Book Review: “Number Go Up”

I recently finished reading the Kindle version of Number Go Up by Zeke Faux. This marks my 11th book review of cryptocurrency and blockchain-related books. See the full list here.

But… Number Go Up is marketed as a cryptocurrency book which is debatable. I would categorize it as True Crime with certain cryptocurrencies and centrally-issued pegged assets (like USDT) providing the enabling infrastructure.

It is a refreshingly witty book on a subject matter that is chronically filled with mindless conspiracy theories or Messianic price predictions.

Faux walked the tight rope, delivering a fairly nuanced and informative testament in an otherwise cacophonous market. Best of all it includes copious amounts of first-hand comments straight from the horses mouth of actual insiders, not wannabe social media influencers.

I read this back-to-back with Easy Money, by Ben McKenzie and Jacob Silverman, which was a dud in comparison. Easy Money was riddled with numerous mistakes that should have been caught when the manuscript was sent for independent fact-checking.

One quantitative example of how robust Number Go Up was, it contained 45 pages of references. In contrast, the shallow Easy Money contained a mere 8 pages of references.1 And while both books touch on some of the same topics (Tether, FTX, Celsius) and even interview some the same exact participants (SBF, Mashinsky, Pierce), Faux’s version of the events is not only richer in detail but often includes additional supporting characters… all without having to rely on an entourage.

Did I mention this was a witty book? In the margins I wrote: jhc, haha, lol, jesus, wow, burn and several variations therein about 25 times. It didn’t make the reader just laugh either. There were several times you could easily become angry, such as the face-to-face encounters that Faux had in Cambodia investigating romance-scam “pig butchering” compounds.

While the book occasionally discusses some technical concepts, it does not attempt to bog the reader down in a sundry of technical details. And when Faux did present something technical – like how a wallet works – he was in and out with the lesson in a few sentences.

If you could only read one book on the rise and fall of the most recent (virtual) coin bubble, be sure to check out Number Go Up.

With that said, despite the excellent prose and editing, I did find a few things to quibble about. But unlike the last two book reviews, there are no major show stoppers requiring a second edition to fix.

Prologue

Faux gets down to business, on p. 9 writing:

I’d like to tell you that I was the person who exposed it all, the heroic investigator who saw through one of history’s greatest frauds. But I got tricked like everyone else.

I’m not quite sure when I began following him on Twitter, but it has been at least a year. And not once during the collapse of the lending and exchange intermediaries last year did I see him do victory laps. Perhaps he did some quiet grave stomping late at night or on the weekend that I missed, but the tone of this book feels congruent with his online voice. And unlike the always-on coinerati (and anti-coiners who shadow them), the author upfront notes that he got tricked, we all did. 2

On p. 12 the author writes:

Thit is the story of the greatest financial mania the world has ever seen. It started as an investigation of a coin called Tether that served as a kind of bank for the industry.

As I pedantically questioned in other book reviews: by what measure was the 2020-2022 bubble the greatest financial mania the world has ever seen? Maybe it is, but in my adulthood the GFC seemed like at least a magnitude larger due to the existential issues of SIFIs and TBTF banks.

On p. 13 the author writes:

I pitched this book to my publisher in November 2021, near the mania’s peak, on the premise that crypto would soon collapse, and I’d chronicle the catastrophic fallout. Three months later, I was sitting with Bankman-Fried at his Bahamas office and looking at the computer screens behind his fuzzy head.

I think the author short changes himself a little here because chronologically he was already doing some sleuthing at the beginning of the year, attending Bitcoin Miami and other events.3 The timing is happenstance because not too far from his dayjob, according to Easy Money, both McKenzie and Silverman also met in a bar in New York to discuss pitching a book to a publisher at around the same time.

On p. 13 the author writes:

I told him my theory: that the coin called Tether, the supposedly safe crypto-bank that served as the backbone for a whole lot of other cryptocurrencies, could prove to be fraudulent, and how that could bring down the whole industry.

As mentioned above, I read this book immediately after completing Easy Money and in reading this particular sentence I had a small sense of déjà vu because that was their thesis too.4

Chapter 1: “I Am Freaking Nostradamus!”

On p. 15 he writes:

Don’t worry about how exactly a dog joke turns into a financial asset—even Dogecoin’s creator didn’t understand how it happened.

While Faux does provide a reference to an interview with Jackson Palmer, it bears mentioning to the readers that Dogecoin was co-created by two people, Palmer and Billy Markus.

On p. 16 he writes:

Jay wouldn’t admit he’d gotten lucky. He acted like his Dogecoin score proved his astute understanding of crowd psychology. Even after he moved on, I didn’t. I started seeing crypto bros everywhere. They were acting like the rising prices of the coins proved they were geniuses. And their numbers were growing.

This is an excellent observation. And when you attempt to engage some of them on social media more than a few will retort, HFSP!

On p. 17 he wrote:

Crypto didn’t hold the same appeal for me. I’d resisted the topic whenever it came up at work. It seemed so obvious. The coins were transparently useless, and people were buying them anyway. A journalist composing a painstaking exposé of a crypto scam seemed like a restaurant critic writing a takedown of Taco Bell.

This is one of the many witty comments, I’ll try not to post all of them because you should grab a copy of the book and find them yourself.5

On p. 18 he writes:

The answer was not much. But I did know they were called “stablecoins” because, unlike coins with prices intended to go up, they were supposed to have a fixed value of one dollar. That was because each coin was supposed to be backed by one U.S. dollar. The biggest stablecoin by far was called Tether.

This is a decent high level description of a centrally-issued pegged coin. In academic literature it is still probably more common to see “fixed” than “pegged” but either works.

With that said, I do think it is confusing – as a reader – to be introduced to Tether and not USDT. Later on it does get confusing, because the author uses Tether to describe both the issuer (Tether LTD) and the medium-of-exchange (USDT). I had a similar nitpick about the same type of usage in Easy Money, where the authors inexplicably do not fully define what a stablecoin is or mention how there is more than one (beyond Terra).

On p. 18 he writes:

I couldn’t tell which country’s authorities were overseeing Tether. On a podcast, a company representative said it was registered with the British Virgin Islands Financial Investigation Agency. But the agency’s director, Errol George, told me that it didn’t oversee Tether. “We don’t and never have,” he said.

One of the strengths of this book is that the author routinely gets a direct quote from people involved on the regulatory and law enforcement side of the table. Strangely we do not see anything like that in Easy Money.

On p. 19 he writes:

There were plenty of critics who speculated that Tether was not actually backed by anything at all.

Another refreshing sub-narrative in this book was the lack of a sub-narrative surrounding “critics” that occurred throughout Easy Money. That is to say, Faux does not attempt to put anyone on a pedestal, least of all, people marketing themselves as “critic” or “skeptic.”

On p. 20 he writes:

“In a panic, everything collapses and they look to the federal government to bail them out,” one attendee at Yellen’s meeting told me. “If the crypto market was isolated, maybe we could live with that. But hiccups in one market start to translate into other markets. These are the things we’re paid to worry about.”

The author referenced a series of important regulatory meetings that occurred in the summer of 2021 and actually got a direct quote from an attendee. Top notch stuff, no guessing games or reliance on clout chasers on Twitter.

Chapter 2: Number Go Up Technology

Great intro to the chapter on p. 22:

The Florida crime novelist Carl Hiaasen once wrote of his home state, “Every scheming shitwad in America turned up here sooner or later, such were the opportunities for predation.” In his books, the scheming shitwads are crooked cops, corrupt politicians, and the cocaine traffickers who financed much of Miami’s skyline. But plenty of people at Bitcoin 2021, the crypto conference I’d come to attend, met the description.

On p. 22 he writes:

I was deeply skeptical about cryptocurrency before I arrived, and what I had been learning about Tether wasn’t doing much to dispel those doubts.

Unlike the previous two book reviewed, the author does not make or spin this “skepticism” into some form of identity.

On p. 22 he writes:

My plan was to listen politely to a bunch of tech bros pitching their apps, and then to ask them what they knew about Tether.

And he did!

On p. 22 he writes:

The attendees wore T-shirts with crypto slogans, like Have fun staying poor or HODL, a meme about never selling crypto derived from a typo for the word “hold.”

He got it right! Unlike the previous two books reviewed, Faux discovered “HODL” was a typo from a drunkard.

On p. 24 he writes:

The mayor equated Bitcoin’s doubters with his city’s skeptics, who liked to needle him about climate change by pointing out that streets flooded even on sunny days. As it so happened, during the week of the conference, the U.S. Army Corps of Engineers had released a report calling for a massive, twenty-foot-high seawall across Biscayne Bay, blocking the ocean views of the city’s financial district. “You guys see any water here? I don’t know, I don’t see any water here,” Suarez joked to the crowd.

Can’t say I follow Suarez closely but does he typically use dark humor?

On p. 24 he writes:

Their bête noire was “fiat money.” That means money printed by central banks—in other words, pretty much all money in modern times.

I need to be pedantic (since that’s my calling card). In the U.S., the vast majority of “fiat money” is actually created by commercial banks not central banks.6

On p. 25 he writes:

A blockchain is a database. Think of a spreadsheet with two columns: In Column A there’s a list of people, and in Column B there’s a number representing how much money they have.

Hurray, a definition. Now I didn’t care much for the example the author used but unlike the previous book review, he gave it the good ol’ college try and it conveyed the necessary information to the reader.

On p. 25 he writes:

With the Bitcoin blockchain, the numbers in Column B represent Bitcoins.

Hurray, countable blockchains. Unlike several other books I have reviewed in the past (especially in the 2016-2017 era), Faux quickly explains to readers that there is more than one blockchain. Two sentences later he mentions the Dogecoin blockchain.

In other words, unlike Easy Money and Popping the Crypto Bubble, Faux does not conflate Bitcoin with every other blockchain.

On p. 26 he writes:

The technical innovation of blockchain is that it lets customers get together and maintain the list themselves, with no banker involved. If I want to transfer 1,000 Bitcoins from my account to someone else’s, there’s no handsy banker to call. So instead, my computer broadcasts the transaction to all the computers that run the Bitcoin network, sending all the other Bitcoin people a message that says, “Hey, I’m transferring 1,000 Bitcoins to another account.”

This is a decent example. But I think a more accurate verbiage would be “intermediary” instead of “bank” (because there are a variety of intermediaries in finance).7

On p. 27 he writes:

The solution that Bitcoin uses to prevent this “double-spending problem” is called “mining,” and it’s incredibly complicated and confusing. It also uses so much electricity that the White House has warned it might prevent the United States from slowing climate change. It’s like something out of the world’s most boring dystopian science-fiction movie.

This page is about as much as readers are provided into the topic of mining. That’s a little disappointing, since the market still lacks a long-form, non-hagiography on the topic. But that’s someone else’s calling for now and would not have really fit well into the flow of the book.8

On p. 28 he writes:

The difficulty of the game automatically increases when more miners enter it.

Technically the difficulty changes (increase or decrease) is based on hashrate, not on entry or exit of “miners.” That is to say, if readers were to download and use a Bitcoin mining client on their home computer, their mere entry would not immediately change the difficulty rating because the amount of hashrate a home CPU brings to bear is miniscule relative to the ASICs housed in warehouses by existing participants.

On p. 29 he writes:

Silk Road was Bitcoin’s first commercial application. Drug consumers didn’t set up their own mining rigs before going shopping on the dark web. They bought Bitcoins for cash on rudimentary exchanges. The demand started driving up the price.

To his credit, unlike Easy Money, Faux does not sensationalize and claim Silk Road was the “most successful onboarding app” for Bitcoin. Maybe it was, but Faux doesn’t get bogged down in histrionics.

On p. 30 he writes:

The system depends on economic incentives. The miners who confirm transactions have made such a large financial investment—in buying computers to compete in the guessing game—that it wouldn’t make economic sense to undermine Bitcoin by entering false transactions. But that also means it does make economic sense to run tons of computers to guess random numbers in hopes of winning the Bitcoin reward. As one person famously put it on Twitter, “Imagine if keeping your car idling 24/7 produced solved Sudokus you could trade for heroin.”

Solid quote. Nice reference to this funny tweet too:

Source: Twitter

On p. 30 he writes:

That is as bad for the environment as it sounds. Once Bitcoin’s price started rising, competition drove out the hobbyist miners. Within a few years, companies were selling specialized computers that were extra good at the guessing game. Miners started operating whole racks of them. Then warehouses full of racks.

This is a pretty concise way of describing the absurdity of the value leaking from the ecosystem, to the benefit of state-owned energy grids, A/C manufacturers, and semiconductor companies.9

On p. 31 he writes:

Other coins would adopt different authentication systems that used far less electricity, but Bitcoiners opposed any change to Nakamoto’s mining system. There was no way to reduce mining’s energy use.

This is a fantastic nuance that other authors, especially in both Easy Money and Popping the Crypto Bubble, fail to distinguish. The ossification and intransigence by the Taliban wing of Bitcoinland is real. For instance, the core developers (and foundations) behind both Zcash and Dogecoin have announced plans to migrate away from proof-of-work and adopt proof-of-stake.

While there have been (dubious?) efforts such as “Change the code” to kickstart something similar for Bitcoin, the bottom line is that it is the centralized exchanges that ultimately call the shots because they control the BTC ticker symbol. And during the blocksize “civil war,” several major ones said they would only recognize the chain that Bitcoin Core worked on. And that clique is anti-proof-of-stake. There will be a test after this book review, so take notes and pay attention!

On p. 31 he writes:

The fundamental absurdity of all this is that the numbers in the Bitcoin blockchain don’t represent dollars, or even have any inherent tie to the financial system at all. There’s no reason why a Bitcoin should be worth more than a Dogecoin or any other number in any other database. Why would someone burn massive amounts of coal just to get a higher number written in the blockchain for their account?

Preach it, brother! As Barney Gumble might say, just hook it to my veins.

Source: Twitter

On p. 31 he writes:

But, of course, just because the supply of something is limited doesn’t make it valuable—only 21 million VHS tapes of Pixar’s Toy Story were made at first, and you can get an original on eBay for three dollars.

Bingo! Without persistent and/or increased demand, a deterministic supply is mostly meaningless.10 Empirically we see that with hundreds (thousands?) of supply capped coins that fail to reach the proverbial NGU moon.

On p. 31 he writes:

For Bitcoin believers, the rising price became its own justification. On stage in Miami, many of the speakers resorted to a sort of illogical reasoning: The price of Bitcoin will go up because it has gone up. They wielded this circular argument to ward off doubt and call forth a future of infinite bounty. It became a mantra: Number go up.

To be fair, this mantra pre-dates the soothsayers at Bitcoin Miami by years. In fact, one could argue that the origins of Bitcoin maximalism – circa March 2014 – incorporated this fallacious circular view.

On p. 32 he writes:

“NUMBER GO UP,” declared Dan Held, an executive at a crypto exchange called Kraken, on stage at Bitcoin 2021. “Number go up technology is a very powerful piece of technology. It’s the price. As the price goes higher, more people become aware of it, and buy it in anticipation of the price continuing to climb.”

A sociologist or two could write a book on Held and his former colleague, Pierre Rochard, for the crazy things they have said to defend (and promote) Bitcoin maximalism.11

On p. 32 he writes:

Max Keiser, a Bitcoin podcaster, emerged first, in a white suit and purple sunglasses, to pounding EDM. “Yeah! Yeah!” he screamed, pumping his fists, as the dance music built to a drop. Elon Musk had recently said that Tesla would not accept Bitcoin due to its environmental impact, and Keiser was raging like the billionaire had run over his dog. “We’re not selling! We’re not selling! Fuck Elon! Fuck Elon!”

During my review of Chapter 6 of Easy Money, I linked to this exact string of expletives as something the authors missed by attending the 2022 edition of Bitcoin Miami and not the 2021 that Faux witnessed.

On p. 33 he writes:

A more accurate description would be that Saylor was the biggest loser in the room. He didn’t mention it during his talk, but his software company, MicroStrategy, had nearly gone bust during the dot-com bubble, back when the internet counted as a hot new technology. In 2000, just before it popped, he told The New Yorker: “I just hope I don’t get up one day and have to look at myself in the mirror and say, ‘You had $15 billion and you blew it all. There’s the guy who flushed $15 billion down the toilet.’ ” Right afterward, he lost $13.5 billion.

Solid quote. Strangely, while Saylor does get another couple of paragraphs, Faux missed out on informing the readers that on August 31, 2022, the Attorney General for DC announced it was suing Saylor for evading more than $25 million in taxes. Surely readers would find that interesting?12

On p. 34 he writes:

Some people speculated that what Tether called “commercial paper” was really debt from exchanges like FTX. That would explain why no one on Wall Street had dealings with Tether. FTX could simply send Tether a note saying, “I promise I’ll pay you $1 billion,” and Tether could zap over 1 billion coins, and no one would be the wiser.

Of all the discussion surrounding Tether, the commercial paper (CP) angle was the one that felt like it lacked a sufficient bowtie for readers. Later he does mention how Tether announced it planned to move entirely away from CP and acquire Treasuries instead.

However I felt that – as mentioned in the reviews of both Easy Money and Popping the Crypto Bubble – it would be helpful to the audience to briefly explain the recent history of shadow payments and shadow banking in the U.S., starting with PayPal and Money Market Funds (MMFs) which trail blazed the path that Tether LTD and other centralized pegged coin issuers followed.13

Source: Twitter

On p. 35 he writes about SBF and Tether:

“We’ve wired them a lot of dollars,” he said. He also told me that he’d successfully cashed in Tethers, transferring the digital coins back to the company and receiving real U.S. dollars in exchange, though the process he described sounded a bit strange. “This is going through three different jurisdictions, through intermediary banks,” he said. “If you know the right banks to be at, you can avoid some of these intermediaries.”

The long and the short of redeeming these centrally issued pegged coins is you have to rely on legacy infrastructure (wiring). I have never attempted to redeem USDT or USDC, but a number of acquaintances have, and following the collapse of SEN and SigNet it involves ol’ fashioned wires.14

On p. 36 he writes about Mashinsky and Celsisus:

But then he described what sounded very much like monkey business. Tether, in addition to investing in Celsius, had lent more than $1 billion worth of its coins to the company, which Mashinsky used to invest in other things. Mashinsky claimed this was safe because for every $1.00 worth of Tethers he borrowed, he put up about $1.50 worth of Bitcoin as collateral. If Celsius went bust, Tether could seize the Bitcoins and sell them. He told me this was a service Tether offered to other companies too.

So I don’t want to be perceived as carrying water for Tether (or Celsius) – I stand by all my critical comments I have made of both of them in the past – but this type of arrangement is kind of what commercial banks do. And that’s probably the angle – shadow banking – I would have probed more.

On p. 37 he writes:

“Somebody is lying,” Mashinsky said. “Either the bank is lying or Celsius is lying.” I was pretty sure I knew who was lying, and it wasn’t J.P. Morgan. I made a mental note to investigate Celsius when I got back to New York.

Why not both?

As mentioned in my review of Easy Money, in 2015, J.P. Morgan paid a combined $307 million fine to settle cases with the SEC and CFTC, admitting wrongdoing in part because certain banking units failed to tell clients it favored in-house funds, clear conflicts of interest. In 2020, J.P. Morgan paid $920 million to settle DOJ, SEC and CFTC charges of illegal market manipulation or “spoofing” in the precious metals and Treasury markets.

If the author was looking for a large unblemished regulated financial institution, there probably is none. But to be fair, this was Mashinsky’s example the author was responding to.

On p. 37 he writes:

Mallers explained that he had gone to a beach town in El Salvador because a surfer from San Diego was teaching poor people there about Bitcoin, which was somehow going to help them stop being poor.

Ha, this is great. And sad too.

On p. 37 he writes:

Rather than telling his citizens first, he had chosen to reveal a major national policy to a bunch of Bitcoiners, in Miami, Florida, in English, a language most Salvadorans don’t speak.

Oof.

On p. 38 he writes:

I didn’t get it. There was a reason no one used Bitcoin to buy coffee—it was complicated, expensive, and slow to use. And what would happen if poor Salvadorans put their savings in crypto and then the price fell? But the audience was rapt. As I scanned the crowd, I saw that Mallers wasn’t the only one wiping away tears.

If there is a movie version of this book, need to have Steve Martin-like entertainer on stage ala Leap of Faith.

On p. 39 he writes:

Not everyone I spoke to in Miami was a Bitcoin cultist. The biggest users of Tether were professional traders at hedge funds and other large firms, and I interviewed several of them too. What they explained to me was that for all the talk of peer-to-peer currency, and the ingenuity of a way to transfer value without an intermediary, most people weren’t using cryptocurrencies to buy stuff. Instead, they were sending regular money to exchanges, where they could then bet on coin prices.

Compared to the two previous books, it is nice to see the author use a nuance around “Bitcoin cultist” — because not every coin or token encourages the sort of maximalism we see from Dan Held and Pierre Rochard. And empirically not every public chain project is attempting to reinvent “money.”

On p. 39 he writes:

Even so, many had their own conspiracy theories about Tether. It’s controlled by the Chinese mafia; the CIA uses it to move money; the government has allowed it to get huge so it can track the criminals who use it. It wasn’t that they trusted Tether, I realized. It was that they needed Tether to trade and they were making a lot of money doing it. There was no profit in being skeptical. “It could be way shakier, and I wouldn’t care,” said Dan Matuszewski, co-founder of CMS Holdings, a cryptocurrency investment firm.

I’m not endorsing CMS but I’ve found it weird to see certain Tether Truthers single out CMS as part of the inner ring of the Tether cabal.15 One of its most vocal members even accused Matuszewski of lying about redeeming USDT for real money, and then deleted the tweet. Maybe CMS (and Matuszewski) are indeed at the center of the Tether cabal, but the burden-of-proof is on the Truthers (the self-deputized prosecutors) to provide evidence.

Chapter 3: Doula for Creation

One of the most interesting things about this chapter is the author described, what I believe may have been the first bookform exploration into the history of Mastercoin.

I’ve read a number of interviews of Brock Pierce in the past. I even briefly met him in late 2014 at a house party in the Bay area. But this was the most colorful description of his social circle, drugs, dreams and all.

For instance, on p. 42 he writes:

I decided to mingle and ask the guests what they knew about our absent host. A beautiful woman told me she’d spent a week with Pierce in the Colombian jungle, where he’d bought land to protect it for Indigenous people. “It’s amazing what he does,” she said. Another man told me Pierce was building a spaceport on an old army base in Puerto Rico. An obnoxious guy who described himself as a “futurist” told me a story about a time in Ibiza when Pierce went three days without sleeping. “He’s surrounded by people who are benevolent dolphins and not sharks,” he said. He then asked me to smell a pastry for him before he ate it, telling me he was allergic to raspberries.

Ha! Everything in this paragraph is worth a couple chuckles because anecdotally it sounds true.

On p. 43 he writes:

At some point, a man at the other end of the table began bragging loudly about a cryptocurrency called “Let’s Go” or “Let’s Go Brandon,” a slogan that, through an almost inexplicable memeification process, had come to stand for “Fuck Joe Biden” among Trump supporters. The man, who I later figured out was a hedge fund manager named James Koutoulas, announced to the table that his plan for the coin was “dumb but it’s working.” A month earlier, a podcaster had presented Donald Trump himself with five hundred billion of the tokens, and just that afternoon, Donald Trump Jr. had made a cryptic post on Twitter seemingly referencing the meme coin. “Is that allowed?” someone asked. “They’re allowed to make money,” Koutoulas said. “Fuck the SEC.”

I had never heard of Koutoulas and I checked my email. A former colleague sent a spreadsheet in September 2018 with Typhon Capital Management listed as a “crypto fund;” that’s the fund Koutoulas founded.

On p. 43 he writes:

A doctor from Boise, Idaho, and a Bitcoiner were talking about the coronavirus vaccine and “medical freedom.” The Bitcoiner refused to tell me his name. “Real G’s move in silence,” he told me, with a high-pitched laugh.

Sounds par for the course. I’ve lost count how many supposed “cypherpunks” want to have it both ways: cash in off their notoriety and live it up large all while being “anonymous.” Jameson Lopp immediately comes to mind: telling The New York Times how he made himself “vanish” and simultaneously getting CryptoDeleted, deleted.16

On p. 44 he writes:

None of the guests seemed to know one another. A crypto venture capital fund manager—wearing a mock souvenir T-shirt from convicted pedophile Jeffrey Epstein’s private island—joked about a scam that another yacht guest was running. A crypto public relations man offered what he called “Colombian marching powder” to a young woman.

So much oof in those three sentences.

On p. 46 he writes:

I realized I had walked in on a presentation for a timeshare that I would pay money not to join. It was also not the best setting for a long conversation. My tour guide soon sent me back downstairs. When Pierce and I did catch up, by phone, he told me he’d dreamed up the idea for a stablecoin back in 2013. He said he knew from the start it would change the course of history. “I’m not an amateur entrepreneur throwing darts in the dark,” he told me. “I’m a doula for creation. I only take on missions impossible.”

Someone should call the police, the author was subjugated to some cruel and unusual punishment.

On p. 49 he writes:

By 2013, Pierce was running one of the first Bitcoin venture capital funds. There still wasn’t much you could do with Bitcoins, and crypto remained largely the domain of geeks and hobbyists. But around that time, a man going by “dacoinminster” had posted a proposal on the popular message board Bitcointalk that would lead to the creation of Tether and make the entire $3 trillion cryptocurrency bubble possible. He called his idea “MasterCoin.”

I think one detail that could have been worth adding was that this fund was originally called Crypto Currency Partners and during the “bear market” of 2015 rebranded to Blockchain Capital. The fund typically wrote small checks (around $25,000 per deal) and had spurned at least one VC rule at that time: do not invest in startups that competed with one another (e.g., if you invest in one exchange in a specific jurisdiction, then do not invest in another exchange that served the same jurisdiction).

On p. 50 he writes:

Willett imagined that once he created the MasterCoin system, other people would come up with all sorts of ways to use it: coins that tracked property titles, shares of stock, financial derivatives, and even real money. None of the ideas were completely original—he told me he’d read many discussions of them on message boards—but he was the first to put them into practice.

Could be worth mentioning that there were several (three?) colored coin projects that existed around the same time, attempting to track similar off-chain wares.

On p. 50 he writes:

“If you think Bitcoin has a reputation problem for money laundering now, just wait until you can store ‘USDCoins’ in the block chain!” Willett wrote in 2012. “I think criminals (like the rest of us) will prefer to deal with stable currencies rather than unstable ones.”

Pretty prophetic. Although, unclear from his original post if Willett was thinking of any distinction between central bank-issued digital currency versus privately issued pegged coins (which is what we have ended up with so far).

On p. 51 he writes:

Willett’s plan was innovative. It was also illegal. What Willett did was a textbook example of what the U.S. Securities and Exchange Commission calls an “unregistered securities offering,” meaning that Willett was selling an investment opportunity without any of the usual safeguards. Willett told me that the agency probably would have fined him hundreds of thousands of dollars if it had noticed what he was up to. But luckily, the regulators weren’t reading Bitcoin message boards. “They would have made a terrible example out of me if they’d known what was coming,” Willett said, laughing. “Never heard anything from them.”

So both Willet and the author could be correct. But I think referencing or quoting a U.S.-licensed attorney would have made this a stronger paragraph.

On p. 51 he writes:

Phil Potter, an executive at an offshore Bitcoin exchange, Bitfinex, was developing a similar idea. They teamed up and adopted Potter’s name for it: Tether. (Potter told me he was actually the one to first approach Sellars with the idea. “I’m sure Brock will tell you he came down from Mount Sinai with it all written on stone tablets,” he said.)

This is one of those quotes I spit-the-coffee-out, so to speak. You see, in Easy Money, the authors never got a direct quote from anyone at Tether, Bitfinex, or the regulators who oversee them. It was a disappointment. In contrast, readers of Number Go Up get a chance to hear from all of the above.

On p. 52 he wirtes:

Tethers. Then Tethers could be transferred anonymously, like any other cryptocurrency.

Pedantically, it isn’t truly anonymous: it is pseudonymously.

On p. 52 he write:

The problem was that Tether, like other cryptocurrencies, broke just about every rule in banking. Banks keep track of everyone who has an account and where they send their money, allowing law enforcement agencies to track transactions by criminals. Tether would check the identity of people who bought coins directly from the company, but once the currency was out in the world, it could be transferred anonymously, just by sending a code. A drug lord could hold millions of Tethers in a digital wallet and send it to a terrorist without anyone knowing.

I partially agree with this but believe a clarification should be added: in the U.S. That is to say, not every country has the exact equivalent of the “Bank Secrecy Act” which is what the author is referring to here.17

Source: Twitter

Three years later I would probably amend my own tweet to state on-chain activity can be surveilled by anyone running a node (tracing can be done at any time). But that surveillance sharing from CEXs depends on jurisdiction.

On p. 52 he writes:

“The U.S. will come after Tether in due time,” Budovsky wrote me in an email from a Florida prison. “Almost feel sorry for them.”

This was another spit-the-coffee-out moments. Unlike the authors of Popping the Crypto Bubble and Easy Money, Faux reached out to the creator of Liberty Reserve for a quote. And got a relevant one. Solid reporting.18

On p. 54 he writes:

When I spoke with Pierce on the phone, I asked him the central question: Was Tether actually backed up by real money? He assured me it was. He said Tether was preserving the dollar’s status as a global reserve currency. “If it were not for Tether, America would likely fall,” he said. “Tether in many ways is the hope of America.” But as he droned on, I realized Pierce had little information to offer about the location of Tether’s funds. My mind started to wander.

To me, this was the correct way to frame the conversation for the reader: Pierce is not an insider, so he probably does not have up-to-date inside info. I pointed this out in the review of Easy Money, where McKenzie and Silverman felt compelled to include Pierce’s information-free banter.

On p. 55 he writes:

But Pierce wasn’t going to help me find salvation. He told me that he’d actually given up on Tether in 2015, about a year after he started it. The currency had gotten almost no users, and it seemed likely it would be frowned upon by authorities. An SEC lawsuit, or a trip to prison, would prevent him from reaching his own destiny. “My view was if I made money from this thing it would prevent me from doing the work that I have to do for this nation,” Pierce said.

Unclear if Pierce truly believes the tales he spins.

On p. 55 he writes:

But if the exchange used Tethers instead of dollars, it wouldn’t need them. Potter pitched this idea to his boss at the exchange: Giancarlo Devasini, the Italian former plastic surgeon. He went for it. Devasini and his partners already owned 40 percent of Tether, and they bought the rest from Pierce’s crew for a few hundred thousand dollars. Pierce told me he handed over his shares for free.

This passage is another example for why I think Faux probably should have used Tether LTD to describe the issuer and USDT to describe tethers. A casual reader might assume that Devasini owns 40% of the USDT supply.

On p. 55 he writes:

After interviewing most of the people involved with Tether’s creation, I realized that they didn’t have the answers I was looking for. All of them said something similar: They definitely deserved credit for coming up with one of the most successful companies in the history of cryptocurrency, but they bore no responsibility for whatever the company was doing now.

Ha!

Chapter 4: The Plastic Surgeon

This is one of the shortest chapters, but involves some interesting color on Giancarlo Devasini that has not appeared in print before.

For instance, on p. 59 he writes:

This didn’t exactly match what I’d read on Bitfinex’s website. There, it said that Devasini’s group of companies brought in more than 100 million euros a year in revenue, and that he sold them shortly before the 2008 financial crisis. But Italian corporate records showed that the companies had revenue of just 12 million euros in 2007. Some of them even filed for bankruptcy. And none of the former employees I spoke to remembered Devasini selling them.

An example of “exit inflation”?

On p. 59 he writes:

What they did tell me was that in 2008, Devasini’s production facility was destroyed in a fire. Fuxa said it was caused by diesel generators that Devasini had set up because the local utility hadn’t provided enough power. “He basically built a power plant in the back and it went up in smoke,” Fuxa told me. But a newly unprofitable factory burning down in a mysterious fire struck me as a potential red flag, waving in the distance.

Oof.

On p. 60 he writes:

Tether called the lawsuit “meritless” and said it went nowhere.

Perhaps it is stonewalling, but a canned response is arguably better than simply not even reaching out to Tether LTD, which is apparently what a lot of the people who market themselves as “Tether Critics” have done. Solely engaging on Twitter has its limitations.

On p. 63 he worte:

Devasini was fascinated with finance. In a December 2011 post titled “The Shell Game,” he explained how Italian banks could avail themselves of billions of dollars of low-interest-rate funding. They could use it to gamble on anything, or to buy higher-yielding government bonds to make risk-free profits.

December 2011 was the middle of the European debt crisis (Italy was one of the i’s in PIIGS). Spoiler alert: since then, a number of Italian banks have struggled in what is labeled “the doom loop,” which includes the oldest Italian bank, Montei dei Paschi (which was bailed out). Would the banking sector be different if they had followed Devasini’s suggestion? Not sure, but is it a straight line between this “shell game” post and the setup of Tether LTD threeish years later?

Chapter 5: Hilariously Rich

On p. 66 he wrote:

He’d been left with a stockpile of 20 million unsold CDs and DVDs from his defunct manufacturing business. Now he decided to sell them for Bitcoin. He posted an ad on the Bitcointalk forum offering them for 0.01 Bitcoin each—about ten cents at the time. Marco Fuxa, his former business partner, told me that Devasini sold them all. If that’s true, and he kept the Bitcoins, their value would have later soared to more than $3 billion. “That’s how he got his money,” Fuxa said.

Big if true.

On p. 66 he wrote:

The first big exchange, Mt. Gox, repurposed a website created as a place to trade virtual Magic: The Gathering cards. (“Mt. Gox” stands for Magic: The Gathering Online eXchange.) Unsurprisingly, a former trading card website proved to be a bad custodian for billions of dollars.

It is interesting to see what different authors decide to include and omit to provide readers a backdrop to the industry they are covering. The collapse of Mt. Gox in 2014 unilaterally led to a 2+ year bear market and is frequently highlighted in mainstream press including this book. Yet neither Easy Money nor Popping the Crypto Bubble mentioned it even though it might have helped their arguments.19

On p. 67 he wrote about the aftermath of the 2016 Bitfinex hack (the 2nd one):

Trading increased so much that within eight months the exchange had earned enough to pay back its customers, either in cash or in Bitfinex stock. With this gambit, Bitfinex earned customers’ loyalty. And judging from what he’d do in the next few years, Devasini had learned a lesson: He could get away with bending the rules.

Even though I am not a trader, this always rubbed me the wrong way. If a regulated financial intermediary (like a custody bank) had done something similar in 2016, it is hard to see how the scrip would have been permitted to be issued. But we’ve seen some pretty strange things in traditional finance too ¯_(ツ)_/¯.

On p. 68 he writes about ICOs:

The hype was so powerful, it seemed like anyone could post a white paper explaining their plans for a new coin and raise millions. Brock Pierce, the Tether co-founder, promoted a coin called EOS, which was pitched as “the first blockchain operating system designed to support commercial decentralized applications.” It raised $4 billion. Yes, really. “I don’t care about money,” Pierce said in an interview around that time. “If I need money, I just make a token.”

Perhaps stranger is that Block.one (the entity that conducted the ICO) settled with the SEC in 2019 for $24 million with no disgorgement. Does this mean that EOS is in the clear now (in the U.S.)?

On p. 68 he writes:

These ICO-funded start-ups promised that blockchain would revolutionize commerce by enabling provenance to be tracked and verified. Even big companies like IBM and Microsoft started saying that they would put practically everything on the blockchain: diamonds, heads of lettuce, shipping containers, personal identification, and even all the real estate in the world. It seemed like blockchain-powered ICOs were the practical use that crypto had been waiting for. But there was one problem. None of this stuff ever advanced beyond the testing phases, if anyone bothered to even do that. Most ICOs were scams. And they weren’t actually an innovative form of fraud. ICOs made it easier to run a scam that’s about as old as the stock market. It’s called a “pump-and-dump” scheme.

I think this needs a paragraph break after the first sentence. Because while accurate, some readers may think that companies like IBM or Microsoft were directly involved in ICOs at that time (they were not).20

On p. 69 he writes:

With help from Mayweather, Centra raised about $25 million. But like most of the companies that raised money with ICOs, it was a total scam. It never issued its crypto debit card, or anything else at all. Even the CEO listed on its website didn’t exist—his picture was a stock photo. It would later be revealed that its founders, including a pot-smoking, opioid-addled twenty-six-year-old who ran a Miami exotic car rental business, had paid Mayweather $100,000 for his endorsement.

In contrast to Easy Money, where one of the authors talks about smoking pot and eating edibles a few times, this is the only place that marijuana is mentioned.21 Is that a good or bad thing? As Buddy Holly might say, Faux’s writing is square.

On p. 72 he writes:

By early 2017, Bitfinex was keeping its money in several banks in Taiwan. But the way the international financial system works, running an exchange required the cooperation of other banks too. Bitfinex’s Taiwanese bankers relied on other banks—known as correspondents—who acted as middlemen to pass money from Taiwan to customers in other countries.

One of my former colleagues at R3 previously worked at a large bank in Taiwan. When this publicized debanking occurred he mentioned in speaking with his former colleagues, senior managers who finally learned what was happening viewed it as scandalous because Bitfinex was flagrantly bypassing risk controls by opening up new accounts under different names.22

On p. 73 he writes:

But somewhere in the United States, an I.T. worker in his early thirties spotted the filing for the abortive lawsuit after it hit the court docket. He couldn’t believe what he was reading. Tether was supposed to be backed by real U.S. dollars in a bank. But in the lawsuit, the company itself admitted it had no access to the banking system. What was especially odd was that even after filing the case, Tether kept issuing coins. It created 200 million new ones that summer. But was anyone even sending in the corresponding $200 million, if the company didn’t have a functional bank account? The man signed up for Twitter, Medium, and other social media platforms under the pseudonym “Bitfinex’ed.” And what he started posting would create big problems for Devasini. Tether had spawned a powerful troll.

I believe one of the first times I interacted with Bitfinex’ed (prior to him losing a bet and blocking me), was when he proof read my post discussing the court case above: How newer regtech could be used to help audit cryptocurrency organizations.23

In retrospect, maybe I should have trademarked one of the subtitles: “Tether is not so tethered.”

Chapter 6: Cat and Mouse Tricks

On p. 74 he writes:

Four years later, when I started looking into Tether on my Businessweek assignment, Bitfinex’ed was still posting multiple times a day. His writing was conspiratorial, but it had struck a chord. Everyone in crypto would bring his posts up in conversation with me. Tether defenders tended to blame him for any negative news about the company. I’d seen things he wrote echoed in lawsuits and in mainstream reports. He seemed to know so much about Tether that I wondered if he worked for the company, or if he was a disgruntled government investigator. I arranged a meeting with him, on the condition I wouldn’t reveal his identity.

As mentioned in the Easy Money review, the first search result for googling “Bitfinexed identity” is to a five year old article that links to a Steemit article. Bitfinex’eds name is Spencer Macdonald.24 Back when I wrote long newsletters Bitfinex’ed was on my private mailing list and sent me the link to a Steemit article of a guy who “doxxed” him because Macdonald had re-used the same catchphrases “Boom. Done.” under an alias Voogru on reddit.25

On p. 75 he writes:

He told me that he didn’t want to reveal his real identity because he’d gotten death threats from Tether defenders. As he worked himself up, the pitch of his voice rose higher.

