Have PoW blockchains become less resource intensive?

More than a couple of people have asked for an update to a popular post published 14 months ago.

What has changed?

Before we begin, a quick reminder: the basic security model behind proof-of-work (PoW) blockchains is to make it economically costly to successfully rewrite the chain’s history. Finite resources, whether it is in the form of electricity or semiconductors, have to be consumed.

Therefore, a PoW chain such as Bitcoin, cannot simultaneously be secure and inexpensive to operate. Because if it was inexpensive to operate it would also be inexpensive to successfully attack.

proof of work, ethereum, mining, blockchain
Source: Crypviz


For Bitcoin, Bitmain announced its S17e system which can churn out 64TH/s.  Each machine consumes ~2880 watts at the wall.  The first of these units are scheduled to be shipped to customers in November (however other less powerful variants shipped during the summer).

The current Bitcoin hashrate has been oscillating around 100 million TH/s the past few weeks.  

[Source: Blockchain.info]

If the entire network was comprised of the unreleased S17e-based machines, there would be around 1.56 million of them. In a given year these would gulp down about 39.4 billion kWh. But we know that is not the case yet. Thus, this will serve as our lower bound.

Bitmain is also shipping several other newly released systems, including the T17e.  Like its cousin above, the T17e also consumes about ~2880 at the wall. But it is not as efficient per hash: creating only 53 TH/s with the same amount of electricity.  

Why manufacture and sell two (or more) different machines that draw roughly the same amount of power?  

Cost.  the T17e costs $1665 and the S17e is $2483. The target market for the T17e is supposedly for miners who have low or no electricity costs.

How many T17e’s would it take to generate the 100 million TH/s network hashrate?  About 1.88 million; or an additional 300,000 more machines than the S17e.

A quick pause. these types of bulk purchases are not idle speculation. In the middle of last summer, during a two-week period of time, the equivalent of 100,000 mining machines was added to the Bitcoin network (likely early variants of the S17). This is a reversal from last November, wherein the equivalent of ~1.3 million S9s were taken offline during one month.

Again, we know that in practice that there are many more less efficient miners still online.  But crunching the numbers, 1.88 million machines each pulling in 2.88 kWh over one entire year results in…  ~47.6 billion kWh annually.

Another Bitmain machine purchasable today is the new T17 that generates 40 TH/s, drawing about 2200 watts at the wall.  It would take about 2.5 million of these to generate the Bitcoin hashrate all while consuming…  ~48.2 billion kWh per year.

To be thorough, Bitmain released the S9 SE in July which generates 16 TH/s, drawing 1280 watts.  It’s unclear how many of these have been sold but if the entire network was comprised of these: 6.25 million would need to be used.  And they would collectively guzzle ~70 billion kWh. This would be a plausible upper bound.

For comparison, if Bitcoin (T17) were its own country it would at minimum consume roughly the same amount of electricity as Romania or Algeria. If the network were comprised of just S9 SE’s, that’d be about the energy footprint of Austria. In either case, very little is value is produced in return… aside from memes and lots of social media posts. And no, despite historical revisionism by maximalists, “hodling” is not what Bitcoin was originally designed for.

As mentioned in the previous post: no other payment system on earth uses the same amount of electricity, let alone aggregate number of machines, as a PoW coin network. That is a dubious distinction.  

In looking at my previous post you will see a similar figure.  In August 2018, using the (older) S9 machine (~13 TH/s) as a baseline, the Bitcoin network consumed about ~50.5 billion kWh / year.1 Some of these types of machines (like the S9 SE) are still on.

Thus whenever you hear a PoW promoter claim that:  

  • Bitcoin doesn’t use much electricity; or
  • Bitcoin’s electricity usage will naturally decline over time; or
  • Bitcoin is more efficient than traditional payment systems

You can rightly tell them all of those claims are empirically false. In fact, the only way for the resource demands of a PoW coin to decline is if there was a long decline in the coin price.

What do taxpayers – who underwrite the state-owned utility companies – get in return for subsidizing these energy guzzlers? New economic zones of growth and prosperity?

Nope.  According to Chainalysis, in a given day more than 90% of activity on the Bitcoin network is simply movement from one intermediary to another. 2 Coin trading is by far the largest category.


And since most of these coin intermediaries increasingly require some form of KYC / AML compliance, the Bitcoin network has morphed into a expensive permissioned-on-permissionless network that has the drawbacks of both and the benefits of neither. There is no point in using PoW in a network in which all major participants are known: Sybils no longer exist.

A common refrain by PoW promoters is, Christmas lights and set-top boxes also consume huge amounts of energy!

First of all, that’s a whataboutism.  But it also ignores how several Bitcoin mining manufacturers have actually tried to embed chips into these wares.

For instance:

  • Bitmain has a couple of routers called the Antrouter that will mine either BTC or LTC for you.  
  • Bitfury has marketed Bitcoin mining light bulbs.

As you can imagine, a fixed unit of labor eventually becomes unprofitable once difficulty levels increase.  It’s the same fundamental problem that faced the 21.co toasters. Thus neither of these took off (the light bulb didn’t ship) even though retail users often keep both their home routers and living room lights on all day.   Historically PoW equipment becomes e-waste fast and the last thing consumers want is embedded e-waste that guzzles electricity.3

We haven’t even touched on other PoW coins such as Ethereum, Bitcoin Cash, or Monero…  but it is worth pointing out that nearly all of the money going to miners via the block reward is value leaking from the system, either to semiconductor manufacturers or state-owned utilities.

