fit.

This is not an insult: the “comfort” refrain is tiring because there have been a couple hundred proofs-of-concept on Bitcoin – and variants thereof – to look into whether those chains were fit-for-purpose… and they weren’t.  This passage should be reworded in the second edition.

On p. 18 they write:

Within financial services, these private blockchains are largely solutions by incumbents in a fight to remain incumbents.

Maybe that is the motivation of some stakeholders, but I don’t think I’ve ever been in a meeting in which the participants (banks) specifically said that.  It would be good to have a citation added in the next edition.  Otherwise, as Hitchens said: what can be presented without evidence can be dismissed without evidence.

On p. 18 they write:

While there is merit to many of these solutions, some claim the greatest revolution has been getting large and secretive entities to work together, sharing information and best practices, which will ultimately lower the cost of services to the end consumer. We believe that over time the implementation of private blockchains will erode the position held by centralized powerhouses because of the tendency toward open networks. In other words, it’s a foot in the door for further decentralization and the use of public blockchains.

This is a “proletariat” narrative that is frequently used in many cryptocurrency books.  While there is a certain truth to an angle – collaboration of regulated entities that normally compete with one another – many of the vendors and platforms that they are piloting are actually “open.”

Which brings up the euphemism that some vocal public blockchain promoters like to stake a claim in… the ill-defined “open.”  For instance, coin lobbyists such as Coin Center and coin promoters such as Andreas Antonopoulos regularly advertise that they are experts and advocates of “open” chains but their language is typically filled with strawmen.

For instance, enterprise-specific platforms such as Fabric, Corda, and Quorum are all open sourced, anyone can download and run the code without the permission of the vendors that contribute code or support to the platforms.

Thus, it could be argued that these platforms are “open” too… which they are.

But it is highly unlikely that ideological advocates would ever defend or promote these platforms, because of their disdain and aversion to platforms built by financial organizations. 31

Lastly, this “foot in the door” comment comes in all shapes and sizes; sometimes coin promoters use “Trojan horse” as well.  Either way it misses the point: enterprises will use technology that solves problems for them and will not use technology that doesn’t solve their problem.

In practice, most cryptocurrencies were not designed – on purpose – to solve problems that regulated institutions have… so it is not a surprise they do not use coin-based platforms as FMI.  It has nothing to do with the way the coin platforms are marketed and everything to do with the problems the coins solve.

On p. 19 they write:

Throughout this book, we will focus on public blockchains and their native assets, or what we will define as cryptoassets, because we believe this is where the greatest opportunity awaits the innovative investor.

The authors use the term “innovative investor” a dozen or more times in the book.  It’s not a particularly useful term.32

Either way, later in the book they don’t really discuss the opportunity cost of capital: what are the tradeoffs of an accredited investor who puts their money long term into a coin versus buys equity in a company.  Though, to be fair, part of the problem is that most of the companies that actually have equity to buy, do not publish usage or valuation numbers because they are still private… so it is hard to accurately gauge that specific trade-off.33

On p. 19 they write about Bitcoin maximalism (without calling it that):

We disagree with that exclusive worldview, as there are many other interesting consensus mechanisms being developed, such as proof-of-stake, proof-of-existence, proof-of-elapsed time, and so on.

Proof-of-existence is not a consensus mechanism.  PoE simply verifies the existence of a file at a specific time based on a hash from a specific blockchain.  It does not provide consensus.  This should be reworded in the next edition.

Furthermore, neither proof-of-stake or proof-of-elapsed-time are actual consensus mechanisms either… they are vote ordering mechanisms — a mechanism to prevent or control sybil attacks. 34  See this excellent thread from Emin Gun Sirer.

Chapter 3

On p. 22 they write:

Launched in February 2011, the Silk Road provided a rules-free decentralized marketplace for any product one could imagine, and it used bitcoin as the means of payment.

This isn’t quite true.  Certain guns and explosives were considered off-limits and as a result “The Armory” was spun off.

On p. 22 they write:

Clearly, this was one way that Bitcoin developed its dark reputation, though it’s important to know that this was not endorsed by Bitcoin and its development team.

Isn’t Bitcoin — like all cryptocurrences — supposed to be decentralized?  So how can there be a singular “it” to not endorse something?35

On p. 22 they write:

The drivers behind this bitcoin demand were more opaque than the Gawker spike, though many point to the bailout of Cyprus and the associated losses that citizens took on their bank account balances as the core driver.

This is mostly hearsay as several independent researchers have tried to identify the actual flows coming into and going out of Cyprus that are directly tied to cryptocurrencies and so far, have been unable to.36

On p. 23 they write about Google Search Trends:

We recommend orienting with this tool even beyond cryptoassets, as it’s a fascinating window into the global mesh of minds.

Incidentally, despite the authors preference to the term “cryptoassets” —  according to Google Search Trends, that term isn’t frequently used in search’s yet.

Source: Google

On p. 24 they write:

This diversity has led to tension among players as some  of these cryptoassets compete, but this is nothing like the tension that exists between Bitcoin and the second movement.

Another frequent name typically used to call “the second movement” was Bitcoin 2.0.

For example, back in 2014 and 2015 I interviewed a number of project organizers and attempted to categorize them into buckets, including things like “commodities” and “assets.”  See for instance my guest presentation in 2014 at Plug and Play: (video) (slides).

This label isn’t frequently used as much anymore, but that’s a different topic entirely.

On p. 25 they write an entire section entitled: Blockchain, Not Bitcoin

The authors stated:

Articles like one from the Bank of England in the third quarter of 2014 argued, “The key innovation of digital currencies is the ‘distributed ledger,’ which allows a payment system to operate in an entirely decentralized way, without intermediaries such as banks. In emphasizing the technology and not the native asset, the Bank of England left an open question whether the native asset was needed

[…]

The term blockchain, independent of Bitcoin, began to be used more widely in North America in the fall of 2015 when two prominent financial magazines catalyzed awareness of the concept.

Let’s pull apart the problems here.

First, the “blockchain not bitcoin” mantra was actually something that VCs such as Adam Draper pushed in the fall of 2015.