That sucks, I have also received a slew of threats (and petty grievances) in the past too. The people who send those threats should receive some kind of consequence. Putting that aside, why does he still use this alias at this point since it has been googlable for years?

On p. 75 he writes:

By then, Andrew had lost me. I had been hoping to get new leads at this meeting, not an analogy drawn from a cartoon about anthropomorphic ducks. Andrew told me his mission to expose Bitfinex wasn’t personal. It seemed like it was. He said he imagined Kevin Smith—who played a slovenly hacker named Warlock who works out of his mother’s basement in a Die Hard sequel—portraying him in a movie. “I think it’s more humiliating for Bitfinex that way,” he said.

I agree with Faux, it seems a bit personal too. And I don’t think there is any shame in admitting that: several Bitfinex/Tether LTD staff (executives?) wronged you in the past — plus repeatedly lied in public — and you want to get even. But Macdonald – like the rest of the Tether Truther gang – likely has no inside information, he says as much to Faux. So how does Macdonald plan to humiliate them? In Easy Money, James Block dropped the alias (DirtyBubbleMedia) and still uses chain analytics to trace linkages, why not follow his lead?

On p. 77 he writes:

When I asked for his sources or evidence, Andrew didn’t have anything new to provide. That was where I was supposed to come in.

This is a big oof. In Easy Money the authors put Macdonald/Bitfinex’ed on a pedestal, but never present a smoking gun. Perhaps there is one, but that rabbit hole took up valuable page space that Faux instead uses to interview a prosecutor from the NY AG office.

Speaking of speculation, Matt Levine recently hypothesized that Tether could be a lucrative business for one of the following reasons:

Source: Twitter

Number 2 is a possibility that Faux also independently surmises in the book, yet the authors of Easy Money do not, possibly because their sources (Bitfinex’ed/Macdonald) dismiss it a priori.26

On p. 77 he writes:

Betts explained that Noble wasn’t exactly a bank—it was an “international finance entity,” organized under looser Puerto Rican laws. His plan was to open accounts for all the major cryptocurrency hedge funds and companies. That way, they could easily transfer money between themselves without ever sending it out of Noble.

The Drake meme seems pretty fitting for this passage:

On p. 78 he writes:

The dispute got so heated that Devasini wanted to pull the company’s cash from Noble. Devasini’s deputy, Phil Potter, wanted to keep their money in the “international finance entity,” so Devasini and his other partners bought him out for $300 million. Potter took the payment in U.S. dollars, not Tethers.

That is a pretty big chunk of change. From its neighboring paragraphs, it appears this buyout took place in 2018. How did the partners who bought him out fund that buyout during this time period?

Chapter 7: “A Thin Crust of Ice”

This was a great chapter if for no other reason than we get to read in booklength (for the first time?), from a NY AG prosecutor involved in the Tether case. After reading this book, I think going forward reporters should ask Tether Truthers if they have ever reached out and/or spoken to any of the prosecutors. That seems like the bare minimum low-effort task to complete, otherwise it is just LARPing as a social media maven.

On p. 80 he writes about John Castiglione and Brian Whitehurst who were assigned to investigate the cryptocurrency market for the NY AG.

On p. 81 he writes about subpoenas:

The crypto industry responded with outrage. Four exchanges didn’t respond at all. Some of the others said they had no responsibility to police suspicious activity. Castiglione and Whitehurst decided to focus on Bitfinex, the crypto exchange owned by the same group that owned Tether. It had the most red flags. The company said it didn’t do business in New York, but one of its top executives—the chief strategy officer, Phil Potter—lived there. Castiglione sent a subpoena to some New York trading firms, and they informed him that they did use Bitfinex.

One of the exchanges that said they would not respond was Kraken whose representatives, at the time, said they did not do business in New York. Yet curiously, a year later, their head of trading – who was based in New York – sued them for stiffed compensation.

On p. 82 he writes:

This was, amazingly, even sketchier than it sounds. Crypto Capital advertised on its website that it enabled users to “deposit and withdraw fiat funds instantly to any crypto exchange around the world.” But it didn’t have any special technology. Instead, it was essentially a money-laundering service. Crypto Capital would simply open bank accounts using made-up company names. They’d tell banks they’d use the accounts for normal things, like real-estate investing. Then they’d let companies like Bitfinex use them for customer transfers. (Bitfinex would later claim that it believed Crypto Capital’s assurances that everything was on the up-and-up.)

Amazing, plus a funny parenthetical.

On p. 83 he writes:

Castiglione and his colleagues asked for proof that all Tethers were paid for with actual dollars by real customers. The defense lawyers acted affronted. But after some back-and-forth, one of the defense lawyers acknowledged that there had been what he called a “development.” They didn’t exactly come clean. Bitfinex had placed more than $850 million with a payment processor—Crypto Capital—and it appeared to be “impaired,” he said. Bitfinex had filled the hole by borrowing from Tether’s reserves. “I’m sorry, can you say that again?” Castiglione asked. Castiglione couldn’t believe it. Impaired seemed to be a euphemism for “gone,” and gone meant the exchange was insolvent and on the brink of collapse. On Wall Street, a trading venue in this situation would have to tell the world and shut down. It seemed like Bitfinex didn’t even plan on informing its customers. Castiglione asked the defense lawyers to leave so he and his colleagues could confer in private.

Future writers and reporters: if your book on Tether doesn’t have something as juicy as this statement above, do more digging because this is the bar to surpass.

On p. 85 he writes:

At first, Bitfinex’s lawyers said the deal to lend themselves Tether’s money was only pending. But after weeks of exchanging letters, they informed Castiglione that it had been completed, though they assured him it was a fair transaction negotiated without conflict of interest. They sent over papers documenting a $900 million line of credit from Tether to Bitfinex. Signing on behalf of Tether was Giancarlo Devasini. And on behalf of Bitfinex: Giancarlo Devasini.

They got the last laugh though, right? In the process of writing this, Tether LTD announced its latest attestations: about 85% of their reserves were now supposedly held in cash and cash-like equivalents (Treasuries). If they are able to pocket the 5%+ yield on Treasuries that is at least a couple billion in annual profit.27

On p. 86 he writes:

The settlement with New York required Tether to publish quarterly reports detailing its holdings, and to send even more detailed information to the attorney general. Castiglione hoped they would inspire someone to look more closely. But no regulators asked to see them.

This is interesting. Why have no other regulators reached out to see the documents? Did other regulators and law enforcement receive similar documents from subpoenas and thought the NYAG had outdated material?

Chapter 8: The Name’s Chalopin. Jean Chalopin.

On p. 91 he writes:

Tether’s lawyer, Stuart Hoegner, had a little bit more to say to me. In a video chat, he called Tether’s critics “jihadists” set on the company’s destruction and said their market-manipulation claims didn’t make sense. And, in an email, he said my reporting was “nothing more than a compilation of innuendo and misinformation shared by disgruntled individuals with no involvement with or direct knowledge of the business’s operations.”

It is not clear when Hoegner had the change of heart, or maybe it is just in external communications? You can always fire your client to save your book credibility.28

On p. 93 he writes:

That October, Businessweek published my account of what I found, with the headline “The $69 Billion Crypto Mystery.” (By then, Tether had issued 69 billion coins.)

Portions of the ~5,000 page article was reused throughout the book. Perhaps because the photo is black & white Jean Chalopin kind of looks like Chuck Norris.

On p. 93 he writes:

People read into the story whatever they wanted to believe. To crypto fans, it showed that Tether did in fact have at least some money, which was a positive. To those who were skeptical, the information about Chinese commercial paper was damning. I wasn’t sure what to make of the financial records myself. I tried digging into the details of their holdings. Many of the loans appeared to be legitimate loans to real companies. Others I couldn’t verify at all. But that was unsurprising given the low quality of data on Chinese corporate loans. Rather than a smoking gun, the records felt like another inconclusive clue.

He hasn’t received a smoking gun so far. Other authors on the beat take note, it’s okay to say you don’t have conclusive evidence one way or the other.

On p. 94 he writes:

“I’m betting a shit-ton of money on them being a crook,” Fraser Perring, co-founder of Viceroy Research, told me. “Worst case is, I can’t lose hardly anything. I’m already rich, but I’m going to be fucking rich when Tether collapses.”

In Easy Money, the authors obliquely refer to a hedge fund (when interviewing James Block). I hypothesized it could have been Hindenburg Research or Citron (the former is mentioned later in this book). How many hedge have active trading positions on Tether solvency (one way or the other?)

On p. 95 he writes:

More recently, in March 2023, California’s Silicon Valley Bank collapsed after worry about its investment portfolio, amplified by a prominent podcaster, caused its customers, mostly start-up executives, to freak out.

Faux references a Financial Times article highlighting Jason Calcanis, who is a co-host of the All-In Podcast. Calcanis’ hysteria has led to a number of memes (and at least one bankrupt bank):

Source: Twitter

On p. 96 he writes:

But none of the analysts seemed much better informed than “Andrew,” the conspiracy theorist I’d met who posted as “Bitfinex’ed.”

Oof. Watch your notifications: FactFreeh, WillyBot, and other anonymous accounts will troll you if you point that out on the bird app.

On p. 97 he discusses the $1 million bounty from Hindenburg Research:

In November, we met in front of a hot dog cart by an entrance to Central Park. Anderson showed up wearing a hoodie. As we strolled down a path past children playing baseball, tourists taking photos, and a steel-drum band, he talked about what he could do with detailed documents on Tether’s holdings. Anderson said the bounty announcement hadn’t produced any great tips so far. I told him I might be able to help. Without revealing any details, I described the documents that I’d received.

I feel a little vindicated because in the past I have asked Tether Truthers, such as Jorge Stolfi, if they were so certain that Tether was acting in a fraudulent manner, why not collect the $1 million bounty. I have no affinity for Tether LTD (or Hindenburg) but I suspect it is because Stofli, and others, do not have actual evidence. Perhaps Tether LTD is still operating in a fraudulent manner, but using innuendo or hearsay is not a valid argument.

On p. 98 he writes:

“This book is going to be called Jay Is Wrong and Zeke Is Right: The Cryptocurrency Story,” I said. “As a writer, you don’t want to be compromising in any way, you know? You don’t want to have ulterior motives.”

This is basically the opposite approach to Ben McKenzie, who in Easy Money writes about his $250,000 bet shorting the coin market… but doesn’t publicly disclose the bet until after the book is published. Conflict of interest?

Chapter 9: Crypto Pirates

This was a really solid chapter on SBF and FTX. In fact, I only had one quibble with it.

On p. 117 he writes:

Owning an exchange (FTX) and a firm that trades on it (Alameda) was an obvious conflict of interest. On Wall Street it wouldn’t have been allowed, due to the risk that the trading firm would be given preferential treatment or access to confidential information.

While I agree with the author, that this should not be allowed, it technically is not true in the U.S.

As mentioned in the review of Easy Money, an uneasy arrangement has been allowed at various eras in traditional markets: Glass-Steagall separated commercial banking from investment banking and was enacted in 1933. Fast forward sixty six years later, in 1999, most of it was repealed. Some economists such as Joseph Stiglitz and Paul Krugman opined that this set the stage for the 2007-2008 financial crisis. Even after the financial crisis and a myriad of debates, Glass-Steagall was still not restored. Even today, too big to fail banks still have these conflicts of interest.

So yes, some U.S. stock exchanges may not have that specific conflict of interest, but a number of other intermediaries do.

Chapter 10: Imagine a Robin Hood Thing

On p. 120 he writes:

There was one other thing that was incongruous with Bankman-Fried’s public image: the itty-bitty matter of U.S. law. If Bankman-Fried had stayed in Berkeley, many of the bets FTX offered would’ve been not quite legal. Or entirely, deeply illegal. Nearly all the coins it listed would have been deemed unregistered securities offerings, like MasterCoin. The exchange itself didn’t comply with SEC trading rules either.

That could be true, but it probably would have been a stronger statement if the author had quoted or cited a U.S.-trained securities lawyer on that matter.

On p. 122 he writes:

“You’ve built up a good reputation,” I said, needling him a bit. “You could probably run some crypto scam and make a few billion dollars right now. By your logic, wouldn’t that make sense?” “Charities don’t want that money,” he said. “Reputation is so important for everything you do. And as soon as you start to think about the second-order effects, it starts to look worse and worse.”

It has been interesting to read this book and write the review during the SBF criminal trial. The book itself was introduced as evidence when SBF took the stand. While the passage above didn’t make it into testimony, in retrospect it was a pretty big self-own.

On p. 126 he writes:

In fact, by then, Tether had grown to 79 billion coins. And it was becoming clear that Bankman-Fried was a big enough user of Tether that he wasn’t likely to tell me if something worse was going on. The short sellers and conspiracy theorists kept promising to reveal some big secret, but it hadn’t happened.

I have my own theory as to why some of the conspiracy theorists went off the deep end, turning their notoriety into a cottage industry for continual media engagement. But putting that cynical view to the side, reporters should ask these folks to provide the receipts. And move on to other sources if they do not.

On p. 127 he writes:

The funds were not in the possession of shadowy North Koreans or some other group of cyberterrorists. The stolen billions were traced to a couple in their early thirties who lived in downtown Manhattan, not far from my place in Brooklyn. Their names were Ilya Lichtenstein and Heather Morgan. Judging from social media, the two didn’t exactly appear to be criminal geniuses.

I recall the first time I saw those names in the press and I asked a couple (trader) acquaintances in NY if they had ever heard of them. No one had. The next chapter illustrates why this book is a solid entry into the True Crime genre.

Chapter 11: “Let’s Get Weird”

On p. 135 he writes:

In 2021, a total of $3.2 billion in cryptocurrency was stolen from exchanges and decentralized finance (or DeFi) apps, in which crypto traders make deals directly with one another. That’s a hundred times more than the total stolen in all bank robberies in an average year in the United States.

Bank robbers need to step up their game, those are rookie numbers.

On p. 135 he writes:

Back in 2015, Bitfinex had set up a new security system after it lost about $400,000 of cryptocurrencies in a hack. Other exchanges generally mixed users’ coins together and stored the private keys on computers that weren’t connected to the internet, a practice known as “cold storage.” Bitfinex’s new system kept each user’s balance in a separate address on the blockchain, allowing customers to see for themselves where their money was. It used software from the crypto-security company BitGo.

Some background: the day Bitfinex was hacked (a 2nd time), some anti-government commentators, such as Andreas Antonopoulos falsely claimed that it was the fault of the CFTC. Recall that a few months prior, the CFTC fined Bitfinex for violating the CEA.

Source: Twitter

There is only so much time of in the day to fact-check, so hats off to Faux for not stumbling down the well-worn “its the governments fault” excuse. Maybe it is sometimes, but not that day.

On p. 135 he writes:

Michael Shaulov, a former coder for the Israeli Intelligence Corps and co-founder of the crypto-security firm Fireblocks, told me hacks like these generally don’t require a high level of technical expertise. Often, he said, the hardest part is crafting an email that tricks an insider into opening a malicious attachment. “The social-engineering vector is key,” he said.

Over the years I’ve had a chance to speak with people involved at a couple of the companies mentioned in this chapter. And while I have heard a single person singled out, it was a little disappointing that the criminal case against Ilya Lichtenstein and Heather Morgan didn’t say who or what was compromised.29

On p. 138 he writes:

They returned after a few weeks and then a third time a few weeks after that. “You sure you’re in the right building?” the doorman asked. (At the time, police were investigating the death of a prostitute in the tower across the street—surveillance video had shown men rolling a 55-gallon drum that concealed her dead body out of the building.) The agents assured him they were.

Faux’s never ending attention to detail strikes again.

On p. 142 he writes:

The arrest was national news. It was the largest seizure of stolen funds ever. “Today, the Department of Justice has dealt a major blow to cybercriminals looking to exploit cryptocurrency,” Deputy Attorney General Lisa Monaco said at a press conference. The TikTok commentariat tore through Morgan’s music videos, and within hours Razzlekhan was already a social media legend, having air-humped her fanny pack into the ranks of famous grifters. “The Bitcoin crimes are nothing compared to calling this shit rap,” Trevor Noah said on The Daily Show.

The amount of podcasts, videos, and obscure magazines and newspapers that Faux must have digested is impressive. Pretty solid zingers elsewhere too.

On p. 143 he writes:

Years after the Bitfinex heist, a fifth of the missing Bitcoins were still unaccounted for. Roughly $70 million worth had been sent to Hydra Market, a Russian dark-web site. No one knew where the money went from there, but on Hydra, vendors called “treasure men” were known to exchange crypto for shrink-wrapped packets of rubles that they buried in secret locations. It was possible there were underground bundles somewhere in Russia, waiting for Morgan and Lichtenstein to dig them up.

Is it just a matter of time before people randomly start digging for bundles of burried rubles? Shouldn’t there be a prediction market for this type of degen activity?

On p. 144 he writes:

The Bitcoins had been worth about $70 million when they were stolen. Devasini and his crew stood to recoup billions of dollars. It gave me little confidence in their abilities to safeguard money that their Bitcoins ended up in the hands of a pair of idiots, but having the coins sitting locked up in the couple’s wallets was probably a lucky break.

Based on the numbers mentioned in this book, there is a possibility that those high up Tether LTD are quite well off at this stage. Although clearly not at the same strata as Colin Platt.

On p. 144 he writes:

I quickly found that Mashinsky had an interesting history. I’d found a 1999 article in a defunct tech publication in which he listed a few very different businesses that he’d tried out after moving to the United States: “importing urea from Russia, selling Indonesian gold to Switzerland, and brokering poisonous sodium cyanide excavated in China for use by gold miners in the U.S.” He also said in the article that he wanted to get into the business of whole-body transplants. “Give an old person a new body—keep the head, keep the spine, and re-create the rest,” he said.

In another universe Mashinsky has taken Brains-in-a-vat mainstream. There you get a free whole-body transplant on the condition that an hour a day you solve captchas. Years later he is sued and charged with digital tomfoolery, for stealthily making it 20 hours a day; he accidentally created the plot of The Cookie Monster.

Chapter 12: “Click, Click, Click, Make Money, Make Money”

On p. 149 he writes:

Stone took his money out of stocks and went all-in on Ethereum, eventually starting Battlestar, which was supposed to help investors earn a return on their crypto holdings through what it called “institutional grade Staking-as-a-Service.” (Don’t ask.)

While I like some technical nitty gritty, rather than bore readers (or botch it like other authors have), Faux punts on describing what “institutional grade Staking-as-a-service” is. And that’s okay. With that said, he does mention “yield farming” a couple of sentences later but doesn’t really define it in the book.30

On p. 150 he writes:

By then, the ICO boom was over. It was no longer plausible for someone to announce they were going to create Dentacoin, a cryptocurrency for dentists, and raise millions of dollars —a real thing that happened in 2017. DeFi was different. It was based on “smart contracts.” These are, basically, simple programs that run on the blockchain. Remember that the Bitcoin blockchain is a two-column spreadsheet, and MasterCoin, Ethereum, and the like allowed for adding new columns that represented new coins. Now imagine if the spreadsheet added functions. Instead of just allowing users to add Bitcoins to one person’s row and subtract them from someone else’s, these smart contracts enabled them to swap one kind of coin for another, or make a loan to another user.

I think this could be a little unclear for readers and a paragraph break should be made with “DeFi was different.” Also, while users can create and deploy new assets via Mastercoin (renamed Omni), it doesn’t have a virtual machine like other “modern” chains do so its functionality is very limited compared with Ethereum.31

On p. 151 he writes:

DeFi used these smart contracts to create decentralized, anonymous versions of exchanges like Sam Bankman-Fried’s FTX.

Probably more accurate to say pseudonymous.

On p. 151 he writes:

“DeFi may not exist in January,” Mashinsky wrote. “What we want is for every DeFi player to have a Celsius account, so when the Ponzi runs exhaust themselves they will all park their coins with Celsius.”

Wow, just wow.

On p. 154 he writes:

His description of life in Puerto Rico sounded like a montage from a crypto version of The Wolf of Wall Street: “dancing, partying, drugs, beach.” Stone set up two big screens at the dining room table. He rarely looked up from them, even when his host threw weekly parties. As people danced around the room, he’d stare at the screens and snort lines of ketamine. Other crypto traders would bring their laptops too. Some preferred Adderall or cocaine. Stone liked to say he was one of the largest players in DeFi, a friend who hung out with him then told me, often yelling about hacks or how much money he was making. “He’d type loud, like he wanted people to know,” the friend said.

On p. 155 he writes:

Because it was crypto, all that money was stored on Stone’s laptop. It was as if Stone kept a billion dollars in bundles of hundreds, just sitting on his friend’s dining room table. The account was protected by a password, but Stone grew paranoid. He couldn’t sleep for more than a few hours at a time. He’d stay up until three in the morning trading, then start again at six or seven.

I’m not a master of memes but pretty certain an appropriate one for the passage above is: are ya winning, son?

On p. 155 he writes:

Mashinsky was claiming Celsius was safer than banks, but the company didn’t even have a system for tracking what Stone and its other traders were doing with the money. As one Celsius executive wrote in an internal email in December 2020: “As things stand currently, Celsius does not have a clear, real-time, and actionable view of our assets and liabilities.”

SMH.

On p. 157 he writes:

Mashinsky argued that crypto was better than dollars, because inflation would inevitably erode the value of all government-issued currency. I told Mashinsky I didn’t have any savings in cash, so it wasn’t like I was sitting on a pile of money that was getting less valuable. And I wasn’t worried about the safety of my bank account.

That old chestnut. J.P. Koning wrote a pretty good debunking of a similar narrative.

Chapter 13: Play to Earn

On p. 162 he writes:

Lapina started using his earnings to buy more teams of blobs, and he hired other people in town to play with them on their own phones. He let them keep 60 percent of whatever they won in the game. Before long, Lapina had more than a hundred people battling for him, including teachers, his grandmother, and even a police officer, who Lapina had to talk out of quitting the force.

Wow, had no idea how “viral” Axie was at that time.

On p. 162 he writes:

“It’s actually the beginning of the metaverse, in our opinion, just hiding in a very cute little game,” Aleksander Larsen, the Norwegian co-founder of Sky Mavis, said on a podcast. “I actually believe that Axie has the potential to impact the globe very heavily with letting people interact with the global economy, actually exiting their prisons, where they are born.”

Filtering through podcasts for this gem. Sounds like something VCs Congratulating Themselves would find.

On p. 163 he writes:

The returns didn’t strike the Filipinos I talked to as unreasonable. But a more sophisticated investor would have realized the daily rate of return was 8 percent—way, way too good to be true. At that rate, with earnings continually reinvested for ten months, Lapina and everyone else who bought a single set of Axies would be trillionaires.

Finally, a scheme on par with PTK.

On p. 163 he writes:

The only thing that kept the Axie economy afloat was new players buying in.

Because I’m overly pedantic I would probably have written, “the only thing that kept the Axie economy afloat at this price level” because technically Axie (the game) is still alive today.

On p. 166 he writes:

Quigan told me she and her husband were considering going abroad to Dubai to seek better-paying jobs. But she still checks the price of potions daily. “I don’t get angry,” she said. “I’m still optimistic that sometime, somehow, it will still go up.”

Probably could print that quote on a shirt and sell it a coin conference.

On p. 166 he writes:

QUIGAN MIGHT NOT have been angry, but I was. Crypto bros and Silicon Valley venture capitalists gave Filipinos false hope by promoting an unsustainable bubble based on a Pokémon knockoff as the future of work. And making matters worse, in March 2022, North Korean hackers broke into a sort-of crypto exchange affiliated with the game and made off with $600 million worth of stablecoins and Ether. The heist helped Kim Jong Un pay for test launches of ballistic missiles, according to U.S. officials. Instead of providing a new way for poor people to earn cash, Axie Infinity funneled their savings to a dictator’s weapons program.

Not a good look Bob.

Chapter 14: Ponzinomics

On p. 170 he quotes Anthony Scaramucci:

“These people are unbelievable the way they dress,” he said. “I’m here in a Brioni, these guys are in Lululemon pants. These guys are moving into the future. These are some of the worst-dressed people I ever met in my life.”

Yea, it’s not the fly-by-night scams to be concerned about, it is the clothing choices.

On p. 171 he writes:

As Lewis went on, Bankman-Fried tapped the toes of his silver New Balance sneakers, sometimes pressing his legs with his elbows as if to hold them still. It seemed like Lewis saw him as another one of the truth-telling, system-disrupting outsiders he liked to write about. But the author’s questions were so fawning, they seemed inappropriate for a journalist. Listening from the packed auditorium, I started to question whether Lewis was really writing a book, or if FTX had paid him to appear. (Lewis later told me that he had in fact come to report for his book and that he was not compensated.)

Was Lewis provided flights on the FTX jet? Either way, Michael Lewis was unhappy with Faux’s reporting on this topic, telling The New York Times in its review of Going Infinite:

I’ve never met Faux but I do not think he is on trial for defrauding customers for ~$8 billion in losses. Who knows, maybe Faux has been moonlighting as a North Korean hacker. How else could he track down VIPs at art shows?

On p. 172 he writes:

At a party for a project called Degenerate Trash Pandas, I asked one coder if crypto would ever be helpful for regular people. “Why is it that you think that is important?” he said to me, in a tone of total sincerity. “I really would like to know.”

Socially useful dapps? Get out of here.

On p. 173 he write:

Another crypto executive showed me a digital image of a sneaker that he bought for eight dollars, which he said had grown to be worth more than $1 million. He told me that recently, all owners of these imaginary sneakers had been issued an image of a box, which was itself worth $30,000. When he opened the box, he found another picture of sneakers and another box, each of them valuable in their own right. “It’s this never-ending Ponzi scheme,” he said, happily. “That’s what I call Ponzinomics.”

Reminds me of that SNL sketch with Tim Meadows and Will Ferrell with a Bible and a bar of gold:

On p. 175 he writes:

It struck me that almost any of the companies I’d heard about would be good fodder for an investigative story. But the thought of methodically gathering facts to disprove their ridiculous promises was exhausting. It reminded me of a maxim called the “bullshit asymmetry principle,” coined by an Italian programmer. He was describing the challenge of debunking falsehoods in the internet age. “The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it,” the programmer, Alberto Brandolini, wrote in 2013.

Source: Twitter

Another solid Tweet reference. Unfortunately Community Notes was not around in 2014-2016 which I think could have headed off some of the nonsense narratives.32

On p. 180 he writes:

Van der Velde seemed annoyed. He hinted that there was something in Tether’s past that he couldn’t reveal. “It’s very easy to invite a journalist into your office when you don’t have any battle damage,” he said. “Tether saved the whole industry. We had to carry those heavy loads. Sam had the luxury of making a nice clean start. Sam never had to deal with that.”

I think this is partly why Tether LTD has been given a free pass by much of the industry: it has provided the necessary lubricant to cross the chasm. It is systemically important for the coin world.

On p. 182 he writes:

He refused and accused me of being insufficiently committed to my project. “How do you expect to write a book about crypto if you have only dedicated $600 to crypto?” Loney said. I told him it was pretty common for writers to write about, say, presidential politics without serving as president, or baseball without being able to hit a fastball. But he wasn’t convinced.

That reminds me of this interaction from a few years ago:

Source: Twitter

Six years later there is still a problem with conflating holding a de minimis amount of coins in order to test out say, how limit orders work on UniSwap V3 versus making it the bulk of your portfolio. You do not need to own an airplane to be a pilot or stewardess or flight instructor. It’s possible to be a blockchain researcher without having to own massive quantities of the coin you are studying.

Chapter 15: All My Apes Gone

On p. 186 he writes:

A common misconception about NFTs is that the buyer owns a unique, verifiable digital image. That’s not the case. There’s nothing stopping anyone from simply right-clicking Justin Bieber’s ape and downloading the image file to their computer. The replica is indistinguishable from the $1.3 million original, and perfectly usable for a profile picture. What a Bored Ape buyer pays hundreds of thousands of dollars for is not a digital ape cartoon—it’s the ability to prove they are the one who paid hundreds of thousands of dollars for a digital ape cartoon.

So I partially agree with the premise here: the way many art-related NFTs were marketed the past few years was if there was a unique digital image. In most cases however – such as with BAYC – the owners had to refer to URL pointers. But not every art-related NFT project followed that path; there is a small category called “generative art” that as the name suggests, is generated and/or store fully on-chain. See Slide 9 for some examples of projects whose assets reside fully on-chain.

On p. 193 he writes:

The process of buying the ape didn’t make me feel any better. It could only be purchased on an NFT marketplace using the cryptocurrency Ether. (That’s what the Ethereum blockchain’s coins are called.)

A pedantic rewording of the parenthetical: the word native should probably be inserted between blockchain and a singular coin.

On p. 193 he writes:

Once my money was on Coinbase, I had to trade it for Ether, which was easy enough. Coinbase works just like E-Trade, except that instead of Apple stock, you’re buying and selling cryptocurrencies. It’s not exactly what Satoshi Nakamoto had in mind when he invented the first peer-to-peer electronic cash system—Coinbase is simply taking the place of your online trading site.

The irony of many intermediaries involved in that trade lifecycle.

On p. 195 he writes:

Each offer charged me a “gas fee” of about three dollars, an annoying sum for a technology advertised as an improvement on credit cards. These are paid to the operators of the Ethereum network—similar to the rewards paid to Bitcoin miners—and vary with demand, sometimes spiking past a hundred dollars per transaction.

It would have been a massive distraction, but I think readers would have liked to know why there was a spike. Not that there needs to be a future edition, but a hypothetical footnote could discuss maximal extractable value (MEV), which is sometimes the cause for these spikes.33

Source: Flashbots

Chapter 16: It’s the Community, Bro

On p. 199 he writes:

The Mutant Cartel was his effort to build a community around the Mutant Apes, which he felt had been a bit overlooked by their creators. “It’s all the good stuff about being in a cult without any of the negative,” Messika said. “It’s genuinely beautiful to see this deep camaraderie.” I wasn’t sure about what he was saying, but I have to admit it felt cool to be part of his crew.

This is the closest Faux describes becoming part of a crew. This stands in contrast to Easy Money where the authors arguably lost objectivity by becoming too close to their sources.

On p. 200 he writes:

Comedian Amy Schumer’s set early in the evening was not a hit. She seemed embarrassed to be there and called the attendees nerds. “I don’t know what NFT stands for,” she said. “I’m assuming it’s, looking out, not fucking tonight, is that correct? Do I have that right?”

Nerds just gonna stand there and take that? Didn’t make an NFT of that NFT joke?

On p. 202 he writes:

Even assuming one was made, the licensing fees would likely be barely enough to cover the cost of one Bored Ape. To make everyone’s investments pay off, 10,000 movie studios would have to make 10,000 deals to make 10,000 cartoons about 10,000 similar-looking animals.

On p. 204 he writes:

The bestselling writer Neil Strauss wrote an impenetrable ape-themed book that was itself released as a limited-edition NFT. At least 2,000 copies sold for about $250 each. “Captain Trippy lay in his hammock at the back of a room, holding a Shaving Ape cigarette loosely in his right foot,” he wrote. “Some say it’s the reason for his brightly colored psychedelic skin and captain’s hat, so that he can be seen through the smoke.” I’m not sure if anyone has actually read the whole thing, but I made a $300 profit when I sold my copy.

Someone call the purity police: the author is flipping NFTs for big bucks!

On p. 205 he writes:

A month before ApeFest, Ripps had started to sell his own NFTs. He called them RR/BAYC. They were exact replicas of Bored Apes—in fact, since NFTs don’t actually contain images, just links to them, Ripps’s NFTs contained links to the exact same images. He offered his for way cheaper, about $200 each. Ripps told me he hadn’t ripped off Bored Apes—he’d created a new artwork by placing them in a new context. “The NFT isn’t the image,” Ripps said. “The NFT is a cell in the spreadsheet that’s in the blockchain that links to an image. No one is mistaking their apes for my apes.”

Well when you say it out loud that way, it does sound a little ridiculous. But… the pedant in me must protest: not all art NFTs require an external link (but most of them do).34

On p. 207 he writes:

I later learned from a legal document that Snoop allegedly owned a stake in Yuga Labs. I was almost relieved to find out he may have been shilling his own investment.

I lied, here’s another zinger.

On p. 207 he writes:

But I felt angry on their behalf. I wondered if Fallon felt any responsibility for promoting Bored Apes in his segment with Paris Hilton.

I empathize with the authors anger. I’ve attempted to confront people I felt were responsible for actively misrepresenting some scheme. But, and I say this as someone who has never owned a ritzy Ape or Mutant: those are Veblen goods. The only way to buy them was to fork over $20,000 for the cheapest. Unsophisticated retail (who apparently got raked on Axie) couldn’t meet that threshold. That’s not an excuse for Fallon but it’s in a different league.

Chapter 17: Blorps and Fleezels

On p. 212 he writes:

Kwon’s main coin was called TerraUSD. It was a stablecoin like Tether, intended to always trade for one dollar. But Kwon didn’t promise to back his coins with dollars in a bank account. Instead, TerraUSD was backed with a second coin that Kwon made up, called Luna. Since Kwon controlled the supply of Luna, he could simply create as many as needed out of thin air.

This is mostly true, except the part where Kwon controlled the supply of Luna. He may have engineered its parameters at genesis, but post-launch he did not appear to unilaterally control Luna’s supply any more than Satoshi unilaterally controlled the Bitcoin supply.35

On p. 212 he writes:

If you’re having trouble following this, that’s actually a good sign about your investing instincts. Comedian John Oliver later summarized Do Kwon’s nonsensical business plan: “One blorp is always worth one dollar. And the reason I can guarantee that is I’ll sell as many fleezels as it takes to make that happen. Also, I make the fleezels.”

Part II is great episode. Coincidentally I referred to Part I in the review of Easy Money.

On p. 212 he writes:

The reason people bought into Kwon’s Terra-Luna plan is that TerraUSD coins could be deposited in a special crypto bank called Anchor, also controlled by Kwon, which paid a 20 percent annual interest rate. This raised obvious questions, such as “Where does the money to pay those interest rates come from?” and “This is a Ponzi scheme, right?”

I probably would describe Anchor as a lending protocol, so maybe a shadow bank? My autopsy of that collapse: Not all algorithmic stabilization mechanisms are the same.

On p. 213 he writes:

The Tether critics were getting excited. Bitfinex’ed, the anonymous critic who asked me to call him Andrew when we met at the bayside pool, tweeted more than sixty times that day.

I think after 50 tweets in a day the state of Florida requires social media users to go outside and touch grass.

On p. 216 he writes:

Kyle Davies, Zhu’s high school friend and co-founder, later said the lenders were so desperate to make loans that they asked for almost no proof that Three Arrows would be able to pay. “One of the last calls we did someone lent me almost a billion, off a phone call,” he said. “That was uncollateralized. That’s where the system was. People needed to get dollars out the door.”

In my review of Easy Money, I pointed out that the authors criticism of lending was shallow because it didn’t discuss how the centralized lenders were rehypothecating funds and/or providing uncollateralized loans. Faux found a podcast with one of the borrowers saying as much. This filtering of information from disparate media is part of the reason why Number Go Up is a superior book.

On p. 217 he writes:

Even companies that hadn’t lent to Three Arrows themselves took a hit. Gemini, a well-regarded exchange, turned out to have lent users’ money to a company called Genesis Global, which lent it to Three Arrows.

Source: Twitter

As mentioned in the Easy Money review, the tweet above (Barry Silbert is the founder of DCG) did not age well. During the process of writing this review, the NYAG sued Genesis, DCG, and Gemini for allegedly defrauding investors.

On p. 217 he writes:

As crypto skeptics David Gerard and Amy Castor wrote, the industry was like an inverted pyramid whose tip rested on a box of hot air—Kwon’s Ponzi scheme. When the box crumpled, the pyramid came falling down.

What are crypto skeptics? This is the first and only time the author uses that phrase. There a number of other people who have provided critical views without marketing themselves as “crypto skeptics.”

On p. 216 he writes:

The losses hit everyone in crypto. Michael Saylor, the laser-eyed crypto prophet who was the star of the Bitcoin conference in Miami, stepped down as CEO of his company, MicroStrategy, after it lost almost $1 billion on its Bitcoin bet.

And was charged with tax evasion by the DC AG four weeks later.

On p. 221 he writes:

Like Chappy, many of the investors I talked to said they were still committed to crypto. It seemed to me like they just didn’t want to admit they’d been wrong. “To me it’s not about the money at all, it’s about the future,” an emergency room doctor in Lafayette, Louisiana, told me after he lost $800,000.

I’ve already used the Michael Scott cringe meme, it would be pretty apt here.

On p. 223 he writes:

I wondered why more people hadn’t cashed in their Tethers. There was clearly at least a small chance Tether might fail. Even someone who mostly trusted the company, despite all the reasons not to, would have reason to cash theirs in. Investors wouldn’t even have to leave the crypto world. Tether could be easily swapped for a competing stablecoin, called USDC, which was based in the United States and didn’t have the same checkered past.

This is the only time in the book where the author mentions another centralized pegged coin (which is one more than either of the previous two books did). I don’t think it is as cut and dry as Faux makes it out to be, for reasons discussed by J.P. Koning.3637 It would be a distraction for the reader, but if we were really to drill into this issue, could be worth looking which centralized stablecoin-issuers executives lobbied against the STABLE Act proposal. And who needed a bailout after SVB, Silvergate, and Signature banks collapsed.

Chapter 18: Pig Butchering

This is another must-read chapter in a must-read book. For instance, I learned that some of the scammers who randomly send beautiful pictures via the phone, are effectively slaves held in compounds in towns scattered around Cambodia. Yea, that stranger guy (or gal) that you have been sending messages to, might just be buttering you up for a coin-related scam.

On p. 231 he writes:

After being allowed to place a few winning bets or trades, the victim, feeling emboldened and thus vulnerable, would be convinced to make a really big gamble. That one they’d lose. Once the mark was gone, the store would be packed up. If the police came, they’d only find an empty room. It was, as the linguist David Maurer wrote in his 1940 classic The Big Con, “a carefully set up and skillfully managed theater where the victim acts out an unwitting role in the most exciting of all underworld dramas.”

TIL. Has Faux been holding that info nugget in his back pocket to be used in the right book?

On p. 232 he writes:

Icetoad and other volunteers from the Global Anti-Scam group told me that Tether refused to help them by freezing accounts or seizing stolen money, even when presented with evidence that an account held the proceeds of fraud. Tether clearly had the capability to help. In some cases, like hacks, Tether had frozen accounts and seized money. But when contacted about pig butchering, Tether would fall back on the excuse that it didn’t control the blockchain. Another Global Anti-Scam volunteer provided copies of several victims’ email exchanges with Tether.

This particular passage, while well-written, just seems a little difficult to follow because Tether probably should be written Tether LTD. Or maybe it is just me.