This isn’t idle speculation either, as Nvidia counted on massive consumption of its GPUs in early 2018 which didn’t materialize due to the crash in coin prices. This led to a glut of high-end GPUs in its channel partners, which hit Nvidia’s bottom line and was later reflected by a 50% decline in share prices (the same phenomenon impacted AMD too):

Source: TechSpot

Apart from a couple of small investments, the value that a couple of semiconductor manufacturers or a clique of state-owned utilities receives via mining is money that is not being invested towards developing the chain itself.    

And some of these mining manufacturers have privatized gains at the expense of taxpayers. For instance, Bitfury, used its political connections to obtain cheap land in the Republic of Georgia where it setup massive mining farms:

 “The efforts have given Georgia, with 3.7 million people, a dubious distinction. It is now an energy guzzler, with nearly 10 percent of its energy output gone into the currency endeavor.”  

In Kyrgyzstan, 45 “crypto” mining firms consumed more energy than three local regions combined:  

“[They] consumed 136 megawatts of electricity, which is more than the amount consumed by three Kyrgyzstan regions: Issyk-Kul, Talas and Naryn.”  

Uzbekistan’s Ministry of Energy has introduced a new bill that would dramatically increase the electricity price to miners who are viewed as being “very energy intensive.”

We could probably create an entire post on these types of stories too.

At least Bitcoin is “decentralized,” right?

While the farms may be geographically dispersed to areas with the cheapest electricity, the mining pools, mining manufacturers, and other infrastructure participants are a small and centralized enough group that they can fit into a hotel for regular conferences.

Source: Twitter

Time to look at other chains.

Bitcoin Cash

Because it is nearly identical to Bitcoin (albeit with a few changes such as a larger block size), we can pretty much do the same set of calculations as we already did above.

Source: BitInfoCharts

Unlike Bitcoin, Bitcoin Cash has seen a dramatic decline in hashrate since it peaked at over 5 million TH/s earlier in the summer. It is now oscillating around 2.5 million TH/s.

For Bitcoin Cash, with a Bitmain S17e system, remember it generates 64TH/s and consumes ~2880 watts at the wall. If the entire network was comprised of the unreleased S17e-based machines, there would be around 40,000 of them. In a given year these would use about 985 million kWh. This will serve as our lower bound.

Bitmain’s S9 SE generates 16 TH/s, drawing 1280 watts. It’s unclear how many of these have been sold but if the entire network was comprised of these: ~156,000 would need to be used. And they would collectively use ~1.75 billion kWh. This would be a plausible upper bound.

Not counting e-waste, that would put the energy usage of Bitcoin Cash somewhere around 150, between Benin and The Bahamas. Compared with last year (when it was around 122), this decline is largely due to the nearly 60% price decline in BCH. This once again illustrates that hashrate follows price (e.g., miners expend capital chasing seigniorage).


Coupled with “the thirdening” in February (in which block rewards declined from 3 to 2 ETH), and an overall decline in ETH prices, hashrate also declined over the past year:

Source: Etherscan

According to Coinwarz, the hashrate is oscillating around 200 TH/s, about 1/3 it was when the previous article was written.

A proposed ASIC from Linzhi that hasn’t been built or shipped aims to generate 1400 MH/s with an electricity consumption level of 1 kWh. As the story goes:

To put those figures in perspective, NVIDIA’s GTX TitanV 8 card is now one of the most profitable piece of equipment on the ethash algorithm, able to compute 656 MH/s at an energy consumption level of 2.1 kWh, according to mining pool f2pool’s miner profitability index.

There are a couple of other ASICs on the market including one from Innosilicon and another from Bitmain. The previous post looked at the same Innosilicon A10 on the market, so to simplify things and because the Bitmain machine is roughly just as efficient, let’s reuse it here.

The A10 generates 485 MH/s and consumes ~850 W. The Ethereum network is around 200,000,000 MH/s. That’s the equivalent of 412,371 A10 machines.

Annually these would consume about 3.1 billion kWh per year. Around 132, about as much as Senegal or Papua New Guinea.

If we used the GTX TitanV 8 card, as described in the article above, we find that 304,878 GPUs would be used. These would consume 5.6 billion kWh per year. That’d be around the same amount that Mongolia does annually.

This is one of the reasons why Ethereum is transitioning over to proof-of-stake. As Vitalik Buterin said last year:

I would personally feel very unhappy if my main contribution to the world was adding Cyprus’s worth of electricity consumption to global warming.

Will the nebulously defined “DeFi” on an actual proof-of-stake system change the usage dynamics in the future?4


Litecoin, better known as Bitcoin’s other testnet, has seen its hashrate decline along with its price.

Source: BitInfoCharts

For simplicity sake, let’s call it an even 300 TH/s which coincidentally it was at 14 months ago too. CoinWarz says it is also currently around that, who are we to argue with them?

As mentioned in the previous article, Bitmain’s L3+ is still around. It generates ~500 MH/s with ~800 watts. A slightly more powerful L3++ is on the market as well.

There are the equivalent of about 600,000 L3+ machines generating hashes.

As an aggregate:

  • A single L3+ will consume 19.2 kWh per day
  • 600,000 will consume 11.5 million kWh per day
  • Annually: 4.2 billion kWh per year

It would be placed around 124th, between Moldova and Cambodia.