For instance, in an interview with Coindesk in October 2015 he said:

“We use the word blockchain now. I say bitcoin, and they think that’s the worst thing ever. It just feels like they put up a guard. Then, I switch to blockchain and they’re very attentive and they’re very interested.”

Draper seems ambivalent to the change, though he said he was initially against using it, mostly because he believes it’s superficial. After all, companies that use the blockchain as a payments rail, the argument goes, still need to interface with its digital currency, which is the mechanism for transactions on the bitcoin blockchain.

“When we talk about blockchain, I mean bitcoin,” Draper clarifies. “Bitcoin and the blockchain are so interspersed together, the incentive structure of blockchain is bitcoin.”

Draper believes it’s mostly a “vernacular change”, noting the ecosystem has been through several such transitions before. He rifles off the list of terms that have come and gone including cryptocurrency, digital currency and altcoin.

“It’s moved from bitcoin to blockchain, which makes sense, it’s the underlying tech of all these things,” he added. “I think in a lot of ways blockchain is FinTech, so it will become FinTech.”

If you’re looking for more specific examples of companies that began using “blockchain” as a euphemism for “bitcoin” be sure to check out my post: “The Great Pivot.”

The authors also fail to identify that there were lots of early stage vendors and entrepreneurs working in the background on educating policy makers and institutions on what the vocabulary was and how the various moving pieces worked throughout 2015.

Want evidence?

Check out my own paper covering this topic and a handful of vendors in April 2015: Consensus-as-a-service.  This paper has been cited dozens of times by a slew of academics, banks, regulators, and so forth.  And contra Draper: you don’t necessarily need a coin or token to incentivize participants to operate a blockchain.37

On p. 26 they write:

A private blockchain is typically used to expedite and make existing processes more efficient, thereby rewarding the entities that have crafted the software and maintain the computers. In other words, the value creation is in the cost savings, and the entities that own the computers enjoy these savings. The entities don’t need to get paid in a native asset as reward for their work, as is the case with public blockchains.

First, not all private blockchains are alike or commoditized.

Two, this statement is mostly true.  At least those were the initially pitches to financial institutions.  Remember the frequently cited Oliver Wyman / Santander paper from 2015?  It was about cost savings.  Since then, the story has evolved to also include revenue generation.

For more up-to-date info on the “enterprise” blockchain world, recommend reading:

On p. 26 they write:

On the other hand, for Bitcoin to incentivize a self-selecting group of global volunteers, known as miners, to deploy capital into the mining machines that validate and secure bitcoin transactions, there needs to be a native asset that can be paid out to the miners for their work. The native asset builds out support for the service from the bottom up in a truly decentralized manner.

This may have been true in January 2009 but is not true in July 2018.  There are no “volunteers” in Bitcoin mining as running farms and pools have become professionalized and scaled in industrial-sized facilities.

Also, that last sentence is also false: virtually every vertical of involvement is dominated by centralized entities (e.g., exchanges, hosted wallets, mining manufacturing, etc.).

On p. 27 they write:

Beyond questioning the need for native cryptoassets – which would naturally infuriate communities that very much value their cryptoassets – tensions also exist because public blockchain advocates believe the private blockchain movement bastardizes the ethos of blockchain technology. For example, instead of aiming to decentralize and democratize aspects of the existing financial services, Masters’s Digital Asset Holdings aims to assist existing financial services companies in adopting this new technology, thereby helping the incumbents fight back the rebels who seek to disrupt the status quo.

Ironically, virtually all major cryptocurrency exchanges now have institutional investors and/or partnerships with regulated financial institutions.38 Like it or not, but the cryptocurrency world is deep in bed with the very establishment that it likes to rail at on social media.

Also, Bitcoin again is at most a payments network and does not actually solve problems for existing financial service providers on their many other lines of business.

On p. 27 they write:

General purpose technologies are pervasive, eventually affecting all consumers and companies. They improve over time in line with the deflationary progression of technology, and most important, they are a platform upon which future innovations are built. Some of the more famous examples include steam, electricity, internal combustion engines, and information technology. We would add blockchain technology to this list. While such a claim may appear grand to some, that is the scale of the innovation before us.

If you’re not familiar with hyperbole and technology, I recommend watching and reading the PR for the Segway when it first came out.  Promoters and enthusiasts repeatedly claimed it would change the way cities are built.  Instead, it is used as a toy vehicle to shuffle tourists around at national parks and patrol suburban malls.

Maybe something related to “blockchains” is integrated into various types of infrastructure (such as trade finance), but the next edition should provide proof of some actual user adoption.

For example, the authors in the following paragraph say that “public blockchains beyond Bitcoin that are growing like gangbusters.”

Which ones?  In the approximately 9 months since this book was published, most “traction” has been issuing ICOs on these public blockchains.  Currently the top 3 Dapps at the time of this writings, run decentralized exchanges… which trade ICO tokens.  Now maybe that changes, that is totally within the realm of possibility.39  But let’s take the hype down a few notches until consistent measurable user growth is observed.

On p. 28 they write:

The realm of public blockchains and their native assets is most relevant to the innovative investor, as private blockchains have not yielded an entirely new asset class that is investable to the public.

The wording and attitude should be changed for the next edition.  This makes it sound as if the only real innovation that exists are network-based coins that a group of issuers continually create and that you, the reader, should buy.

By downplaying opportunities being tackled by enterprise vendors, the statement glosses over the operating environment enterprise clients reside in and how they must conduct unsexy due diligence and mundane requirements gathering because they have to follow laws and regulations otherwise their customers won’t use their specific platforms.

These same vendors could end up “tokenizing” existing financial instruments, it just takes a lot longer because there are real legal consequences if something breaks or forks.40

On p. 28 and 29 they ask “where is blockchain technology in the hype cycle.”

This section could be strengthened by revisiting and reflecting on the huge expectations that these coin projects have raised and were raising at the time the book was first being written.  How were expectations eventually managed?