On p. 233 he writes:

To me, that sounded like a cop-out. When I sent my eighty-one Tethers to Vicky Ho’s platform, there was an entry in Tether’s database representing how much money I had, and another one representing how much Vicky Ho had. Another way of looking at it would be that Vicky Ho had an anonymous, numbered account at the Bank of Tether.

This is not quite true. Unless Vicky (or ZBXS, the platform she used) directly minted or redeemed USDT, then it is unlikely that particular unit ($81) ended up in a database managed by Tether. According to the book, ZBXS seems to be a fly-by-night exchange, and might not do any surveillance sharing. Also, as mentioned earlier, pseudonymous is probably more accurate than anonymous.

Source: The Block

But I do think Faux raises a good point. Tether LTD does actively blacklist addresses (see chart above).

What is the rhyme or reason for why some activity is permitted and others are not?

Source: Twitter

On p. 233 he writes:

I couldn’t believe that Tether was getting away with making its own rules for when it would cooperate with police. Imagine if the cops told a bank that it was holding stolen money and the bank said it wouldn’t return it because the thief didn’t shoot anyone. And, from what Icetoad and other members of his group were telling me, the criminal syndicates who ran pig-butchering scams were actually extremely violent. They told me that many of the people sending spam texts to potential victims like me were themselves victims of human trafficking.

I’m going to say something a little unpopular: I agree with what the author has written but I am not sure his analogy with banks refusing to cooperate with the police is correct.

In speaking with lawyers about this topic, one of the relevant concepts in property law is “nemo dat.” Physical cash is exempt from nemo dat because if every transaction required the cash holder to trace the provenance or lineage of the physical cash, then commerce would grind to a halt. Are centrally-issued pegged coins given the same exemption? I do not know. Perhaps someone could argue that because the coins utilize a public chain, we can (more) easily see the provenance to determine if they are a bona fide purchaser.

Again, I agree with the thrust of Faux’s argument and incidentally it is one of the reasons I surmised that centrally-issued pegged coins would become white-list only. But so far that prediction has been barely partially correct.

On p. 234 he writes:

I’d provided Vicky Ho’s address to Sanders before the meeting. Sanders pulled up a flowchart he’d made tracking transfers to and from the numbered account.

Source: CipherBlade

Above is a short flowchart included in the book. Strangely, neither Easy Money nor Popping the Crypto Bubble included any type of chart. I think readers will find this type of chart helpful, especially since many blockchains can provide those types of linkages by default.

Speaking of which:

Source: Blockseer

Above is a chart illustrating coin movements from Bitfinex to miners in August 2016.38 There is no need for a second edition of the book, but if there was for some reason, then this could fit into chapter 11.

Chapter 19: “We Have Freedom”

It’s a tight race with several other chapters, but this was perhaps the best chapter in the book, in part because it elicits a range of emotions for readers. Including anger and despair. Faux got on an airplane to investigate the leads he had identified. If there is one chapter that will make readers want to go full-on Rambo mode in the hills and valleys of Cambodia, it’s probably this one.

On p. 245 he writes:

Videos like these captured millions of views in Vietnam and turned Phong Bui into a local star. They had gruesome pictures of victims’ injuries and lurid titles like “The Story of Thuy Escaping from Hell on Earth and the Midnight Screams.” I’d paid to have them transcribed and translated. It seemed distasteful to turn human suffering into YouTube content. But they were one of the best sources of information on crypto-fueled human trafficking that I’d found. That’s how I located several of the victims I’d been interviewing.

I have heard content moderation at video sharing sites can really do a number on you. If I had to filter out this type of (flagged) material not sure how long I’d last on the job.

On p. 251 he writes:

“When they want to send to overseas, it’s convenient to send USDT,” he said. “It’s anonymous and it’s quite safe.”

Who am I to argue with a clerk at a money-exchange shop? A pedantic person, that’s who. It’s pseudonymous. If it were truly anonymous then ransomware operators and exchange hackers would demand it instead of Monero.

On p. 251 he writes:

This guy doesn’t care if Tether is backed by Chinese commercial paper, or anything at all, I thought. He just wants to trade crypto for bricks of cash, and not tell anyone about it.

Oof.

On p. 251 he writes:

Then, without asking for identification or even a name, he handed me a crisp $100 bill. I’d turned my crypto into cash, with no paper trail.

Faux point reminds me of something similar from J.P. Koning:

Source: Twitter

On p. 252 he writes:

Before we left, I spoke with Richard Jan, a veteran Taiwanese police officer who worked on the Big Fatty case. He said the Taiwanese government had rescued more than four hundred victims of human trafficking in Cambodia in 2022.

Jesus H. Christ. How many remaining victims were there?

On p. 254 he writes:

I wanted to do something, but Danielle and Dara had told me it was useless to report forced labor to the authorities. Local potentates were generally getting paid off by the traffickers. Rather than aid escapees, Cambodian officials would detain them for immigration violations.

Chapter 20: No Acceptamos Bitcoin

On p. 263 he writes:

I wanted to see the effects of Bitcoin in El Salvador myself. Before going, I met with Jack Mallers, the boyish crypto executive who’d introduced Bukele’s Bitcoin plan for El Salvador on stage at Bitcoin 2021 in Miami. Only ten months had passed since he burst into tears and told the crowd: “I’ll be there. We die on this hill. I will fucking die on this fucking hill!” But when I asked him how the experiment was working out, he said he couldn’t remember the last time he visited. He didn’t seem to be too torn up about it. “It’s very important to know that it’s not my project, you know,” he said.

Do we still use the term “poser” to describe these people?

Speaking of posers, a few weeks ago Faux did a reddit AMA. This response is germane:

Source: reddit

On p. 264 he writes:

Bukele was more committed to the bit. The forty-one-year-old president had become a crypto influencer, with four million followers on Twitter, where he dubbed himself “The Coolest Dictator.” He used government funds to buy $100 million worth of the cryptocurrency, and promptly lost half of it when the price of Bitcoin fell.

Not so fun fact: when Bukele was the toast of the Bitcoin world, Nic Carter uncritically hosted him in a Twitter Spaces, along with Alex Gladstein and Balaji Srinivasan.39 To my knowledge, the only high profile ‘coinfluencer’ to publicly condemn Bukele – and his association with cryptocurrencies – was Vitalik Buterin.

On p. 266 he writes:

When I mentioned Bitcoin at the first store I entered, the clerk snatched the bottle of water I was trying to pay for out of my hands. “Trash,” he said. “I will never use it.”

On p. 266 he writes:

García didn’t have much to say about Bitcoin. It was a way of drawing in tourists, he said. He converted their payments to dollars as quickly as possible. But he did have a story to tell about a different Bukele initiative: the gang roundup. It turned out being an unofficial Bitcoin mascot was not enough to protect him.

There is a similar (sad) story in Easy Money. What do Bitcoin promoters who point to El Salvador as a “success” have to say when these stories are highlighted?

On p. 267 he writes:

Bukele refused to speak with me. I texted with the legislator who’d posted the photo with Devasini, but he refused to talk about Tether, sticking to praising the president for his successful Bitcoin project, all the evidence to the contrary notwithstanding. “Our president is a brave visionary,” wrote the legislator, William Soriano. “El Salvador now leads the monetary revolution that will transform the world as we know it. Not just economically, but culturally as well.”

My Spanish is rusty but I believe Soriano is a sicofante?

On p. 269 he writes:

Bukele’s most prominent, if unofficial, Bitcoin advisers appeared to be Max Keiser, the podcaster who’d screamed “Fuck Elon!” on stage in Miami in 2021, and his wife and co-host Stacy Herbert. A few years earlier they were producing a conspiracy-theory-heavy news show on Russia’s state-owned RT network. Now, judging from social media, they were living large as champions of the state, eating at El Salvador’s best restaurants and flying in military helicopters to tour government crypto projects. Before my trip, I’d watched a segment on YouTube where they celebrated El Salvador’s Bitcoin law.

Oh it’s worse than that.

Source: Twitter

Shortly after his manuscript was sent for publication, an official “Bitcoin Office” Twitter account for El Salvador was established.

The greatest minds of their generation sitting in the official Bitcoin office of El Salvador. No problem is too small for these former Russia Today hosts.

On p. 269 he writes:

Herbert was cheerful and slightly less unhinged in person. She called Bitcoin “perfect money,” Bukele a “super-genius-like mathematician,” and said that Bitcoin City was part of how he would transform El Salvador into the next Singapore. But she wouldn’t share much about Tether and Devasini. She did mention there was one tangible sign of Tether’s presence in El Salvador: a mural that featured a Bitcoin volcano eruption and a tree with leaves shaped like Bitfinex’s logo. It was designed by Devasini’s much younger partner, an artist named Valentina Picozzi, and it was painted on a large wall near the entrance to a gang-controlled neighborhood. She said this was a sign of the commitment by Devasini and Tether’s other executives to helping the Salvadoran people.

Take that salty naysaysers and non-believers! “Perfect money” is going to rock your world.

Chapter 21: Honey is Better

On p. 272 he writes:

As I waited, the Italian critics and I respectfully contemplated Picozzi’s work: a blister pack of large orange pills with the Bitcoin logo on them—Bitcoiners like to say they’ve “taken the orange pill”—and a piece of white paper embossed with the phrase “Son of a bit.”

This is an example for why I contend – despite having been labeled a “critic” or “skeptic” for years – do not think it makes sense to market oneself as a “crypto critic.”

An “art critic” does not deny the existence of many different art forms, or materials used to create cart. In contrast, I have linked to threads above by folks like Jorge Stofli who contend that smart contracts mechanically do not work. The authors of the previous two books each market themselves as a “crypto skeptic” or “crypto critic” but painfully show in long form that they do not understand the subject matter they are writing on.

On p. 276 he writes:

Nearby, I spotted Tether’s chief technology officer, Paolo Ardoino, who was explaining his diet to another attendee. He looked fit, in a tight T-shirt tucked into slim gray dress pants. “I eat once a day. Only red meat,” he said. But he wasn’t willing to speak with me, even about the wonders of beef. “He’s the one that is writing bad things about us,” he told his wife, who was standing next to him. “Hello!” I said. She wouldn’t talk with me either.

A quick quasi related anecdote: when I confronted Chris DeRose for the first time at an American Banker event in 2015, I told him his (brighton36) harassment techniques on reddit were loathsome:

Source: reddit

Now obviously I’m aware that Faux is nothing like the misogynistic DeRose, certainly not a harasser. But I do know what it is like to be in social situations with people you disdain. My wife probably would’ve said the same thing to DeRose after she told off Marc Hochstein. 40

Chapter 22: Assets Are Not Fine

On p. 281 he writes:

FTX had seemed to me like a crypto casino, which lured investors to gamble on made-up coins and scams. But I hadn’t suspected that the casino’s counting room was short on cash.

To be fair, aren’t most cryptocurrencies made up, not just the ones at FTX? Arguably the only “non-made-up” coins are those that claim to link to real-world off-chain assets?

On p. 283 he writes:

The company, valued at $32 billion earlier in the year, was finished. Anyone who had left money on the exchange was completely wiped out.

Ackchyually, while Faux was correct when he submitted the manuscript, due to ongoing developments in bankruptcy FTX customers might now get 50 cents on the dollar.

Chapter 23: Inside the Orchid

On p. 290 he writes:

Talking in detail to journalists about what was certain to be the subject of extensive litigation seemed like an unusual strategy, but it made sense: The press helped him create his only-honest-man-in-crypto image, so why not use them to talk his way out of trouble?

During his house arrest this past year, SBF spoke with a variety of reporters and leaked Caroline Ellison’s journal to a pair of NYT reporters in order to discredit here and build up public sympathy.

Source: Twitter

We never find out which reporter it was (it was only two). The duo also wrote a couple of softball pieces on SBF earlier in the spring and summer. SBF did try to talk his way out of trouble, but ended up getting convicted on all 7 counts anyways.

On p. 292 he writes:

“As an individual, to make a bet where it’s like, ‘I’m going to gamble my $10 billion and either get $20 billion or $0, with equal probability,’ would be madness,” Rob Wiblin, host of an effective-altruism podcast, said to Bankman-Fried in April. “But from an altruistic point of view, it’s not so crazy.”

Another podcast to filter through. Imagine all the tweets the author could have written instead of listening to podcasts!

A year ago, just days before SBF is arrested, Faux interviewed some of the hangers-on left in the Bahamas. Here is one exchange on p. 301:

I threw out an easy question. “Why are you still here?” I asked. He started off by saying he wanted to help FTX’s customers. Then, unprompted, he told me that he thought there wasn’t much risk Bankman-Fried would ever get in trouble. “I firmly believe once somebody becomes a certain level of rich, they’re never poor again,” he said. “They don’t go to jail. Nothing bad happens to them.” I tried to keep a straight face as I imagined him telling that to the congressmen and prosecutors investigating FTX. His supercilious attitude and slovenly appearance reminded me of the disagreeable know-it-all Comic Book Guy from The Simpsons. His answer was so bad, it felt almost unfair to ask him tough questions. I gave him a second chance to say something nice about Bankman-Fried. “Are there specific things that make you think Sam is honest?” I asked. “Oh, I didn’t say he was honest,” the man said.

Unfortunately we do seem to have a two-tier justice system in the U.S., especially when it comes to prosecuting white-collar crime. However in this instance, SBF was arrested, extradited, and found guilty by a jury within a period of 12 months.

Epilogue

On p. 311 he writes:

Traveling around the world investigating crypto had given me a new appreciation for my Visa card. It worked instantly, with just a tap, charged no fees, and never asked me to memorize long strings of numbers, or to bury codes in my backyard.

No one has to like cryptocurrencies but this seems like sample size bias. I purposefully attempt to get credit cards that waive international transaction fees, some people may not qualify for those so they do get charged fees.

I mentioned this in the previous two book reviews: Visa and Mastercard are centralized entities operating centralized infrastructure. In the U.S., Visa and Mastercard operate a duopoly that is good only for their shareholders. For instance, following news that the Federal Reserve has proposed lowering the interchange (swipe) fee, the CEO of Mastercard slammed it.41

Not that there needs to be another edition, but a future footnote could include a conversation about the friction-filled payment infrastructure that allows private companies to extract rents on retail users in the U.S.

For instance, five 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.”

On p. 313 he writes:

Were we really throwing the full weight and resources of the U.S. government to prosecute some kid for manipulating the price of a coin named after a fruit? The situation seemed especially ridiculous given that I didn’t see any cases relating to money laundering for Chinese gangsters or facilitating human trafficking in Cambodia.

This is a good point. For instance, “Bob” is a dual citizen who used to be an executive at a large Bitcoin exchange based in China (not Binance) who knowingly allowed users from sanctioned countries (specifically North Korea) to trade on the platform in order to boost trading volume. He is still very active in this space as an executive for a mining company and regularly posts on social media. Yet Virgil Griffith went to prison.

On p. 313 he writes:

For most banks, this also meant that they had to start paying higher interest rates to their depositors. But Tether doesn’t pay interest to the people who own its coins. Whatever the company earns on its reserves is pretty much pure profit.

This is a good point. I mentioned this in a footnote for Chapter 8 but it is worth surfacing here: Circle shares revenue with partners (large holders), does Tether LTD do the same with large holders of USDT such as centralized exchanges?

The affable J.P. Koning recently pondered something similar:

Source: Twitter

It bears mentioning that in the “permissioned” blockchain world, the concept of passing interest onto holders becomes messy because depending on the jurisdiction paying cash holders (or CBDC holders) would result in the asset possibly being deemed a security which could create onerous reporting and taxing requirements.42

On p. 315 he writes:

Most of the short sellers betting against Tether gave up. Nate Anderson of Hindenburg Research, who had once tantalized me in Central Park by dangling his $1 million prize for information on Tether, failed to turn up the bombshell he was looking for.

Oof. Maybe there is a bombshell, but the problem with Easy Money in particular is that there is so much innuendo around Tether you could slice it with a toy butter knife.

NGU Notes

On p. 350 he writes:

Tether was presented with a 187-point fact-checking memo prior to publication and declined to respond to any specific questions about its history, its reserves, or its use by scammers and human traffickers. “The huge volume of corrections required would be tantamount to our rewriting Mr. Faux’s book for him, which is not our job,” a spokesperson for the company wrote. “Our attention is better focused on our customers and the success of the Bitcoin community.”

Wow, a 187 point memo. Did the authors of the two previous books provide Tether LTD with a similar memo?

Conclusion

This book was nearly flawless, and unlike the previous two books reviewed there are no fatal errors and certainly nothing that would be need to “rewriting” this book.

Unlike Easy Money, which seemed to have a substantive error every three pages, Number Go Up was a breeze to read. It was funny, it was witty, and most importantly it informative!43 In one book the author – who was relatively new to this space – scooped mainstream press as well as the conspiracy circles of Tether Truthers.44

I rarely recommend books, but in this case, have no qualms in doing so.

Endnotes

  1. I also recently reviewed Popping the Crypto Bubble by Diehl et al, which was the worst book on the topic, just filled with evidence-free polemics. It did include 41 pages of references but since the book relied entirely on second-hand information, its references should have been significantly longer. []
  2. Unless your name ends in Ellison or Singh or Wang, best to sit this one out. []
  3. In fact, his BusinessWeek article on Tether was published the month before so I probably would have changed the wording to un-short-change oneself. []
  4. One wonders if November 2018 was too early to seek a book deal to expand on: Systemically important cryptocurrency networks []
  5. One reviewer of this review said: “There are better examples of Taco Bell. For the analogy of useless overhyped food, he could have used protein shakes.” []
  6. Economists use aggregates such as M0, M1, and M2 to measure the expansion and contraction of the money supply. []
  7. Also, not a big deal, but by convention uppercase B is used to describe the network and lowercase b is used to describe the medium-of-exchange/unit-of-account. []
  8. Although, Tether LTD is actively investing in Bitcoin mining operations, including in Uruguay and Oklahoma. Perhaps the topic for a new chapter in the paperback version? []
  9. That’s all McKenzie and Silverman had to do: explain the history concisely. They scarcely even mention what was in the Riot mining facility, let alone how much resources it consumed. []
  10. Analysts and commentators have been discussing this with some Bitcoiners for years. []
  11. One day when I have some extra time, perhaps I will post the older newsletters that had some golden tweets of theirs. []
  12. The case has not gone to trial yet, but Saylor did lose a bid to quickly quash the suit. []
  13. For more on this topic, readers are encouraged to peruse the academic writings of Morgan Ricks and Rohan Grey. []
  14. Recall that Silvergate and Signature Bank both operated infrastructure – SEN and SigNet – that enabled participants to immediately transfer funds 24/7/365. When the parent banks collapsed, this infrastructure was turned off. []
  15. As mentioned in Easy Money, I am not sure who coined the term “Tether Truther” but I have used it in the past to describe people who still claim – post-CFTC settlement – that Tether LTD is still acting in a fraudulent manner. The “Truther” modifier is similar to the scheming intrigue of other “Truther” movements. USDTQ is a riff on the conspiratorial TSLAQ. []
  16. When I worked in Shanghai I met a guy who introduced himself as “John Teddy” who relied on using other people’s bank accounts because he didn’t want to go through he KYC process himself. In the summer of 2011 he did offer to sell me a few thousand bitcoins for a few thousand dollars; whoops on that missed opportunity, right? []
  17. Specifically Faux is probably referring to the “Travel” rule. See also: Gemini UK to Block Bitcoin Transfers To and From Non-Approved Exchanges []
  18. This quote actually first appeared in Faux’s BusinessWeek piece on Tether. []
  19. One reviewer of this review thought this could be because the authors of Easy Money arrived late to the scene and seem to have also relied on sources who were unfamiliar with certain large scams, hacks, and fraudulent schemes. []
  20. Both IBM and Microsoft have been actively involved in blockchain-related projects for years, but to my knowledge, nothing directly intersecting with an ICO. []
  21. Easy Money does not mention Centra at all, even though it could have helped strengthen the authors arguments. Coincidentally, Nathaniel Popper was the first mainstream reporter who wrote an exposé on how influencers such as Floyd Mayweather were being paid to endorse coins (without disclosing they were being paid). For instance, five months after his article appeared, the two founders of Centra were arrested. []
  22. I.e., someone inside was helping them navigate the controls and approval process. []
  23. It is worth pointing out that prior to its publication, I changed the title to the post due to possible reprisals from a now former colleague at R3 who wanted to control all external communications. []
  24. I previously mentioned his real name back in February 2022 in section 5. []
  25. He sometimes calls himself Andrew. Are there more aliases? []
  26. For what it is worth, I too have proposed scenario 2 in the past, and made a bet with Bitfinex’ed that it was a possibility. []
  27. It is unclear what revenue sharing agreements are in place. Recall Circle shares revenue with partners (large holders), does Tether LTD do the same with large holders of USDT such as centralized exchanges? Obviously this assumes that Tether LTD are telling the truth and/or not exaggerating. Perhaps they are fibbing. They claim to be publishing real-time reserve data next year. []
  28. I’m kind of joking, his book was decent for its time. And outside counsel can drop a client, but I believe he was inside counsel (GC even). A reporter should ask him what changed after his Bitcoin book was published. []
  29. Earlier this year, Wired published an interesting article on this topic, but the individual named by others does not appear in it. Maybe I was provided incorrect information? []
  30. Probably not a big deal considering some readers might have tried opening new checking accounts to take advantage of teaser rates, or attempted credit card churning. []
  31. Years ago I wrote a paper critiquing the notion that metacoins, specifically those that used Bitcoin, were fit for purpose for securing off-chain assets. []
  32. Although the fact that Jack Dorsey became a Bitcoin promoter kinda sorta feeds my tin foil hat theory for why “crypto” related activity was not heavily moderated. []
  33. Based on the authors description of how he acquired the art NFT, it is not apparent where additional MEV would have been extracted; he didn’t use a fungible token swap which is typically what gets reordered. []
  34. Ordinals, a Bitcoin-based tokenization protocol, received a lot of attention at the beginning of the year from the art NFT world due to the ability for users to “inscribe” data on-chain. []
  35. At least, that’s not an allegation made by law enforcement at this time. In a court filing, Jump Trading is stated as buying large quantities of UST to prop up its value during an earlier de-peg; still not the same thing as controlling the supply of Luna. []
  36. In the process of writing this, the FCA, the top financial regulator in the U.K., outlined proposed stablecoin rules that would effectively make issuers into narrow banks. []
  37. See also: Will the real stablecoin please stand up? by Anneke Kosse, Marc Glowka, Ilaria Mattei and Tara Rice []
  38. As mentioned in a footnote in Easy Money, I was a formal advisor to Blockseer which was acquired by DMG Blockchain. One of the prominent “crypto critics” amplified false information about myself last year including that I was not an advisor. A quick googling could prove that, why don’t they do it? []
  39. Probably not a huge surprise since both Carter and Srinivasan have publicly stated they are betting against the U.S. []
  40. For some reason Hochstein – who was editor at American Banker at the time – invited DeRose to provide A/V help at the event. Later Hochstein, among other things, unfortunately helped mainstream the nocoiner pejorative. []
  41. The Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction. []
  42. In 2017-2019, Project Jasper, World Wire, and the USC consortium, all had to tackle these thorny issues. []
  43. A reviewer of this review has a strong opinion on selective enforcement: “Overall, the book should have explored a central question: why the U.S. government with its correct and massive focus on money laundering, human trafficking, and terrorism financing is not proactively shutting down new crypto whenever it appears they way it would do if it was a physical dollar printing press. Why Tether, Ripple, Stellar and numerous other coins are allowed to propagate with no public disclosure of how they make money. Or why the PayPal stablecoin was allowed but Facebook’s Libra wasn’t. Other governments obviously don’t have the same moral imperatives to stop those types of activities, but why is the U.S. continually being reactive. I.e., the book doesn’t answer the question of how this was allowed to happen and how it will prevent it from happening again.” []
  44. It’s not a coincidence that a reporter relatively new to the space was able to accurately describe some of the tech: Fais Khan provided feedback and he is the author of another great book, The Billionaire’s Folly. []

Book Review: “Easy Money”

I recently finished reading the Kindle version of Easy Money by Ben McKenzie and Jacob Silverman. Simultaneously, I also read Number Go Up from Zeke Faux, another blockchain-focused book that came out about two months after the publication of Easy Money. These would make the 10th and 11th blockchain-specific books I have reviewed. See the full list here.

Easy Money was not the worst blockchain-related book I have read, that award would go to Popping the Crypto Bubble. Easy Money had a lot of potential, in fact, several chapters had some pretty good prose and first-hand reporting.

But for some inexplicable reason – unlike most of the other blockchain books I have reviewed – the authors insert Ben McKenzie into the story for no apparent reason.

Previous books written by reporters might explain in first person how difficult it was to use a wallet or how difficult it was to explain mining to someone – but McKenzie finds a way to insert himself into every chapter even if he is irrelevant.1 And that takes a lot away from what could have been a powerful book.

For instance, Chapter 7 was probably the best written and interesting chapter of the book. The two authors flew down to El Salvador to investigate what kind of traction Bitcoin-based payments was having in the small Central American country. And as the authors describe the plight of one of the residents who is unlucky to live on land that was to be turned into an airport, they write:

Here was a famous Hollywood actor who wanted to film and interview him, to tell his story, yet no one in his own country could tell him when he would be kicked off his land or where he might go.

The reader is constantly reminded of how McKenzie was in several popular TV shows. In all but one other blockchain book I have reviewed few authors attempt to regularly remind people of who they are. The main exception is Fais Khan who wrote The Billionaire’s Folly, which was an insiders account of working at ConsenSys.

McKensie was not an insider. In his own words, he was stoned and out of work in late 2020, and came to the conclusion that he should pivot careers and write a book about crypto. Yet because he did not get really started until late 2021 – near the height of the recent bubble – it all comes across as Johnny-come-lately ambulance chasing self-serving plot filler to boost his PR so he can appear in the Netflix adaptation.2 It is both poor form and cringey.

Furthermore, the dual authors make a number of elementary mistakes. For instance on p. 36 they write: “In 2016, Tether was hacked. More than 100,000 Bitcoin (worth $71 million at the time) was stolen, and the company was in desperate straits.”

What they meant to write was that Bitfinex, the centralized exchange, was hacked. It was actually hacked twice in 2016, the second time 119,756 bitcoins were stolen.

Later, on p. 264 they write: “The other major player left standing was Tether. The stablecoin company, valued at $71 billion as of March 1, 2023, had miraculously survived while the industry around it bit the dust.”

This is not an accurate way of describing the company. The valuation of a bank – or in this case, a shadow bank – is usually determined by its book value of equity (BVE), not by how large its deposit base is. If we took its self-disclosed quarterly reports at face value, Tether LTD itself is worth several billion dollars. In contrast, the aggregate value of USDT spread across all chains, as of this writing, is around $86 billion. Academics such as Stephen Kelly, have publicly analyzed these claims, a future edition should include such remediations.

It is also worth pointing out that the book quickly glosses over any deep or detailed technical discussion and that is likely to help the reader move through the pages. Yet there is no glossary for further explanations and the Appendix consists of a single page copied from the SEC website regarding Ponzi schemes.

This is kind of strange considering even Diehl’s book at least paid some lip service towards the technical bits. To be fair though, unlike Diehl’s book, McKenzie and Silverman do not repeat the same refrain over and over again. But that should not be the bar. With the resources of a real publisher (Abrams), this should have been a top shelf book. But instead it is 1-star quality book and a hard pass.

As usual, all transcription errors are my own.

Chapter 1: Money and Lying

On page 1 the authors write:

These get-rich-quick speculative schemes were merely the latest iteration of casino capitalism. Political economist Susan Strange populated the term in the 1980s, but its roots stretch at least as far back as the 1930s.

This may seem pedantic but I am pretty certain the authors meant to write “popularized” and not “populated.”

On page 1 the authors write:

You may have noticed something about cryptocurrencies: They don’t do anything. Sure, you can trade them, betting that one will rise or fall, but they aren’t used for anything productive. Cryptos aren’t tied to anything of real value, unlike shares in a company or a commodities future. They’re computer code uncorrelated with any actual asset.

This requires nuance, something the book does not really have.

For instance, not every cryptocurrency is the same. Some, such as non-fungible tokens (NFTs), attempt to represent off-chain assets. A myriad of financial institutions and other large enterprises have attempted to tokenize a plethora of atoms, often in toy experiments that do not last a year or so. However there is an entire category of “real world assets” (RWA) that do in fact represent “real value.”3 We can argue about the particulars – should Paxos USD or PYUSD be allowed to exist? – but the authors cannot ignore the existence of tokenized assets identified by Centrifuge.

A better, a stronger argument they could have used involves “self-referential assets” — which many major cryptocurrencies are considered.

On page 1 they write:

In crypto, this comes from the fees charged by the exchanges, as well as the costs associated with validating the transactions. In Las Vegas, it’s called the rake, the amount the house takes from every pot. This means that, given enough time, the average gambler will lose. It’s how casinos keep the lights on.

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 Jack 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.”

On page 2 they write:

When I first started paying attention to financial markets in the fall of 2020, I came to a similar conclusion, a troubling sense that graft and deceit had penetrated all aspects of the economy, operating with political and legal impunity. It made me want to scream in anger—and to make a wager of my own.

McKenzie is a couple of years older than me and it is hard to imagine how he thinks this helps his credibility.

How can you go your adult life – as someone with an economics degree – without paying attention to financial markets until three years ago? What were you doing in 2008 during the financial crisis? How did you miss the craziness of the ICO boom in 2017-2018 that John Oliver ridiculed?45

On p. 3 they write “crypto-currency” with a dash and then inexplicably use “cryptocurrency” without a dash later. And back and forth. The same happened with the word “block-chain.” Where was the proof reading?

On p. 3 they write:

A few thousand cryptos in 2020 grew to 20,000 two years later, and their purported value swelled in tandem, from some $300 billion in the summer of 2020 to $3 trillion by November 2021.

The authors use this 20,000 figure throughout the book. It comes from reference #4 for Chapter 1 which refers to CoinMarketCap (CMC) but in going to the website, there are currently 9,213 cryptocurrencies.6 For comparison, CoinGecko currently catalogues 10,812 coins. There probably have been significantly more than 10,000 coins or tokens created – many of which have died – but the author’s figure seems like an outlier.7

On p. 4 they write:

Narrative Economics was published in 2019, prior to both the current viral spread of cryptocurrency and the COVID-19 pandemic.

That seems like a weird tie-in especially since there was a mountain of PR for cryptocurrency projects during 2017-2018 in the U.S. For instance, between December 2017 to January 2018, you could turn on CNBC to hear some guest promoting a random coin they liked.8 More than likely, Narrative Economics was published before the viral spread of cryptocurrencies that the authors paid attention to.9

On p. 5 they write:

Two of its biggest drivers were financial deregulation and low interest rates—a decades-long, mostly bipartisan political effort to grow the financial sector combined with a policy intended to stimulate the economy in the wake of the first dot-com bubble.

This is partially true. A future edition should include a conversation around just how leveraged banks were, both foreign and domestic. This would have also been a good spot for the authors to discuss systemically important financial institutions (SIFIs) such as ‘too big to fail banks’ (TBTF) which even Diehl’s book paid lip service to once.

Why are SIFIs and TBTF banks worth discussing? Putting aside the ever present rent-seeking and moral hazard issues, the infrastructure that these organizations rely on often is highly centralized and dependent on a specific vendor thereby creating single points of trust and single points of failure. The book largely ignores legacy infrastructure operated by incumbents.

For example, a future edition could highlight one area the U.S. financial system (specific banks) could be improved: make banks public utilities.

On p. 7 they write:

Coordinating with other countries’ central banks, the US government offered $700 billion in bank bailouts and trillions in loan guarantees, managing to stem the worst of the contagion.

Probably worth telling the readers that this controversial bailout package, frequently referred to as TARP, failed to pass the initial House vote.

On p. 8 they write:

Public key encryption plays a vital role in modern life. For example, all https:// websites (nearly all the ones the average person uses) employ public key encryption. It does things like protect users’ credit card information from being stolen when making online purchases. Public key encryption has two useful properties: Anyone can verify the legitimacy of a transaction using publicly available information (the public key), but the people/parties conducting those transactions are able to keep their identities hidden (the private key).

While this is not a bad explanation, the authors should have used “public key cryptography” because that is usually how it is referred to. In fact, Bitcoin – like most cryptocurrencies – does not use any form of encryption.

On p. 9 they write:

This time-stamped, append-only ledger is the blockchain. In 1991, computer scientists Stuart Haber and W. Scott Stornetta, building off the work of cryptographer David Chaum, figured out a way to timestamp documents so they couldn’t be altered. Each “block” contains the cryptographic hash (a short, computable summary of all the data in it) of the prior block, linking the two and creating an irreversible record, a ledger composed of blocks of data that can be added to a chain (blockchain), but never subtracted from.

This is good. In fact, one of the problems with Diehl et al.’s book is that the trio completely whiffed on the Haber & Stornetta references in the original Bitcoin whitepaper. Worth pointing out that pages later, McKenzie and Silverman reuse this archaic blockchain as a strawman, hold your breath!

On p. 9 they write:

So far so good, but one issue remained: what’s known as the double spend problem. If you remove a centralized authority from the equation, how do you make sure people aren’t gaming the system by spending money that’s already been sent somewhere else? How do you secure the network against manipulation? “Satoshi” relied on what’s called a consensus algorithm.

Pedantically Bitcoin – and its progeny – use what is called Nakamoto consensus. For comparison, Diehl et al.‘s book briefly mentioned it in passing. A future version should incorporate that.

On p. 9 they write:

The network targets a new block every ten minutes or so, by dynamically adjusting the degree of difficulty required in the winning block; the more participants, the harder the process gets, and the more energy is required to guess the next block correctly. This is the proof of work behind Bitcoin: lots and lots of computers (“miners”) performing relatively simple mathematical calculations over and over again endlessly.

This is not really accurate:

(1) There are many proof-of-work based coins. Bitcoin (and some of its clones) have a readjustment period of 2,016 blocks, roughly two weeks. Adjustment does not take place every block as the authors write above.

(2) The resources consumed in a proof-of-work network like Bitcoin rises and falls directly proportional to the coin price. If number go up, then so too does the difficulty level and vice versa. They cite him later in Chapter 5 but it would be helpful to include analysis from Alex de Vries here as well.

What this means is that more energy is not necessarily required to guess the next block correctly. In fact, in its early years, Bitcoin could be solo mined on a normal laptop. Proof-of-work coins that never see much price appreciation can be solo mined by simple computers too.

There is another issue with their statement above: it does not explain the nuance, the difference between a Bitcoin mining pool (which is the block maker) and Bitcoin hashing farms (which generate the proofs-of-work). But more on that later.

On p. 9 they write:

After about an hour, participants in the network are convinced about history six blocks deep; they know that it is extremely unlikely anyone will rewrite that history.

This is not accurate. By social convention – not code – intermediaries such as coin exchanges will allow users to trade their newly deposited bitcoins between 3-6 block confirmations. Centralized exchanges like Coinbase, may require some coins such as Ethereum Classic to have hours of blocks built in order to protect against reorgs. But in both cases, this is social convention, not code.

On p. 9 they write:

As you may be able to tell, Satoshi’s vision is both immensely clever but also cumbersome, practically speaking. As more competitors enter, the hash rate increases and more energy is expended to agree upon a block of data that remains roughly the same size. This is what’s called a Red Queen’s race, a reference to Lewis Carroll’s Alice in Wonderland.

There are a couple of problems with this:

(1) During each transition from CPUs -> GPUs -> FPGAs -> ASICs, whoever was able to access to the newest generation of equipment first has had a material advantage from an energy usage perspective.10 For instance, four pages later the authors mention what Laszlo Hanyecz did – but fail to mention who he is and how he got his bitcoins. Note: Hanyecz was one of the first (if not the first) person to scale bitcoin mining with GPUs. His hashes per watt were likely lower than anyone else up until that point in 2010.

(2) I looked in the refences but do not see the authors point to any article that mention the Red Queens’ race. I myself referred to the Red Queen’s race multiple times in papers and articles between 2014-the present day.11 Would be interesting to see who it originated from (I believe I first saw it on a /r/bitcoin post in 2013); echoes of John Gilmore?

On p. 10 they write:

Ethereum also led to the introduction of NFTs, which are basically links to receipts for JPEGs stored on blockchains (shh, don’t tell that to anyone who owns one).

This is false. Both tokenization and non-fungible token projects existed several years before Ethereum turned on. For example:

Source: ChainLeftist

It bears mentioning that even before Spells of Genesis was released on Counterparty (in 2015) several different colored coin projects attempted to tokenize off-chain assets. See my short presentation on this topic from last year.

In fact, if we are going to be really pedantic, perhaps the original idea behind “crypto art” (and NFTs) was inspired by Hal Finney in 1993?

Source: CryptoSlate

On p. 10 they write:

The number of cryptos exploded around this time, rising tenfold in five years, from less than one hundred in 2013 to more than a thousand by 2017. There are now an estimated 20,000 cryptos, most of them small and insignificant, their ownership concentrated in the hands of a few “whales,” much like penny stocks.

There could be 20,000 coins and tokens, but as mentioned earlier, it is unclear where they arrived at that specific estimate since both CoinMarketCap and CoinGecko currently show around 10,000 each.

On p. 11 they write:

Remember, blockchain is at least thirty years old and barely used by businesses outside of the crypto industry. Since at least 2016, hundreds of enterprises have tried to incorporate it into their business models, only to later scrap it because it didn’t work any better than what they were already using. Ask yourself a simple question: If blockchain is so revolutionary, after thirty years, why is its primary use case gambling? Ironically enough, the more important technology is the one that predates it: public key encryption.

Nearly every sentences in this paragraph has an inaccuracy.

(1) Yes, the “blockchain is at least thirty years old” is really how McKenzie and Silverman are going to spin things. Even if we take their claim at face value the other problem is that not every blockchain is the same.

The Haber & Stornetta “chain” is limited in functionality. What is its throughput? How decentralized is it? Were the authors aware that this archaic chain places attestations once a week in The New York Times? That’s arguably not the best security property.

Source: Twitter

(2) Since there were hundreds of enterprises that have tried to incorporate a blockchain into their business, could the authors provide one example next time?

We are beginning to see a troubling pattern from the authors, lots of strawmen and few specifics.

They could be right, in fact, I even agree with part of their statement. But as Hitchens’s razor states: that which is asserted without evidence can be dismissed without evidence.

What kind of evidence could they have provided?

Source: Twitter

Above is a line chart illustrating Stack Overflow posts per quarter for three different ecosystems: Ethereum, Corda, and Hyperledger (Fabric). The latter two were primarily targeted at enterprises. R3, the major sponsor for Corda, recently announced layoffs impacting more than 20% of the company headcount. Does the decrease in Stack Overflow activity translate to less commercial activity? Maybe.

Since we are already doing their homework for them, here’s another example they could use in a future edition: in the process of writing this review Citi announced that it is offering a pilot service that turns customer deposits into digital tokens, for use use trade finance and cash management. Is this the type of blockchain project the authors think will ultimately be scrapped? Maybe it will, but next edition the authors could give specific examples.