According a distributor, the Antminer L3++ specifications:

  1. Hash Rate: 580 MH/s ±5%
  2. Power Consumption: 942W + 10% (at the wall, with APW3 ,93% efficiency, 25C ambient temp)

If only L3++’s were used, the outcome would be about the same. 5

This consumption is pretty absurd once we factor in things like how there is only a couple of active developers who basically just merge changes from Bitcoin into Litecoin.6 In other words, one of the largest PoW networks has very few users or developers, yet consumes the same amount of energy as Moldolva. How is that a socially useful innovation?

Note: an easy way to double-check our math on this specific one: the price of LTC is nearly the same today as it was 14 months ago. Ceteris paribus, miners will expend capital no higher than the coin price, to ‘win’ the seigniorage.


In terms of mining, it appears that several decisions makers (administrators?) in the Monero world really dislike ASICs. So much so that they routinely coordinate forks that include “ASIC-resistant” hashing algorithms. Stories like this are mostly just PR because we know that any PoW coin with a high enough value, will eventually become the target of an ASIC design team.7

Source: BitInfoCharts

From the chart above, you can clearly see when the forks occurred that added “ASIC-resistance.”

Compared with the previous article, the hashrate has declined by about 1/3rd to about 325 MH/s. And it is believed that most of this hashrate is generated by GPUs and CPUs.

There are lots of how-to guides for building a Monero mining rig. Rather than getting into the weeds, based on this crazy 12-card Vega build, the user was able to generate 28,100 hashes/sec and consume 1920 watts. That’s about 2341 hashes per card (more than 10% faster than the one used in the previous article).

That’s about 138,829 GPUs each sipping 160 watts. Altogether these consume 194 million kWh annually. That’s likely a lower bound for GPU mining.

If we reused the Vega 64 mentioned in the previous article, there would be about 162,500 GPUs at the current hashrate. These would consume around 228 million kWh annually.

Not surprisingly, coupled with the “ASIC-resistant” fork and a coin price decline of nearly 50%, this resulted in about 1/3 energy used from the previous year. But this is still not an upper bound because it is likely that CPUs contribute to a non-insignificant portion of the hashrate via persistent botnets and cryptojacking.

Based on the same electricity consumption chart as the others, Monero would be placed somewhere above Grenada and the Mariana Islands. Perhaps a bit higher if lots of CPUs are used. Remember, this is called CPU-cycle theft for a reason.8


In aggregate, based on the numbers above, these five PoW coins likely consume between 56.7 billion kWh and 81.8 billion kWh annually. That’s somewhere around Switzerland on the low end to Finland or Pakistan near the upper end. It is likely much closer to the upper bound because the calculations above all assumed little energy loss ‘at the wall’ when in fact there is often 10% or more energy loss depending on the setup.

This is a little lower than last year, where we used a similar method and found that these PoW networks may consume as much resources as The Netherlands. Why the decline? All of it is due to the large decline in coin prices over the preceding time period. Again, miners will consume resources up to the value of a block reward wherein the marginal cost to mine equals the marginal value of the coin (MC=MV).9

This did not include other PoW coins such as Dash, Ethereum Classic, or Bitcoin SV… although it is likely that based on their current coin value they each probably consume less than either Litecoin or Bitcoin Cash.

Thus to answer the original question at the beginning, the answer is no.

PoW networks still consume massive amounts of electricity and semiconductors that could otherwise have been used in other endeavors. Some of these power plants could be shut down entirely. PoW-based cryptocurrencies crowd out and bid up the prices of semiconductor components.10 Apart from a few stories designed to pull on our heartstrings, little evidence exists (yet) for PoW coins creating socially useful economic output beyond moving coins from one intermediary to another.

And because most coins are mined via single-use ASICs, they generate large amounts of e-waste which leaks value from towards a small clique of semiconductor manufacturers and (mostly) state-owned utilities, neither of whom typically contribute back to the coin ecosystem.11 Will this change in the next 14 months?

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  1. I – and many others – have written about this before. PoW mining is a Red Queen’s race — miners are incentivized via block rewards to expend additional capital on mining, but the total reward available to miners is fixed. Thus while chip efficiency may increase each generation, miners as a whole increase capital outlays for equipment rather than reduce. []
  2. According to The Token Analyst, nearly 7% of all mined bitcoins reside in exchanges. []
  3. Another way some have used to describe Bitcoin is an ASIC-based proof-of-stake. But really it is DPOS but not with the “D” that you may be thinking. Since mining equipment rapidly depreciates (with a typical lifespan of less than 18 months), Bitcoin arguably uses depreciating proof-of-stake. []
  4. According to both DappRadar and State of the Dapps, there has been about a marketed increase in “users” and Dapps (although they combine all Dapp platforms, not just Ethereum). []
  5. Although obviously, as in all examples above, there are loses in efficiency as the energy travels from the power plant all the way through the grid and into a home or office. []
  6. If there is only one actual developer maintaining the Litecoin codebase, how is this ‘sufficiently decentralized’ or not an administrator under FinCEN’s definition? Even the “official” foundation is basically out of funds. []
  7. Wouldn’t it be interesting if a few botnet operators or sites like The Pirate Bay were moonlighting as Monero developers, so they could directly benefit from CPU mining? []
  8. Outright theft continually takes place. For instance, a Singaporean allegedly stole $5 million worth of computing power to mine bitcoin and ether, and “for a brief period, was one of Amazon Web Services (AWS) largest consumers of data usage by volume.” []
  9. See Bitcoins: Made in China and The Marginal Cost of Cryptocurrency by Robert Sams []
  10. During the most recent bubble, DRAM prices soared in part because of demand from cryptocurrency mining. []
  11. Emin Gün Sirer has done a good job explaining this ‘leakage.’ Recommend watching his Devcon 5 presentation on Athereum. []

Evolving language: Decentralized Financial Market Infrastructure

[Note: this was originally published at Diar.co]

Beginning in late 2014 through early 2015 a small group of startups in the US and UK independently began to lay the ground work for what is often marketed as “permissioned” distributed ledgers.  Or DLT as it became known.