Specifically, on p. 29 they write:

While it’s hard to predict where blockchain technology currently falls on Gartner’s Hype Cycle (these things are always easier in retrospect), we would posit that Bitcoin is emerging from the Trough of Disillusionment. At the same time, blockchain technology stripped of native assets (private blockchain) is descending from the Peak of Inflated Expectations, which it reached in the summer of 2016 just before The DAO hack occurred (which we will discuss in detail in Chapter 5).

The first part is probably wrong if measured by actual usage and interest (as shown by the Google Search image a few sections above).41

The second part of the paragraph is probably right, though the timing was probably a little later: likely in the last quarter of 2016 when the first set of pilots turned out to require substantially larger budgets.  That is to say, in order to be put platforms into production most small vendors with short runways realized they needed more capital and time to integrate solutions into legacy systems.  In some cases, that was too much work and a few vendors pivoted out of enterprise and created a coin or two instead.42

Chapter 4

On p. 31 they write:

Yes, the numbers have changed a lot since.  Crypto moves fast.

This isn’t a hill I want to die on, but historically “crypto” means cryptography.  Calling cryptocurrencies “crypto” is basically slang, but maybe that’s the way it evolves towards.

On p. 32 they write:

Historically, crypotassets have most commonly been referred to as cryptocurrencies, which we think confuses new users and constrains the conversation on the future of these assets. We would not classify the majority of cryptoassets as currencies, but rather most are either digital commodities (cryptocommodities), provisioning raw digital resources, or digital tokens (cryptotokens), provisioning finished digital goods and services.

They have a point but a literature review could have been helpful at showing this categorization is neither new nor novel.

For instance, the title of my last book was: The Anatomy of a Money-like Informational Commodity.  A bit long-winded?

Where did I come up with that odd title?

In 2014, an academic paper was published that attempted to categorize Bitcoin from an ontological perspective. Based on the thought process presented in that paper, the Dutch authors concluded that Bitcoin is a money-like informational commodity.  It isn’t money and isn’t a currency (e.g., isn’t actually used).434445

On p. 32 they write:

In an increasingly digital world, it only makes sense that we have digital commodities, such as computer power, storage capacity, and network bandwidth.

This book only superficially explains each of these and doesn’t drill down into why these “digital commodities” can’t be priced in good old fashioned money or why an internet coin is needed.  If this is a good use case, is it just a matter of time before Blizzard and Steam get on board?  Maybe worth looking at what entertainment companies do for the next edition.

On p. 33 they write about “why crypto” as shorthand for “cryptoassets” instead of “cryptography.”

For historical purposes, Matt Blaze, the most recent owner of crypto.com, provides a good explanation that could be included or cited next edition: Exhaustive Search Has Moved.

On p. 35 they write:

Except for Karma, the problem with all these attempts at digital money was that they weren’t purely decentralized — one way or another they relied on a centralized entity, and that presented the opportunity for corruption and weak points for attack.

This seems to be conflating two separate things: anonymity with electronic cash.  You can have one without the other and do.46

Also, the BIP process is arguably a weak point for attack.47

On p. 35 they write:

One of the most miraculous aspects of bitcoin is how it bootstrapped support in a decentralized manner.

The fundamental problem with this statement is that it is inaccurate.48 Large amounts of centralization continues to exist: mining, exchanges, BIP vetting, etc.

On p. 35 they write:

Together, the combination of current use cases and investors buying bitcoin based on the expectation for even greater future use cases creates market demand for bitcoin.

Is that a Freudian slip?

Speculators buy bitcoin because they think can sell bitcoins at a higher price because a new buyer will come in at a later date and acquire the coins from them.49

For example, last month Hyun Song Shin, the BIS’s economic adviser and head of research, said:

“If people pay to hold the tokens for financial gain, then arguably they should be treated as a security and come under the same rigorous documentation requirements and regulation as other securities offered to investors for a return.”

In the United States, recall that one condition for what a security is under the Howey framework is an expectation of profit.

Whether Bitcoin is a security or not is a topic for a different post.50

On p. 36 they write:

For the first four years of Bitcoin’s life, a coinbase transaction would issue 50 bitcoin to the lucky miner.

[…]

On November 28, 2012, the first halving of the block reward from 50 bitcoin to 25 bitcoin happened, and the second halving from 25 bitcoin to 12.5 bitcoin occurred on July 9, 2016.  The thrid will happen four years from that date, in July 2020. Thus far, this has made bitcoin’s supply schedule look somewhat linear, as shown in Figure 4.1.

Technically incorrect because of the inhomogeneous Poisson process and the relatively large amounts of hashrate that came online, the first “4 year epoch” was actually less than 4 years.

Whereas the genesis block was released in January 2009, the first halving should have occurred in January 2013, but instead it took place in November 2012.  Similarly, the second halving should have — if rigidly followed — taken place in November 2016, but actually occurred in July 2016 because even more hashrate had effectively accelerated block creation a bit faster than expected.

On p. 36 they write:

Based on our evolutionary past, a key driver for humans to recognize something as valuable is its scarcity. Satoshi knew that he couldn’t issue bitcoin at a rate of 2.6 million per year forever, because it would end up with no scarcity value.

This is a non sequitur.51

Maybe Satoshi did or did not think this way, but irrespective of his or her view, having a finite amount of something means there is some amount of scarcity… even if it is a relatively large amount.  Now this discussion obviously leads down the ideological road of maximalism which we don’t have time to go into today.52  Suffice to say that bitcoin is fundamentally not scarce due to its inability to prevent forks that could increase or decrease the money supply.

On p. 37 they write:

Long term, the thinking is that bitcoin will become so entrenched within the global economy that new bitcoin will not need to be issued to continue to gain support. At that point, miners will be compesnated for processing transaction and securing the network through fees on high transaction volumes.

This might happen but hasn’t yet.

For instance, Kerem Kaskaloglu (see p. 71) created a cartoon model to show what this should look like.

But the actual curves do not exist (yet).

Recommended reading: Analysing Costs & Benefits of Public Blockchains (with Data!) by Colin Platt.

Notice how reality doesn’t stack up to the idealized version (yet)?

On p. 39 they write about BitDNS, Namecoin, and NameID:

Namecoin acts as its own DNS service, and provides users with more control and privacy.