(3) I actually kind of agree with their comment about how popular gambling-type of activities are within the various major chains.12 But strangely, the authors do not beef up their argument by providing any stats or charts.13 Stranger: while there are a handful of graphics in the book, there are zero blockchain-related charts, some of which could have helped strengthen their arguments. A quick googling found a bunch of crypto casino stats. Are the veracity of the numbers reliable? Sounds like something the authors could include next time.

On p. 11 they write:

The original story—that Bitcoin represents a response to the devastating failures of the traditional financial system—holds significant power because we all agree on its premise: Our current financial system sucks. But is the story of Bitcoin actually true? Does it do what it purports to do, create a peer-to-peer currency free of intermediaries? Was a trustless currency relying only on computer code even possible?

I have no affinity for Bitcoin but this is a strawman argument because it uses a retconned narrative from a number of Bitcoin maximalists. Satoshi herself explained that she started coding Bitcoin 18 months prior to the release of the whitepaper, which chronologically places its origin before the financial crisis of 2008-2009. I think the initial motivation was more aligned with securing (and funding) an online poker community, which the authors discuss later in the book.

On p. 11 they write:

Bitcoin may be the most popular digital currency, but it was not the first. In a 1982 paper, cryptographer David Chaum theorized the intellectual scaffolding of blockchain, upon which cryptocurrency would emerge some quarter of a century later.

They do not talk much about “blockchains” later in the book but it is worthy pointing out that in 2023 we typically use an article such as “a” or “the” in front the word blockchain. There was a period of time (mostly around 2016-2017) where consultant-types tried to push an articleless blockchain, but the grammar pendulum has shifted once more.

On p. 11 they write:

DigiCash was a legitimate project, without the conflicts of interest and other red flags surrounding many current crypto ventures. Unfortunately, it failed to take off and in the late 1990s the company declared bankruptcy before being sold.

Who died and made these authors king? By what standard was DigiCash “legitimate” or “illegitimate”? Maybe it was both or neither? But they provide no rubric, just dictum. According to legend, at one point Microsoft considered paying $75-$100 million to acquire DigiCash and integrate into Windows but Chaum wanted $2 per license sold. Also, in 2018 Chaum announced a new blockchain platform, Elixxir. Is this legitimate? It’s a public blockchain so obviously not?

On p. 11 they write about eGold:

It lasted until the mid-2000s before being shut down by the feds for violating money transmitter laws.

Throughout the book the authors describe activities from the FBI but this is the only time they lowercase feds.

On p. 13 they write:

PayPal and other payment services existed, but they were beholden to annoying gate-keepers like the law, national borders, banks, and terms of service agreements.

PayPal provided the MSB-centric model that a couple centralized pegged coin issuers have emulated.

While they make a lot of bluster over Tether LTD, this is the type of statement that impeaches the authors credibility: because neither seems to understand how certain fintechs have skirted U.S.-specific laws they cite in the book. This is nearly identical to Diehl et al. who approvingly namechecks PayPal a couple of times too, all while trying to dunk on “stablecoin” issuers. That is not consistent.

Source: Twitter

On p. 13 they write:

Bitcoin seemed like a solution, but at first no one outside the small Bit-coin network ascribed any worth to its tokens. In a story that has become memorialized in Bitcoin lore

Why is there a hyphen/dash in the 2nd Bitcoin but no hyphen/dash in the other two?

On p. 13 they write:

on March 22, 2010, 10,000 Bitcoins were used to pay for two pizzas, worth forty dollars

Without mentioning his name, or more importantly how he got 10,000 bitcoins, the authors are describing Laszlo Hanyecz. They do cite a relevant Forbes article but I think the readers would enjoy learning how disappointed Satoshi was when she first heard about GPU mining on the Bitcoin Talk forum.

On p. 13 they write:

Sure, the stuff was nearly worthless, but it was open to all, as early adopters could mine Bitcoin with their home computers without racking up enormous hardware and electricity costs.

This is accurate. But it conflicts with a number of their comments on page 9. A future edition should reconcile these conflicting statements.

On p. 13 they write:

Until it was shut down by US law enforcement in October 2013, the Silk Road was the most successful onboarding mechanism in Bitcoin’s history.

This might be true, but how did the authors determine or quantify “the most successful on boarding mechanism”? In looking at the citations and references, there are none. Maybe they are correct but a future edition probably should include a highly cited relevant paper: A Fistful of Bitcoins: Characterizing Payments Among Men with No Names by Meiklejohn et al.

On p. 13 they write:

If it didn’t work as a currency, perhaps a new story could be told. In the coming years, coiners started talking about Bitcoin as a potential store of value (despite its wild volatility) or as the basis of a new, parallel financial system, free of state control.

There are a couple of issues with this:

(1) They include the word “coiners” without providing any definition.14 “Coiners” appears nine times altogether in this book, yet not once do the authors explain what might mean. It is only by looking at the surrounding context that we can guess they have conjured up a word to describe “the outgroup.”

And here is where the story becomes even stranger. McKenize and Silverman arrived relatively late to the coin thunderdome. For some reason, they quickly fashioned themselves as “nocoiners” a term that readers of this blog understand was intended to be a slur. Yet these two market themselves with it as a badge of honor to The New York Times. Bananas.

Recall that 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.15 The fact that McKenzie, Silverman and other prominent “anti-coiners” use it as a way to identify themselves – and their “in-group” – is baffling because it is the language of an intended 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 or use the term “coiner” to describe others. It is identity politics.

(2) The authors are somewhat correct: certain Bitcoin promoters, specifically a group that often refers to themselves as “Bitcoin maximalists” did in fact shift the narrative from disintermediated payments to a store-of-value.

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

Source: Twitter

I do not have a horse in this race, especially since I have no particular affinity for Bitcoin. But I do think the authors should have been more nuanced and specific about who was pushing specific narratives. 16

On p. 14 they write:

This was the beginning of DeFi (decentralized finance), in which tokens would be routed through complex, mostly automated protocols that added leverage and risk to the system—and a chance at huge rewards.

This is the introduction chapter but readers expecting more in-depth nuance will be disappointed because this is pretty much how they describe “DeFi.” It is not really accurate but let us wait a few more chapters to discuss why.

On p. 15 they write:

In late 2020, I came down with a serious case of FOMO. The entertainment business was on ice thanks to the pandemic, and I was bored and depressed. I saw a bunch of average Joes making money in the stock markets, so I dusted off my long-neglected degree in economics and started paying attention to them for the first time in my life.

Look, 2020 sucked for a lot of people. 17 But the statement above does not really help your credibility. Wouldn’t… you want to portray yourself as an expert?

On p. 19 they write:

Cryptocurrencies didn’t do any of these things well. You couldn’t buy stuff with them—the guys at my deli would look at me like I was nuts if I tried to pay for my bagel and coffee in Bitcoin. Advocates say this is a temporary problem; if more people would just buy Bitcoin, eventually it will become a currency you can actually use.

There are at least two issues with this:

(1) Readers have probably noticed the pattern wherein the authors conflate “cryptocurrencies” (broadly) with Bitcoin (specific). This is a strawman. Also, on social media the people who frequently push this particular narrative they are criticizing are often Lightning Network aficionados. Those are a subset of the Bitcoin-specific world.

(2) A lot of cryptocurrency / cryptoasset-related projects are not attempting to tackle payments or reinvent money. According to the book, the authors sample size for “industry events” I believe was just two? SXSW and Bitcoin Miami. That’s not exactly a robust sampling. Sure, you can conduct market research remotely but their unnuanced language has room for improvement.

On p. 19 they write:

The technology behind Bitcoin sucks. It doesn’t scale. Satoshi’s solution to the double spend problem was innovative, but also clunky. The more miners who entered the competition the more energy was used, but the blocks were the same. Bitcoin is able to handle only five to seven transactions a second; it can never go above that.

There are some good criticisms of Bitcoin out there but this rant is just bad, it sounds identical to Diehl et al.

(1) Bitcoin is just one implementation of a blockchain. The authors claimed earlier in this chapter that the “original” blockchain arose thirty years ago. But they never provide any metrics on how fast that one is/was. What is the throughput of the Haber & Stornetta “chain” versus Bitcoin 0.1 in 2009?

(2) The authors conflate the limitations of Bitcoin with every blockchain, and that is intellectually dishonest. There are several different Layer 1 (L1) chains – such as Avalanche – that clearly show the world is not limited to the throughput of Bitcoin. If anything, the omission of other chains shows a lack of market research and due diligence by the authors. Yea, sifting through claims is tiresome work, that’s my day job and often isn’t fun.

(3) Nakamoto consensus (proof-of-work) is not the only game in town when it comes to solving the “double-spend problem.” For just under a decade, different teams of researchers have successfully engineered and productionized proof-of-stake-based chains which overcome some of the limitations that proof-of-work-based chains had. The authors mention “proof of stake” a couple of times later on in passing but do a disservice to readers by effectively ignoring it.

(4) As mentioned a couple of times before: just because someone attempts to mine on a proof-of-work chain does not automatically mean extra resources are immediately required to mine additional blocks. For instance, if I started a new proof-of-work chain tomorrow, a fork of Bitcoin, then a variety of older USB-mining devices could easily generate hashes while consuming relatively little amounts of electricity. Energy (or resources in general) are typically only expended if the coin value goes up. Crab price action is often not attractive miners, especially those who own warehouse facilities filled with hashing equipment.

(5) In the references they cite one paper, On Scaling Decentralized Blockchains, which was presented in February 2016. A lot has happened in the past 7+ years. In fact, the paper primarily focuses on Bitcoin which again, is no the only blockchain in the world. Surely there are more relevant technical papers exploring the challenges and limitations of other chains?

On p. 19 they write:

Visa can process 24,000. To operate, Bitcoin uses an enormous amount of energy, the equivalent in 2021 of Argentina—the entire country. Visa and Mastercard use comparatively miniscule amounts of electricity to serve a customer base orders of magnitude greater. Bitcoin’s energy consumption is enormously wasteful, and poses a massive environmental problem for the supposedly cutting-edge technology (and really, for all of us).

This type of rant is similar to the kind you would find in Diehl et al. book, where there is a kernel of truth surrounded by apples-to-oranges comparisons.

I actually agree with their criticisms of (proof-of-work) energy consumption, and have written about it many times. But their other arguments above are incorrect in at least two ways:

(1) Visa and Mastercard are centralized entities operating centralized infrastructure. In the passage above, the authors endorse and defend rent-seeking incumbents. In the U.S., Visa and Mastercard operate a duopoly that is good only for their shareholders. For instance, following news that the Federal Reserve has proposed lowering the interchange (swipe) fee, the CEO of Mastercard slammed it.18li

The next edition of this book could include a conversation about the friction-filled payment infrastructure that allows private companies to extract rents on retail users in the U.S. For instance, five 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.”

(2) A better comparison would be between proof-of-work networks (like Bitcoin) and proof-of-stake networks such as Avalanche or Cosmos. The latter two do not require enormous amounts of energy to operate. By continually conflating Bitcoin with all blockchains as a whole, weakens their credibility.

On p. 19 they write:

So if cryptocurrencies weren’t currencies, then what were they? How do they actually work in the real world? Well, you put real money into them and hope to make real money off of them through no work of your own. Under American law, that’s an investment contract. More precisely, it’s a security.

The authors – neither of whom are lawyers – throw this hand grenade towards the end of Chapter 1 and do not even provide a citation in the reference section.19 Maybe they are right, but that which is asserted without evidence can be dismissed without evidence.

Also, anyone can create a (ERC-20) token and pair it with another token on a decentralized exchange, such as an automated market maker (AMM) like Uniswap.20 You can do it without raising external capital from anyone too. That’s precisely what Colin Platt did a few years ago.

On p. 20 they write:

There were now potentially 20,000 unregistered, unlicensed securities—more than all the publicly listed securities in the major US stock markets—for sale to the general public.

You would think they would provide specific examples of coins or tokens, and the facts-and-circumstances as to how they are unregistered and/or unlicensed securities. But they do not. Maybe they are right, but that which is asserted without evidence can be dismissed without evidence.

On p. 20 they write:

Worse, these unregistered, unlicensed securities were primarily traded on crypto exchanges, which often served multiple market functions and, therefore, had massive conflicts of interest.

The first part of the sentence can be correct, but they again do not provide any citation. I whole-heartily agree with the 2nd half of the sentence. I even gave a speech a few years ago, discussing these types of conflicts of interest.

On p. 20 they write:

And perhaps most disturbing, most of the volume in crypto ran through overseas exchanges. Rather than being registered in the United States, they were often run through shell corporations in the Caribbean, apparently to avoid falling under any particular regulatory jurisdiction.

This is a partially valid argument. Although they do not provide specific examples here, anecdotally it is likely that some centralized exchanges attempt to use regulatory arbitrage to avoid specific jurisdictions. But the next edition should provide a couple here (they do a little later).

One other quibble with this passage is that traditional financial institutions do precisely the same thing. They pioneered the playbook of lobbing for regulatory changes and structures in specific jurisdictions. For instance, the entire reinsurance industry is headquartered out of Bermuda.

On p. 21 they write:

When you buy a share of Apple, you are effectively a portion of the revenue stream, as well as the brand equity, market share, intellectual property—all of that. But cryptos don’t make stuff or do stuff. There are no goods or services produced. It’s air, pure securitized air.

This could have been a stronger argument if the authors used nuance. As mentioned earlier, there are “real world assets” (RWA) which tokenize off-chain wares. Instead of making a blanket statement, they should have honed in on the self-referential nature for most other cryptocurrencies. Also, the burden-of-proof is on them when they claim each and every cryptocurrency is a security.

On p. 21 they write about “Dave”:

We came up with a side bet of our own: I bet him dinner at the restaurant of his choosing that Bitcoin would be worth $10,000 a coin or less by the end of 2021. To my mind, it was easy money.

We never find out if Dave is a real person or not but that is unimportant. What is important is that prior to the publication of this book, McKenzie had an undisclosed financial interest: a large bet.21

As another book reviewer pointed out:

In a recent Guardian profile, the actor disclosed he lost as much as $250,000 trying to short the market. Allegedly he got the timing wrong. The article doesn’t share many details, so we can only speculate but this wager could undercut much of what McKenzie has been saying over the years. In other words, the self-declared paid liar is also a hypocrite.

Is McKenzie a liar? He definitely cherry picks but I’m not sure I would use liar to describe him yet. He is definitely inconsistent for not disclosing on social media that he was actively shorting cryptocurrencies.22 Later in the book he kind of defends this behavior by saying he does not invest in public companies so perhaps he justifies it all by claiming the coin projects are private? Again, we do not know exactly what the short(s) were so it is kind of just guesswork.

On p. 23 they write:

I decided to do something. I decided to get stoned.

When I was reading the book, I did an audible chuckle. It may be authentic, but why do the authors think this adds credibility to the story? Why should we take him seriously at this point? This is not the last time we hear about his marijuana usage.

On p. 24 they write:

I needed to do something other than drink to help me cope. Pot did the trick. While high, I stumbled upon an ingenious notion: I would write a book! It would be a book about crypto, fraud, gambling, and storytelling, as told by a storyteller who was himself gambling on the outcome. To my THC-inspired brain, it all made perfect sense. I had stumbled on something profoundly original! The next day, I woke up a bit groggy and realized the obvious: I don’t know how to write a book.

This is not even the silliest thing in the book. By now readers expecting a deep-dive into the nitty gritty should temper their hopes. Easy Money is basically a self-promotion book that takes a serious set of topics and superficially touches on each while giving the authors an excuse to play blockchain tourist. It is a disappointment to those of us who actually filled out whistleblower forms and sat down with prosecutors.

Chapter 2: What Could Possibly Go Wrong?

While every book has an origin story, for some reason the authors felt the backstory for this book was compelling enough to include in the actual book. While there are some amusing parts, most of it should have been left on the cutting board. It all comes across like Entourage wannabes. A good journalist needs a team but that team – and the journalist – do not have to become part of the story. Here they force themselves onto the reader and it is pages that could have otherwise been used to describe more of what happened in El Salvador. For instance, Zeke Faux – and other journalists – show you do not have to continuously insert yourself into the story line just because you have a hot take.

On p. 27 they write:

It was August 13, 2021, and I was perspiring more than I would have liked outside my local bar. It wasn’t the sweltering heat of that summer night making me nervous; it was the stupidity of what I was doing. You know how it goes, what had seemed sensible to propose via Twitter DM after some edibles seemed somewhat less so now. I had invited a journalist I’d never met to pitch him on writing a book I didn’t know how to write about events that hadn’t happened yet. What could possibly go wrong?

If you’re keeping score at home, this is the third time in as many pages that the author mentions he is consuming some form of marijuana. Sure it is just edibles, no big deal right? It is neither classy nor does it add credibility. If anything it reinforces stereotypes of the entertainment industry.

On p. 27 they write about McKenzie’s first interactions with Silverman:

I told him about my econ degree and my interest in fraud. I talked about my friend Dave, and about our little bet that a crypto crash was imminent, and that I felt I had a duty to warn others before it was too late. And then I told him I wanted to write a book about it all.

I genuinely appreciate his sincerity on wanting to warn others but the timing – and self-serving motivations – are ridiculous. Coin prices peak about two months after this meeting. The time to warn, and act, was arguably a couple years before hand. What were you doing in 2018-2019?23

On p. 26 they write:

I could summon my own superpowers as an econ dork and mid-level celebrity and spread the gospel of “crypto is bullshit.” I could call out the liars and thieves, write it all down, and put it out there for the people to see.

This is incredulous.

Pages ago the authors explained how McKenzie had ignored finance until the fall of 2020 and needed to dust off his economics degree. Was the Netflix version of this book going to show a montage of McKenzie pouring over the works of John Nash or Keynes’ General Theory and writing equations on a chalkboard that quickly turn him into an “econ dork?”

To his credit, McKenzie does look a bit like Russell Crowe, so that scene is a possibility.

More seriously: the fact that the authors literally state spread the gospel of “crypto is bullshit” undermines their credibility. How can you be objective while oozing so much self-righteousness? If you are going to self-deputize, shouldn’t you at least go through the motions of ascertaining the facts-and-circumstances like an actual prosecutor must?

On p. 28 they write:

I tried my best to be civil but firm toward my fellow celebrities, some of whom had made a lot more money and had much bigger bills than I did. I get it: Life’s a hustle. But let’s not be gross about it, or lack any discernment or critical thinking. There’s a bridge too far and crypto is past that.

We have no idea how much money the authors made from the book advance but we already saw McKenzie mention he had FOMO and was looking for work. The solution was that he hustled “crypto is bullshit” to anyone including reporters.

For example, last year in that same interview where he wore the “no-coiner” identity as a badge of honor he says:

Trolls still tell me to “have fun staying poor” and I have yet to react by saying “look at my bank account.” That is juvenile.24 And this is not the only time the authors humblebrag.

Chapter 3: Money Printer Go Brrr

This is could have been an interesting chapter, if the authors had spent time explaining to readers how the market structure of the coin world worked. For instance, they could have explained what pegged stablecoins were.25 Who were the major issuers. What market makers were. How centralized cryptocurrency exchanges typically fold together custody, trade execution, and clearing all in one. Instead, we are introduced to a cast of characters that do not seem fully integral to the story (e.g., they are not insiders).

On p. 31 they write:

For skeptics like Jacob and me, there was one corporation that reigned supreme when it came to our suspicions about the cryptocurrency industry: the “stablecoin” company Tether and its assorted entities such as the exchange Bitfinex.

Before diving into this, one thing that was a slight (grammatical) distraction was “Jacob and me” which is used 3 times altogether in the book, versus “Jacob and I” which is used 24 times. Again, not a big deal, just a little copyediting nitpick.

Anyways, much like “coiners,” the authors never define what “skeptics” are. Are they the same as “critics” – another vacuous word they frequently use? Strangely still, they commandeer a word that has been used to describe an assortment of people the past few years.

For instance, I have also been labeled a “realist,” “critic,” “skeptic,” “nocoiner” — oh and a “gadfly.” Terms I have rejected and the authors should have rejected too. For example, on June 30, 2015, CoinTelegraph described me as:

Source: CoinTelegraph

Several years later The Financial Times labeled me as “realist”:

Zeke Faux did not attempt to co-opt a term, his loss, right?

Sure we have “food critics” and “movie critics” but neither of these practitioners deny the existence – or potential utility – of the thing they are critiquing. Over the past 24 months the terms “critics” and “skeptics” seem to be used as a way to market newsletters, podcasts, and books. For instance, David Gerard and Molly White – people the authors namecheck in the Acknowledgements – have built careers out of the “nocoiner” identity – they are fully invested in it. And it shapes their coverage on this topic.

At a minimum can we all agree that fervently marketing oneself something contrarian sometimes devolves into tribalism?

On p. 31 they write:

Founded in 2014, Tether claims to be the first stablecoin ever created. (A stablecoin is a cryptocurrency pegged to an actual currency such as the US dollar.)

Three issues with this:

(1) The authors really should have used “USDT” to describe the token itself and Tether LTD to refer to the company that issues tether tokens. It gets confusing later on.

(2) In a future edition the authors should add a nuance around what a pegged and non-pegged stabilized coin are. For instance, while centrally issued stablecoins like USDT attempt to maintain a pegged value, others such as Rai drift a bit but are relatively stable (due to a controller system and CDPs). There is a small but growing category of assets that are stabilized relative to some external value, by definition they are not pegged-coins.

(3) Back in 2012-2014 during the heyday of “colored coin” projects, there were some toy experiments that attempted to tokenize (link) USD to a discrete amount of satoshi.26 On Counterparty, there was an actual product – Digital Tangible Gold – that tokenized gold held in custody by Morgan Stanley. For history buffs, Pierre Rochard, one of the maximalists who coined the term “nocoiner,” contacted Morgan Stanley directly who then closed the custody account.

On p. 31 they write:

And if you were making huge gains or moving money between jurisdictions, Tether helped avoid the imposition of regulated banks with their pesky reporting requirements.

As previously mentioned it is unclear if the authors are referring to tether (USDT) or Tether (the company). If it is the latter, according to the company they have implemented some KYC / AML requirements. It would be interesting to know how rigorous those were. Also a future edition could explain the difference between banked and bankless exchanges and how USDT acts as a type of shadow bank for latter as well.

On p. 31 they write:

On October 19, 2021, we published “Untethered” in Slate.

At this point I had already interacted with Silverman via Twitter, sending him mining-related links. They reached out to conduct an interview for the article above, here’s what they penned:

Source: Slate

Those were indeed my words, but it does feel a bit like cherry picking for sensationalism. I pointed this out on Twitter too. I also provided a lot of other color that they did not use. Obviously it is their column but I don’t think it was a fair representation of the totality of my conversation.

On p. 31 they write:

We hadn’t cracked the company’s mysteries, but the piece, which built on past investigations by Bloomberg, the Financial Times, and writers like Cas Piancey, Bennett Tomlin, and Patrick McKenzie, was consistent with our proselytizing mission. We were here to ring alarm bells and make sure the lay public could hear them.

This is a little revisionist history and misses some important people such as J.P. Koning. Since the authors have done such a good job at self-promotion, let me give it a shot.

Back in 2017 I introduced “Bob” to reporters including Bloomberg and later the NYT. Bob later went on to speak with the CFTC (this is not to take credit for what became the CFTC lawsuit).27 The most popular post I wrote that year was Eight Things Cryptocurrency Enthusiasts Probably Won’t Tell You which identifies Bitfinex and Tether as the number one glossed over aspect of the ecosystem.

In December 2017, I was quoted in Bloomberg:

“Is there anything backing this?” said Tim Swanson, who does risk analysis for blockchain and cryptocurrency startups. Swanson, also director of research at Post Oaks Labs, said he fears problems with tether could hobble exchanges that trade it. “If these aren’t backed 1-to-1, then what is the contagion risk if one of these exchanges goes down?”

And I was far from the only person curious about Tether in 2017.

While a future edition does not need to cite me, they should at least expand the list of people who openly discussed the role Tether (USDT) played in the coin world beyond the three they mention above, starting with Koning. For bonafides, the oft-cited Money Flower Diagram from the Bank for International Settlements (BIS) specifically mentions Koning’s Fedcoin idea.

On p. 32 they write:

The second red flag for Tether was its size relative to its workforce. Twelve employees (maybe even fewer) are running a business that deals in tens of billions of dollars? Forget the absurdity and ask yourself why. If you were running a legitimate, huge business dealing in big-dollar transactions, wouldn’t you want, and need, more than a dozen people helping you run it?

This would not be a top three red flag for me. The authors are saying: managing that size of money should involve more than a dozen. But does it necessarily? What is the average size of a money manager or hedge fund? According to IBISWorld the average U.S. hedge fund has 10.7 employees.

Ah but Tether LTD is not a hedge fund, or at least should not be, right?

And this is how we arrive at what the top red flag should be and one that Rohan Grey forcefully argues thusly: a case against centrally issued pegged-USD issuers – such as Tether – should be rooted in first principles. Tether LTD intentionally operate as shadow banks and/or a shadow payment provider. Everything else – while perhaps important – is a knock-on of that.

This is why we should put aside conspiracy theories – if Tether LTD owns Evergrande commercial paper – because a first principles analysis would conclude that U.S. regulators should use the tools available to them to bring Tether LTD into compliance irrespective of what Tether LTD has as reserves. If that means Tether LTD is required to form a state or national bank, then that is one (unlikely) outcome.28

However a persistent problem in this book is that the authors spend more time discussing possible hypotheticals rather than what we can easily confirm. The CFTC and NYAG have already provided evidence that backs up the concerns academics such as Rohan Grey previously articulated. Strangely, while the authors namecheck Grey in the Acknowledgements, they do not cite any of his work. A future edition should also include a discussion on shadow banks that explores any similarities between PayPal and Tether LTD.

On p. 34 they write:

They hid that fact from the general public, only to have it revealed with the release of the Paradise Papers, a trove of confidential financial documents that were leaked to journalists in 2017.

It was Nathaniel Popper, then a reporter at The New York Times, who first connected overlapping ownership between Bitfinex and Tether LTD via the Paradise Papers. The reason I highlight this is because Jacob Silverman dunked on Popper on Twitter during the writing of the book. Then later deleted the tweets.29 Despite his stellar reporting on the topic, Popper is notably absent in the book including the reference section.

On p. 36 they write:

To pick one more bizarre factoid from an extensive list, their primary bank mentioned above, Deltec, was headquartered in the Bahamas and run by Jean Chalopin, the guy who co-created the Inspector Gadget cartoon series. If it wasn’t a giant scam, it was at least marvelously entertaining.

In November 2018, I got heckled on stage by a Tether promoter, Josh Olszewicz. Here is part of what he yelled at me from the audience:

Source: Twitter

It wasn’t even the first time I was harassed at a fintech event (John Carvalho stalked me at Consensus 2017).

Putting aside the colorful personalities this space attracts, I still do not understand the Inspector Gadget fascination. 30

On p. 36 they write:

In 2016, Tether was hacked. More than 100,000 Bitcoin (worth $71 million at the time) was stolen, and the company was in desperate straits.

As mentioned at the beginning of this review, this is incorrect. In August 2016, Bitfinex – the cryptocurrency exchange – was hacked and 119,756 bitcoins were stolen.

On p. 36 they cite a paper: Is Bitcoin Really Un-Tethered? by John Griffin and Amin Shams.

But then they wrote something kind of strange in parenthesis:

(Griffin’s blockchain forensics firm has also had contracts with a number of government agencies, indicating that he is advising on crypto investigations.)

Why speculate on what Griffin’s analytics firm may or may not be working on? Surely you could just contact them and ask? It is called Integra FEC.

On p. 36 they write:

Wash trading is the practice of buying and selling an asset back and forth among accounts you control in order to give the appearance of demand for that asset. Crypto is perfectly suited for this sort of manipulation.

To strengthen their argument they could have cited the CFTC settlement with Coinbase before its direct listing two years ago. Its senior engineer, Charlie Lee (who was the creator of Litecoin), was accused of wash trading on the GDAX platform.

On p. 38 they write:

While Tether might have been a last resort for people in need, it carried with it massive costs. Trading in crypto often means incurring heavy fees, and it’s difficult to cash out into real dollars via legal means, pushing people into relationships with unsavory characters who are, at a minimum, not motivated by charity.

How much are those heavy fees?

On p. 38 they write:

In addition, the use of Tether can be seen to further undermine already weak currencies, contributing further to their downfall.

I should be in their small-tent camp, right?

For instance, on November 2, 2018 in an op-ed for FinTech Policy, I labeled Tether (USDT) a systemically important utility for the crypotcurrency world. On March 3, 2021 I gave a presentation to the Fed’s DLT monthly meeting and ended by saying they should look into pegged-coin issuers like Tether LTD.

The authors could improve their arguments by providing specific details because they miss the entire discussion from first principles: centralized pegged-coin issuers acting as shadow banks.

For instance, in their one sentence claim above, how does using Tether (USDT) undermine weak currencies? Which currencies? Is there a nation-state that has adopted USDT? Who knows, the authors do not provide those details.

On p. 38 they write:

I couldn’t believe what I was hearing. On the other end of the line was a male voice I only knew as belonging to a pseudonymous Twitter handle calling himself Bitfinex’ed. He had been on the Tether case for years. Bitfinex’ed had long suspected the company was a fraud, and had paid the price for his obsession with harassment, ridicule, and, he claimed, an attempt to buy him off. On crypto Twitter, some hailed him as a conspiratorial crank while many others, including people in the industry and in mainstream media, had learned to trust his tips.

There are a couple of issues with this:

(1) Bitfinex’ed real name has been in the public for a few years, all you have to do is a bit of googling. It is Spencer Macdonald. How did I find this out?31 Back when I wrote long newsletters he was on my private mailing list and sent me the link to a Steemit article of a guy who “doxxed” him because Macdonald had re-used the same catchphrases “Boom. Done.” under an alias Voogru on reddit.

While the Steemit article mentions his name it is not fully accurate either. At the time, some of Tether LTD’s supporters were pretty bananas online (just look at how one heckled me IRL). For instance, Stephen Palley helped provide legal assistance when there were issues with Macdonald’s Twitter account being locked. CoinDesk ran an article about it.

The other area where that Steemit article is incorrect relates to Jeff Bandman and the CFTC. The entire bottom quarter of that post is a guilt-by-association. Maybe Bandman is bff’s with both Palley and Macdonald, maybe they play golf and tennis together each weekend. There was no evidence presented that they are all in cahoots. Either way, ~2.5 years later we learned the results from the CFTCs subpoenas: that at certain periods of time Tether LTD did not have reserves they claimed backing the USDT (among other things) and some of the executives lied both publicly and privately about that.

(2) What tips did the authors assess were right and wrong?

For instance, Macdonald and I made a bet almost two years ago. And I won. But he blocked me months ago and never sent me the scotch. Sad days.

Source: Twitter

Maybe Macdonald and the group of “Tether Truthers” (USDTQ) are correct, maybe Tether LTD still operates as a fraud today.32 If readers are expecting some kind of “smoking gun” from reading this book, they will be disappointed. Bitfinexed – and some others in his circle – act as if they have some kind of secret knowledge.

When you ask them to simply reveal it, they post to more twitter threads.33 When you ask them to file whistleblower forms, they do not.

For comparison, Zeke Faux met with Bitfinex’ed in-person and wrote the following on p. 77:

When I asked for his sources or evidence, Andrew didn’t have anything new to provide. That was where I was supposed to come in.

[Andrew is one of the nom de plume of MacDonald/Bitfinex’ed]

Nothing secret was revealed in this book which is a disappointment. For instance, Bitfinex is an investor in Blockstream and USDT was directly issued onto Liquid (a quasi permissioned chain operated by Blockstream).34 At least two of the executives, Adam Back and Samson Mow, regularly promote and defend both Tether and the current president of El Salvador. Did they really own a Gulfstream IV?35 Nary a mention of Blockstream in the book.

In my view there are two distinct phases of Tether-related criticism with the divergence before and after the settlements with the CFTC and NYAG:

Phase 1 – concluded in early 2021 where the CFTC and NYAG both proved that Tether LTD did not operate in full reserve and some of the executives lied
Phase 2 – 2021 to the present day, post-settlement Tether Truthers claim that Tether LTD still does not operate and back USDT in full (reserve).

I stand by my previous criticism of Tether LTD and Bitfinex from phase 1.

But the onus is on the Tether Truthers to provide evidence that Tether LTD is still operating as a fraud and/or scam. Maybe it is, but what we typically see on Twitter is innuendo. Are both the CFTC and NYAG missing something? I posted this question on Twitter the other day and was called low IQ. Great feedback, I’ve been called much worse!36

On p. 38 the authors write:

Bitfinex’ed, whose real identity remained a mystery to us

The first search result for googling “Bitfinexed identity” is to a five year old article that links to the Steemit article.

On p. 38 they write:

Despite attempts to dox him—and a temporary Twitter suspension—Bitfinex’ed managed to maintain his anonymity, while developing a growing audience online. His fixation on Tether has bordered on obsession.

Again, the first search result for googling “Bitfinexed identity” is to a five year old article that links to the Steemit article.

On p. 38 they write:

Crypto partisans dismissed him as being salty because he hadn’t gotten in early enough on Bitcoin. But more sober observers pointed out the fact that Bitfinex’ed had been right about many of his claims. Some just took longer to prove.

That could be true, but which specific claims was he right about? Off the top of my head, based on direct communications with him I believe he had two correct predictions:

(1) That USDT was at times not fully backed

(2) That Tether LTD and Bitfinex shared common ownership

And while not a prediction per se, at the time he also transcribed ad hoc interviews that executives, such as Phil Potter, publicly gave on issues surrounding banking access. Speaking of which, did the authors try to reach out to Potter? Because Faux gets a direct quote from Potter regarding the origins of Tether.37

On p. 38 they write:

And few people had done more to educate journalists, critics, and the larger public about the perfidy lurking underneath crypto’s wildly anarchic market activity.

How do McKenzie and Silverman know this? They did not start covering this space until just under two years ago. Did they sit down and tabulate who educated who?

On p. 38 they write:

Bitfinex’ed was the angry, roiling conscience of crypto Twitter, always ready to swoop into a conversation and expose the dark underbelly of the latest industry spin. To some that made him a threat.

Macdonald did not and does not have a monopoly on “exposing the dark underbelly.” For example, did the authors contact ZachXBT?


On p. 42 they write:

SPACs, or Special Purpose Acquisition Companies, were often nothing more than blank checks issued to aggressively self-promoting “investment gurus” who would pocket a huge fee in exchange for gambling with their investors’ money.

This is a good point.38

On p. 43 they write:

My portfolio of short bets was, to put it generously, in shambles. I started with $250,000 that summer, by November it was down to $38,931. While I had bet on other frauds, the main culprit was simple: I had wagered too much on crypto’s collapse too soon, and blinded by my certainty, I nearly lost it all. By the time I got out of my initial crypto positions, they were almost worthless. What had been a lot of money was now very little. To be blunt, it was an unmitigated disaster—the kind of thing that provokes an uncomfortable conversation with your spouse.

We learn a few more details scattered around the book. As mentioned earlier, he began this bet with a friend “Dave” but we are never told its composition. Did McKenzie attempt to short some futures contracts on CME? Also, at least he is honest about his “blinded by my certainty” — something that other book authors on this topic failed to reflect on (such as Michael Casey’s dubiously title: “The Age of Cryptocurrency” reviewed 7 years ago).

On p. 43 they write:

The financial press was practically in lockstep about the inevitable crypto-fied future of money. Politicians, their pockets brimming with donations from industry moguls like Sam Bankman-Fried of FTX, were preaching the Bitcoin gospel. They were also openly contemplating passing industry-written legislation to further legalize these rigged casinos.

This is another decent point. But later in the book, we are only provided a cursory set of examples which we will discuss later. Also, the main quibble readers should have with the 2nd sentence is that the authors conflate “Bitcoin” with “crypto” as a whole. SBF may have been many things, but he did not frequently give off maximalist vibes.

On p. 44 they write:

Since in my analysis crypto was only speculation, it would fall like a rock once the Fed raised rates. Unfortunately for me, I had been just a bit early in making that call.

As my friend Colin Platt – the richest person in the world – is wont to point out: being early is effectively the same thing as being wrong. He says this from experience (with DPactum)!

On p. 45 they write:

In the interests of objectivity—and not wishing to be a participant in the kind of market manipulation I’ve denounced—I’ve never written about the companies I’ve shorted. You don’t have to trust me on this; you can look at my work. I’ve never written about publicly traded companies, only privately held ones. I’ve never traded or owned any cryptocurrency. My bet on crypto was simpler, and bigger than any one company: I thought the whole thing—all $3 trillion of it—was a speculative bubble. That part was obvious to me. The thing I couldn’t prove yet was that it was a bubble predicated on fraud. Hence, my journey with Jacob.

As mentioned above on p. 21, another book reviewer labeled McKenzie a liar and a hypocrite for failing to disclose this bet. The disclaimer above doesn’t really absolve the lack of disclosure: he has a vested interest in seeing the coin world go kaput.

I empathize with McKenzie.

For example, during the rapid rise in coin prices in December 2017, I was quoted as a “skeptic” in The Wall Street Journal:

That was published just days before the Bitcoin price peaked. Yet as certain as I was, I still did not short the market primarily because of counterparty risk and timing. Do I get book deal with Abrams now?

One last comparison, in Number Go Up, Zeke Faux describes a multi-million dollar offer he received to provide some purported Tether-related documents to a short seller. He turned it down, reasoning:

“This book is going to be called Jay Is Wrong and Zeke Is Right: The Cryptocurrency Story,” I said. “As a writer, you don’t want to be compromising in any way, you know? You don’t want to have ulterior motives.”

Unlike Faux it’s pretty clear from the book – and tweets – that at least one author has an ulterior motive: McKenzie discusses his short selling bet a number of times.

Overall this chapter made several interesting observations (such as the abuse around SPACs) but it seems like portions of the chapter could have been removed (e.g., most of the commentary around Bitfinex’ed) and instead re-used to discuss more of the celebrities like Matt Damon who acted as a public spokesperson for crypto-related companies.

Chapter 4: Community

A portion of this chapter hones in on McKenzie’s desire to have an entourage, a crew. It comes across as sappy and cringey and not something a made-it actor or journalist would strive for.39 As mentioned at the top, in no other book on this topic (that I have reviewed) have the writers explicitly stated as much because it should not be necessary.

In fact, because of the never ending drama-per-second the coin world generates, copy-paste Twitter accounts like Web3isGoingGreat, are able to rely on continuous streams of mainstream reportage on this topic to copy-paste from. McKenzie and Silverman did not need a crew of podcasters, and the next edition of the book probably should reclaim these pages to discuss what is going on in say, El Salvador, which was interesting and novel.

On p. 49 they write:

Bitcoin maximalists proudly boast that “Bitcoin has no marketing department,” which is technically true, but in practice dead wrong. Multibillion-dollar corporations—at least on paper—spent real dough to convince people to buy crypto. Sometimes the appeals were explicitly about Bitcoin, leveraging the brand awareness of the best-known cryptocurrency.