I am acutely aware of their journey because I wrote the key, widely cited paper that unfortunately popularized that exact term (a term first invented by Robert Sams from Clearmatics). 

I say unfortunately because that DLT acronym – while well-intentioned – quickly became a gimmicky “marketing term” by many of the large consultancies around the world trying to capitalize – and frankly scare – clients into buying high-priced toys, none of which gained any meaningful traction.  Conjoined with images of a Candyland nirvana, there were (and are) a slew of “me too” vendors that flooded the market in late 2015 and early 2016 all searching for big pay days and funding from deep pocketed enterprises that had no clue as to what DLT as an acronym actually meant; subsequently some of these flash-in-the-pan ambulance chasing vendors have repivoted to doing things like an ICO or just fading away entirely.

How to visualize this?  If shrink-wrapped box packaging was still en vogue, we could imagine “Now with DLT!” brightly stamped in neon colors on the side of the latest version of some wares. 

For example, some finger-pointing can be done at various software companies, though not all of them.  Lured by a number of their clients who wanted to remove reconciliation but maintain the same intermediated business model, more than a few vendors deconstructed the concept of a byzantine fault-tolerant, globally shared state capable of enabling P2P transfer of value into something arguably less meaningful: bilateral states using the same old financial intermediation to solve the double-spend problem.  In some cases it was boiled down to digitally signed message passing integrated into legacy market structure.  Useful yes, but not revolutionary.  Calling it a “distributed ledger” makes boring software products sound sexy but it ultimately confuses anyone who makes the effort to figure out what it all means.

And because there’s plenty of blame to go around: various coin maximalists religiously latched onto and dutifully created umpteen strawmen arguments using contorted disingenuous views of what DLT meant to them.  The two specific cartoonish examples that stick out the most are the horse-buggy meme and the naive “sewer rat” analogy that is occasionally regurgitated on reddit.  Why are these shortsighted?  Because at the time of their genesis, they both assumed that the only type of blockchain (or distributed ledger) that can or should exist, is the Bitcoin blockchain or derivative thereof.  It is entirely self-serving, dogmatic, and void of empirical reflection.

In all instances – big consultancies, starry-eyed startups, large software companies, and ideological zealots – they eventually butchered the acronym into an indistinguishable pile of mush.  By late 2015 as this was happening, I explained that it was basically the same thing that happened during the “no gluten” marketing mania of the early-2010s.  No one could really tell you what gluten is, but every food vendor was quick to add that their products do not have it.  A bit like cloudwashing endured too.

Due to their collective inability to manage expectations, by mid-2017 nearly the entire “DLT” ecosystem found itself in the abyss of the trough of disillusionment.  A handful never fully fell in and a couple have clawed their way out, without the aid of retail coin flippers or religious troll armies.  Others attempted quick fixes or rebrand such that they were no longer classified as a DLT company hoping that definitionally they couldn’t be in the trough of disillusionment.

A good couple books could be written on the trials and tribulations of the vendors that made the headlines during these first few years.  Eventually the DLT term has fallen out of disfavor for something only slightly less abused: “enterprise chains.”  It’s only marginally better than DLT in that it is shorter when written out and hasn’t been gentrified by VCs or demonized by coin peddlers.  But it’s not really accurate because the tools that are being built, aren’t just for use by enterprises. 

|| Onwards and upwards

This brings us to: DLT is an acronym that has served its initial use and should evolve with the times. 

What then, can we use to describe the utilization of technology to re-architect organizational processes and business models?  Automating networks is generic and while accurate, is not nuanced enough.

While it would take a bit more length than this article form allows for, there are some salvageable ideas worth transplanting in the years ahead. 

For starters, there is something rather mundane but simple: automating the principles for financial market infrastructures (PFMI).  As I – and others – have described elsewhere, PFMI are decades old standards by which operators (and overseers) of financial market infrastructure ought to follow; in most jurisdictions operators are legally required to follow them.  Basically a list of do’s and don’ts for running systemically important things like payment and settlement systems.   Like, how to identify risks and hold those who touch risk accountable when something goes wrong.  This is a bundle of seemingly boring but existentially important frameworks.

Which principals can be automated or should be automated?  Unfortunately, that’s beyond the scope of this short article.

What is being briefly proposed – and built – is what can be labeled “dFMI”: decentralized financial market infrastructure.

Funnily enough, FMI today is typically distributed and not fully centralized.  In the case of the EU there is a supranational payment system, but this is an exception to the rule that each developed, and most developing, country has one or more payment, clearing, and settlement system for both cash and securities.  The majority of these systems were set up and created heavy intermediation (single point of trust) due in part to technological limitations of the 1970s.  The CSDs such as DTCC and even exchange operators exist the way they do today – as systemically important institutions – partly because of an era in which mainframes and ‘minicomputers’ were the only available options.