In the next edition they should mention how Namecoin ended up having one mining pool that consistently had over 51% of the network hashrate and as a result, projects like Onename moved over to Bitcoin and then eventually its own separate network altogether (Blockstack).

On p. 41 they write:

This is an important lesson, because all cryptocurrencies differ in their supply schedules, and thus the direct price of each cryptoasset should not be compared if trying to ascertain the appreciation potential of the asset.

One way to strengthen this section is to provide a consistent model or methodology to systemically value a coin that doesn’t necessarily involve future demand from new investors.  Maybe in the second edition they could provide a way to compare or at least say that no valuation model works yet, but here is a possible alternative?

On p. 42 they write:

A word to the wise for the innovative investor: with a new cryptocurrency, it’s always important to understand how it’s being distributed and to whom (we’ll discuss further in Chapter 12). If the core community feels the distribution is unfair, that may forever plague the growth of the cryptocurrency.

Two things:

  1. If a cryptocurrency or “cryptoasset” is supposed to be decentralized, how can it have a singular “core” community too?
  2. In practice, most retail buyers of coins don’t seem to care about centralization or even coin distribution.  Later in the book they mention Dash and its rapid coin creation done in the first month.  Few investors seem to care. 53

On p. 42 they write:

Ripple has since pivoted away from being a transaction mechanism for the common person and instead now “enables banks to send real-time international payments across network.” This focus plays to Ripple’s strengths, as it aims to be a speedy payment system that rethinks correspondent banking but still requires some trust, for which banks are well suited.

If readers have time, I recommend looking through the marketing material of OpenCoin, Ripple Labs, and Ripple from 2013-2018 because it has changed several times.54 Currently there are a couple of different products including xRapid and xCurrent which are aimed at different types of users and as a result, the passage above should be updated.

On p. 43 they write:

Markus used Litecoin’s code to derive Dogecoin, thereby making it one more degree of separation removed from Bitcoin.

This is incorrect.  Dogecoin was first based off of Luckycoin and Luckycoin was based on a fork of Litecoin.  The key difference involved the erratic, random block reward sizes.

On p. 45 they write about Auroracoin.

Auroracoin is a cautionary tale for both investors and developers. What began as a seemingly powerful and compelling use case for a cryptoasset suffered from its inability to provide value to the audience it sought to impact. Incelanders were given a cryptocurrency with little education and means to use it. Unsurprisingly, the value of the asset collapsed and most considered it dead. Nevertheless, cryptocurrencies rarely die entirely, and Auroracoin may have interesting times ahead if its developer team can figure out a way forward.

A few problems:

  1. Auroracoin is still basically dead
  2. Over 1,000 other coins have died, so “rarely” should be changed in the next edition
  3. Why does a decentralized cryptocurrency have a singular development team, isn’t that centralization?

On p. 46 they write:

Meanwhile, Zcash uses some of the most bleeding-edge cryptography in the world, but it is one of the youngest cryptoassets in the book and suitable only for the most experienced cryptoasset investors.

In the next edition it would be helpful to specifically detail what makes someone an experienced “cryptoasset” investor.

On p. 46 they write:

Adam Back is considered the inspiration for Satoshi’s proof-of-work algorithm and is president of Blockstream, one of the most important companies in the Bitcoin space.

While Hashcash was cited in the original Satoshi whitepaper, recall above, that the original idea can be directly linked to a 1993 paper entitled Pricing via Processing or Combatting Junk Mail by Cynthia Dwork and Moni Naor.  Also, it is debatable whether or not Blockstream is an important company, but that’s a different discussion altogether.

On p. 46 they write:

Bitcoin and the permissionless blockchain movement was founded on principles of egalitarian transparency, so premines are widely frowned upon.

What are the founding principles?  Where can we find them?   Maybe it exists, but at least provide a footnote.55

On p. 47 they write:

While many are suspicious of such privacy, it should be noted that it has tremendous benefits for fungibility.  Fungibility refers to the fact that any unit of currency is as valuable as another unit of equal denomination.

Cryptocurrencies such as Bitcoin are not fungible.  Be sure to listen to this interview with Jonathan Levin from May.  See also: Bitcoin’s lien problem and also nemo dat.

On p. 48 they write:

Monero’s supply schedule is a hybrid of Litecoin and Dogecoin. For monero, a new block is appended to its blockchain every 2 minutes, similar to Litecoin’s 2.5 minutes.

In the next edition I’d tighten the language a little because a new monero block is added roughly or approximately every 2 minutes, not exactly 2 minutes.

On p. 48 they write:

By the end of 2016, Monero had the fifth largest network value of any cryptocurrency and was the top performing digital currency in 2016, with a price increase over the year of 2,760 percent. This clearly demonstrates the level of interest in privacy protecting cryptocurrency. Some of that interest, no doubt, comes from less than savory sources.

That is a non sequitur.

Where are the surveys of actual Monero purchasers during this time frame and their opinions for why they bought it? 56

For instance, in looking at the two-year chart above, how much on-chain activity in 2016 was due to speculators interest in “privacy” versus coin flipping?  It is impossible to tell.  Even with analytics all you will be able to is link specific users with purchases.  Intent and motivation would require  surveys and subpoenas; worth adding if available in the next edition.

On p. 48 they write:

Another cryptocurrency targeting privacy and fungiblity is Dash.

Is Dash really fungible though?  That isn’t explored in this section.  Plus Dash has a CEO… how is that decentralized?

On p. 49 they write:

In fact, Duffield easily could have relaunched Dash, especially considering the network was only days old when the instamine began to be widely talked about, but he chose not to.  It would have been unusual to relaunch, given that other cyrptocurrencies have done so via the forking of original code. The creators of Monero, for example, specifically chose not to continue building off Bytecoin because the premine distribution had been perceived as unfair.

How is this not problematic: for a “decentralized” cryptocurrency to be controlled and run by one person who can unilaterally stop and restart a chain?

It actually is common, that’s the confusing part.  Why have regulators such as FinCEN and the SEC not provided specific guidance (or enforcement) on the fact that one or a handful of individuals actually are unlicensed / non-exempted administrators of financial networks?