While we are never provided a full definition of what “Bitcoin maximalism” or who specifically makes that claim, I have heard this claim before from Andreas Antonopolous during his halcyon days. And while the authors do list off a series of A-list celebrities and entertainers who shilled something coin-related, it would be great to see specific tweets of endorsements in a second edition.

On p. 50 they write:

It also felt appropriate that I found myself on the opposite side of the proverbial line of scrimmage from the Hollywood consensus, but seemingly without a squad of my own. To counter the feelings of isolation and depression in my quest for truth in crypto, I needed to finally meet some fellow skeptics in the flesh. I needed a team of my own. Crypto-skeptic nerds assemble!

You do not need a squad to be a (investigative) reporter in this space.

Sure, building up a reliable rolodex of contacts is part-and-parcel to what reporters covering a beat will accrue over time, but journalists are encouraged not to get too close to sources otherwise you compromise your objectivity.

For instance:

Source: Twitter

I have not had a chance to read Michael Lewis’s new book, but according to his 60 Minutes interview, Lewis still has some affinity for SBF.

Source: Twitter

On p. 51 they write:

HODL is hold on for dear life, meaning that you should cling to your crypto no matter the price.

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. 53 they write:

Surveying the landscape in 2022, it was hard not to notice the myriad similarities between crypto and pyramid schemes. Both depended on recruiting new believers rather than buying anything with an actual use case.

This is an adequate comparison (for many cryptocurrencies).

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:

Source: J.P. Koning

On p. 54 they write:

Bitcoin ownership is highly concentrated in an extremely small number of whales who wield enormous power in the highly illiquid market. According to an October 2021 study conducted by finance professors Antoinette Schoar at the MIT Sloan School of Management and Igor Makarov at the London School of Economics, .01 percent of Bitcoin holders control 27 percent of all the coins in circulation. Some community.

Anecdotally this is probably true, for Bitcoin at least. Is it the case that every cryptocurrency / asset is the same way?

On p. 54 they write:

The eccentric community of crypto skeptics also fits in that category, and I was proud to call myself a member.

We are over 50 pages into the book and the authors still have not provided a succinct definition of what a “Coiner” or Skeptic” or “Maximalist” or “Critic” are. What are these tribes? What are their etymology?

On p. 56 they write:

many coiners really do feel that they are part of a like-minded community

What are coiners?

On p. 56 they write:

Practically everyone I spoke to at crypto conferences and other public events both admitted to being scammed and accepted it as if it was almost obligatory, a character-building exercise and bonding agent. Few spoke about stopping scammers in general.

This is a really good point, and I completely agree with the authors.

McKenzie’s experience reminded me of the meme from The Ballad of Buster Scruggs:

It is still unclear why this rugging behavior is perceived as a rite of passage and normalized.

On p. 57 they write:

In the case of the 20,000 cryptos other than Bitcoin, it should be simple to categorize them under the law. Most were securities made by real companies with real employees.

Maybe that is true, did the authors cite a securities lawyer? Did they quote a U.S. judge?

This is the same problem that occurred in Diehl et al., book: lots of opinions but few references. I am a certain there are U.S.-trained lawyers who share the same views as the authors, why not quote them here? For instance, later in the book they chat with John Reed Stark; this would have been a good spot to introduce him.

On p. 57 they write in parenthesis:

Ethereum also used proof of work to mine its cryptocurrency, until turning to proof of stake in September 2022. In proof of stake, owners of the crypto validate the blocks, making the system far less energy intensive, but incentivizing even more centralized ownership.

Two issues with this:

(1) As mentioned earlier, while there is some discussion of proof-of-work-based mining (the authors visit a hashing farm in Texas), the conversation or discussion around alternatives — such as proof-of-stake — are few and far between.

(2) Did the authors provide evidence that proof-of-stake systems are even more centralized? Maybe they are, but no references were provided. What can be asserted without evidence can also be dismissed without evidence.

This also reminds me of Matthew Green’s evergreen tweet:

Source: Twitter

On p. 57 they write:

What started as simple speculation and peer-to-peer exchange became a web of derivatives markets, DeFi protocols (a set of rules governing a particular asset, often using so-called smart contracts, run on blockchains), lending pools, and other newfangled features of digital finance.

What are derivatives markets? What are DeFi protocols? What are lending pools?

On p. 58 they write:

Under this arrangement, buying Dogecoin on a crypto exchange like Binance was indeed an act of trustlessness, but only in the sense that it was hard to trust any offshore crypto entity.

This is a strawman. Why? Because Binance is a centralized exchange, it is a trusted-third party. No one is arguing that Binance or other centralized exchanges are… decentralized.

On p. 58 they write:

“Not your keys, not your coins,” was the mantra thrown around by die-hard crypto fanatics, meaning you should keep your crypto in a “cold wallet” that didn’t touch an exchange—or even the internet. But that kind of advice did not reflect the reality of the markets. It defeated the primary purpose of money, which is to make buying and selling stuff convenient and fluid.

I mostly agree with their observation and have written about all of the “friction” that coin-related intermediaries often add. But there does need to be a nuance with private keys because various controllers in traditional finance also have key (recovery) management involving hardware wallets, cold wallets, an so forth. Traditional finance has incorporated the modern iteration; see Thales on slide 9.

On p. 58 they write:

Unfortunately, creating money that’s trustless is impossible in practice, for it goes against the very nature of money itself. Adopting it as a mission can only lead to disappointment.

There are a couple issues with this:

(1) This seems to be an a priori argument. By definition, a priori arguments are the opposite of empirical arguments. So no matter what evidence someone could provide, it seems like the authors have made up their mind.

(2) Not every cryptocurrency or cryptoasset project is attempting to reinvent money.

On p. 59 they write:

In the United States, the nation with the largest economy in the world—as well as the issuer of the world’s reserve currency since 1944, the US dollar—we often take this consensus for granted. Everyone wants dollars, especially in times of crisis.

What is a reserve currency?

There are several reasons why the U.S. is the issuer of the world’s reserve currency. While the authors do mention a couple of authors, experts such as professor Michael Pettis and Brad Setser, attribute the U.S. dollars current reserve status due largely to the (im)balance of trade. The U.S. runs large trade deficits. And mercantilist economies such as China are either unwilling or unable to shift to running large trade deficits. Until something dramatically changes, the U.S. dollar will continue to remain the key reserve currency.

On p. 59 they write:

In that sense, the stated goal of cryptocurrency—to create a trustless form of money—is literal nonsense. You cannot create a trustless form of money because money is trust, forged through social consensus. As Jacob Goldstein writes in Money: The True Story of a Made-Up Thing, “The thing that makes money money is trust.” Saying you want to create trustless money is like saying you want to create a governmentless government or a religionless religion. I think the words you are searching for are anarchy and cult. The bartender should cut you off and make sure you get a ride home.

This is a strawman. Not every cryptocurrency or cryptoasset project is attempting to become “money.”

There are a number of coin promoters who regularly echo comments similar to Zero Hedge, that the U.S. dollar is doomed. Maybe it is, and maybe that is who the authors are thinking about, but we are not provided specific names of people who make the argument that a specific cryptocurrency is going to become a “reserve currency” let alone “money.”

On p. 60 they write:

The failures of our current system to do so have no doubt lent the story of cryptocurrency much of its power. A severe, and very understandable, lack of trust in the financial system reflects a wider loss of faith in democratic governance. Wealth inequality is at near record highs and many working people feel that the economy is rigged against them. But that doesn’t mean the story of cryptocurrency is true, or offers a better alternative to the present situation. You cannot replace people and flawed institutions with magical bits of computer code.

There are a couple of issues with this:

(1) What are some of the failures of the current system? Are the authors referring to too big to fail banks? Systemically important financial institutions?
(2) What is the story of cryptocurrency? Which one? This is a problem with generalizing without looking at the facts-and-circumstances of each.

On p. 60 they write:

That code was written by human beings who themselves are far from perfect.

This seems like an inconsistent argument. Is the claim that “smart contracts” and/or “blockchain” projects are inherently prone to error because humans wrote the code? If so, shouldn’t we be equally concerned about all digital, automated financial infrastructure created by humans? Why single out cryptocurrency?

On p. 61 they write:

A decentralized financial system seemed less like an inherently noble pursuit than an alternative structure that, just like TradFi, further enriched those at the top.

What is TradFi? They tell us later but should have mentioned it here.

On p. 61 they write:

I will inevitably be attacked by crypto promoters as advocating for nation-state supremacy or excusing the myriad failings of this or that government, but that is missing the point entirely.

In the past I have jokingly referred to myself as a statist shill. Looks like we all could have been fellow travelers at some point!

On p. 61 they write:

Consider a familiar example: our banking system. Why do you trust that the money you put in a licensed US bank is going to be there when you want to use it? Because the federal government guarantees it in the form of the FDIC (Federal Deposit Insurance Corporation).

While true this seems a bit of cherry-picking because we also have too big to fail banks that are regularly penalized for screwing their customers. I think there are better arguments to describe the utility of trust that has been created by public institutions like the U.S. Mint or the Federal Reserve without having to describe prudential regulators such as the FDIC.

For instance, earlier this year 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.

On p. 61 they write:

Is our financial system perfect? Of course not! In fact, it is deeply, deeply flawed. It cries out for more reform and democratic accountability. But it at least includes guardrails that protect consumers and a legal framework that acknowledges the role of trust in binding people together, whether in social life or commerce.

There has got to be a better way of defending “trust” and “consumer protections” than defending private incumbents.

That passage also sounds strikingly similar to what Diehl et al., wrote in their own book:

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.

On p. 62 they write:

But nonetheless, the private banking era was not a success, and eventually central banks were created to better manage the franchisee banks and ensure the safety of customer deposits.

Agreed, and there is a long line of commentators, researchers, and academics who favor policies allowing retail to directly gain access to central bank money (bypassing commercial banks). 40 There is no technical reason, in 2023, for retail to be intermediated from central bank money. If this comes in the form of a central bank digital account and/or digital currency is a separate discussion and one worth having.41

On p. 62 they write:

Among the many butcherings of language in cryptocurrency, historians may find this the cruelest cut of all. The purported “future of money” is in fact the past of money, a failed experiment and one we revisit at our collective peril.

At least two problems with this:

(1) It generalizes all cryptocurrencies as attempting to build a “future of money” when this is not the case.
(2) It is an a priori based argument so by definition it is not evidence-based.

On p. 62 they write:

I have to address one last false story that Bitcoin maxis—the people with the laser eyes who aren’t Tom Brady—have been spreading.

That is a shallow explanation of a Bitcoin maximalist. While some prominent maximalists may have added laser eyes to their profile pictures, that’s more of a degen meme than anything else. Many of the original Bitcoin maximalists – the guys and gals who coined the term – hate me and made it abundantly clear on Twitter each quarter from mid-2014 until the present day. They did not have laser eyes until the past couple of years.

On p. 63 they write:

In economics, supply does not determine scarcity. Supply is simply the amount of something available to be bought or sold. Scarcity occurs only when the demand for that thing exceeds the supply at the price of zero.

I whole heartily agree! This is a good point.

On p. 63 they write:

Imagine I own the rights to all the dogshit in Brooklyn. I have approached each and every dog owner in the fair borough, and they have agreed to sell me their dog’s poop. I do not own the dogs, mind you, merely the rights to their fecal matter. Now, there are only so many dogs in Brooklyn, and there is only so much they can defecate. The supply fluctuates by the number of dogs—despite how it may appear, there is an upper limit here on the number of dogs, certainly lower than twenty-one million—and the amount of times they poo. But is dogshit scarce? Are people clamoring for it because it is prized and useful? Will my cornering the market make me a rich man? Unfortunately for my empire of shit, the answer to all those questions is no.

Much like smoking pot and consuming edibles earlier in the book, is it really classy to use this specific example? Surely there are less crude ways of explaining supply and demand?

On p. 64 they write:

By now, more than 90 percent of the Bitcoins that can ever exist have already been mined. That makes Bitcoin’s supply almost perfectly inelastic, a fancy word meaning it can’t grow or shrink in response to changes in price.

The fact that over 90% of bitcoins total supply has been mined is not why bitcoin is perfectly inelastic. What makes it perfectly inelastic – a topic I have written on a few times before – is that fact that irrespective of the labor force applied, no extra units of bitcoins can be extracted. With proof-of-work networks like Bitcoin, the marginal productivity of labor is zero. It does not matter how many more units of labor are added to the income generation (mining) process as the network will always produce the same amount of economic output. In contrast with traditional commodity extraction, deploying more equipment or a larger labor force, could result in large production of say, a precious metal.

There is one caveat: Bitcoin mining may be considered perfectly inelastic due to the code that prevents extra units from being extracted, but the way block propagation works in practice, block makers (mining pools) have accelerated halvenings.42 That is to say, when Bitcoin was first released, the halvenings were expected to coincide roughly every four years. However because of how mining works in practice, the next halvening is expected April 2024, about 8 months ahead of schedule.

On p. 64 they write:

It’s basically fixed. This makes the price of Bitcoin even more susceptible to changes in demand.

Agreed! I – and several others – have written about this before.

On p. 65 they write:

The problem with the Bitcoin-as-digital-gold argument runs even deeper when we examine economic history. Bitcoin maxis are often “gold bugs,” meaning they want us to return to the gold standard, when you could exchange paper money for a certain amount of gold.

Anecdotally this seems to be true, many maximalists I have met and/or interacted with often are some form of goldbug.

On p. 65 they write:

But elasticity is crucially important in times of crisis.

Agreed!

On p. 66 they write:

But that does not mean returning to the gold standard would be any better.

Agreed!

On p. 66 they write:

The day after the Super Bowl, I finally met in the flesh my first fellow crypto skeptic not named Jacob Silverman. Cas Piancey and Bennett Tomlin host a podcast called Crypto Critics’ Corner that proved a lifeline when I first stumbled into the seemingly lonely world of crypto skepticism in the spring of 2021. Sensing something was off about the industry but hoping to educate myself, I searched for decent podcasts on the subject.

(1) I am not going to say do not listen to their podcast, but McKenzie is correct: it was (is!) hard to find a good podcast that isn’t 100% shilling the listener something. Can recommend Epicenter which regularly hosts technical-focused guests. And despite my disagreements with her in the past, I think Laura Shin’s Unchained is often quite good too. For instance, here is her recent interview with Zeke Faux.

(2) How did McKenzie conduct a “literature review” or due diligence during 2021? Although tough to navigate, there were plenty of active “skeptics” or “critics” that the authors never even mention, such as Mark Williams, Yakov Kofner, Angela Walch, and J.P. Koning.43 We will discuss this again later.

On p. 68 they write:

Appearing on Crypto Critics’ Corner alongside Jacob, who joined remotely from Brooklyn, would mark my first long-form interview in my bizarre career pivot. Cas, a sideways-baseball-cap-wearing SoCal native, welcomed me generously, showing me around the studio owned by an artist friend whose elaborate wood carvings decorated the walls.

It is unclear why the authors are using this nom de plume when Cas Piancey revealed his identity last year. His real name is Orson Krupnick Newstat.44

On p. 69 they write:

Leaving Cas’s studio, I realized I had found my community. It had nothing to do with a coin we were pumping, a company we believed in, or some utopian technological vision that, in practice, came with a heavy side of dystopia. We wanted to understand this crazy new financial system, especially its dark side. And it helped that we liked each other.

This book seems like it is veering into auto-biography territory, was that the intent?45

On p. 69 they write:

The crypto skeptic community that Bitfinex’ed, Cas, Bennett, Jacob, and others brought me into became my team, friends, and trusted colleagues. A few of them I regarded as heroes—or at least the closest thing to it in an industry in which it seemed most people would sell a Ponzi scheme to their mother if it would help pump their bags. Bitfinex’ed—whoever he was!—was our initial ambassador to this new community, but he was soon joined by other pseudonymous online sleuths, as well as economists, computer scientists, indie journalists, cynical former bankers, straight-laced former regulators, stoner podcasters, Scandinavian businessmen, and a few untrustworthy cranks.

Maybe this is one “crypto skeptic community” but certainly not the only one. Also, for years I have been referred to as a “crypto skeptic” — a title I thought was shallow and one I never adopted. Does this make me a crypto skeptic, skeptic? Crypto skeptic skeptics, assemble!

On pgs. 69-70 they write:

To say I learned a lot from them would be a vast understatement, and it quickly became apparent to me why a community like this was valuable. The world didn’t need just one crypto critic, it needed a thousand of them, of diverse backgrounds, interests, and motivations, spelunking through the industry’s darker corners and sharing what they found. When everyone was selling something, we needed a few people to say, “I’m not buying, but I’m curious how you do it.”

Apart from the fact that the authors still do not define what a “critic” is or is not, I agree with nearly everything in this statement. With one major caveat: let’s try to forego purity tests, especially if you just became interested in this space. See for instance, this clique of “no-coiners” acting as if there wasn’t a wider universe of coin “skepticism” or “criticism.” Let’s be Big Tent and include actual technical experts, not just people we may agree with.

On p. 70 they write:

At least now, with Cas, Bennett, and a delightful crew of eccentrics behind me, I had a corner of my own to retreat to in between rounds. Admittedly, it was a David and Goliath battle—a random group of skeptics up against a multi-trillion-dollar industry. But I came back from Los Angeles with more pep in my step. Maybe it was just the gambler in me, but I liked my chances.

Repeating it over and over does not make it sound more objective. Readers might ask: are you moonlighting as a reporter or as a social club manager? Can’t be both. Plus, there are a number of investigative reporters operating at this point, did you reach out to any of them for potential collaboration?

Chapter 5: SXSW, the CIA, and the $1.5 trillion that wasn’t there

This chapter should have been split into two, with the visit to the Bitcoin mining facility pulled out. Also, because of the uneven tone of the book up until this point, it wasn’t clear who the authors felt would narrate this in the movie adaptation. You might think think this is facetious but the entire conversation with the alleged CIA agents does not give a reader any sense of conclusion, there is no bowtie on it. What purpose do the agents fill besides page filler?

But let’s start with one of the two events they attended.

On p. 71 they write:

In early 2022, South by Southwest (SXSW), a big tech and music conference in my hometown of Austin, Texas, invited me to organize a panel of crypto skeptics. I was pretty fired up. SXSW would mark our first venture into the real world; everything Jacob and I had done thus far was online or remote. We recruited Edward Ongweso Jr., a razor-sharp journalist for Motherboard, Vice’s technology site, to join us on stage. I decided to record the whole thing, hiring a local director of photography, Ryan Youngblood, to film whatever hijinks might transpire.

What are crypto skeptics? Are they the same thing as critics or realists? Why did they choose Ongweso?

On p. 72 they write:

“Well, there’s another DAO that helps with that,” he said. His dream was to move to Portugal, a burgeoning crypto tax haven.

That was probably true while the book was being written, however in October 2022, the Portuguese government said it will start taxing short term gains on digital assets. It is unclear if this has reduced the desirability or appeal for crypto-related projects from domiciling.

On p. 73 they write:

Bad actors are everywhere—certainly in so-called TradFi, or traditional finance—so why should crypto be different?

Ah, gotta love the “so-called” modifier. While the authors do interview a number of coin promoters and coin “skeptics” they don’t make much room for anyone who works in traditional finance. Strange because there are credible people within the world of “tradfi” that probably agree with their views. A second edition should interview experts at the DTCC (the largest CSD in the world) or say, Tony McLaughlin from Citi, he’s no coin shill.4647

On p. 75 they write:

The guy who had approached us, whom I will call Charles, led us over to a group of six people with SXSW name tags that read USG in the spot reserved for their employer. Most of them were unassuming: close-cropped hair, dress shirts, fleece vests—the typical uniform of law enforcement people playing at casual dress.

For approximately four pages the authors describe a strange interaction they have with a couple of alleged spooks.

For example they write on p. 76:

Charles was a couple years from early retirement. “I can’t wait to smoke weed!” he said. “It’s great,” we assured him.

Yet more weed smoking by the authors. Why is this in the book?

On p. 78 they write:

“You need to be a borderline sociopath to do this work,” Charles said. “Ryan is probably too normal,” he added, referring to our local cameraman, who said he had been rejected years earlier from the CIA. Ryan smiled uncomfortably.

It was never fully clear why the authors hired a cameraman for many of their interviews. Are they planning on releasing a video as well? For instance, last year Alex Gladstein asked the authors to release the video interview of SBF, which they declined.48

On p. 78 they write:

It went like this all night, Jacob and I exchanging occasional looks that indicated our mutual disbelief. At one point, Jacob gawked as Charles explained that the NSA had found “a small bug” in Signal—the encrypted messaging app used by journalists, activists, and millions of other people, including the spies at our dinner table—but if you restart your phone once a week or so, it wasn’t a problem. It was hardly a sophisticated technical explanation, and maybe it was all bullshit braggadocio, but a Signal exploit would be incredibly valuable—easily seven figures on the open market—and a closely held secret by any intelligence agency.

In my typed notes on Kindle I wrote “Isn’t this burying the lede?” Surely a big story here is that a U.S. intelligence agency used an exploit in Signal?

The only reason I can think of not to include this earlier is because we never learn if these two people – Charles and Paul – actually were spooks. I’ve met people at conferences who claimed to work for a branch of the government and I would google them afterwards and often it was true. What did the authors find out about these two?

On p. 82 they write:

There are more than 20,000 cryptocurrencies out there, sophisticated exchanges, decentralized finance protocols that allow billions of dollars of crypto to change hands without human intermediaries, and financial products that resemble less regulated, riskier versions of their Wall Street equivalents.

What are sophisticated exchanges? What type of decentralized finance protocols? What are human intermediaries? Which financial products resemble less regulated, riskier version of their Wall Street equivalents? It is unclear.

On p. 82 they write:

At least in the gambling-like realm of financial speculation, there’s a lot you can do with crypto. With few guardrails in place, it’s easy to borrow money and add leverage in order to increase one’s odds of winning big or losing everything. Many of these financial products and transactions are extremely complicated, and difficult for the average investor to navigate. Nearly all of them are extraordinarily risky.

I agree with the majority of these comments apart from the leverage element. At the time it was written leverage in the coin world was primarily procured by going through a centralized intermediary like an exchange (Binance) or lender (Celsius).49

On p. 82 they write:

By some measures, Celsius was a successful going concern, but with investment backing from Tether (they loaned Celsius over $1 billion), strange lending activities, sky-high interest rates on offer, and some murky movement of its tokens, it was an object of extreme speculation and rumor within the crypto-skeptic world.

If there is a second edition the authors must cite Maya Zehavi for being the first “Celsius skeptic.” Among other firsts, she was the first person to publicly put a magnifying glass on Hogeg before and after he was removed as CFO. Is she a “skeptic”? She was often labeled as one before the term was co-opted.

On p. 83 they wrote:

I took a breath, told myself that I wasn’t hungover from a night of drinking with CIA operatives, and, trailed by my cameraman, did my most confident walk over to Mashinsky and his confederates.

But were they actual spooks? Is the reason Charles and Paul were in this book just so the authors could say they drank with some alleged spooks?50

On p. 84 they wrote:

We got it on camera. There were moments that astonished me. Talking about scams, he took the usual tack and said people needed to educate themselves.

So are you going to release the video too? Seems spicy no?

On p. 84 they wrote:

Toward the end of our conversation, when the video was off but with audio still rolling, Mashinsky told me something that made my blood run cold. I asked him how much “real money” he thought was in the crypto system. I didn’t think he would actually answer the question, but he did.

Is that common? To turn off the video but keep the audio rolling? I have no affinity for Mashinsky but was that an accident?

On p. 84 they wrote:

“Ten to fifteen percent,” Mashinsky said. That’s real money—genuine government-backed currency—that’s entered the system. “Everything else is just bubble.” The number seemed straightforward and eminently believable. But it was still shocking to hear it from a high-level crypto executive, who seemed totally unconcerned about it all. Mashinsky acknowledged that a huge speculative bubble had formed. If the overall crypto market cap was about $1.8 trillion at the time we spoke, that meant that one and a half trillion or more of that supposed value didn’t exist.

Everyone new to this space is entitled to be shocked, that the “market cap” is probably not an actual “market cap.”

For instance, five years ago, I cited an estimate from Nikolaos Panigirtzoglou at JP Morgan entitled “Flows & Liquidity: The emergence of cryptocurrencies.”  According to his analysis:

The net flow into cryptocurrencies is very much a function of coin creation which is controlled by computer algorithms and in the case of bitcoin is diminishing over time. Figure 6 shows the net amount of money invested every year since 2009. The cumulative amount has totaled around $6bn since 2009, well below the current market cap of $300bn.

Panigirtzoglou illustrates this over time with the bar chart below:

Around the same time Citi published a note with similar estimates:

In 2017, cryptocurrencies grew from a market cap of less than $20bn to around $500bn. We estimate this surge was driven by net inflows of less than $10bn.

What was the estimate five years later?

That’s a good question and something the authors do not readily provide an answer for apart from citing Mashinsky and later SBF. Maybe the two operators are/were correct but definitely a missed opportunity and one that should be included in another edition.

Graph 1 (above) comes from Project Atlas, a new initiative coordinated by the BIS in partnership with several other central banks. Figure C is likely something the authors would find of interest.

On p. 84 they write:

And given the general lack of liquidity in crypto markets—that a billion dollars’ worth of Ethereum isn’t redeemable for a billion dollars of cash without tanking the market—that meant that the crypto economy was dancing on a knife’s edge. One bad move by a major player might tip the industry into freefall. An illiquid market based on irrational speculation, it was all essentially vapor.

Well that could be true, what references did they cite? Nothing in the works cited at the end. That which is asserted without evidence can be dismissed without evidence.

On p. 85 they write:

Crypto critics call it “hopium,” and it’s a powerful drug.

What is a crypto critic? Who was the first crypto critic to call it hopium? It might actually be difficult to identify because there is a French automobile brand called “Hopium” founded in 2019. I believe the first time I heard the term “hopium” as it related to coins – was after the 2017 bubble imploded. People were making memes of “copium” and “hopium” but perhaps I am misremembering and it was more recent.

On p. 85 they write:

As OG crypto critic David Gerard would say, “You lost your money when you bought the tokens.”

Gerard may have said that and he might be right but let’s not hand over trophies to people who market themselves as “crypto critics” or call someone an “OG” when they are not.51

Whose shoulders did Gerard and others stand on? In addition to J.P. Koning and Angela Walch (mentioned before) there was Ray Dillinger. If we were to make a chronological argument, then a “godfather” of ‘crypto critics’ (in the English-speaking world) is professor Mark Williams. Who is Williams?

Williams’ op-ed appeared about 6 days after the price of bitcoin peaked. Despite arcuately describing its volatility, some Bitcoin promoters labeled him “Professor Bitcorn.” Why wasn’t he mentioned in this book?

In April 2014 Williams even provided public testimony at a U.S. House committee. Definitely worth referencing in the next edition.

And since we are being very specific, if the authors really wanted to label something “OG” then we might want to hand a trophy over to the annual Financial Cryptography and Data Security conference whose attendees include a crossover from the cryptocurrency and blockchain world (remember, “crypto” used to mean “cryptography.”) What kind of crossover? Just look at the 2023 program.

Inexplicably the authors continue this chapter and include an unrelated topic: a visit to a Bitcoin mining facility.

You know what is a tad weird? The authors are about to visit the largest U.S. based Bitcoin mining facility – operated by Riot Blockchain – and they miss the opportunity to speak with Pierre Rochard. Yes, that Rochard – the co-creator (popularizer?) of the “no-coiner” pejorative works for Riot. In fact, Rochard hasn’t missed a beat, pushing out nonsense that is indistinguishable from satire (he’s the one walking in a field with a hard hat).

On p. 85 they write:

If you drive for about an hour northeast from Austin, past the scrub brush and the quota-driven traffic cops, you reach a former Alcoa aluminum smelting plant on the outskirts of the tiny town of Rockdale (pop 5,323). It was the kind of old-school corporate holding that’s so big they built a lake to service it (Alcoa Lake). The facility, sold in 2021 for $240 million to an obscure real estate firm, had mostly gone fallow. But its mere existence—the mothballed warehouses, silent smokestacks, miles of fencing, the power substation on site—was a reminder of a not-so-bygone era when large industries operated in the United States and factories, perhaps even staffed by decently compensated union workers, actually made stuff.

This is good prose, this part of the chapter is pretty good. Readers deserve an entire chapter – heck, a whole book – discussing the zaniness of the mining world. For instance, Riot earned $31 million in energy credits from ERCOT (the energy regulator in Texas) in the month of August. That is right, a Bitcoin mining company got paid not to mine. This isn’t a brand new subsidy either and it deserves (ridicule!) mention in the next edition.52

Continuing on p. 86 they write:

Money was coming in, ambitious building projects were planned, people were getting steady construction work—all the supposed hallmarks of basic economic progress. But to what end and at what cost? I had come to Whinstone to find out, accompanied by Jacob and David Yaffe-Bellany, a reporter from the New York Times who wanted to write a piece on me.

We never did find out to “what end” or “what cost” — we are left wondering. We have seen a widely circulated video inside one of the Riot’s facilities so that gives us some idea of how large, but the authors should have provided an answer to these. Also, was that a humblebrag?

On p. 87 they wrote:

We wanted to hear their pitch: how Bitcoin mining brought jobs, stimulated development, and would be an asset for the whole community. To hear that pitch, they asked us to sign what amounted to nondisclosure agreements. David, the Times reporter, assured us that he couldn’t, his job wouldn’t allow it. None of us felt comfortable. What was the point of signing something that might limit our ability to write and report on what we might see? It made no sense to do so when we were going in with cameras—if they were going to let us in with cameras.

Oddly enough, we as readers, never did get to hear that pitch described in words even after the authors did not sign the NDAs. What are the jobs numbers?

On p. 87 they wrote:

Eventually we confronted a more urgent reality: Jacob really had to pee. Standing practically cross-legged outside the car, his face radiated the barely withheld anxiety that comes after a long car ride after a morning guzzling coffee. I was a bit out of sorts, too. We were supposed to be featured in the New York Times as intrepid crypto critics, and here we were unable to get into our featured location while self-urination seemed to be a non-zero possibility.

Look I was born and raised in Texas, spent about 25 years there. And I fail to see how this passage is interesting. It’s like the marijuana consumption, probably should cut it out.

On p. 87 they wrote in parenthesis:

We’d met a lot of strident Bitcoin critics but not anyone interested in attacking a Bitcoin mine.

Well at least this time the authors provided a little nuance “Bitcoin critics” and not just “critics.” And if we were to guess why the site has the security measures described it is likely because Riot doesn’t want someone to come in and steal the mining (hashing) gear. Those are effectively money printers. The golden goose as it were.

On p. 88 they wrote:

We chopped it up for a few more minutes, and then, after the typical alchemy of bureaucratic authority parceling out permissions, we were told that we could go in the gates and drive to the main office. “I left my NDA in the bathroom,” said David as soon as we piled into the car. Jacob announced his paper was under his foot. Others had disposed of theirs quietly in their pockets. Either some Whinstone official had forgotten about the agreement during our time in the office or perhaps had been overruled. It didn’t matter. We weren’t signing anything. They waved us through the gate and we drove in.

I am not a huge fan of NDAs but I have signed my share of them, and/or my bosses have which made me bound by them (at time of employment). Readers have no idea what was in this specific NDA either. Maybe it was all just theater?

Either way how does it help the authors credibility to show that they will wiggle around to avoid signing an NDA? Just tell them you won’t sign an NDA and see what happens.

Pages earlier you mentioned turning off the video but keeping the audio on in the Mashinsky interview. Are you guys trying to do “gotcha” interviews in an industry filled with people (criminals) making cringy music videos?53

On p. 89 they write:

While I agreed that, everything else being equal, employment was a good thing, I couldn’t help but notice the flimsy underpinnings of this otherwise sturdy mining operation. This company was using enormous amounts of electricity to mine speculative digital assets to keep a zero-sum game of chance going. Texas’ notoriously over-worked electric grid, also known as ERCOT, had gone down after a winter storm in February 2021, contributing to the deaths of 246 people. Mining Bitcoin hardly seemed worth the potential harm to the population.

While I agree with much of this statement, I don’t think it is completely fair to connect Bitcoin mining with mismanagement by ERCOT in February 2021. Maybe that argument is stronger in November 2023 but 30 months ago this large facility was not fully operational.

Also, the authors should be clearer: Riot currently only contributes proof-of-work hashing for one specific chain, Bitcoin. Digital assets should probably be singular, not plural, in the next edition.

On p. 90 they write:

What benefit did any of this produce for the rest of us? Was it worth the cost? In 2021, the greenhouse gasses released to produce the energy consumed by Bitcoin and fellow networks more than offset the amount saved by electric vehicles globally.

This is a good point muddied by “fellow networks.” What are the fellow networks? For example, in my February 2021 paper I provided estimates not just for Bitcoin but also for Ethereum (pre-Merge), Litecoin, Bitcoin Cash, Monero, BSV, ZEC, and Dogecoin. Are these what the authors had in mind when they mentioned “fellow networks”?

On p. 90 they write:

It was all ridiculous, but I kept coming back to the same thing. Economically, the parabolic rise and fall of bubbles was well established. But what would crypto’s downfall do to this community?

This is a great question that is never answered. How many jobs does Riot contribute to Rockdale? How many jobs do Bitcoin mining (hashing) operations contribute to across the U.S.? It’s probably negligible but the authors raised these questions and never answered them.

Despite the issues with the nuances of mining, I still think this particular section could be the foundation for a good future chapter focused on proof-of-work mining in the U.S. To date no one outside the coin industry has written a long-form non-hagiographic explanation of how large hashing operators hone in on specific regions due to subsidies and/or acquisition of say, a retired coal power plant that becomes unretired. For instance, how Stronghold Digital Mining bought two languishing coal-fueled generating facilities in Pennsylvania and ramped up their production.

We have seen organized greenwashing from coin lobbyists such as Coin Center but only piecemeal pushback from investigative journalists. For instance, here’s one of the all-time greatest (leaked) RFPs:

Source: Twitter

The second edition has a lot of potential when they dig into what the lobbyists have tried to whitewash and greenwash. Environmentalist Ketan Joshi has documented some of these attempts.

Chapter 6: The Business of Show

This chapter had some interesting potential, to discuss the ‘Brock Chain’ (Brock Pierce)! The authors visited Bitcoin Miami, albeit the 2022 edition and not the arguably more-coke-filled 2021 edition. Alas, while they do discuss El Salvador at the end there is no mention of former Russia Today host, Max Keiser and his wife (Stacy Herbert), who are official advisors to Bukele… and was a bit bananas at Bitcoin Miami 2021.

Anyways, let’s start off with a humblebrag on p. 91:

On April 1, 2022, our months-long investigation into the world’s largest crypto exchange, Binance, was published in the Washington Post.

Their Washington Post article was good albeit a little short, clocking in at around 2800 words. And most of that Washington Post story is reused – word for word – in the first part of chapter 6 (specifically the bits about Francis Kim and Fawaz Ahmed). That’s perfectly fine and common by the way (I myself reused portions of articles and papers in one book). Readers looking for some more depth might be interested in reporting by Tom Wilson from Reuters who was actively investigating the same topics at the same time.

On p. 92 they write:

The second, and perhaps more important, reason crypto took off in China was to avoid capital controls. The official limit of $50,000 in overseas foreign exchange per year is an attempt by the state to restrict wealthy Chinese from moving their money out of the country. If you are a Chinese billionaire, there are numerous ways to get around this, but one of the less expensive ones is crypto. Either buy crypto with yuan and cash out into dollars or other currencies overseas, or perhaps better yet, invest in Bitcoin mines (often using electricity stolen from the grid) and then move the mined Bitcoin via crypto trading elsewhere.

They reference a 2020 article from South China Morning Post, but I think it is a bit of a stretch to make a couple of the specific inferences that McKenzie and Silverman do. For instance, the article does not mention billionaires at all or that Bitcoin mines “often use electricity stolen from the grid.” Maybe both of those are true, but neither are mentioned in the article. Scrolling through my archives, I quickly found one example in Hunan province.

In fact, the article specifically mentions how USDT became popular in China:

Ironically, Beijing’s ban actually fuelled the adoption of Tether in China. Chinese users started replacing the yuan with Tether as the de facto currency in cryptocurrency trades, purchasing it under the table from unregulated “over-the-counter” brokers.

I have no affinity for Tether LTD but that detail wasn’t mentioned in the chapter. Wonder why?

On p. 93 they write:

Binance allows its customers to employ enormous leverage—at one point up to 125-to-1 (now down to 20-to-1 for most customers, comparable to other exchanges). That means retail traders can gamble with far more chips than they actually bought. The upside is large, but so is the downside: At 125-to-1, for every 1 percent move, your one-hundred-dollar bet could net you a fortune, or wipe you out instantaneously. Kim was trading with 30-to-1 leverage. In mainstream financial markets, offering extreme amounts of leverage to retail traders—not accredited investors who must prove they have the funds to withstand a margin call—is not allowed

That is mostly accurate and fair but with one nuance: foreign exchange (FX) trading platforms do offer – and advertise – high leverage, even beyond 125x. For instance, according to Benzinga, at least three FX platforms allow higher than 125x leverage.  Whether cryptocurrencies / assets like bitcoin are the same as FX is a different matter, but Diehl et al., made the same error.

As of this writing, the global FX market is the largest most liquid market in aggregate (and filled with oodles of retail punters).54 This is not a defense of Binance rather it is to highlight how wording and nuance are important. High leverage is allowed in certain “mainstream financial markets.”

On p. 94 they write:

If that weren’t enough, Binance itself trades on its own exchange. In traditional markets, this kind of arrangement would never be allowed, as the conflicts of interest—and potential for market manipulation—are glaring.

This is a good point, and I agree with it. However contrary to the authors conviction, this kind of arrangement has been allowed at various eras in traditional markets: Glass-Steagall (which the authors briefly mention later) separated commercial banking from investment banking in 1933. Fast forward sixty six years later, in 1999, most of it was repealed. Some economists such as Joseph Stiglitz and Paul Krugman opined that this set the stage for the 2007-2008 financial crisis. And guess what, even after the financial crisis and a myriad of debates, Glass-Steagall was still not restored. Yes, even today, too big to fail banks still have these “glaring” conflicts of interest.

On p. 94 they write:

Imagine the New York Stock Exchange or Nasdaq taking positions on different sides of trades it facilitates. No financial regulator would allow it, for obvious reasons.

I agree with the thrust of their argument, even though it is not really accurate.55

What is incorrect? While the NYSE and Nasdaq do not custody user funds and in theory – only provide order matching – the parent companies of both are equity holders of a handful of clearinghouses in the U.S. 56

What would have been helpful in this book (and others post-FTX collapse) would be to describe the similarities and differences in clearing and settlement (C&S).57 These socially useful activities (C&S) are operated by systemically important financial institutions (SIFIs), which in the U.S. are overseen by the Fed Board of Governors. And at an international level, the Financial Stability Board (FSB). Post GFC, post-Dodd Frank we actually have a more concentrated set of SIFIs with conflicts of interest throughout the entire trade life cycle because of how interconnected ownership has become.58 One of the best articles that concisely describes this convoluted relationship is How a Lone Norwegian Trader Shook the World’s Financial System.