What if we could safely and securely disintermediate market structure, reduce single points of trust, and remove monopoly rents, all while following PFMI?

It is a bold vision, but one that does not involve standing on tables saying it is the greatest thing since the invention of the internet or preying on unsophisticated retail investors in order to flog the coin-of-the day to some other retail punter.

It’s easy to be cynical towards an ecosystem that has proportionally attracted as many snake oil salesmen as the various coin groups have the past few years.  And it is hard to fulfill the promises that are hyped at events.  For example, the Sibos “New Kids on the Blockchain” video from 2015 is illustrative of those difficulties: just a couple of the panelists still work for the same company they did at the time and all of the groups represented in the video have had uphill battles to stay afloat today.

In conclusion, instead of playing identity politics with lightning bolts in a social media handle, motivated developers genuinely looking to help transform market structure can crack open a copy of the PFMI handbook and immerse themselves with a world that keeps civilization from falling apart. 

Coupled with tools and libraries first conjured up within the ill-defined drama-filled blockchain world, real market structure changes can be made and society will be better off for it.  Best of all, it doesn’t need to involve burning mountains of coal to secure either.

It’s not sin to still use DLT as a term-of-art but dFMI is arguably a more expressive acronym, providing more context for both practioners and users alike.

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Sufficiently Decentralized HoweyCoins

[Note: this was originally published at Diar.co]

SEC Director Hinman gave a public speech about three weeks ago which was subsequently affirmed by testimony from Chairman Clayton the following week.  A key point in his speech for many was his observation that ether (ETH) was no longer a security because it had become sufficiently decentralized.

In Hinman’s speech, he also provided an ad hoc checklist for issuers to go through to make sure they do not fall afoul of securities registration requirements.

But in doing so, the guidance does not really seem helpful as it raises more questions than answers which are discussed below.  Note: the discussion for how – if at all – the rules are updated or changed is not within scope of this short article.

|| Forks

The first is technical and pedantic: ETH as we know it, is actually the first major fork of Ethereum Classic (ETC).  Recall that following The DAO attack (hack) in June 2016, key participants in the Ethereum ecosystem coordinated a hard fork which resulted in two separate chains – what we now call ETH and ETC – and that ETC represents the original chain.  So transitively, does Hinman actually mean ETC is sufficiently decentralized too?  Or is it just a property for the fork, ETH?

While most people are aware that it was the exchanges — specifically Poloniex — which decided to recognize and associate specific chains with specific ticker symbols, exchanges were also key – existentially critical — during the first moments after The DAO attack (hack) was discovered.

How integral were they?  And how did they coordinate? 

A public chat log from June 17, 2016 details the coordination between core Ethereum developers and exchanges.  One such dialogue is the following:

Source: https://pastebin.com/aMKwQcHR

The specific passage highlighted above shows how key developers requested that exchange operators stop trading ETH and after some discussion, the major exchange operators – such as Poloniex – temporarily acceded to the request.  It bears mentioning that the chat above is missing some additional context around locked DAO tokens (which were still locked up for several more weeks) and that this provisional trading freeze was being done to protect all coin holders.

This wasn’t the first time that core developers attempted to coordinate with exchanges after a mistake has occurred.  In March 2013, a group of Bitcoin developers, miners, and exchanges did something perhaps more glaring – coordinated off-chain to stop a hard fork — in an IRC chat room during an unintended hard fork of Bitcoin.

If you follow the dialogue in either chat room, it is clear that a relatively small set of participants has influence and especially in the Bitcoin fork instance, arguably administrates the chain and its governance during these critical time periods.

And at least one question arises from this: is the ongoing success of the system (and the token’s value) reliant on the ongoing efforts of others?  If not, why not.

Arguably the answer is yes for most of these public blockchains.  And based on the handy “arewedecentralizedyet” chart we can see that similar – and probably more – types of centralization exists for many other cryptocurrencies too.

But recall that Hinman’s speech seems to assume that ether was a security at one point and then through some process that is still not explained, is no longer a security.  What day did that transition take place?  Was it before or after the ICO in 2014?  Before or after the coordinated hard fork in July 2016 (as a solution to The DAO attack (hack))?  Before or after <insert other milestones or forks>. 

For those counting at home, following the July 2016 hard fork, this means that the ETC chain was actually created twice and in both cases was the work of a small group of known people, some of whom continue to maintain it.  After all, blockchains don’t automagically fix themselves.

Is it possible for a coin or token to become un-decentralized?  And if so, do the maintainers get something like a 90 day grace period to make it re-decentralized otherwise the coin is sent to some kind of securities purgatory?

While we wait for more clarity and specific answers to these questions, another potential issue is with HoweyCoins.

|| Parody

HoweyCoins is a parody ICO website published by the SEC on May 16, 2018 – right smack in the middle of “Blockchain Week” in New York City.  The website is supposed to serve as a lampoonish illustration to coin issuers of what not to do when fundraising – and also serve as a warning to investors for what to look out for as red flags such as early participation discounts.  It’s definitely good fun – my friends and I frequently refer to it in jest.