On p. 49 they write:

The Bitcoin and blockchain community has always been excited by new developments in anonymity and privacy, but Zcash took that excitement to a new level, which upon issuance drove the price through the roof.

Putting aside the irrational exuberance for Zcash itself, why do the authors think so many folks are vocal about privacy and anonymity?

Could it be that a significant portion of the coins are held by thieves of exchanges and hosted wallets who want to launder them?  Here are a few recent examples:

On p. 49 they write:

Through his time at DigiCash and longstanding involvement in cryptography and cryptoassets, Zooko has become one of the most respected members in the community.

Let’s put aside Zooko and Zcash.  The phrase, “the community” frequently appears in this book and similar books.  It is an opaque, ill-defined (and cliquish) term that is frequently used by coin promoters to shun certain people that do not promote specific policies (and coins).57  It’s a term that should be clearly defined in the next edition.

On p. 50 they write:

While it is still early days for Zcash, we are of the belief that the ethics and technology chops of Zooko and his team are top-tier, implying that good things lie in wait for this budding cryptocurrency.

The statement above seems like an endorsement.  Did either of the authors own Zcash just as the book came out?  And what are the specific ethics they speak of?  And why do the authors call it a cryptocurrency instead of a “cryptoasset”?

Chapter 5

On p. 51 they write:

For example, the largest cryptocommodity, Ethereum, is a decentralized world computer upon which globally accessible and uncensored applications can be built.

How is it a commodity?  Maybe it is and while they use a lot of words in this chapter, they never really precisely why it is in a way that makes much sense.  Recommend modifying the first few pages of this chapter.

On p. 52 they write about “smart contracts” and mention Nick Szabo.

For a future edition I recommend diving deeper into the different uses and definitions of smart contracts.  Also could be worth following Tony Arcieri suggestion:

I really like “authorization programs” but people really seem married to the “smart contract” terminology. Never mind Martin Abadi’s work on authorization languages (e.g. Binder) predates Nick Szabo’s “smart contracts” by half a decade…

For instance, there has been a lot of work done via the Accord Project with Clause.io and others such as IBM and R3.  Also worth looking into Barclay’s and UCL’s effort with the Smart Contract Templates.  A second edition that aims to be up-to-date should look at these developments and how they have evolved from what Abadi and Szabo first proposed.

On p. 53 they mentioned that Counterparty “was launched in January 2014.”  Technically that is not true.  The fundraising (“proof-of-burn”) took place in January and it was the following month that it “launched.”

On p. 54 they write:

The reason Bitcoin developers haven’t added extra functionality and flexibility directly into its software is that they have prioritized security over complexity. The more complex transactions become, the more vectors there are to exploit and attack these transactions, which can affect the network as a whole. With a focus on being a decentralized currency, Bitcoin developers have decided bitcoin transactions don’t need all the bells and whistles.

This is kind of true but also misses a little history.

For instance, Zerocoin was first proposed as an enhancement directly built into Bitcoin but key, influential Bitcoin developers who maintained the repository, pushed back on that for various technological and philosophical reasons.  As a result, the main authors of that proposal went on to form and launch Zcash.58

On p. 56 they write:

Buterin understood that building a system from the ground up required a significant amount of work, and his announcement in January 2014 involved the collaboration of a community of more than 15 developers and dozens of community members that had already bought into the idea.

I assume the authors mean, following the Bitcoin Miami announcement in January 2014, but they don’t really say.  I’m not sure how they arrive at the specific headcount numbers they did above, would be good to add a footnote in the future.

On p. 56 they write:

The ensuing development of the Bitcoin software before launch mostly involved just two people, Satoshi and Hal Finney.

This assumes that Satoshi is not Hal Finney, maybe he was.  But it should also include the contributions of Ray Dillinger and others.

On p. 56 they write:

Buterin also knew that while Ethereum could run on ether, the people who designed it couldn’t, and Ethereum was still over a year away from being ready for release. So he found funding through the prestigious Thiel Fellowship.

This is inaccurate.

After reading this, I reached out to Vitalik Buterin and he said:59

That’s totally incorrect. Like the $100k made very little difference.

So that should be corrected in the next version.

On p. 57 they write:

Ethereum democratized that process beyond VCs. For perspective on the price of ether in this crowdsale, consider that at the start of April 2017, ether was worth $50 per unit, implying returns over 160x in under three years. Just over 9,000 people bought ether during the presale, placing the average initial investment at $2,000, which has since grown to over $320,000.

There are a few issues with this:

  1. Ethereum did a small private and a larger public sale.  We do have the Terms and Conditions of the public sale but we do not know how many participated in the private sale and under what terms (perhaps the T&Cs were identical).
  2. Over the past 12 months there has been a trend for the “top shelf” ICOs to eschew a public sale (like Ethereum did) and instead, conduct private placement offerings with a few dozen participants at most… typically VCs and HNWIs.
  3. There are lots of dead ICOs.  One recent study found that, “56% of crypto startups that raise money through token sales die within four months of their initial coin offerings.”  Ethereum is definitely an exception to that and should be highlighted as such.

On p. 57 they write:

The extra allocation of 12 million ether for the early contributors and Ethereum Foundation has proved problematic for Ethereum over time, as some feel it represented double dipping. In our view, with 15 talented developers involved prior to the public sale, 6 million ether translated to just  north of $100,000 per developer at the presale rate, which is reasonable given the market rate of such software developers.

Who are these 15 developers, why is that the number the authors have identified?

Also, how much should FOSS developers be compensated and/or the business model around that is a topic that isn’t really addressed at all in this book, yet it is a glaring omission since virtually all of the projects they talk about are set up around funding and maintaining a FOSS team(s).  Maybe some findings will be available for the next version.

On p. 57 they write:

That said, the allocation of capital into founders’ pockets is an important aspect of crowdsales. Called a “founder’s reward,” the key distinction between understandable and a red flag is that founders should be focused on building and growing the network, not fattening their pockets at the expense of investors.

Because coins do not typically provide coin holders any type of voting rights, it is legally dubious how you can hold issuers and “founders” accountable.60

That is why, as mentioned above, there has been an evolution of terms and conditions such that early investors in a private placement for coins may have certain rights and that the founders have certain duties that are all legally enforceable (in theory).