Again, I agree with the point the authors are trying to make, but they could have used a better example.

On p. 96 they write:

At one point, according to a screenshot of a chat with a Binance customer service representative that Kim shared, he was offered a voucher for $60,000 in Tether and another $60,000 in trading credits as an inducement to keep him on the very platform that he felt had robbed him.

Perhaps it is just me, but I do think the authors to describe “Tether” as both the unit-of-account and the issuer is confusing. USDT would have sufficed.

On p. 97 they write:

Liti staked $5 million to support the suit, which was being led by international law firm White & Case. Binance’s user agreement requires litigious customers to submit to arbitration at the Hong Kong International Arbitration Centre. With a minimum cost of $50,000 for the services of the court and a qualified arbiter, this clause in the agreement creates a prohibitive barrier for traders who lost a few hundred or thousand dollars seeking restitution. By pooling millionaire day traders with mom-and-pop claimants, and using the backing of Liti Capital, White & Case got around that hurdle.

What is the status update for this? The official website of the Steering Committee for the Binance Claim does not seem to have been updated for a couple of years. The last tweet from the account was September 18, 2021.

On p. 98 they write:

According to their analysis, Binance has become the perfect playground for professional trading firms to clean up against unsophisticated retail traders. Using state-of-the-art algorithmic trading programs and access to the latest market-moving information, these firms are both faster and more powerful than the regular Joes they compete against.

This is probably true, professional high frequent trading (HFT) operations have an edge versus retail in traditional finance so maybe the same odds (or worse?) in the coin world?

On p. 98 they write:

Ranger compared what was happening on crypto exchanges to the online poker craze of the mid-2000s. Back then, you had a sense of the stakes and could see who was beating you at the virtual table. “At least poker’s kind of honest,” said Ranger. “You’re losing to this guy named, like, Penis420, and he bluffed you out of your cash, and you’re here.” But for average crypto investors/gamblers trading on Binance, there was no such clarity. Across the table could sit an advanced computer trading program. Regular traders don’t stand a chance; when the professional firms easily outmaneuver them, they can get wiped out in seconds.

This passage is a little confusing. The poker analogy makes sense in poker but what persona are the authors describing in the last sentence? Day traders? Leveraged traders? How to “regular traders” who buy and hold and do not have leverage get wiped out in seconds? Maybe they gobbled up some junk coins?

On p. 99 they write in parenthesis:

Zhao himself said that Binance may eventually lose out to more nimble and harder-to-regulate DeFi, or decentralized finance, exchanges.

We are nearly a hundred pages in and still no cohesive explanation of what “DeFi” is or what examples of a decentralized exchange is.

On p. 99 they write:

It was hard to see how this “democratization of finance” was going to lead to a fairer economy rather than a more chaotic one, with a vast gulf between winners and losers. The liberatory rhetoric and experimental economics of crypto could be alluring, but they amplified many of the worst qualities of our existing capitalist system while privileging a minority group of early adopters and well-connected insiders.

This is a really good point, I agree with it. The one caveat I would make is that not every intermediary operator claims to be trying to “democratize finance” so a future edition should provide a specific name.

On p. 100 they write:

Surprisingly, the press passes actually came through. We received an official invitation to make a pilgrimage with the true believers.

Why was that a surprise? How many events / venues / interviews rejected press pass requests while writing this book?

On p. 100 they write:

Peter Thiel, the arch-capitalist fifty-four-year-old cofounder of PayPal, was throwing one-hundred-dollar bills from the main stage, trying to signify their unimportance. When members of the crowd rushed to grab them, Thiel appeared shocked. “I thought you guys were supposed to be Bitcoin maximalists!”

Welp, I chuckled at something Thiel said, time to call it a day.

On p. 101 they write:

But first, I wanted some merch. Across the sprawling Miami Beach Convention Center, the product and sales pitches ranged from free NFTs to getting in on the ground floor of the next ICO that seemed a lot like the last ICOs. A DAO promised an investment scheme to “democratize yachting.” Crypto mining machines sold for thousands of dollars each.

This chapter would have been solid if it simply described the crazy claims made by the kiosk participants. One nitpick though: which crypto mining machines sold for thousands of dollars each? Because Bitmain has sold hashing equipment for years that cost roughly that. Is that a lot or a little money?

On p. 101 they write:

If you ignored the formal hysterics and instead talked to regular folks milling about the conference, Bitcoin Miami sometimes felt like just another trade show. Big and energetic, full of boozy salesmen talking about how Bitcoin had changed their lives, with sponsorships adorning every surface, it was a Potemkin village of American consumerism and gambling addiction masquerading, in typically humble crypto fashion, as the future of the entire financial system.

Excellent prose!

On p. 102 they write:

“In Miami we have big balls,” said Francis Suarez, Miami’s Bitcoin bro mayor, who has toyed with the idea of abolishing taxes and funding the city through a nearly worthless token known as MiamiCoin.

The authors missed a golden opportunity to dunk on MiamiCoin, which lost more than 95% of its value in the span of 9 months and Suarez himself lost $2,500 on it.  

On p. 102 they write:

The local faithful, while zealous, were peaceful. No one yelled at me at the Bitcoin Conference or denounced me as a nonbeliever. Some people overflowed with solicitous generosity—there was at least one strip club invitation that I believe wasn’t a covert marketing stunt. The lack of open conflict was almost a letdown—and an indicator of my own latent narcissism, perhaps. Everyone was just excited to talk to some guy from TV that had cameras following him around.

You all should come with me sometime because I’ve had plenty of threats made against myself both online and offline! Someone even called my wife a chink. Classy! Also, why was McKenzie expecting open conflict?

On p. 103 they write:

There are many different ways one could define the crypto community, but the cynic in me would say there were none, not really. The majority of the people in Miami seemed only loosely tied to one another through commerce. They had few other bonds to speak of besides a utopian vision of financial freedom. To me, they were a projection of the timeless American fantasy: getting rich for free as quickly as possible. They flew to Miami to perform the rituals of multi-level marketing-style salesmanship and gladhanding. Also, there were parties.

Excellent writing.

On p. 103 they write:

From his home base in tax-friendly Puerto Rico, Brock maintained numerous crypto business interests and had become one of the industry’s most colorful spokespeople. I hadn’t expected to stumble upon him like that, but Brock—an insider with a sketchy past—was an ideal interview subject.

On the topic of crypto colonialism and Brock Pierce, readers might also be interested in an article five years ago: Making a Crypto Utopia in Puerto Rico. A new paper from Olivier Jutel, “Blockchain financialization, neo-colonialism, and Binance” is also a must-read.

On p. 104 they write:

The goal of interviewing Brock was to talk about Tether, the company he cofounded in 2014. While Brock had no current involvement with the company, we had heard from a source that he had at one point tried to buy back into Tether’s ownership group for the laughably low amount of $50,000. A source had also told us Brock dangled his political connections to the Trump White House in the hopes of getting back into the good graces of Tether executives like CFO Giancarlo Devasini.

Strangely, at least in the subsequent dialogue provided in the book: neither of those rumors were confirmed or denied. Did the authors ask him about buying back into Tether LTD in the video?

On p. 105 they write:

“I talk to more world leaders, probably, than our secretary of state,” he said. “I’m talking to forty-plus governments.” These statements seemed absurd, the kinds of exaggerations told by a particularly imaginative friend in grade school, but I smiled and nodded. It would take a little forbearance to eventually steer the conversation toward Tether.

Isn’t another logical follow-up: what are you talking to these world leaders about? Are these dialogues with other governments set up by Pierce’s team or solicited by the governments themselves?

On p. 105 they write:

“Why hasn’t Tether been audited?” I asked. His response was telling: He simultaneously claimed that they “probably” were working with a major accounting firm while bemoaning that they had tried and failed “hundreds” of times to get an audit. His reasoning was that no firm would touch them because of the lack of “regulatory clarity” around crypto, invoking a common industry complaint. For us crypto skeptics, this didn’t even rise to the level of cliché. There was plenty of clarity. It was just that companies like Tether tended to operate offshore and outside the ambit of American law. Tether’s executives, who never stepped foot in the United States, were reportedly being investigated by the Department of Justice for bank fraud.

I think it is a fair question that should be asked.59 But what did the authors expect Pierce to respond with? He’s no longer an insider, right? And while I mostly agree with the authors commentary, none of us are lawyers so maybe next edition a reference or quote from a lawyer would be better? Oddly, there is nothing in the reference section even though there are probably are a number of U.S. trained lawyers who would say something similar on the record.

Lastly, during his interview with Laura Shin, Zeke Faux provides an answer on the auditing question too, one that McKenzie or Silverman would probably disagree with. Can investigative reporters agree to disagree?

On p. 105 they write:

Given their role as essentially crypto’s unacknowledged central bank, with a few multimillion-dollar settlements already behind them, the company’s behavior potentially violated all manner of security, banking, and financial laws and regulations. Some even argued that by minting a dollar-denominated digital token, Tether was engaged in counterfeiting. As Jacob liked to joke, one sign that Tether was a fraud was that the company had never sued anyone for calling it a fraud. (As Tether’s leadership surely knows, the discovery process goes both ways.)

Maybe all of this is true, and maybe they are finally hammered by a series of law enforcement actions, but the question I ask Tether Truthers (USDTQ) is: why doesn’t the NY AG re-sue Tether LTD/Bitfinex?

Recall that there was a two year monitoring period after the settlement; the authors are alleging that Tether LTD continues to operate in a fraudulent manner during this time. Maybe that company is indeed up to no good. But the onus is on the authors to provide evidence in this book, and they don’t.

Matt Levine sorta does. If anyone claims to have direct evidence, shouldn’t the logical question be: have you submitted it to law enforcement and/or informed the CFTC and NY AG of possible violation of settlement terms? What about the fact that there is no major price discrepancy between CEXs that do not allow pegged coin trading versus those that do?

Also, why would Tether LTD sue Spencer Macdonald (Bitfinexed) or myself, for having publicly asked what the reserves were prior the settlement agreements with both the CFTC and NYAG? What would they get from either of us? BitPay never sued me after a couple of analytics-based posts. I don’t think a lack of lawsuits is necessarily a strong argument. 60

On p. 107 they write:

“Of innovation in general. I can’t really share the conversations I’ve had . . . National Security Council and things . . .” I may have involuntarily laughed at that point. Obviously Brock Pierce would not have attended an NSC meeting!

Great line, why would Pierce brag about something that didn’t happen? Bananas.

On p. 107 they write:

Risk-tolerant crypto traders and exchanges owners were stacking leverage on leverage (or fake dollars on top of fake dollars) to extract returns—in real dollars—on their investments.

The bigger story probably was undisclosed / unknown rehypothecation occurring at centralized lenders. But they only touched on Celsius so far. Also, what is a fake dollar? If the authors mean that collateral backing loans wasn’t there then that’s probably true, if so, would that be undisclosed rehypothecation?

Source: Twitter

The tweet above (Barry Silbert is the founder of DCG) did not age well. During the process of writing this review, the NYAG sued Genesis, DCG, and Gemini for allegedly defrauding investors.61

On p. 107 they write:

Tethers were being printed by the billions and issued to a very small group of important players like crypto mogul Justin Sun, who issued a token called TRON, along with sophisticated trading firms like Cumberland and Alameda Research, the Bahamas-based outfit owned by Sam Bankman-Fried, known in the crypto world (and now beyond) as SBF.

Would be helpful to have a diagram explaining the USDT minting / redemption process and who allegedly participates.

For example:

Source: OfNumbers

Above is a rough stab at a flow of funds of user behavior in April 2015. What do those flows look like in 2023?

On p. 107 they write:

Those players then gambled with the Tethers. The supposedly democratizing, decentralizing currency of the future had come full circle: a way to enrich the few at the expense of the many, in opaque games of chance the public couldn’t hope to understand.

This is a strawman. You don’t have to like cryptocurrencies or blockchains but portraying USDT – which is centrally issued – and Tether LTD as “democratizing and decentralized” is disingenuous.

The final few pages of this chapter are great, the authors interviewed two exiled Salvadorans in Miami: Mario Gomez and Carmen Valeria Escobar. Rather than quoting portions here, I do recommend grabbing a copy of the book for those final interactions plus the next chapter.

Overall this chapter had some good gems, such as the interview with Brock Pierce and the Salvadorians. But the authors also made some unforced errors that were a real distraction, such as not knowing that there are existing conflicts of interest within U.S. banks that regulators continue to allow (post Glass-Steagall).

Chapter 7: The World’s Coolest Dictator

This was the best chapter in the book and unfortunately it was also one of its shortest, clocking in at just 12 pages. While it weaves some good prose in with first-hand reporting, the authors still use terms like “coiners” without providing a definition.

Let’s start off with the obligatory reminder that one of the authors was/is a TV star. On p. 113 they write:

He was easy to spot. He held a placard with the alias I use when traveling, Don Drysdale, and wore a Batman T-shirt. Napoleon turned out to be a fan of Gotham, the Batman prequel TV show I starred in that centered on a young police lieutenant (and future commissioner) named Jim Gordon.

Most of the remaining part of the chapter is significantly less cringy and the description of Bukele and how he rose to power is pretty solid.

For instance, on p. 119 they write:

Unfortunately for his people, the young leader refused to accept defeat, instead doubling down on his Bitcoin wager. Bukele changed his Twitter handle to “world’s coolest dictator,” and his profile picture sported laser eyes favored by Bitcoin maximalists, or maxis, who believed that Bitcoin was the one true cryptocurrency and the rest imposters, mere shitcoins. Bukele bragged that he bought Bitcoin, using the state treasury, on his phone while sitting on the toilet.

This is the closest we get to a working definition of a “Bitcoin maximalist,” it is not horrible but does not really encompass the nuances that one the first maximalist extolled.62

Pages 120-122 have some solid interviews with Salvadorians who ended up on the wrong side of Bukele, including a family who lived in a house that unfortunately would be demolished to make way for the new airport for Bitcoin City. What is Bitcoin City and why does it need an airport? Read the book.

One nitpick (timing wise) has to do with one of their comments on the bottom of p. 122:

By the time we visited in May 2022, the issuance of the bond had been delayed, seemingly indefinitely. Despite the ill-conceived scheme, there were still consequences for the local population.

To be fair, if I were in their shoes, I probably would have written the same thing. However following the book’s publication there was a 180% rally in El Salvadorian government bonds. The following month, in August, Bloomberg ran a headline Bitcoin-Touting Bukele’s Bond Rally Draws JPMorgan, Eaton Vance. And as of this writing, the rally has not cooled off.

On p. 123 they write:

Despite the tense environment, Wilfredo welcomed us to his home with open arms. I immediately noticed what I would come to understand as his signature expression: a broad, easy smile revealing several gold-capped upper teeth. As we fumbled to communicate, first through my poor Spanish and then by way of Nelson translating, he was patient and wry with his replies. Here was a famous Hollywood actor who wanted to film and interview him, to tell his story, yet no one in his own country could tell him when he would be kicked off his land or where he might go.

As mentioned in the beginning of this review, McKenzie’s remark comes across as a little tone deaf. Why not use your notoriety to stop Wilfredo’s home from being demolished? The purpose of the book – according to the Author’s Note – is to condemn those who committed fraud. And what about helping the victims too?

Overall a decent chapter and one that could be expanded in a future edition or even used as a standalone spinoff.

Chapter 8: Rats in a Sack

This is one of the weaker chapters because it relies almost entirely on repeating news from other sources. And unlike the previous chapter, nothing really knew is revealed that we couldn’t learn from other books or mainstream news sources.

There is also an introduction to some important concepts that once again, are not explained.

For instance on p. 128 they write:

The two were bound together via an arbitrage system designed to keep Terra, a so-called algorithmic stablecoin, at one dollar.

What is an algorithmic stablecoin? Are all algorithmic stablecoins the same are are there differences?

On p. 128 they write:

Or so went the plan. There was also a “staking pool” called Anchor, which was also created by Do Kwon and his company, Terraform Labs.

What is a staking pool? Is that the same thing as a validating pool used by some proof-of-stake networks? Or are there differences, like a whitelist maintained by a 3rd party?

On p. 128 they write:

Sure, there was the occasional bit of criticism. The economics of Terra, Luna, and Anchor were clearly Ponzi-like, involving the circular flow of money common to such schemes. Where was the 20 percent return on Anchor coming from?

Strangely, with so much written on Anchor from other sources, they never answer their own question. The short answer is the 19.5% – 20% yield marketed for Anchor was an unsustainable subsidy based on a combination of ANC (the governance token for Anchor) and bLUNA staking yield. Here’s my long form explanation of what happened to Terra last year: Not all algorithmic stabilization mechanisms are the same.

On p. 129 they write:

That the whole thing smelled like a Ponzi was no secret, but rather a fact discussed by some big industry names on Twitter, podcasts, and in other media.

Probably the most prominent Terra critic during that time was a trader, Kevin Zhou, who publicly described the fundamental issues of UST (and ANC) with just about anyone willing to listen. A second edition should include him or at least refer to his interviews.

On p. 129 they write:

But on Mirror, people weren’t trading real stocks in a regulated market. They were trading synthetic copies of real stocks on a market overseen by, well, Do Kwon.

Even the SEC lawsuit does not use this as an argument, because it is not true. Mirror was many things but it was not “overseen by Do Kwon.”

On p. 129 they write:

Can you imagine the gall it takes to set up a fake copy of the New York Stock Exchange, one that, given its shaky underpinnings and nonexistent oversight, might attract who knows what kind of shady players? And then to refuse to even account for it?

Again, this is not the argument the SEC made when it (1) subpoenaed Terraform Labs and Do Kwon and (2) sued them.

This is important because it hurts the credibility of the authors: right now there are more than a dozen stock exchanges operating in the U.S. These stock exchanges are not all the same, some offer traders different functions and different products. Some purposefully attempt to mitigate the advantages of HFTs. Some process significantly more volume than others.

But a key similarity is that say for equities, a share of Apple stock, none of these exchanges has a monopoly as the trading venue for that stock.

In contrast, some exchanges, like the commodities-focused ones, have a monopoly on specific futures contracts: you can only trade it on one exchange. For example, the WTI Crude futures contract that is frequently quoted in financial press is only tradable at the New York Mercantile Exchange (NYMEX).

The SEC sued Terraform Labs for selling unregistered securities. Not for making a new trading venue.

And in June 2022, a U.S. court rejected Do Kwon’s appeal:

The court stated that business arrangements with U.S. companies to trade assets from the Mirror Protocol justified the SEC’s investigation, where “a $200,000 deal with one U.S.-based trading platform” was made. Furthermore, the Terraform Labs “indicated that 15% of users of its Mirror Protocol are within the U.S.” during negotiations.

It’s unclear why the authors thought the appropriate analogy was a “fake copy of the New York Stock Exchange” when that type of example does not appear in the complaint. 63

On p. 130 they write:

Almost a year later, one LUNC was worth about one thousandth of a cent, but the token’s overall market cap was still in the top fifty of all crypto tokens. That signaled two things: Crypto was dominated by what were essentially penny stocks, and even in a disaster like TerraLuna, a lot of people hadn’t given up hope. They were holding on.

To be fair to the coin world: penny stocks originated the pejorative, penny stocks. Maybe the next edition can use “Lunatics” as a coin-specific pejorative?

On p. 132 they write:

In the midst of all this, Terraform Labs’ entire legal team quit at once.

The authors missed the opportunity to find specific tweets to dunk on, such as one lawyer who mentioned how they lost everything including their significant-other… just weeks after bragging about how wealthy they now were.

On p. 132 they write about the cascading collapse of centralized lenders in the wake of Three Arrows Capital (3AC) insolvency:

Blockchain.com, a crypto exchange, was due $270 million. The contagion had spread.

The authors were pretty miserly when it came to graphics and images, one they should include in the next edition is this whammy:

Source: Twitter

It is a self-attestation from Kylie Davies, co-founder of 3AC to Blockchain.com. This was basically all the due diligence the lender did. Check out my March presentation for more doozies.

On p. 134 they write:

After devouring tech talent the previous year, big exchanges like Crypto.com (usurpers of the naming rights to Staples Center) and the Winklevoss twins’ Gemini conducted multiple rounds of layoffs, sometimes without any public announcement, in just a few months.

Usurpers? They are naming rights not a birth right and Staples had a 20 year deal beginning in 1999. What should the stadium be called?

On p. 134 they write:

One of them was BlockFi, another crypto lender that offered huge, and unsustainable, interest rates on customer deposits.

Pretty easy to say after the collapse of the bubble. For what it is worth, I publicly questioned BlockFi’s yield in 2019 and got lampooned by Andrew Kang, Nic Carter and Rob Paone.

Source: Twitter

Deep analysis!

Spongebobbed!

What were the books authors doing in March 2019?

It is all too easy to come after the bubble and publish a mostly second hand account about “huge and unsustainable interest rates” after the lender filed for bankruptcy, the harder part was publicly discussing where the yield comes from prior to the bubble.

Source: Bloomberg

On p. 134 they write:

The curtain was being slowly peeled back through a steady diet of leaks, bankruptcy filings, and the first wave of lawsuits. Important revelations were emerging, some of which confirmed earlier criticisms from skeptics.

What specific criticism? Which “skeptics”? Please provide the receipts.

On p. 135 they write:

The entire crypto economy depended on Tether’s stablecoin—it was by far the most traded token each day. But its murky operations, uncertain financial backing, and bloviating executives—to say nothing of those executives, like CEO Jean-Louis van der Velde, who were almost never heard from—didn’t seem like the makings of an organization that could weather a major industry downturn. At some point, I believed, the bill would come due for Tether, and it would be one it couldn’t afford to pay.

The first sentence is probably true for some (most?) spot exchanges, but not necessarily for on-chain trading.

For instance:

Source: The Block

The color-coded bar chart (above) visualizes the different on-chain volumes of USD-denominated pegged coins. While USDT-based volume is large, USDC is often much larger. Strangely the book doesn’t discuss other centrally issued pegged coins at all.

On p. 137 they write:

And all the while, scams, rug-pulls, hacks, and Potemkin crypto projects proliferated, adding billions more to the toll that comes with being part of the web3 community.

Since “web3” is never formally defined in the book, this dunk doesn’t really bite. Are readers supposed to assume anything blockchain-related suffered from billion dollar scams and hacks during this time frame? Or did the damage primarily impact intermediaries? Where’s the shade for Certik?

On p. 137 they write:

Perhaps the most disturbing part of the crypto crash of the spring of 2022, which wiped out more than $2 trillion in notional value and wrecked the nest eggs of everyday traders all over the world, was the utter lack of humility shown by the industry’s leading figures. Materially, most of them were fine: Their predictions might have been ludicrous, and perhaps they lost oodles of money—but it was usually someone else’s money, and they had made enough insider profits along the way to simply hop over to the next project, should the current one fail. Many had also bought in early to Bitcoin, which still held some value, even if it was 60 percent or more below its peak.

There is a lot to unpack here. I agree with the authors, that a lot of the shills and prominent promoters lacked humility. Coinesia writ large.

But the authors are playing fast and lose with the word “most.” How many were fine? How many bought bitcoin early? How many had made “enough insider profits”? I’m sure some coinfluencers check all of those boxes, but readers are never given even a ballpark estimate.

On p. 138 they write:

As trillions of dollars of wealth evaporated

If we take “market cap” at face value, the aggregate coin market cap peaked just north of $3 trillion in November 2021 and dropped to around $1 trillion where it currently gyrates. Saying “trillions” seems like an embellishment.

On p. 139 they write:

The truth is that most of the scammers and con men were tolerated—or even encouraged—by the wider crypto industry because there was no economic incentive to do otherwise.

This is a fair point. Though not everyone encouraged or tolerated these bad actors. Some even publicly called them out.

On p. 139 they write:

While I had been shouting to the Twitter rafters trying to warn people of the impending financial disaster I sensed looming, seasoned academics were articulating a more nuanced version of the same.

Buddy, you didn’t start tweeting about any of this until after the bubble peaked in 2021. The time to warn people was in 2018-2019.

On p. 139 they write:

Hilary Allen, professor of law at American University, wrote a paper in February 2022, just three months before the crash, referring to cryptocurrency and its assorted DeFi products as effectively a new form of shadow banking.

Allen’s paper, while sincere in its concerns, made several major errors.64 A number of people, including myself, attempted to explain some nuances that she missed. For instance, she claimed that lending protocols effectively provide unlimited leverage. However, in practice not only do all of the major lending protocols implement a form of whitelisted assets but each of those assets has a loan-to-value cap.

For instance, p. 938 of her paper is factually incorrect in a couple of areas, she did not incorporate the suggestions from experts. That part of the paper should not have passed peer review. Empirically, while many centralized lenders collapsed in 2022, none of her predictions she made came to pass specifically regarding DeFi lending protocols. 65

On p. 139 they write:

Broadly speaking, shadow banking refers to a company offering banking services while avoiding banking regulations.

The authors are finally discussing what a shadow bank is. If you recall, in the first chapter they mention PayPal but fail to mention it was one of the first prominent fintech “shadowbanks.” A number of centrally-issued pegged coins issuers (like Tether LTD) have modeled their operations after the path pioneered by PayPal, as a shadow payment and shadow bank provider. None of that is mentioned by the authors (or Allen).

On p. 140 they write:

We know this happened during subprime, but as Professor Allen points out, the leverage in crypto, especially DeFi, is far higher. “The amount of leverage in the system can also be increased by simply multiplying the number of assets available to borrow against,” she writes. “That is a significant concern with DeFi, where financial assets in the form of tokens can be created out of thin air by anyone with computer programming knowledge, then used as collateral for loans that can then be used to acquire yet more assets.”

Allen and the authors are not only incorrect but they do not even provide a number, what is the leverage? That which is asserted without evidence can be dismissed without evidence.

Specifically the part where Allen is wrong is claiming that any amount of tokens can be created out of thin air and used as collateral for loans.66 In practice, only about thirty different coins and tokens have been whitelisted on DeFi lending protocols such as Aave or Compound.

Fun fact: the authors never mention specific lending protocols in the entire book.

On p. 140 they write:

The people behind crypto coins can create endless amounts of fake money. Crucially, the exchanges themselves can also do so, in the case of coins like FTT (FTX) and BNB (Binance). If folks can use that fake money to borrow real money, that’s a problem, as the leverage is potentially unlimited.

This is absurd.

If the authors were right, then none of the centralized lenders would have gone bankrupt last year because they would have just created endless amounts of fake money and continue to lever up and up. They could not because there is no such thing as unlimited leverage in either DeFi or centralized lending.

Why make this up? There was real provable criminal activity taking place, why resort to exaggerating like this?

This again reminds me of another evergreen tweet from Matthew Green:

Source: Tweet

On p. 142 they write:

Crashes happen in regulated markets, but at least there is some flexibility built into the system—whether it be negotiations between the parties, court cases, or even government bailout—that can mitigate the damage. At the end of the day, licensed banks in the United States are backstopped by a trusted third party, the US government. Cryptos are famously trustless, so no such third party exists. Not only that, but rigidity lies at the very foundation of crypto itself in the form of so-called smart contracts.

This is a pretty shallow explanation of how the U.S. financial industry is overseen and regulated by different state and federal regulatory bodies. Sure due to time and space constraints the authors need to be brief, but there is no delineation between state-chartered and nationally chartered banks. Or the role that the FDIC or OCC play. Or how in times of crisis the Federal Reserve acts as the lender-of-last resort. Or what role international bodies, such as the Financial Stability Board, play “at the end of the day.”

Also cryptos, which by now is the catch-all term the authors use to capture all cryptocurrencies / cryptoassets, are only “trustless” in the on-chain realm (assuming the chain is actually decentralized). Most of the criticism in this book, so far, seems to be around activities of off-chain intermediaries such as centralized lenders.

On p. 142 they write:

Smart contracts are basically small computer programs designed to execute their functions immediately, without the interference of a financial intermediary, a regulator, a court, or the parties themselves. The irreversibility of the blockchain—it’s an immutable ledger that can only be added to, never subtracted from—and the smart contracts built around it means DeFi is far more rigid than TradFi. Most actions, once performed, cannot be undone. When an interconnected system falls apart, this is not a good thing.

I wrote an entire (outdated!) book in March 2014 on this topic and the definition above is superficial at best. For instance, smart contracts do not have to execute all of their functions immediately. On permissioned chains – or even permissionless chains – intermediaries can even play a role. In fact, that’s precisely what real world asset (RWA) issuers due via black listing and white listing of addresses such as Aave Arc.

When the authors say “DeFi is far more rigid than TradFi” that could be true but they do not follow-up with any evidence. That which is asserted without evidence can be dismissed without evidence.

For instance, you would think an easy slam dunk example they could provide is the fallout from The DAO hack in 2016, such as a hard fork. But that famous hack is not mentioned anywhere in the book. Are the authors aware of what happened? If so, surely that would be a good way to steelman their view in the next edition.

On p. 142 they write:

Complexity leads to fragility. The more complicated the financial mousetrap you build, the more likely it is to fail.

What evidence or source do they cite to back up these claims? Nothing. They are just opinions. That which is asserted without evidence can be dismissed without evidence.

On p. 142 they write:

Blockchain, consensus algorithms, smart contracts, and cryptographic signatures are all real human creations whose value we can debate. As individual components, they may all have positive attributes, but combining them together in a more or less unregulated marketplace has become self-evidently problematic. Unless, of course, you were just trying to use that complexity as a smokescreen to commit fraud.

If a large commercial bank, such as J.P. Morgan were to start using smart contracts for a blockchain-based project, does that a priori mean that JPM is “using that complexity as a smokescreen to commit fraud”? That is how weak the authors arguments have become in this book.

Onyx may fail, but it serves as a counterfactual to the a priori arguments used by the authors. Launched in 2020, this blockchain-based project from J.P. Morgan exists. Is the bank using it to commit fraud? Who knows, maybe the authors could weigh in.

On p. 143 they write:

Remember my initial thesis: When a bubble pops, the most speculative things fall fastest. Since crypto was entirely speculative, the investment equivalent of gambling, it was bound to go poof when the Fed started raising interest rates.

Perhaps he tweeted it but it is unclear when McKenzie publicly stated this thesis. I actually partially agree with it. But without receipts, he can’t really do a victory lap.

On p. 143 they write:

On March 17, 2022, seeking to counteract inflation, the Fed raised interest rates by a quarter point (or 25 basis points if you want to sound fancy). On May 5, they raised half a point and the carnage began. On May 8, crypto had a nominal market cap of $1.8 trillion. By June 18, it was $800 billion. A trillion dollars evaporated in less than six weeks. The joke was the lie that it had ever been there in the first place.

The whiplash is strong here. Just 13 pages earlier the authors chronicled the collapse of Terra which led to a cascading collapse of centralized trading entities (like 3AC) and lenders (such as Celsius). No one, including the authors, have connected the collapse of Terra with the rise in interest rates. This is a spurious correlation.

Now I would agree with part of the authors arguments that in November 2023, with rates at 5.25%, it is likely that “risk free” investments (such as U.S. Treasuries) are attracting some speculative funds that would otherwise go into riskier assets like cryptocurrencies. But the implosion of Terra – and the subsequent unwind and cascading domino effect onto centralized lenders was mostly self-imposed due to poor risk management (e.g., rampant rehypothecation). In other words: Jay Powell and the Board didn’t pop the bubble, the Board just has stymied that spate of exuberance for now.

On p. 144 they write:

Democratic politicians were taking huge donations from the crypto industry—most notably, from Sam Bankman-Fried—and spending far too much time with industry lobbyists. (We saw the photos on Twitter before you deleted them, guys.)

This is one of just a small handful of times the authors mention coin lobbyists which is a little strange considering how much air cover the coin lobbying industry provides.

Not only did the authors not name names, they did not even reference the Tweet or the date, here it is:

Source: Twitter

Mark Wetjen never registered as a lobbyist for FTX which he is required by law to do (see the Lobbying Disclosure Act). This is considered a big no-no. Wetjen was also on the advisory board of Coin Center as of ~3 years ago (unclear when the lobbying org changed it). Following the collapse of FTX, Pham deleted the picture and Wetjen deleted his Twitter account.

On p. 144 they write:

But crypto, in practice, was nearly always the opposite of what it claimed to be, so of course it ended up becoming a tool for political influence. And because crypto was foremost a way to get rich, crypto investors celebrated the billionaires, like SBF, who were showering politicians with donations in order to legitimize crypto and shape its regulatory future.

This is a great point.

On p. 144 they write:

The previous fall, Bitfinex’ed told us the crypto industry was vanishingly small, controlled by only a handful of players. At the time it seemed far-fetched, but the more bankruptcy filings forced the opaque sector into the light, the more he was proven right.

Unless Macdonald named names, this is just a he-said-she-said. For instance, on October 16, 2021 Macdonald DM’ed me that “Even disclosure of reserves can be catastrophic” and nine days later that “Get ready to buy me that scotch don’t worry I’ll share.”

I have no affinity for Tether LTD or Bitfinex but Macdonald’s predictions above were wrong. And he didn’t even buy me the scotch he wagered.

A couple of times he was, that’s why I stayed in touch with him. But he ended up blocking me for holding him to the same standard we all hold promoters: verify don’t trust. Maybe Tether LTD’s attestations are bogus, maybe they operate in the same fraudulent manner as they did in 2016-2018, but the onus is on Macdonald and others to provide that evidence. And right now, none of the “disclosure of reserves” has been catastrophic.

On p. 145 they write:

Crypto critics and good governance advocates worried about Bankman-Fried’s growing political influence.

Specific examples before 2022? Such as?

On p. 146 they write:

“Help you avoid things that won’t age as well.” It wasn’t the first time a powerful person had tried to shape our reporting, but few were higher on the food chain than SBF. As in all relationships like this, the important thing was to not succumb to that influence, however it might be exerted. As a newly minted journalist, I had begun to realize that competing agendas were all around me, that sometimes we had to mingle with some unsavory people in order to find the truth while still keeping our ethics intact.

This is hard to buy because one of the things readers (at least U.S.-based readers) are aware of is Hollywood entertainers are represented by an agent(s) and have connections with PR firms whose goal is to help promote the entertainer in a flattering light in order to land the next big gig. Competing opinions and agendas are all around Tinseltown, they make movies about it.

On p. 146 they write:

At the same time, I realized something: If these crypto bros were really as cocky as they appeared to be, maybe stirring some shit up on Crypto Twitter would yield results. To use a poker analogy, why not splash the pot a bit, piss some people off? On May 14, I fired off a tweet egging them on: “Anyone in the crypto industry wants to come at me, feel free. Fwiw, I have spent 20 years in showbiz, I can take a punch. Just a couple words of advice: don’t miss.”

It’s nearly impossible to McKenzie seriously since he openly admits to shitposting on social media to trawl for engagement. That is what Instagram influencers do for more attention, not a serious investigative reporter. Zeke Faux didn’t, that’s your peer.

All in all this was one of the worst chapters in the book primarily because it relies on and amplifies Hilary Allen’s false predictions. And also because the authors continue to make a priori arguments instead of evidence-based ones.

Chapter 9: The Emperor is Butt-ass Naked

Despite the adolescent chapter title, the chapter is one of the better ones. Unlike most chapters, this one involved some first-hand reporting on FTX and Sam Bankman-Fried. For readers unfamiliar with SBF, the chapter does a decent job of painting the scene. But for those already steeped in the lore surrounding SBF, nothing new is really revealed.

But there were still a number of unforced errors made by the authors who used unnuanced language.

For instance, on p. 151 they write:

Hong Kong benefited from being close to mainland China, where cryptocurrency had exploded in popularity, due in no small part to the desire of wealthy Chinese to avoid state capital controls.

This may be true, but what is the reference or citation for this? Nothing in the back of the book. If the authors are relying on the South China Morning Post article from earlier, recall it did not specifically mention wealthy people (millionaires or billionaires). Again, anecdotally I think it could be true, but the burden of proof rests with the authors.

On p. 152 they write:

The first was potential conflicts of interest. Sam owned an exchange and a trading firm that operated on that exchange. Imagine if J.P. Morgan owned an unregulated version of the Nasdaq. What was stopping him from manipulating the value of assets on his exchange via Alameda and pocketing the proceeds?

I agree with the thrust of what the authors are saying, but it is not a particularly good example. Recall earlier the discussion around revoking Glass-Steagall. Today J.P. Morgan operates the largest commercial bank in the U.S. which is fused with an investment bank.67

In 2015, J.P. Morgan paid a combined $307 million fine to settle cases with the SEC and CFTC, admitting wrongdoing in part because certain banking units failed to tell clients it favored in-house funds, clear conflicts of interest. In 2020, J.P. Morgan paid $920 million to settle DOJ, SEC and CFTC charges of illegal market manipulation or “spoofing” in the precious metals and Treasury markets.

If the authors were looking for a large unblemished regulated financial institution, there probably is none. So the next edition could just describe why these “conflicts of interest” are abused by CEX operators.

On p. 152 they write:

The second was his company’s deep ties to Tether. In November 2021, Protos, a crypto media company renowned for its skepticism, revealed that Alameda Research was one of the largest (perhaps even the largest) customers of Tether.

Strangely there is no link or reference to the Protos article. Also Protos is sometimes hit-and-miss. While I have found myself nodding in agreement with a couple of their op-eds, they also have a notable few duds.

(1) This past summer they published a byline-free xenophobic article: Uncovering Ethereum’s close ties to Chinese money.68 One of the shadowy reasons is because Vitalik Buterin’s interest in speaking Chinese! Since I worked in China for five years and my wife is Chinese just waiting for a xenophobic hitpiece to drop.

(2) A year ago, Protos published the “Tether Papers” which they billed as being as important – and revealing – as the Paradise Papers. Upon closer inspection it was a dud because the authors – some of the same people that McKenzie and Silverman put on a pedestal in this book – did not reveal anything about market makers you couldn’t already get from a subscription of The Block Pro or Messari or The Tie Terminal. In other words, the investigation was standard market research wrapped in a cloak-and-dagger marketing foil.

On p. 152 they write:

The notoriously shady stablecoin company had printed $36.7 billion for Alameda. We’re supposed to believe Alameda gave over $36 billion to buy thirty-six billion Tether? Where would Alameda have gotten $36 billion from? According to public reporting, they had raised a few billion from VC firms and others, but nothing like what Protos found. If Alameda didn’t give Tether the full amount up front, how did the arrangement work?

These are good questions, none of which are answered anywhere.69 The next edition should explore how this arrangement worked.

The line chart (above) visualizes Alameda’s balance on FTX for the duration of 2022.70 It is negative for all but one day. A second edition should include these types of charts to help readers understand the magnitude of loses.

On p. 152 they write:

The ties between Tether and FTX/Alameda went even deeper. Daniel Friedberg was the former general counsel of FTX, and now its chief regulatory officer. He once worked alongside Stuart Hoegner, the general counsel of Tether, at Excapsa. Recall that Excapsa was the holding company of Ultimate Bet, the online poker site that had a secret “god mode” where insiders could see other players’ cards. So FTX/Alameda’s top lawyer worked with Tether’s top lawyer at the parent company of the card cheating website. Huh.