And while Hinman’s speech explicitly punted on how Ethereum was initially funded, the Ethereum public sale back in July 2014 also relied on discounts (or bonuses) to early investors during its six week sale.  The first two weeks, participants received 2,000 ETH per BTC, which linearly declined until the final epoch in which investors received 1,337 ETH per BTC.  Were the designers of the HoweyCoins website aware of this discounting?

In looking at the actual HoweyCoins whitepaper there is no technical meat that issuers or investors alike can count on for guidance.  That is to say: there is no technical attributes describing the functionality of how HoweyCoin mechanically works.  In its 8 pages it describes a couple use-cases but – like most ICO whitepapers – is very vague at how it will accomplish or achieve them.

But ignoring the Ethereum initial fundraising period and its Terms and Conditions, a problem that is not resolved in either Hinman or Clayton’s recent speech and testimony is that HoweyCoins, for all of its vague promises of high yield returns is a strawman that does not really help provide guidance as it relates to the facts and circumstances around how Ethereum – or any crowdfunded coin – can become sufficiently decentralized

After all, what is to stop someone from spinning up their own blockchain called “HoweyCoins,” raise ~$17 million through a public sale  and 12 months later, formally launch the mainnet (as Ethereum did)?

The wording and justification for why Ethereum is not still a security – that it somehow at some point became sufficiently decentralized – seems ripe for debate and will surely be gamed by future coin and token sales.  Without explicit parameters, if Ethereum is sufficiently decentralized, then so to – at some point in the future – could HoweyCoins.  And then it’s no longer a parody.


A third and final point is that while Hinman alluded to them, even if these chains are finger quote “decentralized,” and thus not falling strictly under the “common enterprise” in the literal sense (i.e. where there is literally a single legal entity determining the success), how does a “community enterprise” present less risk to investors?   Tangentially, isn’t this the same type of argument that mob bosses frequently used and as a result RICO Acts were created to pierce through?

If we take the view that the spirit of the regulations (1933, 1934, 1940 Acts) which led to the Howey ruling was actually to protect small investors, does a non-singular, and quasi-independent, but systemically important influential organization actually reduce risk? 

If that is the view that they are taking, it would be helpful to see how the commission has come to that conclusion.   

After all, it is plain as day to see that most coin foundations are heavily influential in the maintenance and success or failure of a coin.  And representatives from investment groups like DCG are routinely making statements which have the single effect of moving the price and/or direction of coins such as ETC.  Even if these groups are superficially independent of the mining and operation, on the day-to-day they are directly traceable to the volatility in the market and to a large extent the success or failure of projects. 

Most, if not all of the coin foundations, market and advertise milestones which depend on the coordinated effort and work of developers that are paid with investors’ money.  Coin foundations typically register and own trademarks and other IP so (theoretically) they could force exchanges to associate a specific ticker symbol with a specific chain.  And often there is a hierarchy within a coin foundation with respect to the “community” it manages and oversees: it owns IP, controls investor funds, manages the verified social media accounts, and empirically calls the shots. 

Look no further than Nano and dozens of other coin projects that have been hacked or “exit scammed” because of how centralized the command and control structures typically are.  Another instance just last week, EOS block producers got on a conference call and paused their network (and later proposed scrapping their constitution).  Ignoring their year-long $4 billion ICO, is that series of actions sufficiently decentralized?

|| Conclusion

To be fair, the SEC has an unenvious role to try and regulate something (a network-based coin) in just one jurisdiction whereas these coins are also trading and custodied in other jurisdictions.  For instance, the FCA doesn’t currently regulate tokens (e.g., that are not equity or debt instruments).  And the Howey test is not applicable in the UK. 

Perhaps opening a public comment period to provide suggestions could be helpful in conceptualizing objective measurements and quantifying decentralization (assuming it is not an oxymoron).  Though, that inbox would likely just get spammed so maybe just start with credible opinions such as those of the BIS.

In closing, a hypothetical HoweyCoins and its benevolent overseers and thought leaders at the HoweyCoins Foundation could mimic other sufficiently decentralized projects and host an annual HoweyCon; simultaneously emceed by none other than Howie Mandel and Howie Long.  If and when this occurs, is the only thing that HoweyCoins did “wrong” was promise to provide discounts to early investors? 

Maybe not, at least if they donate some of their proceeds to coin lobbying groups to help explain to policy makers and regulators that HoweyCoins is not a security, because it is sufficiently decentralized (e.g., more than one Howie exists).  Either way, I bet there will be some amazing schwag at HoweyCon, really looking forward to it.  There may also be an announcement about the forthcoming HoweyCoins Classic fork. 

Stay tuned.

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Bitcoin’s PR challenges


Source: agmarketing.com.au

What kind of feedback has my book received over the past week?  Here are a few threads on reddit:

I am called any number of names on these threads and stylistically was equated with “Gish Gallop” and a “word soup” thesauri.

Hass McCook (“Bit_by_Bit”) weighs in at one point in the first thread saying that these claims are only valid in August 2014.  McCook had similar sentiments as noted in Chapter 3.  However, no word on the MV=MC issue that was brought up in that same chapter, it will always apply no matter what the efficiency of the mining equipment.  This cost basis was also independently confirmed by a miner.

Today a friend pointed to a new post by Mircea Popescu which takes aim at me (not my book): “No, you don’t have something to say on the topic.”  In it he claims I am a “boneheaded teenaged male approach to learning.”  Not a word about the marginal costs of mining.  In fact, he also claims that there is no data “per se” in the book which is curious since there is actually a lot of data in the book.