Because no one is publishing these T&Cs, it is hard to comment on what are globally accepted practices… aside from allowing early investors liquidity on secondary markets where they can quickly dump coins.61

Without the ability to legally hold “founders” accountable for enriching themselves at the expense of the project(s), the an interim solution has been to get on social media and yell alot… which is really unprofessional and hit or miss.  Another solution is class action lawsuits, but that’s a different topic.

Also, I put the “founders” into quotes because these seem to be administrators of a network, maybe in the next edition they will be described as such?

On p. 58 they write:

Everyone trusts the system because it runs in the open and is automated by code.

There is lots of different types of open source code that runs on systems that are automated.  For instance, the entire Linux, Apache, and Mozilla worlds predate Bitcoin.  That isn’t new here.62

Also, as mentioned in the previous chapter: Researchers: Last Year’s ICOs Had Five Security Vulnerabilities on Average.  As a result, this has led to the loss of nearly $400 million in ICO funds.

Readers and investors shouldn’t just trust code because someone created a GitHub repo and said their blockchain is open and automated.63

On p. 59 they write:

Most cryptotokens are not supported by their own blockchain.

This is actually true and problematic because it creates centralization risks and the ability for one party to unilaterally censor transactions and/or act as administrators.

For instance, a few days ago, Bancor had a bug that was exploited and about $13.5 million in ETH were stolen… and Bancor was able to freeze the BNT.  That’s because BNT is effectively a centrally administered ERC20 token on top of Ethereum.

Ignoring for the moment whether or not BNT is or is not a security, this is not the first time such issuance and centralization has occurred.  See the colored coin mania from 2014-2015.

On p. 60 they write about The DAO:

Over time, investors in these projects would be rewarded through dividends or appreciation of the service provided.

They mention regulators briefly later on – about SEC views – but most of the content surrounding crowdsales was non-critical and borderline promotional.64  Might be worth adding more meat around this in the next edition.

On p. 61 they write about The DAO:

The hack had nothing to do with an exchange, as had been the case with Mt. Gox and other widely publicized Bitcoin-related hacks. Insted, the flaw existed in the software of The DAO.

Is it really possible to call it a “flaw” or “hack” and not a feature?  See also: “Code is not law” as well as “Cracking MtGox.”

On p. 61 they write:

However, a hard fork would run counter to what many in the Bitcoin and Ethereum communities felt was the power of a decentralized ledger.  Forcefully removing funds from an account violated the concept of immutability.

Just a few pages earlier the authors were saying that the lead developer behind Dash should have restarted the network because that was common and now they’re saying that doing a block reorg is no bueno.  Which is it?

Why should the reader care what a nebulously defined “community” says, if it is is not defined?

The reason we have codes of conduct, terms of service, and EULAs is to specifically answer these types of problems when they arise.

Since public blockchains are supposed to be anarchic, the lack of formal governance is supposed to be a feature, right?   That’s a whole other topic but suffice to say that these two sentences should be reworded in the next edition to incorporate the wisdom found in the Lexicon paper.

On p. 62 they write:

Many complained of moral hazard, and that this would set a precdent for the U.S. government or other powerful entities to come in someday and demand the same of Ethereum for their own interests. It was a tough decision for all involved, including Buterin, who while not directly on The DAO developer team, was an admistrator.

This is the first and only time they point out that key participants collectively making governance decisions are administrators… a point I have been highlighting throughout this review.

I don’t think it is fair to label Vitalik Buterin as a singular administrator, because if he was, he wouldn’t have had to ask exchanges to stop trading ether and/or The DAO token.  Perhaps he was collectively involved in that process, but mining pool operators and exchange managers are arguably just as important if not more so.  See also: Sufficiently Decentralized Howeycoins

On p. 62 they write:

While hard fork are often used to upgrade a blockchain architecture, they are typically employed in situations where the community agrees entirely on the beneficial updates to the architecture. Ethereum’s situation was different, as many in the community opposed a hard fork. Contentious hard forks are dangerous, because when new software updates are released for a blockchain in the form of a hard fork, there are then two different operating systems.

A few things:

  1. Notice the continued use of an ill-defined “the community”
  2. How is agreement or disagreement measured?  During the Bitcoin block size debate, folks tried to use various means to express interest, most of which resulted in sybil attacks such as retweets and upvotes on social media by an army of bots.
  3. Is any fork non-contentious.  Surely if we looked hard enough, we could always find more than a handful of coin owners and/or developers that disagreed with the proposal.  Does that mean you should ignore them?  Whose opinion matters?  These types of questions were never really formally answered either in the case of the Bitcoin Segwit / Bitcoin Cash fork… or in the Ethereum / Ethereum Classic / The DAO fork.  Governance is pretty much an off-chain popularity contest, just like voting for politicians.65

On p. 63 they write:

The site for Ethereum Classic defines the cryptoasset as “a continuation of the original Ethereum blockchain–the classic version preserving untampered history; free from external interference and subjecitve tampering of transactions.”

This could be revised since Ethereum Classic itself has now had multiple forks.

As mentioned in a previous post last year:

Ethereum Classic: this small community has held public events to discuss how they plan to change the money supply; they video taped this coordination and their real legal names are used; only one large company (DCG) is active in its leadership; they sponsor events; they run various social media accounts

There has been lots of external interference, that’s been the lifeblood of public blockchains… because they don’t run themselves, people run and administer them.

Continuing on p. 63 they write:

While many merchants understably complain about credit card fees of 2 to 3 percent, the “platform fees” of Airbnb, Uber, and similar platform services are borderline egregious.

Maybe they are, maybe they are not.66 What is the right fee they should be?  Miners take a cut, exchanges take a cut, developers take a cut via “founder’s funds.”

The next edition should give a step-by-step comparison to show why fee structures are egregious (maybe they are, it just is not clear in this book).

On p. 64 they wrote about Augur.  Incidentally, Augur finally launched in early July while writing this review.  I have an origin story but will keep that for later.