This is guilt by association and is lazy. I have no affinity for Stuart Hoegner, have even publicly stated so. I’m not going to carry water for Friedberg, but it is disingenuous to slam him without at least referencing his side of the drama.

On p. 152 they write:

Sam posed for a picture with CFTC Commissioner Caroline Pham and was a regular at CFTC offices.

What is the context for that photo? The authors do not provide a reference or link. Scroll up to page 144.

On p. 153 they write:

But banks in the Caribbean were often more willing to engage. And whether coincidentally or not, Tether’s bank happened to be nearby. Deltec Bank, the one run by the cocreator of the Inspector Gadget cartoon series Jean Chalopin, was based in Nassau. Chalopin boasted of assisting the Bahamian government in drafting the DARE Act.

This is an interesting point. I had not heard the part about Chalopin boasting before. Is there a reference or a citation I can learn more about this? Not in the back section unfortunately.

Also, when the authors say “banks in the Caribbean were often more willing to engage” how much easier is it to open an account in an Caribbean bank? Are there some stats to quanitfy this engagement level?

On p. 154 they write:

Still, I was glad he was there, as we quickly realized the room I had rented was too small to fit much more than the five of us in addition to the two cameras. But that also gave me an idea.

It’s never really addressed in the book but: why did the authors need to video tape every interview? There is no separate web page for Easy Money where readers are directed to for additional content, like video interviews. In fact, to the chagrin of SEO, there are at least two films with the same name (released in 1983 and 2010). Did the authors think it adds more weight or seriousness to the F2F interview? Also, as mentioned earlier, last year Alex Gladstein asked the authors to release the video interview of SBF, which they declined.

On p. 156 they write:

I pointed out that Sam himself had publicly stated that most cryptos were in fact securities. He tried to duck it, saying he hadn’t done a “thorough review of tokens 10,000 to 20,000.” This was a common talking point from crypto evangelists; they all knew (or should have known) the bottom 10,000 coins were the functional equivalent of penny stocks, with ownership of the coins heavily concentrated in the hands of a few whales who could manipulate the market for them. Nonetheless, Sam conceded that “the majority are maybe securities by count.”

Pigs flew past my window: I actually agree with SBF on his point. In the U.S., prosecutors conduct an investigation based on the facts-and-circumstances of a coin or token. At a minimum the authors should include a citation or quote from a U.S.-trained securities attorney, which SBF is not. It is unclear why the authors do not cite any attorney in this chapter when there are more than a handful of U.S. trained and practicing attorneys who likely agree with the authors position on the matter.

On p. 157 they write:

Sam pointed out that Bitcoin can only process 5–7 transactions per second. By his own admission, Bitcoin was “four orders of magnitude” away from accomplishing this. It was never going to happen. Finally we agreed on something! But then Sam pivoted. He argued that other blockchains were faster.

Why set up a strawman for the readers? This is not a secret. Historically it was Mike Hearn, the Bitcoin Core developer, who initially came up with that calculation. Subsequently, Hearn wanted to conduct a hard fork to increase the Bitcoin block size so that there could be more transaction throughput. Disagreement with other developers led to the famous blocksize “civil war” in 2015-2017.

And twice in two pages: SBF is right, there are other blockchains on this planet, some that are significantly faster than Bitcoin.

On p. 159 they write:

The Solana blockchain suffered numerous outages since its launch in 2020, with fourteen in 2022 alone. It also had an unfortunate tendency to be hacked, including a hack that would occur just weeks after our interview that cost users at least $5 million.

This is untrue. While there have been outages, as of this writing, the Solana blockchain itself has never been hacked. Since they did not provide a citation, a quick googling found that several thousand wallets were indeed compromised. But conflating wallets with the blockchain hurts their credibility.

On p. 159 they write:

I asked Sam what percentage of crypto was being used for payments. He agreed the “majority of people today are not using it as a payment method” but instead as a “financial asset.” He guessed “$4 billion” of crypto was being used as payments. Crypto’s market cap was roughly $1 trillion on July 20, 2022. Four billion would represent 0.4 percent of that number. Seemed pretty insignificant to me, but then again, could you even trust that Sam’s number—or the market cap number—was real? That gave me an idea.

That estimate could be correct. But of all the things to drill into with the SBF, why burn any oil on this? Central banks and universities researchers regularly publish surveys on the motivations of coin ownership.

For instance, in the process of writing this review:

Source: Twitter

But Tim, this survey was published after the book was done. Yes, but there are similar surveys published each year by different central banks, this wasn’t the first.71

Or more to the point, if the authors wanted to improve their argument, at a minimum they should have sliced some data: asked some analytics providers for flows into payment providers.

For example, in January 2015 I published a paper that included this line chart (below):

Source: Slicing Data

The dataset above came from the WalletExplorer dataset. Because BitPay reuses addresses, it is a visual of what BitPay has received over a two year time frame (2013-2015). It clearly shows that at the time, retail activity was not seeing huge growth that certain promoters claimed.

On p. 160 they write:

Sam expressed cautious optimism that eventually customers in Celsius and Voyager would get some of their money back. I was skeptical but I wasn’t there to argue bankruptcy law.

Fair point, but why argue about securities laws when he isn’t a lawyer either?

On p. 160 they write:

Eventually, Sam got back to the original question. He estimated that there were $100 billion of stablecoins left and that they were “roughly backed” 1:1. (No, I don’t know what “roughly backed” means either.)

Since he is actively responding to your DMs, why didn’t you ask him a follow-up question later?

On p. 161 they write:

“You could say the same of stocks,” Sam said. I pointed out I can go in and out of stocks in seconds via an app on my phone.

This is not particularly good argument because it implies to readers that McKenzie is talking about market orders, which over the past decade are not necessarily good for retail on any type of trading platform. This connects with payment-for-order-flow (PFOF), a controversial business practice implemented by Robinhood (and other fintechs) with its high-frequency trading partners such as Citadel. Robinhood earns the majority of its revenue from PFOF which isn’t necessarily good for the users. Is this the app that McKenzie is referring to?

On p. 161 they write:

We moved on to stablecoins. SEC Chair Gary Gensler called stablecoins the “poker chips at the casino,” I said. Tether was the biggest stablecoin in terms of trading volume by a country mile. “Your company Alameda is one of Tether’s biggest clients.” “Alameda does create and redeem Tether. We’re one of the larger ones doing so.”“Okay, so there was an article from Protos, the crypto publication, from last year that said that Alameda and Cumberland, another trading firm, received $60 billion of USDT (Tether) over the time period they analyzed, which is equal to 55 percent of all outbound volume ever.” “Yep.” “Does that sound right to you?” “Sounds ballpark correct.”

The insinuations and innuendo are getting a bit long in the tooth at this point. The authors should either introduce the “smoking gun” or try a different angle. Because even in the current SBF court case (jury just convicted as of this writing), Tether LTD does not seem to play a major role in the collapse of FTX.

Maybe Tether (USDT) is a key enabler and systemically important infrastructure, I would agree with that. I think there is sufficient on-chain data to show it is a key lubricant to trading in several ecosystems (via Mastercoin, ERC-20, and TRC-20). But readers are not even presented charts or stats that illustrate these points.

On p. 167 they write:

Most people who had ever purchased crypto entered the market in 2020 and 2021, and most of those people had lost money. Sam argued that the people who invested before then had made money, which didn’t refute my point.

This could be true but the authors do not provide any reference or citation. That which is asserted without evidence can be dismissed without evidence.

On p. 168 they write:

Sure, a minority of people who got in early did well. He tried to pivot away from a discussion of price and toward an “ultimate use case.” I was fine with that. One of my biggest problems with crypto was that it didn’t actually do anything anything productive. To that end, I repeated my ask from earlier: Give me one use case for crypto.

Anyone asked this question by the authors should be aware the authors are a priori anti-blockchain. Throughout this book they repeatedly use the same evidence-free approach that Diehl et al., used. McKenzie literally states his view in the paragraph.

So it is hard to have a good faith discussion when they do not seem to recognize the existence of RWAs.72 Also, SBF should have had a better answer considering all of the pitches he had heard.

On p. 169 they write:

In a roundabout way, Sam had gotten to the heart of the matter. While getting a wire transfer can be a major pain in the ass, and I agreed we could improve our payments system and our broader financial system, one of the reasons a wire transfer is cumbersome is that it runs through our banking system, which has safeguards in place: anti–money laundering laws, know-your-customer laws, the ability to protect against fraud. These regulations exist for a reason. We can and should argue over how to improve our system and amend those regulations when necessary, but claiming crypto was better simply because it was “cleaner” and moved faster was either disingenuous or deeply ignorant. Sure, it moved fast, but at enormous cost. Crypto opened the door to facilitating all sorts of criminal activity, and “trusting the code” often meant having to live with hacks, scams, and fraud as a cost of doing business. Plus, the irreversibility of the blockchain meant you couldn’t correct an honest mistake. You lose money? DYOR, man.

This strawman is similar to the type found in Diehl et. al., book. Not every cryptocurrency or blockchain project is attempting to create a bank, or a payment system, or “money.” The next edition needs to be more specific about which projects the authors are referring to here. Or what existing infrastructure they are comparing the strawman with.

For instance, how does McKenzie propose “we could improve our payments system”? Does a wire transfer take three days to move because of KYC and AML processes? FedNow flipped on a couple of months ago, it introduced another real-time payments (RTP) system in the U.S.

Does FedNow cut through the 3-day wire by removing or ignoring regulations? No. The poorly named “The Clearing House”, which operates the other RTP, must be super fast because it bypasses these KYC and AML processes, right?73 No.

The authors inexplicably defend the status quo – including slow incumbent intermediaries – without explaining why it takes a specific unit of time for funds to transfer. Saying that “crypto moved fast but opened the door to all sorts of criminal activity” is sensationalistic writing and not serious investigative reporting.

On p. 170 they write:

I was searching for some semblance of heartfelt contrition on his part, some gesture of sympathy toward the naive crypto-buying masses, but mostly I came up empty. Sam reiterated a generic need for federal oversight. I expressed a hope that, at a minimum, we skeptics could find common ground with industry players like him and work toward eliminating the myriad scams and pervasive fraud in crypto. Sam nodded, his head hanging low.

What are skeptics? Does McKenzie speak on their behalf? Is there a card membership form?

On p. 171 they write:

We said our perfunctory thank-yous. But Sam kept talking. “And always if you guys have any thoughts or questions about the ecosystem. Feel free. And Tether, there’s a lot more I could say off-the-record.” (Off-the-record is by mutual agreement; we never agreed to it.) “Frankly, they’re emotional guys. And I don’t want to piss them off. Weird fucking dudes. Like really fucking weird. They’re honestly not scammers, but they are difficult people. And I think the FT article on Giancarlo is an amazing article . . .”

This is the third time the authors have shown a lack of compunction towards off-the-record conversations. It all sounds like “gotcha” journalism, not investigative journalism. The ends do not justify the means. Worse for the authors, the hot mic does not reveal anything new.

It also reminds me of that same tweet from Matthew Green:

Source: Tweet

On p. 172 they write:

Jacob asked if USDD, a new stablecoin, could be an eventual replacement for Tether. Recently Alameda had announced a financial partnership with Justin Sun, the entrepreneur behind USDD. Sam responded as if he had never heard of USDD. “USD what?” “USDD.” “Which is DD?” “The new Justin Sun algorithmic stablecoin.” “No, no. I don’t know where on the scale from DAI (another algorithmic stablecoin) to LUNA it is, but I think it might be on the bad end of that spectrum.”

What is an algorithmic stablecoin? Still no definition or description or categories. Also, like most of Justin Sun’s projects, USDD did not take off. For example, a year ago its “marketcap” was about 10% higher than it is today.74 Speaking of which, the paragraphs on Sun were pretty solid, a second edition could mention the SEC lawsuit announced in March 2023.

On p. 176 they write:

But if there was one thing that everyone could agree on, it was that Sam Bankman-Fried had it all figured out. Even among the most die-hard crypto skeptics, it was broadly assumed that Sam was making money hand over fist, and whatever shenanigans he might be up to, he would most likely get away with it.

That’s why the victory laps – by anyone – after the demise of FTX, make no sense. As Faux and these authors pointed out, no one knew besides 4-5 people.75

On p. 177 they write:

For example, “every year there was a 25 percent chance that [Terra] was going to crash to less than 50 percent.” Where did that number come from? Interviewing Sam was like punching against air. If this was the king of crypto, was it a kingdom made of sand?

That’s a good question. The next edition should try to track down the answer.

All-in-all this chapter does not provide any crazy revelations. Based on the questions in the SBF interview, the authors revealed they too had no idea what was happening between Alameda and FTX. For instance, if the authors knew what the inner circle knew, then one of the questions that would have been asked is: is Alameda exempt from liquidations on FTX? Instead it was a lot of innuendo around Tether LTD which as of this writing, does not appear to been a major culprit in the downfall of FTX.

Lastly, based on theirs actions, it appears the authors are willing to not only use the content of a hot mic, but also publish content that the interviewer said was off-the-record. The ends justify the means? In this case, the hot mic didn’t reveal anything interesting, so why include it?

Chapter 10: Who’s In Charge Here?

A future version of this chapter has the potential to be very interesting at it could discuss how the coin lobbying world works. Instead, the current chapter is pretty shallow. While one piece of specific legislation is mentioned, readers are not informed of who’s-who in the coin lobbying world, or what spin doctoring they have achieved.

On p. 179 they write:

But to skeptics, and to people unlucky enough to have invested more than they could afford to, the implosion represented something more severe. Crypto was on life support. A market worth $3 trillion in November of 2021 had been reduced to less than $1 trillion—and even that number seemed aspirational at best. As some bankrupt crypto companies stopped allowing customer withdrawals, it was hard to know how much real money was left to back the fake stuff. When I spoke to him in March, Alex Mashinsky of Celsius had estimated that number at less than 15 percent—and that guy was allegedly running a Ponzi scheme that soon went bankrupt. He might have been exaggerating; it was probably even less.

What is a skeptic? The authors still have not provided a concrete definition. Also, the authors state “it was probably even less.” How much less? They never provide a ball park estimate of what they think the “real money” inside the coin world is.

On p. 179 they write:

Michael Saylor, CEO of MicroStrategy, and the guy who encouraged people to mortgage their houses to buy Bitcoin, resigned his position in August.

Inexplicably the authors missed a key event. Michael Saylor resigned on August 2, 2022. On August 31, the Attorney General for DC announced it was suing Saylor for evading more than $25 million in taxes. Surely readers would find that interesting?76

On p. 180 they write:

What was clear was just how widely the crypto virus had infected the general public. Most Americans who bought into crypto did so in 2020 and 2021, when the market was at its peak, having been lured by promises of mind-boggling profits in the crooked casinos. That same majority, on average, lost money as the price of virtually all of these cryptocurrencies had crashed, most by 70 percent or more from their all-time highs.

They could be right but there are no references or citations in the back. That which is asserted without evidence can be dismissed without evidence.

On p. 181 they write:

How in the world was this massive speculative bubble in an industry rife with fraud—and built upon an incredibly shaky economic foundation—allowed to metastasize to such a degree?

Because in part, actual whistleblowers were ignored? And the prosecutors left the government and joined the counsel for the defense? There is a world worth looking into circa 2017-2019 that the authors missed.

On p. 181 they wrote:

In the midst of all this, crypto lobbying expenditures were at an all-time high, and politicians from both parties were touting pro-industry legislation.

What is an estimate for how much these expenditures were in the U.S.? How much was spent lobbying in other developed countries?

One notable example that comes to mind was an intense effort to lobby specific senators, such as Kyrsten Sinema, during the debate around the Infrastructure Investment and Jobs Act in 2021:

Source: Twitter

A future edition should include specific examples.

On p. 182 they write:

The stateless, peer-to-peer currency that would avoid all intermediaries and democratize and decentralize the future of money now needed to kiss Washington’s ass in the present and throw some of the real stuff around. It was either that, or watch their industry go bye-bye.

This is a strawman, not every public blockchain project is attempting to build “the future of money.” But with the second sentence, I fully agree.

Here are a couple times I lampooned the phenomenon specifically with Bitcoin:

Source: Twitter
Source: Twitter

On p. 182 they write:

Ironically, even Michael Lewis, author of Liar’s Poker and The Big Short, was in thrall with the boy wonder, according to reporter Zeke Faux of Bloomberg.

Oh a trifecta of streams almost crossed! Three books published within four months of one another on the same topic.

On p. 184 they write:

Toomey spun his ownership of Bitcoin and the potential conflict of interest as a source of important “expertise” when deciding on regulatory policy. He argued that Washington needed to offer “respect for consumers” to make their own investment choices, despite the fact that the very lack of disclosures inherent in cryptos not being classified as securities kept investors in the dark as to how they might be getting swindled.

I partly agree with the authors view point here. But – and to be clear I am not a lawyer – I do not think the “lack of disclosures inherent in cryptos” is why some might not be classified as securities. The entire facts-and-circumstances exercise that a U.S. prosecutor conducts involves several prongs that the authors mention a couple of times. Disclosures – or lackthereof – is tangential.

On p. 184 they write:

A representative example was Brian Brooks, who was chief legal officer of exchange Coinbase before he became Acting Comptroller of the Currency, only to leave that governmental position to become the head of Binance’s US division. He lasted all of three months at that job, before resigning due to “differences over strategic direction.”

It is worse than that. Brooks was never confirmed by the Senate, he served as an Acting Comptroller and days before leaving he unilaterally published guidance – which he did not request public comments on – that has since been partially rescinded. His next gig was as the CEO of Bitfury, a notorious mining company whose machines at one point consumed 10% of the electricity in the Republic of Georgia.

On p. 186 they write:

Unfortunately, like the majority of crypto investors, most people of color entered the market near its peak in the bull run of 2020/2021 and were now among the ones left holding the bag.

This could be true but what is their source? There is no reference in the back either. That which is asserted without evidence can be dismissed without evidence.

On p. 186 they write:

Many of these issues were known to them, in some form, even if they hadn’t been publicly acknowledged, much less acted upon.

It could be worth the authors time for them to investigate which non-lobbyists spoke to policy makers and regulators in the 2017-2019 time frame. I know I was not the only one.

On p. 187 they write:

The United States of America is unique in the way it separates its regulation of securities from its regulation of commodities. It’s basically a historical fluke.

Actually if the authors had looked into it, they would have discovered it is nearly all political. There have been multiple attempts to merge the SEC and CFTC, including shortly after the 2008 Financial Crisis. The most recent attempts always hit the same road blocks: powerful lobbying forces from the banking industry and their interlocutors: the members of the House and Senate Banking Committees and the House Agriculture Committee. For instance, in 2012 a bill was introduced in the House to merge the two and in 2017 the Treasury department – then led by Mnuchin – weighed in on a proposed merger.

On p. 190 they write:

For many coiners, it was taken as good news, a way of legitimizing the first cryptocurrency by enshrining it under the existing regulatory regime.

What is a coiner?

On p. 190 they write:

There was no fine or criminal prosecution. CFTC Commissioner Wetjen, in the grand revolving door tradition, later entered the crypto industry. In 2021, FTX US hired Wetjen to be its head of policy and regulatory strategy—the mirror to his former governmental position. To recap, the first derivatives exchange in crypto to be classified as such under American law was later found to have engaged in illegal activity, got off the hook, and then later another exchange hired the regulator who oversaw that decision to help guide their maneuverings on Capitol Hill. You can’t make this stuff up.

In the next edition the authors should include the part mentioned above on page 144 that Wetjen did not register as a lobbyist (like he was supposed to) and was also an advisor to Coin Center, another coin lobbying organization. To be fair, the revolving door crosses both ways: probably worth mentioning that after leaving the CFTC, Wetjen joined the DTCC as head of public policy and later the Miami International Holdings which is a holding company that owns several exchanges.

On p. 190 they write:

But the reality is that Bitcoin’s ownership is actually extraordinarily centralized, concentrated in a tiny group of whales and mining pools. In fact, just two mining pools account for 51 percent of its global hash rate, meaning just two large groups control the majority of new Bitcoin created.

This is not a good argument, as it lacks two things: (1) references and (2) nuance. Without references it can be dismissed out of hand as just another opinion; there are some ways to verify the claims but why should I keep doing their homework for them?

In terms of nuance: while mining pools have become important for proof-of-work chains, it takes two to tango. I agree with the thrust of the point, I have made it myself about GHash voluntarily “self-limiting” in 2014. But unlike GHash (which provided a hosted mining service too), the largest pools do not usually run the hashing equipment, those are typically operated by 3rd parties (such as Riot who the authors visited). Thus, it is not technically sound to say that two mining pools control the majority of the new Bitcoin created, because they need the hashing equipment (that generates the proofs-of-work) in order to build a correct block.

On p. 190 they write:

Whoever Satoshi Nakamoto is, it’s a real person or real people. Once again, code does not fall from the sky. One day we may well find out who started this whole nonsense. If so, break out the popcorn, law nerds.

It’s not clear from the rest of the chapter what the authors are implying. Do they mean Nakamoto would be liable for something and therefore sued or charged by a government? If so, why not just say that?

In fact, while I doubt she agrees with the authors modus operandi, Angela Walch authored a paper that they might want to cite in the next edition: In Code(rs) We Trust: Software Developers as Fiduciaries in Public Blockchains. 77

On p. 190 they write:

One meeting included one of Pham’s former colleagues who had gone over to the crypto industry and now was publicly lobbying her.

Who? Name names next time.

On p. 191 they write:

That’s not to overlook the efforts of SEC Commissioner Hester Peirce, whose enthusiasm for the industry is legendary.

The authors missed the opportunity to use the “subprime mom” and “subprime dad” analogy from Lee Reiners:

Source: Twitter

Curiously, while the authors namecheck Lee Reiners in the Acknowledgments, they misspell his name and worse, they don’t actually cite any of his work. Notably, Reiners was the first person to write a long form discussion on the revolving door as it relates to the coin world. In fact, five years ago he wrote a widely circulated article entitled: The Revolving Door Comes to Cryptocurrency. It is a strange omission, credit where credit is due.

On p. 194 they write:

“There really is no legitimate side to crypto,” said Stark. To him, crypto had simply repackaged the traditional get-rich-quick scheme in a shiny, fraudulent wrapper.

While Stark might be correct, what evidence did he provide? If it is asserted without evidence it can be dismissed without evidence.

On p. 195 they write:

“For me it’s all so obvious,” said Stark. “When you ask anybody, ‘Give me one legitimate use for crypto. Give me one thing you can use crypto for?’ I just don’t see it, and nobody can ever tell me anything.”

Why is Stark the final arbiter for what is and is not a legitimate use for crypto? Who died and made him king? If you have already predetermined there are no legitimate use cases, what can someone tell you?

For instance, in the process of writing this review J.P. Morgan announced its Tokenized Collateral Network. They weren’t the first organization to deploy a new chain with “enterprise” customers.

In any case, the authors need to be more consistent in the next edition: are they a priori handwaving all blockchain-related projects out of hand? Or are they going to conduct market research and lots of interviews to drill into say, 100 dapps (categories) from DeFi Llama? Cannot simultaneously be evidence-based and use an a priori cudgel.

On p. 195 they write:

What I found most refreshing about Stark was his concern for people who got caught up in crypto. “You can blame the victim if you want. But the reality is, it’s really not the victim’s fault. They’re being taken in by really sophisticated hustlers.”

What victims has Stark helped? Which hustlers did he bring to justice?

On p. 195 they write:

It was up to critics like Stark—who had no skin in the game, who didn’t make money off of his crypto criticism—to put forward that argument.

What are critics? Are they the same as skeptics?

How do the authors know Stark hasn’t made any money off of his notoriety? Is that really the litmus test? Are the only people worth talking to those who write long LinkedIn posts? If the authors are willing to entertain the idea that “critics” and “skeptics” come in all shapes and sizes, they’d find that there are a ton of industry folks who are quite openly critical and probably even agree with some of the authors views. There is no reason to be insular or have some kind of purity test on these topics.7879

On p. 197 they write:

In combating a false economic narrative, it is crucial to put forth an alternate true one, to reveal the hucksters and con men for who they really are. But Kardashian and her fellow celebs were, at least for the most part, not those fraudsters. They were just a tool, a megaphone used to spread the lies of crypto more effectively.

I agree with this view, whole heartily. But in the next edition could the authors use more precise language? For instance, Kim Kardashian was sued by the SEC and fined $1.26 million in penalties for failing to disclose she had been paid to advertise EthereumMax (EMAX). It was unlawfully touting, not fraud that she was charged with. This is sloppy polemics just like the Diehl et al., book.

Overall this chapter was a wasted opportunity: the authors could have dug into specific coin lobbying organizations, an idea I encouraged them to do. Instead readers are not informed of who’s-who in the coin lobbying world and are twice referred to a Tweet that is never provided (which Pham deleted but others saved). While we are given an overview of specific piece of legislation, the DCCPA, we aren’t informed that an industry insider – Gabriel Shapiro, a lawyer – leaked a draft that put SBF on damage containment mode and contributed to ending its legislative hopes.

As a consequence, readers are not informed of who’s actually in charge here.

Chapter 11: Unbankrupt Yourself

This is one of the better chapters, largely because it involves a bit of first-hand reporting. We learn about Dr. James Block (aka DirtyBubbleMedia) who used Etherscan to identify suspicious transactions. Yet one oversight was not including Maya Zehavi anywhere in the discussion of Celsius. She is an Israeli-based blockchain-focused entrepreneur who was the first person to publicly sound the alarm on Celsius and Hogeg in particular. She should be interviewed in the next edition.

There is not much to nitpick in this chapter. For instance on p. 206 they write:

At the time, before many industry players turned on one another, there was a collective omertà against bad-mouthing competitors.

Omertà is a great word and I want to agree with the authors here. But tribalism is still quite common irrespective of market conditions, especially the uno coin maximalism variety. Heck, I got yelled at last year for talking about the etymology of “nocoiner” tribalism. Talk about social media wasting your time!

On p. 207 they write:

Soon, James discovered that Chain.com, a murky startup with a lot of crypto but seemingly only one employee, may have been behind it. James and Jacob had been looking into Chain, and James wrote a piece about the CEO’s extravagant purchases of multimillion-dollar NFTs. It turned out that after James published his Dirty Bubble Media article about Chain, someone had created similar, competing articles that, while containing much of the same content, painted Chain in a more positive light.

I previously mentioned this to Jacob Silverman: Chain.com today is not the same entity (or people) that ran Chain.com ten years ago. For the bulk of the 2010s, Chain.com attempted to play its hand in the “enterprise” blockchain world and eventually was acquired by Stellar. Someone else bought the domain name a couple years ago. But that’s not clear from the the language in the passage above. For example, is Adam Ludwin still involved? Seems unlikely.

On p. 209 they write:

Jacob confronted Chain’s CEO via Telegram. He denied ever having heard of Mevrex or hiring them. Eventually, after a fair amount of badgering and pleading with communications people at the respective companies, James’s Twitter and Substack accounts were restored.

What did Jacob say? What did James say?

On p. 210 they write:

They also treated their critics—some of them simply well-meaning customers who wanted to know how their assets were being handled—with utter derision.

This is a good point. One notable example was Mashinsky responding to Mike Dudas.

Source: Twitter

On p. 210 they write:

Every time Mashinsky accused his evil critics of spreading FUD, I assumed that DBM was probably on the right track. The proof was often in the block-chain data, waiting to be interpreted.

Why is there a hyphen in blockchain?

The discussion on KeyFi’s revelations on p. 211 was good, seems like everyone was happy when NGU but when it doesn’t, they spill the beans on social media.

On p. 214 they write:

As for James Block, who eventually revealed his name after journalists began peppering him with requests for tips and commentary, he was offered a job by a hedge fund shorting crypto. He decided to stick to medicine.

Out of curiosity was the hedge fund Hindenburg Research? The same ones who announced a $1 million bounty on Tether that as of this writing no one has claimed? Or was it Citron Research, the fund that announced it was shorting Ethereum and then days later deleted their thread?

I’ve often wanted to short a variety of coins and tokens but the counterparty risk was one of the main reasons I haven’t.80 Perhaps this is part of the reason why Perpetuals are popular?81

On p. 216 they write:

James sounded the alarm on Celsius, but few wanted to listen.

I think James Block did a great job highlighting numerous red flag as Celsius. And there were others, including Maya Zehavi, who publicly questioned Celsius’s model. Nearly two years ago Protos even highlighted one of Zehavi’s tweets.

And one on Hogeg that could be in the book:

Source: Twitter

Zehavi has at least a dozen Hogeg-related tweets pre-2020. A second edition should give her a well deserved podium.

What would have made this chapter in particular stand out is if it included some diagrams showing the flow of funds that James Block and others identified. The prose was decent too. Definitely seems like the chapter with the fewest errors or mistakes.

Chapter 12: Chapter 11

Source: Kindle

There was a minor technical glitch in the Kindle version, it is missing the subtitle.

Overall this chapter is a bit dry in large part because it relies almost entirely on second-hand reporting. They do have a few new original quotes from SBF but none of those seemed particularly incriminating.

The authors also missed a couple of comparisons when it comes to evaluating intermediaries.

For instance, on p. 217 they write:

Accounts on FTX US were of course not FDIC-insured, as FTX US is not a licensed US bank but rather a money services business, which doesn’t offer customers the same protections.

This is a good point. A similar (misleading) claim was made by Robinhood five years ago. In December 2018 the CEO publicly claimed that user deposits in new checking accounts were insured by the SIPC only to have to walk back the claims after the head of the SIPC (and others) pointing out that this was not technically true.

On p. 217 they write:

Like so many interactions in crypto, it was a messy and unsatisfying affair. However, it did reinforce one thing: Sam was desperate to stage-manage his public image. The dark arts of PR were part of any actor’s Hollywood education, and Sam clearly needed more lessons.

What are the dark arts of PR? Is McKenzie saying he too was involved in the “dark arts of PR”?

On p. 219 they write:

Over Twitter DM, Sam spoke darkly to me of a coming conflict dividing the industry. Binance was pushing its customers to convert their stablecoins into BUSD, Binance’s own dollar-pegged token. “It’s the beginnings of the second great stablecoin war,” he messaged me on September 5. “All the stables are gearing up for it. Taking this as a declaration of war.”

This is interesting. For illustrative purposes a timeline could be helpful to readers to understand when the first, second, third, etc. “stablecoin wars” supposedly took place. Also, when SBF said “all the stables are gearing up for it” did he provide any evidence for this? For instance, was TUSD or Dai backers involved?

On p. 220 they write:

That financial perpetual motion machine looked a lot like the Celsius “flywheel” concept that James had previously investigated, and that Professor Hilary Allen had warned about in February of that year.

It bears repeating: Celsius was a centralized lender. Connecting that with what Allen wrote about (“DeFi”) last year is disingenuous.

In contrast, here’s what I had to say in June 2022:

There’s not need to cite me, but if you are going to critique the coin world, at least try to accurately describe what is and is not centralized.

On p. 220 they write:

According to bankruptcy filings, FTX/Alameda lost $3.7 billion before 2022. Quite impressive to lose that much in a bull market!

This is a good point.

On p. 227 they write:

As last month’s scammers came in from the cold to yuk it up on social media, the post-SBF positioning became frantic—who was to blame, who supported him, who failed to warn the public. Even us crypto skeptics got our turn in the dock—apparently our frequently repeated claims that the entire industry was built on bad economics, bad incentives, and outright fraud wasn’t enough.

What is a “crypto skeptic”? Do the authors speak on all of their behalf?

On p. 228 they write:

Some claimed to have held back for fear of angering a powerful industry player. Bitcoin maximalists blamed Sam for all their problems, rightfully pointing out SBF’s cozy relationship with mainstream media publications, regulators, and lawmakers (some of which he gave large sums of money). But then, as maxis are wont to do, they wandered off into wackadoodle land, painting conspiracy theories that Sam was working with Biden to send money to Ukraine via crypto.

What are Bitcoin maximalists? What are maxis? I have seen it but in the next edition can the authors provide a reference for the conspiracy theory?

On p. 229 they write:

Rep. Emmer was hopeful that further discussions might let them proceed with legislation that would allow for a “light touch” when it came to crypto regulation. The Blockchain Eight encapsulated so much of what was wrong when it came to Washington’s cozy ties to the industry. Evenly divided between Democrats and Republicans, five of the eight members received campaign donations from FTX employees.

I mostly agree with this. But I think there is arguably an even more damning example: a couple of the “Blockchain Eight” attempted to overturn the results of the 2020 presidential election. To use blockchain parlance, those would be Byzantine actors.

On p. 230 they write:

Legitimate technology companies like Microsoft belatedly summoned the bravery to admit that actually, when you really think about it, blockchain sorta sucked. It had no substantive use case. All the money spent to explore how maybe crypto might actually do something in the future had been wasted. Numerous other blockchain “pilot projects” quietly folded, including one by the Australian Securities Exchange.

There is a kernel of truth in this paragraph. For instance, in May, ASX said it would not use a blockchain for its CHESS-replacement endeavor (which was spearhead by Digital Asset). And there have been quite a few pilots and experiments that tried and failed to gain product-market fit or infrastructure-market fit. I’ve written about several of these cases (including the Chain.com of the 2010s).

But the rest of it is just polemical in the same vein as Diehl et. al. When did Microsoft belatedly say “blockchain sorta sucked”? As of this writing, their Azure department has an entire Web3 team still actively involved in the blockchain world.

But let’s take the authors unreferenced claim at face value, that there is no substantiative use case discovered by Microsoft or other “legitimate technology companies.” So is that the end of the blockchain story?

Putting aside for the moment that the authors have shown an affinity for incumbents, why should readers be led to believe those are the only participants allowed to have opinions on the matter? One of the key weaknesses of this chapter, and book, in general is that the authors attempt to have it both ways: they sometimes attempt to use evidence when it helps their argument but then resort to an a priori cudgel in other instances. The next edition needs to have consistency (e.g., remove the a priori arguments).

A better argument would have been to reach out to the “head of blockchain” at Microsoft (currently Yorke Rhodes) and do some first hand reporting about what that organization has done and why they apparently think “blockchain sorta sucks.” Maybe it does! But let’s at least be methodical about dressing it down.

On p. 233 they write:

The chairman of FBH was none other than Jean Chalopin, the chairman of Deltec Bank, whose most infamous client was Tether. As the New York Times noted, “Farmington’s deposits had been steady at about $10 million for a decade. But in the third quarter this year [2022], the bank’s deposits jumped nearly 600 percent to $84 million.” The bank was renamed Moonstone. Its digital director was Janvier Chalopin, son of Jean.

So what exactly is the crime? That there is nepotism at a bank called FBH (Moonstone)? Should sons or daughters be able to run banks their parents previously ran? If not, should the Rockefeller and Morgan families be looking over their shoulders? Insinuation and innuendo is all the authors have here?

On p. 235 they write:

On December 16, just over one week after releasing its report on Binance’s holdings, Mazars announced—via Binance—that it was exiting the business of auditing crypto companies “due to concerns regarding the way these reports are understood by the public.” The company deleted its website with its reports on Binance and other crypto firms.

Oof, that’s a good point. I think one of my favorite audit-related stories was shortly after Bitfinex was hacked (the 2nd time) Michael Perklin was brought in to conduct an audit. But then he quietly left and joined Shapeshift. No audit was made available to the public.82

On p. 237 they write:

The Trump NFT collection—45,000 silly cartoonish portraits of the former prez looking cool and badass—sold out in a day at ninety-nine dollars apiece, likely netting him millions.

“Likely”? Perhaps Donald Trump lied in his filings, but according to a CoinDesk story in April 2023, he earned between $500,001-$1 million on NFT sales. Is that a lot or a little?

On p. 237 they write:

That system eventually became an engine of economic inequality and political alienation. Crypto was right about that. But their solution—to create a private, trustless financial system based on code, unstable digital assets, and a new class of intermediaries—fell apart under its own contradictions, including rampant opportunities for fraud. Crypto had indeed produced something no one could trust, and Sam Bankman-Fried, their knockoff J. P. Morgan, would be remembered as one of its architects.

This is not a strong argument. For example, what happens if incumbents end up using blockchains in the future? Are intermediaries okay so as long as they are incumbents?

It’s also unclear why the authors keep using a false dichotomy. Investigative journalists don’t have to carry water for anyone. And in this instance, it is perfectly fine to critique both the cryptocurrency world and traditional finance.83

This could have been a good chapter. For example, they did do a decent job concisely chronicling some of the drama (and beef) between Binance and FTX. But the tone of it all feels like self-promotional “told ya so” which is strange because neither author was actively investigating this space until late 2021, after the alleged crimes began at the various centralized intermediaries. A future edition could fold this together with the outcome of the current SBF criminal case.

Chapter 13: Preacher’s Father

This chapter probably should have come much earlier because it told a really interesting, sad story that the authors did some first-hand reporting on. The problem is that its somber tone is polar opposite of the stoner tone of the first few chapters. While the authors were quite glib about discussing McKenzie’s pot smoking/edible habit, at the end of the book the readers get some whiplash with McKenzie sitting in church listening to a sermon from a son of a fraud victim. Although to be fair, I’m not religious so maybe I’m being overly sensitive relative to other readers.

A future edition could probably keep the entire chapter intact, as it was well-written and involved a relatively unknown (alleged) fraudulent operator: Stallion Wings.

With that said, there are a few nit picks.

On p. 246 they write:

They come in wanting to limit their downside, but end up doing the exact opposite—they chase their losses until the money is gone. The vast majority end up losing money because the forex market, just like a casino, has a negative expected value.”

This could be true – and anecdotally I think they could be right – but the authors do not provide any references (in fact, there are only 2 references for the whole chapter). That which is asserted without evidence can be dismissed without evidence. Also, as mentioned earlier, some trading platforms in the forex (FX) market also allow high leverage to retail (beyond 125x).

On p. 247 they write:

The volatility of crypto and the high leverage offered to retail customers add to its addictiveness. With wild swings in price, a well-placed crypto bet can be intoxicating, euphoric. Add to that leverage—essentially the ability to borrow large sums to bet with—and the highs get even higher. Recall that Binance offered regular customers 125-to-1 leverage, a ratio unheard of in regulated markets.

A future edition should include the meme of Mark Karpelès, former ex-CEO of Mt. Gox:

Again, there are regulated markets (FX) that allow for that type of ratio, just google: Forex leverage. MultiBank Group immediately pops out, are they legit? Should FX markets be more tightly regulated?

On p. 252 they write:

The original computer code that would become Bitcoin included a poker lobby, a framework from which a virtual poker game could be built. Whoever Satoshi Nakamoto was, in early 2007 they were clearly interested in methods of creating non-confiscatable digital money and how they might be used in online poker.

I agree with this point. And over the years, there are at least five cryptocurrency developers who have publicly said something similar, albeit for different reasons: Matt Corallo, Greg Maxwell, Jeff Garzik, Alex Waters, and Jackson Palmer. There are a number of threads on reddit and Bitcoin Talk that also discuss this scenario.