This is a common rejoinder; some vocal advocates not looking at actual data from the blockchain.  In some ways their timeline looks like this:

  • 2007: First lines of BTC code written
  • 2008: Whitepaper revised and published
  • 2009: Blockchain put into production
  • 2009 – 2014: data created, but the only valid data is fiat prices, the rest is not real data “per se”

Other responses

Aside from the ad hominem’s above what has been the criticism?

Peter Surda, a researcher, disagreed with my points on inelastic versus elastic money supply but didn’t go into many details in a short email exchange.

I received a number of encouraging emails from a variety of readers and was named one of thirteen “Big Thinkers” in this space, though I doubt some of the other candidates would like me to remain in company with them.

I have had some responses with a couple others, including L.M. Goodman (creator of Tezos), on Twitter this past weekend — though this is largely unrelated to the book itself.

What does this mean?

Partisanship may be impacting scholarship, especially the Myth of Satoshi variety.

No, Leah Goodman did not uncover who Satoshi was.  But one thing was clear from that episode in February was that some partisans do not want the individual who created Bitcoin to be taken down from the pedestal they have put him on; they want their caricature to be immutable.  Just like some historians have tried to revise history to make their heroes look impeachable, so to has the veneration of Satoshi.  If Bram Cohen had anonymously released BitTorrent a decade ago, would BitTorrent have had a similar following due to its mysterious beginnings?

I hold no ill-will to the person or group that comprised Satoshi, but it is clear from the evidence cited in chapters 9 and 10 that he, she or they did not consult an actual economist or financial professional before they created their static rewards and asymptote money supply.  This is a mistake that we see in full force today in which the quantity of money available has shrunk due to theft, scams, purposeful burning, accidental destruction, etc.  Satoshi recreated a deflationary inelastic economy and much to the chagrin of the self-appointed purity police, it is not being used the way he expected it to (actual commerce) and is instead being used for things it is relatively useful for (e.g., donating to Wikileaks, gambling).

What other economic and environmental issues are still being ignored?

Jake Smith, creator of Coinsman recently published a new article on mining in China.  Yet despite being, in his own words, a “true believer” and interviewing other “true believers” in the mining space, he missed the unseen calculation, the economics of extracting and securing rents on this ledger unit which consume scarce resources from the real economy.  This is not something that it is unknown, there is an economic formula to explain it: MV=MC (as described copiously in Chapter 3).  There is nothing magical or mysterious about mining as other people in the reddit thread point out how mining is currently an environmental albatross or as Fred Trotter dubs it, a “black hole.”

Moving forward

Today the Consumer Financial Protection Bureau (CFPB) issued its Consumer advisory: Virtual currencies and what you should know about them.  The advisory (PDF) gives a cursory look, in layman’s terms of what are the challenges and risks of participating in this space.

What does this mean?

While it is unclear as to the motivations of some of the “true believers” are, they collectively did underestimate the costs of consumer protection and/or did not put it as a top priority for mass consumer adoption.  But why would they?  Consumer protection is usually expensive, its unglamorous and its centralized (which apparently is a “no-no”).

For example, generally speaking, most people do not like having their possessions stolen.  And in the event something is stolen, in practice, individuals prefer to take out insurance and even sue those responsible for damage (torts). If instead of promoting and building illicit markets (like Dark Market and Dark Wallet), these same developers and early investors had funded a start-up that helped track down these stolen funds, or start a non-profit to help get stolen coins, it would have been an amazing public relations coup.

To be balanced, theft takes place across the spectrum of services.  It also happens on the edges of Visa’s network. The difference is Visa offers insurance which is built into their cost structure (highly recommend reading Richard Brown’s recent post).  Insurance alone is just another product and has nothing to do with the protocol.  And this specific point (for the individual user) could be resolved sooner or later (e.g. Xapo already offers some home-made insurance).  However, insurance does not change the economics behind Bitcoin, especially since lost coins are permanently and constantly removed from the money supply.

Then again, there is a built in incentive to allow this theft to occur — stolen coins need mixers and exits which could potentially benefit developers and investors of those services; and simultaneously as more coins drop out of circulation this increases the value for those holding the remaining supply.

In addition, a vocal group of these “true believers” do not think Bitcoin has an image problem.  Yet it has a massive PR problem, for similar (albeit smaller) reasons that Tylenol had in 1982: customers and their families do not like getting burnt.  The only group I am aware of that tried to immediately help the victims of the Mt. Gox debacle was Goxcoin (here’s the LTB interview of it).  In contrast, thread after thread on reddit was filled with bullies saying “no big deal.”   It is a big deal to normal people with real responsibilities beyond downvoting skeptics on reddit and pumping stories about Bitcoin curing cancer and ending wars.  And Mt. Gox liabilities won’t be resolved for at least another year.  Instead of cyber bullying merchants into adopting bitcoin payments, these same hectors could have created a company catering towards recovering stolen property (e.g., loss recovery specialists).  It was a lost opportunity.

my wallet transaction volume

Source: Blockchain.info

In contrast, Blockchain.info has a mixing service called SharedCoin based off the CoinJoin feature from Greg Maxwell.  Blockchain.info recently crossed the 2 million ‘My Wallet’ mark but as I noted in Chapter 4, the vast majority of these likely go unused.  This past spring, one of their representatives claimed that they receive about 15 million visitors a day, but what this actually is, is largely API traffic (external websites pulling charts from their site). They probably do not have close to 2 million users let alone 15 million visitors.