On p. 65 they wrote about Filecoin:

For example, a dApp may use a decentralized cloud storage system like Filecoin to store large amounts of data, and another cryptocommodity for anonymized bandwidth, in addition to using Ethereum to process certain operations.

A couple thoughts:

  1. That’s the theory, though Filecoin hasn’t launched yet — why do they get the benefit of the doubt yet other projects don’t?
  2. There is no price or use comparison in this chapter or elsewhere… the book could be strengthened if it provided more evidence of adoption because we have seen that running decentralized services such as Tor or Freenet have been less than spectacular.

On p. 65 they write:

Returning to the fundamentals of investment theory will allow innovative investors to properly position their overarching portfolio to take advantage of the growth of cryptoassets responsibly.

It is still unclear what an “innovative investor” is — at least the way these authors describe it.67

Chapter 6

On p. 69 Tatar writes:

Not only did I decide to inveset in bitcoin, I decided to place the entirety of that year’s allocation for my Simplified Employee Pension (SEP) plan into bitcoin. When I announced what I had done in my article “Do Bitcoin Belong in your Retirement Portfolio?,” it created a stir online and in the financial planning community.

This was one of just a couple places where the authors actually disclose that they own specific coins, next edition they should put it up front.

On p. 70 Tatar writes:

Was I chasing a similar crash-and-burn scenario with bitcoin? Even my technologically and investment savvy son, Eric, initially criticized me about bitcoin. “They have these things called dollar bills, Dad. Stick to using those.”

Eric is probably right: that the authors of this book accepted traditional money for their book (Amazon doesn’t currently accept cryptocurrencies).

Based on their views presented in this book, the authors probably don’t spend (many) coins they may have in the portfolio, instead holding on to them with the belief that other investors will bid up the price (measured in actual money).

On p. 77 they write about the GFC prior to 2008:

Becoming a hedge fund manager became all the rage for business-minded students when it was revealed that the top 25 hedge fund managers earned a total of $22.3 billion in 2007 and $11.6 billion in 2008.

Coincidentally a similar “rage” for running cryptocurrency-related funds has occured in the past 18 months, especially for ICOs.

More than two hundred “funds” quickly popped up in order to gobble up coins during coin mania.  At least 9 have closed down through April and many more were down double digits due to a bear market (and not hedging).

Chapter 7

On p. 83 they write:

Bitcoin is the most exciting alternative asset in the twenty-first century, and it has paved the way for its digital siblings to enjoy similar success.

It is their opinion that this is the case, but the authors don’t really provide a lot of data to reinforce it yet, other than the fact that there have been some bull runs due to exuberance.68 Worth rewording in the next edition.

On p. 83 they write:

Because bitcoin can claim the title of being the oldest cryptoasset…

Historically it is not.  It may be the oldest coin listed on a liquid secondary market, but there were cryptocurrencies before bitcoin.

On p. 85 Berniske writes:

Similarly, I (Chris) didn’t even consider investing in bitcoin when I first heard about it in 2012. By the time I began considering bitcoin for my portfolio in late 2014, the price was in the mid $300s, having increased 460,000-fold from the initial exchange rate.

I believe this is the only time in the book that Burniske discloses any coin holdings.

On p. 85 they make some ridiculous comparison with the S&P 500, DJIA, NASDAQ 100… and Bitcoin.

The former three are indices of multiple regulated securities.  The latter is just one coin that is easily influenced and manipulated by external unaccountable parties.  How is that an apples to apples comparison?

On p. 87 they continue by comparing Bitcoin with Facebook, Google, Amazon, and Netflix.

Again, these are regulated securities that reflect cash flows and the financial health of multinational companies… Bitcoin has no cash flows and isn’t (yet) setup to be a company… and isn’t regulated (no KYC/AML at the mining farm or mining pool level).

Bitcoin was originally built to be an e-cash transmission network, a decentralized MSB.69 How is comparing it with non-MSBs a useful comparison?

On p. 88 they write:

Remember that, as of January 2017, bitcoin’s network value was 1/20, 1/22, 1/3, and 1/33 that of the FANG stocks respectively. Therefore, if bitcoin is to grow to a similar size much opportunity remains.

This whole section should be probably be modified because these aren’t apples-to-apples comparisons.  FANG stocks represent companies that have to build and ship multiple products in order to generate continuous revenue.

With Bitcoin, it is bitcoin that is the product, nothing else is being shipped nor is revenue being generated70

Maybe the price of a bitcoin — as measured with actual money — does reach a 1:1 or even surpass the stocks above.  But a new version of this book could be strengthened with an outline on how it could do so sustainably.

Also, the whole “market cap” topic should be removed from next edition as well.  About 20% of all bitcoins have been lost or destroyed and this is never reflected in those exuberant “market cap” stories.  See: Nearly 4 Million Bitcoins Lost Forever, New Study Says

On p. 92 they write about volatility:

Upon launch, cryptoassest tend to be extremely volatile because they are thinly traded markets.

Actually, basically all cryptocurrencies including the ones that the authors endorse throughout the book — are still very volatile.

Below is one illustration:

Source: JP Koning

The authors do have a couple narrow, daily volatility charts in the book, but none that provide a similar wideview comparison with something that is remotely comparable (Bitcoin versus Twitter doesn’t make any sense).

On p. 101 they write:

Cryptoassets have near-zero correlation to other captial market assets.

That’s loosey goosey at best.71

For instance, as pointed out in multiple articles this year: Bitcoin and other cryptocurrencies tend to be locked together – and that’s a big problem

On p. 102 they write:

In contrast, the past few years have been more nuanced: bitcoin’s volatily has calmed, yet it retains a low correlation with other assets.

That first part is untrue, as shown by the chart above from JP Koning.  The second part is relative.72

Chapter 8

On p. 107 they write:

The Securities and Exchange Commission has thus far steered clear of applying a specific label to all cryptoassets, though in late July 2017 it did release a report detailing how some cryptoassets can be classified as securities, with the most notable example being The DAO.

That’s pretty much the extent of the authors analysis of the issue.  Granted they aren’t lawyers but this is a pretty big deal, maybe in the next edition beef this up?

On p. 107 they write:

While it’s a great validation of cryptoassets that regulators are working to provide clarity on how to classify at least some of them, most of the existing laws set forth suffer from the same flaw: agencies are interpereting cryptoassets through the lens of the past.

From this wording it seems that the authors want laws changed or modified to protect their interests and the financial interests of their LPs.  This isn’t the first or last time that someone with a vested interest lobbies to get carve outs, exceptions, or entire moratoriums.

Maybe that it is deserved, but it’s not well-articulated in this chapter other than to basically call regulators “old-fashioned” and out of touch with technology.73 Could be worth rethinking the wording here.

On p. 107 they write:

Just as there is diversity in equities, with analsts segmenting companies depending on their market capitalization, sector, or geography, so too is there diversity in cryptoassets. Bitcoin, litecoin, monero, dash, and zcash fulfill the three definitions of a currency: serving as a means of exchange, store of value and unit of account.

This is empirically incorrect.  None of these coins functions as a unit of account, they all depend on and are priced in… actual money.74

There are lots of reasons for why this is case but that is beyond the scope of this review. 7576

On p. 110 they write about ETFs:

It should be noted that when we talk about asset classes we are not doing so in the context of the investment vehicle that may “house” the underlying asset, whether that vehicle is a mutual fund, ETF, or separately managed account.

They don’t really discuss it in the book, but just so readers are aware, there have been about 10 Bitcoin-only ETFs proposed in the US, all of which have been rejected by the SEC (or applications were voluntarily removed).

Curious to know why?  See the March 10, 2017 explanation from the SEC.

Note: this hasn’t stopped sponsors from re-applying.  In the process of writing this review, the CBOE filed for a Bitcoin ETF.

On p. 111 they write:

Much of the thinking in this chapter grew out of a collaboration between ARK Invest and Coinbase through late 2015 and into 2016 when the two firms first made the claims that bitcoin was ringing the bell for a new asset class.

Just to be clear: the joint paper they published in that time frame was a bit superficial as it lacked actual user data from Coinbase exchanges (both GDAX and the consumer wallet).  I pointed that out back then and this book is basically an expanded form of that paper: where is specific usage data on Coinbase?  The only way we have learned any real user numbers about Coinbase is from an IRS lawsuit.

For instance, a future edition should try to differentiate on-chain activity that is say, gambling winnings or miners payouts from exchange arbitrage or even coin shuffling.  Their analysis should be redone once they remove the noise from the signal (e.g., not all transactional activity is the same).

This is a real challenge and not a new issue.  For instance, see: Slicing data.

On p. 112 they write:

Cryptoassets adhere to a twenty-first century model of governance unique from all other asset classes and largely inspired by the open source software movement. The procurers of the asset and associated use cases are three pronged. First, a group of talented software developers decide to create the blockchain protocol or distributed application that utilizes a native asset. These developers adhere to an open contributor model, which means that over time any new developer can earn his or her way onto the development team through merit.

There is no new governance model.

In practice, changes are done via social media popularity contests.  We saw that with the Bitcoin blocksize debate and Ethereum hard fork.  And in some ways, strong vocal personalities (and cults of personality) is how other FOSS projects (like Python) are managed and administered.

The fluffy meritocracy feel-goodism is often not the order of the day and we see this in many projects such as Bitcoin where the commit access and BIP approval process is limited to a small insular clique.

Source: Jake Smith (section 3)

The 4 point plan above is a much more accurate break down of how most coin projects are setup.

On p. 112 they write:

However, the developers are not the only ones in charge of procuring a cryptoasset; they only provide the code. The people who own and maintain the computers that run the code–the-miners–also have a say in the development of the code because they have to download new software updates. The developers can’t force miners to update software. Instead, they must convince them that it makes sense for the health of the overall blockchain, and the economic health of the miner, to do so.

But in many projects: developers and miners are one in the same.  This is why it is so confusing to not have seen additional clarity or guidance from FinCEN because of how centralized most projects are in practice.

Be sure to look at “arewedecentralizedyet.”77

On p. 113 they write:

These companies often employ some of the core developers, but even if they don’t, they can assert significant influence over the system if they are a large force behind user adoption.

Maybe that is the case for some cryptocurrencies.78  Should “core” developers be licensed like professional engineers are?

Also, isn’t their statement above evidence that most projects are fairly centralized because the division of labor results in specialization?

On p. 113 they write:

These users are constantly providing feedback to the developers, miners, and companies, in whose interest it is to listen, because if users stop using the cryptoasset, then demand will go down and so too will the price.  Therefore, the procurers are constantly held accountable by the users.

Except this isn’t what happens in practice.

Relatively little activity takes place at all on most of these coin platforms and most of what does occur involves arbitrage trading and/or illicit activity.

This activity seems to have little direct connection to the price of the coin because the price of the coin is still largely determined by the whims of speculative demand.

For instance, above is a two-year transactional volume chart for bitcoin.  The price of bitcoin in the summer of 2016 was in the $600-$700 range whereas it is 10x that today.  Yet daily transaction volume is actually lower than it was back then.  Which means: the two are separate phenomenon.

Also, arguably the only direct way coin owners can — in practice —  hold maintainers accountable is via antics on social media.  That is why control of a specific reddit, Telegram, or Twitter account is very important and why hackers target those channels in order to influence prices.

On p. 113 they write about supply schedules:

For example, with oil, there’s the famous Organization of the Petroleum Exporting Countries (OPEC), which has had considerable control over the supply levels of oil.

Inadvertently they actually described how basically all proof-of-work coins operate: via a small clique of known miners and mining pools.  A cartel?

Source: Jameson Lopp

While these miners have not yet increased or decreased the supply of bitcoins, mining is a specialized task that requires certain capital and connections in order to be successful at.  These participants could easily collude to change the money supply, censor transactions, etc. and there would be no immediate legal recourse.

On p. 115 they write:

Cryptoassets, like gold, are often constructed to be scarce in their supply. Many will be even more scarce than gold and other precious metals. The supply schedule of cryptoassets typically is metered mathematically and set in code at the genesis of the underlying protocol or dis