How few?  We have an idea based on their own internal numbers, MyWallet transactions is flat over the past 12 months.  If there were 2 million or 15 million users, we would probably see a gigantic uptick in usage elsewhere on the blockchain (e.g., TVO would skyrocket, tx fees to miners would skyrocket, etc.).

What this all means is that, while they do not release actual user numbers, that at least a minority of wallets are probably ‘burner wallets,’ dumped immediately by individuals wanting to mix coins.  This is great for those who need to mix coins but not so great for consumers who just had their coins stolen.  How to resolve this going forward?

Incidentally in May, Roger Ver (an angel investor including in Blockchain.info) was extorted by a hacker who had figured out a vulnerability in Ver’s security.  Ver put a 37.6 bitcoin bounty on the hacker and the hacker eventually backed down; Wired and CoinDesk each did an article on it.  Yet during the same month, coins were stolen from others and when the users came to reddit for help, they were ridiculed for not having done the 27 steps to make a paper wallet.  No Wired article was written for them and in turn — speculatively — their coins could have been mixed on a site like Blockchain.info.  As a result, why would normal consumers ever want to use Bitcoin after that experience?

Perhaps user behavior and therefore the data will change in the future.  Consequently blockchains in general will probably find other niches beyond what Bitcoin is being shoehorned to do today.  This includes, other chains and platforms that may be able to help firms like Wageni Tech accomplish its goals in Kenya by helping farmers move, manage and track produce to market in an attempt to bypass middlemen and introduce transparency.  Bitcoin may be able to do that one day, but maybe not at the current $40 per transaction cost structure.  Start-ups such as Pebble, Hyperledger, Tezos, Tendermint, Dogethereum (Eris), Salpas, SKUChain, Stellar and several other funded projects in stealth mode may be able to as well (remember, Google was the 15th search engine and the iPod was at least the 9th MP3 player).

This is not to say that “Bitcoin” has collapsed or will collapse, nor is this to single out Ver (he has done a lot to try and create value in this space and even donated 1,000 bitcoins to FEE last year).  Instead it may continue to evolve into is something called Bitcoin-in-name-only, (or BINO as I refer to it in chapter 16) and it probably will continue to be used for what most risk-tolerant consumers use it for today: as a speculative commodity and as a way to pay for things that credit cards cannot be used for.

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Many thanks to those who have helped provide feedback

It is pretty easy to find people who are strictly bullish or bearish on a particular asset or idea (or philosophy).  It is another to find people who take the time to look at the details and also give of their time to help educate you.

Over the last few weeks, I’ve had the fortunate chance to speak with a diverse group of experts, entrepreneurs and educated contrarians.  And without their feedback, my thought processes and writings would be much weaker, poorly structured and lacking data.  This is not to say I am correct in my analysis — perhaps just slightly less wrong!

Below is a list of these individuals.  I should point out that their inclusion does not mean they endorse my own views, in fact several strongly disagree.  These are the people who are creating or trying to create the future in the roller coaster world.

  • Taariq Lewis
  • Petri Kajander
  • Jonathan Levin
  • Dave Babbitt
  • Dave Hudson
  • Jack Wang
  • Ron Hose
  • Raffael Danielli
  • Preston Byrne
  • Oliver Bruce
  • Chris Turlica
  • Karl Holmqvist
  • John Ratcliff
  • Adam Stradling
  • Robert Sams
  • Robby Dermody
  • Joseph Chow
  • Andrew De Gabriele
  • Peter Todd
  • Mike Hearn
  • Andrew Poelstra
  • Bryan Vu
  • Steve Kirsch
  • Ryan Orr
  • Matt Wilson
  • Daniel Cawrey
  • Pamela Morgan
  • Pete Rizzo
  • Jon Southurst
  • David Shin
  • Sidney Zhang
  • Stephanie Murphy
  • Adam B. Levine
  • Greg Simon
  • David Mondrus
  • Andrew White
  • Martin Harrigan
  • James Duchenne
  • Mark DeWeaver
  • Byron Gibson
  • DC, Cukeking and David S
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Cryptocurrency in the news #15

Need to close some tabs, here are some links of interest:

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Decentralized storage on the horizon

In addition to existing projects such as Tor(oken) and FreeNet and future developmental projects like Bitcloud and StorJ, there is a new decentralized system being released in the next few months: MaidSafe.

I have a new piece over at Bitcoin Magazine that discusses some of how it works.  Suffice to say, if they can execute on the targets outlined in the article, it could have long-standing ramifications for a plethora of industries (e.g., SaaN providers, ISP margins, start-up costs, Dropbox-style companies, reduced overhead at NGOs/NPOs, etc.).

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Neologisms and wordsmithing

An old business school student I used to teach in Anhui recently sent me an email about economic development and created a new word that actually makes a lot of sense.  See if you can spot it.

On the other hand, some claims made by others include the assertion that releasing the city’s burden cannot solely rely on moving big companies out. It is a convenient life that drives people to live in downtown, such as easy access to educational resources and health care. However, this alone is not convincible, especially in the fast developing society, it unlikely to become a problem to build up those necessary facilities in a new community.

I recommend Language Log if you enjoy the twists, turns and the art of wordcrafting.

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