Their concluding paragraph of the chapter, on p. 255 reads:

Each generation of tech and financial “innovators” promise their own form of utopia, and crypto advocates have had their turn to demonstrate theirs, with all of its attendant failings. Like so many of its Silicon Valley venture capitalist forebears, the crypto industry’s vision is fundamentally a selfish one, divorced from any real sense of how the world works and what is required to bring us together rather than pull us further apart. We cannot eradicate the need for trust, and it is not just wrongheaded, but fundamentally nihilistic to aspire to do so. In the end, we have only ourselves and each other on whom we can rely.

I agree with the first sentence and have written about “Innovation Theater” before. But it is a strawman and inaccurate to portray “the crypto industry vision” as a unified something. Sure there are a variety of camps that sometimes lobby together, but they can’t claim to speak “on behalf of crypto” anymore than the authors can claim to “speak on behalf of critics.” It’s disingenuous and happens throughout the book.

Ironically while the authors attempt to hammer home the importance of “trust,” throughout the book they do not cite sources for a number of their claims. Verify, not trust.

Overall it was an okay chapter, albeit a bit preachy which is sort of fine considering it partially takes place in a church. Perhaps the biggest drawback from this chapter and the book altogether at this point is that the authors do not provide any solutions to prevent fraud or restore those who have been defrauded. That is a missed opportunity.

Epilogue

This epilogue is pretty self-serving, it is basically describes McKenzie as some kind of maverick who tells truth to power. It’s cliché and does not really cover new ground. It makes sense to have an epilogue for this type of book but its tone seems out of touch with the victims described in the previous chapters.

On p. 257 they write:

It was December 14, 2022. I was testifying before the Senate Banking Committee on the collapse of FTX/Alameda and what it meant for crypto, and for the millions of investors who had lost money in the process. On the other end of the panel was Professor Hilary Allen, whose February paper had anticipated crypto’s collapse.

How many millions of investors lost money from the collapse of FTX and Alameda? Did they mean to write customers?

Also, Allen’s paper did not anticipate “crypto’s collapse.” She incorrectly predicted DeFi lending protocols would collapse, and they did not whereas centralized lenders did. Maybe Aave and Compound will eventually face some kind of existential cataclysm, but as of this writing they have not.

On p. 257 they write:

Professor Allen and I had been invited to describe the myriad ways in which crypto’s epic collapse was entirely predictable and why the time for such shenanigans is long past.

I think the readers would be interested to know who invited McKenzie and Allen, just like we would like to know who invited Schulp and O’Leary. There are an endless amount of folks who probably want to testify to a Congressional committee. There are also a number of experts worth adding to the dais that have unimpeachable on this topic, including J. P. Koning and David Andolfatto.

On p. 258 they write:

“Mr. Wang created this back door by inserting a single number into millions of lines of code for the exchange, creating a line of credit from FTX to Alameda, to which customers did not consent,” claimed FTX lawyer Andrew Dietderich. The innovative wonders of “trustlessness” and “decentralization” were on full display.

This is a strawman. FTX and Alameda were centralized intermediaries, by definition neither were decentralized.

On p. 258 they write:

Add a single number to millions of lines of code, and voilà, one can siphon billions in “loans” from accounts held by regular folks oblivious to the swindle. Trust the code, indeed. Dietderich continued: “And we know the size of that line of credit. It was $65 billion.” Bernie Madoff’s Ponzi was $64.8 billion.

Another strawman. The code that ran this part of FTX was written for the intermediary, not a blockchain, and it was managed on github. And again, both Alameda and FTX are centralized intermediaries. Neither was a blockchain nor a smart contract. The authors are insinuating that the code that runs DeFi protocols, such as Aave, have some kind of giant exploitable whole on par with Madoff’s Ponzi or FTX. Maybe they do, but the authors need to be specific next edition. That which is asserted without evidence can be dismissed without evidence.

On p. 259 they write:

I’d gotten into several public Twitter spats with journalists at The Block who questioned my understanding of the industry they supposedly covered honestly. They were less voluble now.

Is it possible that both are true? That certain coin reporters are shills and that the authors do not have a good understanding of the subject matter?84 For instance, in all but one chapter the authors conflate Bitcoin with “crypto” (broadly) and do not provide definitions or examples of “DeFi.”

On p. 263 they write:

While the speed of the failures was alarming, I couldn’t help but notice that two of the three collapsed banks had significant exposure to the volatile world of cryptocurrency, and the third (SVB) counted as clients the crypto companies Ripple, BlockFi, Circle, Avalanche, and Yuga Labs, among others.

Steven Kelly and Todd Phillips are academics that should be included in a future edition as they discussed these bank failures in real-time.85

Readers may be interested in the Appendix of my March 2023 presentation on the topic as well.

On p. 264 they write:

The other major player left standing was Tether. The stablecoin company, valued at $71 billion as of March 1, 2023, had miraculously survived while the industry around it bit the dust.

As mentioned at the beginning of this review, this is not the correct valuation of the company. The authors mistakenly conflate the aggregate amount of USDT issued with the book value of equity of the issuing company (Tether LTD). Tether LTD is worth a fraction, in the low billions

On p. 264 they write:

Per Bloomberg, “Bitfinex Chief Technology Officer Paolo Ardoino said in an interview he sees enough demand for El Salvador to issue the full $1 billion it is seeking.” Where this demand would come from was anyone’s guess.

I am skeptical of that claim too but the authors are reporters: they are supposed to find out where that demand is. For example, in Chapter 7 I noted that following the book’s publication there was a 180% rally in El Salvadorian government bonds. The following month, in August, Bloomberg ran a headline Bitcoin-Touting Bukele’s Bond Rally Draws JPMorgan, Eaton Vance.

On p. 265 they write:

The issuance of the Bitcoin Bond was itself fraught with consequences for the local population. Wilfredo Claros, the fisherman I visited the previous spring who lived in the hills above La Unión, would soon be forced to abandon his home and his land so the airport servicing Bitcoin City could be built. According to Wilfredo, the government offered him one-tenth the amount he had requested in exchange for his property.

This is probably what the epilogue should have centered around: the victims. The people who got screwed by the SBF and Mashinsky.

A future edition of the Epilogue could focus more on “where are they now” — the stories of the El Salvadorians are interesting!

Acknowledgements

Even at the end, we still do not have a precise definition of a “critic” or “skeptic.”

On p. 269 they write:

To the members of the crypto skeptic community, I want to thank you for your friendship, tutelage, and guidance along the way. Unfortunately, it would be impossible to list all the skeptics who have helped me over the past two years, but I do want to thank a few of them specifically.

Is there a formal organization for supposed “crypto skeptics”? Or the “cryptos skeptic skeptics”?

The authors then list off eight names, none of whom are blockchain technical experts (although one worked for a smart contract-related company, which he removed from his LinkedIn). Did the authors reach out to any of hundreds of engineers that eagerly respond to social media questions on this topic? If not, why eschew actual experts?

Why interview actual experts when you can chat with social media influencers!

On p. 269 they write:

Thank you to Hilary Allen, Lee Reneirs, Rohan Grey, Eswar Prasad, and John Reed Stark for helping me understand American law as it relates to cryptocurrency, as well as the history of financial regulations in the US.

As mentioned in Chapter 10, they misspelled Reiners last name and didn’t cite any of his work. Strangely, even though they name check Rohan Grey, they don’t cite any of his work either, despite having co-authored the STABLE Act and opined on centrally-issued pegged coins on numerous occasions.

Appendix

This is a copy/paste from the SEC website.

Conclusion

In retrospect, seeing as how much it has been used as a marketing term, perhaps I should have trademarked both “crypto critic” and “crypto skeptic” back when I was first called them.

This was not a good book. It should have been, as it had a good publisher and the market clearly needs a book exploring what went wrong during the bubble years. But the authors made a lot of unforced errors, including getting too close to their sources, that could have been fixed through independent fact-checking.

What’s one example?

Let’s start with the Author’s Note at the very beginning:

What follows is my opinion of the events as I perceived them over the nearly two years I spent down the crypto rabbit hole. Throughout the book I use terms like “fraudsters,” “conmen,” “swindlers,” and “scammers” in reference to various actors in the crypto industry. These descriptors are nothing more than shorthand for my opinion. I don’t mean to imply that any particular person, in fact, broke a law or violated a regulation. In a similar vein, not everyone who works in cryptocurrency has poor intentions. While we may disagree wildly as to crypto’s usefulness, they have not committed fraud. It is my hope they will join me in condemning those who have.

Despite this disclaimer, the authors regularly claim – without facts – that such and such is a security or some entity broke a law. Sure everyone is entitled to an opinion, but using nuance-free language, and strident certainties is at odds with this Author’s Note.

There was no substantive technical criticism.86

For example, the authors missed the opportunity to discuss the critical role Lido currently plays in the Ethereum universe. What role is that? That’s what the authors should have figured out.

Or how centralized and dependent L2s currently are on sequencers. What’s a sequencer?

Or how MEV has evolved overtime. What is MEV? How do frequent batch auctions (such as those used in CoW Swap) reduce the impact of MEV?

Source: Threads

I mostly agree with Benedict Evans observation above. It seems clear from this book that the authors misunderstand the subject matter, otherwise they wouldn’t have made as many mistakes. This includes conflating all “crypto” with Bitcoin or failing to provide a single example of a DeFi dapp or not explaining what staking is or what a block maker is or not knowing that PayPal operates as a shadow bank (now with two types of “dollars”).8788

Furthermore, by endorsing Hilary Allen’s thesis, this also dings their credibility. Recall Allen predicted that DeFi lending protocols would collapse during a crisis. Aave and Compound did not collapse like she predicted. In fact, it was the centralized lenders that blew up last year. Perhaps these DeFi lending protocols will face a day of reckoning, but they do not suffer from the rehypothecation problem in part because all of the collateral is locked on-chain.

The authors routinely impeach their credibility by purposefully crumbling up NDAs and intentionally keeping the audio recording after an interview is done. This smells more like gotcha journalism which is lazy especially since nothing new was revealed in the process.

As a consequence, the book should probably be renamed: Blockchain Tourists. Is that unfair?

The jaunt down to Rockdale Texas seems to have resulted in little more than a photo-op for the authors. Did they help close down Riot’s Bitcoin mining facility?  Have they subsequently attended any of the local hearings or spoken with anyone during the “week of action” like Peter Howson did?89 Note: Howson is the author of the newly released: Let Them Eat Crypto

And while you can’t always time the publish date of the book, Easy Money had the misfortune of being released just before Zeke Faux’s Number Go Up, which was superior in all dimensions. 90 If you have to choose between the two, I can definitely recommend Faux’s version of events. See my review of that book here.

Endnotes

  1. In Number Go Up, Zeke Faux also writes his book in first-person, but doesn’t make the story about him. []
  2. For example, were the authors aware that one of the events McKenzie attended was a front for BSV? []
  3. By the end of Q3 2023, tokenized U.S. Treasuries hovered around $665 million. []
  4. In contrast, Zeke Faux noted this episode on p. 212:

    If you’re having trouble following this, that’s actually a good sign about your investing instincts. Comedian John Oliver later summarized Do Kwon’s nonsensical business plan: “One blorp is always worth one dollar. And the reason I can guarantee that is I’ll sell as many fleezels as it takes to make that happen. Also, I make the fleezels.”

    Strangely the authors did not include any history – abridged or otherwise – on the zany world of ICOs. This is puzzling because the infrastructure enabling Tether (USDT) was Mastercoin, one of the first projects to use the ICO model to kickstart itself. In contrast, Zeke Faux discusses it at length on page 49. []

  5. Fun fact: in January 2018 I spoke with one of the producers of that John Oliver episode and provided some fact-checking and clarification. []
  6. CMC also has a little 2m+ figure in the top left, that clearly is larger than the figure the authors use. []
  7. Hayden Adams, co-creator of Uniswap, has previously mentioned that on an average day 5-10 new coin pairs are added to Uniswap by random developers. []
  8. For instance, Meltem Demiror’s appeared on CNBC in a now deleted segment mentioning XRP. All of that was memoryholed, promoters ended up with coinesia. []
  9. Speaking of which, does everyone remember when Anthony Pompliano stopped using “The Virus is Spreading” as his catch phrase circa March 2020? []
  10. Jeff Garzik got on an airplane in order to receive one of the first Avalon ASIC miners. []
  11. For instance, Chapter 4 of my 2014 book literally is titled: The Red Queen of Mining. In Chapter 6 of “The Age of Cryptocurrency,” Michael Casey made a similar mistake. []
  12. In 2014, during a now deleted podcast episode (#116), I had a chance to debate co-hosts Stephanie Murphy and Adam B. Levine regarding on-chain activity, including gambling from Satoshi Dice. See: A Marginal Economy versus a Growth Economy []
  13. The authors could have easily dunked on garbage metrics such as cumulative addresses or wallets, two figures that only goes up no matter what. For instance, over eight years ago I published: A brief history of Bitcoin “wallet” growth. A few days later, an employee at BitGo contacted me for help to identify which wallets were “real” versus one-time burners. That was a job for an analytics company. []
  14. For comparison in Number Go Up, Zeke Faux uses the term “crypto bro” (15 times) which is a term I and other writers have used to describe specific coin promoters. []
  15. Marc Hochstein unfortunately normalized its mainstream usage. []
  16. For instance, during the block size civil war in 2015-2017, a number of the the Bitcoin Cash/XT developers wanted to significantly increase the block size in order to pursue a payments-focused roadmap. Who was right or wrong? Well empirically we have seen Bitcoin Cash successfully upgrade to 32 MB blocks, but these are mostly empty blocks because in practice, most BCH holders seem to want to hoard their coins instead of use them for payments. []
  17. We moved three times in the span of ten months, all with a one-year old in tow. []
  18. The Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction. []
  19. Readers may enjoy: Everything Everywhere Is Securities Fraud by Matt Levine. []
  20. In theory, AMMs could be used in traditional finance too. See: Automated Market-Making for Fiat Currencies by Alex Lipton and Artur Sepp. []
  21. It is likely that the authors of several other books I reviewed also had some undisclosed investments. One that comes to mind was Chris Burniske in Cryptoassets. []
  22. For what it is worth, there have been dozens of times where I wanted to short a specific coin or token, but it was hard to trust the counterparty (the CEX), so I never did. I empathize with his motivation, but he should have disclosed the bet(s). []
  23. I wrote long newsletters outlining the antics and shadiness of parts of the coin industry. []
  24. This past summer, McKenzie trolled the birdapp by saying “have fun staying poor” as well. []
  25. See also: Will the real stablecoin please stand up? by Anneke Kosse, Marc Glowka, Ilaria Mattei and Tara Rice []
  26. Tokenization attempts have expanded beyond precious gems and metals. In 2021, Poolin, at the time one of the largest multi-cryptocurrency mining pools, released a “hashrate token” which as the name suggests, attempts to tokenize a discrete amount of hashrate generated by mining hardware. At the beginning of the year, Navier, a Bitcoin hosted mining services company, announced a similar effort for “qualified investors.” []
  27. On p. 96 the authors mention White & Case. Coincidentally, this was the law firm Bob – a U.S. trained lawyer – worked at prior to joining the coin world. []
  28. The STABLE Act, co-authored by Rohan Grey, provides legislative latitude for the erection of a narrow bank-like structure that currently does not exist but likely best fits the needs of an entity like a pegged-coin issuer. []
  29. For some reason Silverman has deleted every tweet he ever engaged with me on as well. Unclear when this occurred; is this common for reporters at The New Republic to do? []
  30. For instance, two months ago, the U.S. Secret Service seized around $58 million belonging to Deltec from MUFJ. Why does it matter if the creator of Inspector Gadget founded Deltec? Is there only a specific category of people who are allowed to create banks? It is a distraction for readers who should have been informed more pertinent details like what Forbes reported in January. Perhaps this is a little unfair, as the authors had to ship a book and missed some news (they were still updating this book in January and the Epilogue appears to be written in March). Either way, the book was light on details for Deltec which does seem like an interesting bank to look into and Zeke Faux did so in Number Go Up. []
  31. I previously mentioned his real name back in February 2022 in section 5. []
  32. I am not sure who first coined the term “Tether Truther” but I have used it in the past to describe people who still claim – post-CFTC settlement – that Tether LTD is still acting in a fraudulent manner. The “Truther” modifier is similar to the scheming intrigue of other “Truther” movements. USDTQ is a riff on the conspiratorial TSLAQ. []
  33. “Cut to the chase” is an apt expression here. In contrast to Faux’s book (which does discuss Tether at length), McKenzie and Silverman linger and beat around the bush. Part of the issue likely stems from the fact that they have cultivated sources, such as Bitfinex’ed, who have no insider information. []
  34. It seems USDT-related development is about the only thing active on Liquid at the moment. []
  35. See 40 cointroversies to look into over the summer []
  36. Gee, I wonder what cowardly “Boston Celtics” fan who loves to setup alt accounts saying the same thing “This You?” to the same exact people, could be. []
  37. On p. 50 Faux writes: Phil Potter, an executive at an offshore Bitcoin exchange, Bitfinex, was developing a similar idea. They teamed up and adopted Potter’s name for it: Tether. (Potter told me he was actually the one to first approach Sellars with the idea. “I’m sure Brock will tell you he came down from Mount Sinai with it all written on stone tablets,” he said.) []
  38. Many SPACs deserve scorn because in part, some screwed over retail and it was odd that Diehl et al. treatment on this topic did not mention SPACs at all. []
  39. One response could be that Zeke Faux, on p. 199 of Number Go Up, mentioned being part of the “crew” for The Mutant Cartel, but it was clear to readers that the mutant ape he purchased was to be temporarily used as a guest admission ticket, not some permanent band-of-brotherhood. []
  40. For instance, I have publicly stated many times that I am in favor for allowing anyone that wants to opt-in to have an account with the central bank. See section 2 in Was 2021 the year the coin world went from edgy to banal? []
  41. It is worth looking at the E-Cash Act too. []
  42. 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. []
  43. Kofner is the author of the widely cited comparison between transferring funds with Bitcoin versus several “traditional” wiring services. It debuted in 2014 and is still updated on a regular basis. []
  44. Newstat tweeted out his identity and then did a “reveal” podcast with Tomlinson wherein he made a number of false statements about myself. Unfortunately neither McKenzie nor Silverman reached out to verify if any of the claims that Newstat had made were valid (or not). And subsequently McKenzie falsely accused me of harassment. Then he blocked me. It would be a massive distraction to this book review if we were to litigate all the finer points of this drama. In reading this book it is clear that they were all pals, so closing ranks makes sense, but that is not what a reporter is supposed to do. Verify, not trust. []
  45. I recall a DC-based reporter recently tweeting that if a reporter feels the need to befriend their sources, they should probably just get a pet instead. []
  46. An interesting post-trade infrastructure story – about the DTCC and Cede and Co. – was written more than six years ago: Dole Food Had Too Many Shares by Matt Levine. []
  47. Coincidentally, in the process of writing this review the DTCC acquired Securency, to help with their tokenization efforts. []
  48. Note: I strongly disagree with Gladstein on many things but do find it strange that the SBF segment wasn’t released, surely it would be good promo material? []
  49. While it is possible to lever up with white-listed collateral on DeFi lending protocols such as Aave and Compound, the amount thus far is magnitudes less in part because of capped LTV ratios. []
  50. Between 2014-2019 I met a whole sundry of people claiming to work for some kind of agency including the FBI and InQTel. Didn’t drink with them though. []
  51. Seems like this purity contest over who is the most OG “critic” is stolen valor. And the supposed award nominations? Jumping the shark. []
  52. Dozens of U.S.-based Bitcoin mining companies recently visited Washington D.C. to lobby and spin the narratives away from P-o-W being an environmental blight. A second edition could look at these types of efforts. []
  53. The authors could have highlighted that some bad actors never leave the coin world. For instance, Michael Patryn – co-founder of defunct exchange Quadriga – was revealed to be Sifu. Patryn/Sifu were in the news last year for forking Aave. []
  54. Coincidentally, in the process of writing this review, FX retail trading in Japan – which accounts for the largest market share globally – hit a record high. []
  55. Not an endorsement but there are attempts to build self-custodial exchanges in the DeFi world, such as C3. []
  56. Look no further than the Board of Directors at registered clearing agents to illustrate possible synergies and conflicts. []
  57. Derivative liquidations in traditional finance is now less brazen in how it screws end users. For instance, in the UK, retail traders of spread-betting and CFD products often lose all capital in 3-6 months. As a consequence the FCA has honed in on changes to advertising CFDs the past four years which includes restricting the sale and how they are marketed. []
  58. Coincidentally, I co-authored a peer-reviewed paper that intersects with this topic: Decentralized Financial Market Infrastructures: Evolution from Intermediated Structures to Decentralized Structures for Financial Agreements []
  59. I have publicly asked it as well, for instance, on November 30, 2017. []
  60. Also, doesn’t the former Chief Strategy Officer – Phil Potter – live in New York City? []
  61. Laura Shin recently interviewed two creditors of Genesis who deposited more money following assurances from Genesis. []
  62. See Tribes of maximalism []
  63. To hammer this point home, nearly two years ago, BSTX, a joint venture between tZero and Boston Options Exchange (BOX) Digital Markets, received approval from the SEC to operate a blockchain-based securities exchange. Maybe BSTX fails to gain traction, maybe the market doesn’t care about blockchain-related exchanges. But the issue at the heart of Mirror wasn’t “the exchange” existed; the problem was the fraud, not the existence of a new trading venue. []
  64. Allen also made a number of incorrect claims regarding Ethereum’s “Merge” last year. []
  65. Allen was wrong in part because according to her acknowledgements she seems to rely on Stephen Diehl for technical assistance. Here is a my book review on Diehl’s book, the most inaccurate blockchain book I have ever read. []
  66. I sent an email to Hilary Allen on February 20, 2022 that included a number of comments in her draft, it does not appear that she incorporated any of the suggestions including the correction to the false claims about new tokens being used as collateral for loans. []
  67. Over the past 15 years it acquired Lehman Brothers, Washington Mutual, and WePay. The former two during the duress of the financial crisis. J.P. Morgan is also a partial owner in Maxex, a mortgage clearinghouse; payments consortium “The Clearing House”; Cboe Clear (in Europe); and other infrastructure that might meet the criteria of “conflicts of interest” albeit at arms length. []
  68. Lack of by-lines: one of the reoccurring themes within the Protos world is to dunk on anonymous Tether promoters and shell companies, yet the publication allows anonymous contributions. This is a double-standard, having your cake and eating it too. []
  69. According to its Chapter 11 bankruptcy filing last year, Alameda had outstanding liabilities of $5.1 billion. But putting aside those loses, I could conjure several explanations. []
  70. One interesting nugget the public learned during the SBF criminal trial is that Caroline Ellison testified that she produced multiple different balance sheets, all of which were false. The one that was leaked to CoinDesk in 2022 was one of the rosier balance sheets, yet was itself fudged too. []
  71. See also Crypto adoption in America by J.P. Koning []
  72. This is not an endorsement of RWAs. At least one lawyer has argued: that the point of blockchain is to reduce trust assumptions/requirements and in almost all current cases, “tokenizing RWA” increases trust assumptions far above those even required for normal off-chain ownership. As a researcher this is why I have found it strange that some DeFi dapps parasitically rely on off-chain collateral (centrally issued pegged coins). Readers may be interested in this relevant thread from Andrea Tosato. []
  73. Zelle is operated by Early Warning who partnered with The Clearing House a couple of years ago. []
  74. On October 10, 2022 the USDD “marketcap” was about $795 million, a year later it was roughly $728 million. In contrast, according to ChainArgos, “Overall USD stablecoin market cap on ethereum down roughly $4 billion on ethereum and up more than $5 billion on Tron over the last 90 days.” []
  75. Some of the people the authors cited in this book did some grave stomping when FTX collapsed. But as we have seen in the criminal court case of SBF, apart from a handful of insiders no one actually knew what was going on. []
  76. The case has not gone to trial yet, but Saylor did lose a bid to quickly quash the suit. []
  77. Having spoken to Walch about the current batch of “skeptics” and “critics” – which she has been labeled in the past – it is pretty clear why neither of us amplify people who market themselves as such on social media. []
  78. Following the Hamas terrorist attacks, Stark dinged his credibility in a pair of sensationalistic tweets. He states that “crypto is not traceable” yet relies on ChainArgos which uses analytics to link addresses. Contra Stark, in this case, something is indeed traceable. Two chain analytics companies wrote rebuttals to this specific sensationalism: Chainalysis and Elliptic. Also, the authors of The Wall Street Journal article Stark cites mistakenly counted an entire exchanges’ trading volume (~$82 million) for a terrorist group’s address. Even the U.S. Deputy Treasury Secretary Wally Adeyemo weighed in on the topic. []
  79. One example of the “Horseshoe theory” in practice — the observation that some Bitcoin maximalists and anti-coiners both use an anti-empirical, a priori cudgel — is to look at say, Stephan Livera’s list of guests. At one point the running joke was that his dozen repeat guests each had podcasts whereby the only invited one another, because that was the size of their maximalist clique. In some ways we see that form of insular “in-group” dynamic in this book wherein the majority of “critics” or “skeptics” are the ones who pass one another’s purity tests. []
  80. In Number Go Up, Zeke Faux spoke with several hedge funds that wanted to short USDT. On p. 92 he writes: “I’m betting a shit-ton of money on them being a crook,” Fraser Perring, co-founder of Viceroy Research, told me. “Worst case is, I can’t lose hardly anything. I’m already rich, but I’m going to be fucking rich when Tether collapses.” []
  81. Perpetuals has become a catch-all term for a category of futures. These products often have higher daily trading volume that spot trading on centralized exchanges. Cam Harvey put together a quick primer on the topic. The original idea dates back three decades, from a paper by Robert Shiller. []
  82. As I mentioned at the time: For instance, on August 17, 2016, Bitfinex announced that they had hired Ledger Labs who, “is undertaking an analysis of our systems to determine exactly how the security breach occurred and to make our system’s design better going forward.” According to one post, Michael Perklin was the Head of Security and Investigative Services at Ledger Labs and part of the team leading this investigation. However in January 2017 a press release announced that Perklin was joining ShapeShift as the Chief Information Security Officer; his profile no longer exists at Ledger Labs. 18 Thus the question, what happened to the promise of a public audit? []
  83. The authors point out that during highly volatile periods, some CEXs suffer delays and/or shutdown entirely. They highlight a couple of possible reasons, including exchange operators being up to no good, which historically is a real possibility. To be even handed, even mature exchanges in traditional finance have (partial) shutdowns. For instance, in the process of writing this review the London Stock Exchange had a major technical incident which impacted (trading delays) small cap stocks for around 80 minutes. []
  84. Will certain crypto reporters from The Financial Times be held to the same standard they often criticize coin reporters of not reaching? []
  85. Coincidentally, during the process of writing this review, Phillips published a new paper directly related to the “securities” issue the authors referred to: Crypto Skeptics’ Supreme Risk. []
  86. Another missed opportunity was a discussion around privacy and confidentiality. For instance, the Zcash Foundation had its implementation of a threshold signature system reviewed by security professionals. Throwing the baby with the bath water, as this books authors frequently do, seems short-sighted. And this germane topic is not just relevant in the blockchain world either. For instance, Plaid normalized man-in-the-middle attacks. Will Akoyab continue this MITM normalization process? []
  87. A low-hanging point they could have made with proof-of-work mining: the block rewards are often value leaking from the ecosystem, to the benefit of state-owned energy grids and semiconductor companies. []
  88. Speaking of PayPal: is PYUSD just a marketing stunt? Which of the two different PayPal dollars is safer than the other? Will the frequency of the audit of the assets backing their other PayPal dollar be increased? []
  89. See also: Texans versus bitcoin: Jackie Sawicky and the Texas Coalition Against Cryptomining []
  90. For instance, while both books discuss Tether at length, Faux reached out to and received direct quotes from: Phil Potter (former CSO of Bitfinex) and from J.R. Willet (who created Mastercoin which is the infrastructure the USDT used on Bitcoin). Faux even corresponded with Arthur Budovsky, the creator of e-gold, who wrote back from prison. Did McKenzie and Silverman attempt to speak with these sources? []

Guest Post: “Why Gold and Blockchain Don’t Mix”

[Note: Below is a guest post discussing a “real world asset” (RWA) tokenization use case that has been proposed and re-proposed for about a decade (first with Colored Coins and Counterparty). Among other articles, the author previously co-authored another thoughtful piece A Quick History of Cryptocurrenices BBTC — Before Bitcoin. Reprinted with permission; and the views are those of the authors alone.]

By Ken Griffith

Since the appearance of Bitcoin in 2008 numerous people have had the idea of issuing gold tokens on a blockchain, or using a blockchain to support a digital gold currency system.  This short essay will look at some of the attempts to do this and suggest the reasons why this has not worked, and is unlikely to ever work.

In 2015 Roy Sebag borrowed a phrase from Satoshi and created a company called “Bitgold” which performed a reverse IPO on a Canadian stock exchange.  Sebag raised several hundred million dollars to “put gold on the blockchain.” However, instead of creating Bitgold, he proposed a buyout to James Turk at GoldMoney.com.  After buying out goldmoney.com, Sebag simply invested the funds into expanding that business which had been founded in 2001. Goldmoney has a ledger, but it does not use blockchain at all.  

In the intervening years a dozen or more different gold tokens have been created on Ethereum and other platforms.   Of these, many turned out to be scams, and one or two of them were legitimately backed by actual gold.  However, none of these have gained any traction in the marketplace.

To understand why gold and blockchain do not mix we need to look at the history of digital gold and cryptocurrencies.  E-gold was the first Internet money in 1996, 12 years before the Bitcoin whitepaper was published.  By 2001 e-gold had one million users worldwide, and had an annual transaction volume of about US $2 billion per year worth of gold.  By 2005 there were six such digital gold issuers.  However, the US Treasury began a campaign of prosecuting the digital gold companies using the USA Patriot Act from 2006 to 2009, in which the four USA based issuers were indicted, their gold reserves seized, and officers indicted.

Goldmoney.com was the only digital gold issuer to survive the purge because they were fully licensed in Jersey, UK.  However, they never allowed an independent network of exchange agents to provide exchange services to their users.  So Goldmoney.com never became a popular means of payment.  Goldmoney was primarily used by institutional investors to hold large amounts of physical gold.

The primary obstacle to developing a gold payments network is government regulations in various countries.

Blockchain tokens such as Bitcoin have the advantage of being decentralized with no person or company as the issuer.  They are resistant to government regulation and control because there is no central server that can be seized or turned off.  There is no person who can be arrested to stop the Bitcoin network from continuing to process transactions.  The network continues to operate so long as the people operating servers with this software continue to operate them and keep the same rules.

When you create a gold-backed token you violate the basic social reason that has allowed blockchains to ignore government regulations.  An asset-backed token is a promise by some person or company to deliver some asset in exchange for the token.  That is implicitly a contract between the issuer and the holders of the token. The token may live on a blockchain, but the person who issues the contract lives in the real world. The physical assets used to back the token also exist in the real world.  A government can arrest a person or a company and confiscate the physical assets.

The Crux of the Problem

Once a token is issued on a permissionless blockchain it is impossible for the issuer to control who gains access to that token.  It can be transferred to someone in a country where such tokens are illegal or otherwise regulated.

We saw this in the case of EOS, which raised $4 billion in a year-long token sale from 2017 to 2018.  The terms of the sale expressly forbade US Citizens from buying the tokens.  The sale contract required the buyer to swear that they were not a US Citizen or resident of the United States.  The website blocked US IP-addresses so the token sale could not even be seen by web browsers in the United States.

Two years after the token sale was complete, the SEC began an investigation, and a class action lawsuit was filed against EOS for selling tokens to US citizens.  This means that some US citizens made a false statement under oath to buy those EOS tokens, and then handed that evidence to US law enforcement agencies.  Because the company had raised $4 billion, the large pile of money was very attractive to US law enforcement agencies.  EOS ended up settling with the SEC for 24 million dollars.

The value of the assets is the critical factor in determining which companies are prosecuted and which ones are ignored.

We conclude that any tangible asset digitized on a blockchain is vulnerable to lawsuits and criminal prosecutions from countries that regulate or otherwise make such payments illegal.

Law enforcement agencies do not immediately prosecute every company who issues such a token.  They bide their time and wait until they see a large pile of value that is vulnerable to prosecution. Only then, do they begin an investigation and prosecution in order to seize those assets using asset forfeiture laws.

How to Avoid this Problem to Issue Real Digital Assets

An Internet ecosystem which allows persons to issue real-world financial contracts for various assets would require a contract-based ledger such as one based on Ricardian Contracts.

Rather than creating one company, such as Goldmoney.com, that offers gold accounts to citizens of many countries, it is better to create a network of lawful institutions in different countries that only offer asset accounts to residents of that country.  Thus, each institution need only concern itself with the laws of one nation, rather than the laws of all nations.

A clearing mechanism will allow payments to clear between different institutions in different countries.  This short video explains the concept of a clearinghouse in two minutes:

It is better to have many small issuers of gold or other assets than one large centralized issuer.  Each of the small issuers should have a license for a money service business in their jurisdiction.

Since corruption is part of human nature, and will always be a problem, it makes more sense to build a system that anticipates the cost-benefit factors that drive corruption. Even law enforcement agencies have a cost to seize financial assets.  They have to bring a case in court, which costs money.

Many small piles of gold are much more expensive for a government to seize than one large pile of gold.  If there are many issuers, then a government would have to indict each issuer with a separate court case in a separate jurisdiction.   This is too expensive and inefficient.  Ideally, you would want issuers to hold the amount of gold roughly equal or less in value than the cost of prosecution.  So, for example, a typical prosecution of such a company would cost $1 to $5 million USD.

In traditional banking, bank ledgers were protected by financial privacy laws.  Unfortunately, the twentieth century saw the steady weaponization of banks against their customers by the State.  However, banking privacy worked effectively for centuries.  The best long term solution is for states to reform their banking laws to restore and protect financial freedom and privacy.

Conclusions

We find that permissionless blockchains are not environments that are ever likely to work for contract-based financial transactions. They have no native means to record consent to a contract, nor to restrict access to a token to those who have consented to a contract. 

By contrast, a Ricardian Contract based ledger would be ideally suited to enable an online financial ecosystem with securities and asset-backed tokens operating within the law.  Ricardian Contracts were invented a decade before Bitcoin.  Yet, there has been very little community interest in building Ricardian Contract based systems.  The reason for this appears to be ideological.

The ideological spectrum of cryptocurrency users leans heavily towards anarchy.  Even classical libertarians believe in the necessity of courts of law to enforce contracts.  Yet, the majority of cryptocurrency fans seem to reject even the idea of courts of law, as seen in their reaction to the CSW defamation case.  Without courts of law, contracts are unenforceable.

The idea that computer code can be a replacement for law and courts is popular but fatally flawed.  It is extremely difficult to write and maintain error-free software.  It is fine to say that the code is the law, until an error in the code allows an outcome that was not intended.  Human courts of law are the ultimate error processing routine. This is unavoidable, and therefore should be embraced in the design of any financial ecosystem.

The dream of creating online financial ecosystems that live on the blockchain, free from courts of law is doomed to perpetual anarchy.  Financial institutions, by definition, hold assets in trust for their account holders.  Such relationships require contracts and courts of law to enforce.  Without contracts and courts of law, all that can be expected is a wild west of online fraud.  The long string of failed cryptocurrency exchanges and other projects testifies to the truth of that assertion.

Book review: The Cryptopians

I have found a blockchain-related book that did not have me completely shaking my fist in the air. For background, I have reviewed six other blockchain-focused books, most of which were pretty bad and/or filled with inaccuracies (the exception thus far was Digital Gold).

In contrast, The Cryptopians by Laura Shin was a breezy read and one that – from a technical perspective – I feel comfortable recommending to both geeky and non-geeky audiences trying to understand some of the people that created the Ethereum ecosystem (as well as a few other blockchains).

For instance, I enjoyed the steady dripping of GRE words like pastiche and bucolic which were carefully placed throughout each chapter alongside detailed (physical) descriptions of venues and individuals. I look forward to seeing it turned into a mini-series (Luka Dončić will obviously play Vitalik).

In terms of “inside baseball,” while I have bumped into and interacted with many of the people mentioned, I don’t know enough to comment on several figures discussed so the review below is largely about other portions of the book.

With that said, there were a few areas that I had quibbles with. For instance, I probably would’ve highlighted how much aggregate fraud took place during the 2017-2018 ICO boom (e.g., why Chinese governmental authorities kicked out exchanges, etc.). But that likely would have distracted the main story around how Ethereum evolved as infrastructure.

And before I’m labeled a rose-tinted glasses fanboy, worth pointing out that when I first interacted with Shin years ago, we didn’t agree on a number of things. Rather than dwell on those past differences, I think it is a credit to her reporting that she provided nuances in the story (such as the early days of Hyperledger project and Enterprise Ethereum Alliance) that pundits who are new to this space are unaware of or put no effort in understanding. Calling everything a scam is the laziest form of concern trolling and fortunately readers have a list of citations to peruse instead of relying on innuendo from flash-in-the-pan Twitter personalities.

Note: all transcription errors are my own. See my other book reviews on this topic. Spoiler Alert: there are a bunch of spoilers below!

Preface

Before we begin, worth pointing out that the book covers a roughly four year timespan (January 2014-January 2018) and was published in February 2022. The preface included a helpful backdrop of what was occurring in the financial services area during this time frame. One paragraph stuck out, stating on p.3:

Soon financial institutions as powerful as JPMorgan Chase, Nasdaq, Visa, HSBC, State Street, UBS, Santander, and many others worldwide began exploring the technology. In late 2015, “Blockchain, not bitcoin” became the mantra on Wall Street, and from January 2014 into February 2017, more than fifty financial services firms invested in the space.1

To be pedantic, the very first person I am aware of that said “Blockchain, not bitcoin” is a VC named Adam Draper, who opportunistically pivoted the messaging from his portfolio companies in late 2015:

Source: CoinDesk

I attempted to chronicle some of these wordsmith shenanigans in October 2015.

Is it important in the scheme of things?

Maybe not. But I think it is worth re-highlighting this fairweather etymology. For instance, contemporaneously some anti-coiners actively attempt to memoryhole the slur that is “no-coiner” to play identity politics; e.g., People who purposefully do not own snow skis are not labeled as “no-skier” or someone who doesn’t own an airplane, a “no-planer” or someone who doesn’t own a computer a “no-computerer.” One of the reasons some anti-coiners do not call themselves anti-coiners is because they likely do not understand the etymology of “no-coiner” and how it is a grammatic corpse.

But that’s a different story, although germane for 2022.

Chapter 1

Chapter 1 provides readers with a short biography about Vitalik Buterin, including his early childhood (I was unaware of his prowess with Excel!).

I made a pedantic scribble on p. 12:

Shutting down Bitcoin would require tracking down and switching off the devices of every single person running the software — and that would require the coordinated action of every government in the world. But even shutting off all existing computer on the network wouldn’t stop anyone else from spinning up the Bitcoin software.

This is accurate at a high level. Pedantically however, in mid-2022 a well-resourced attacker (such cooperating governments) has a bit simpler task: (1) shut down large mining farms which ultimately slows down block production (e.g., the difficulty overhang would likely require a hard fork); (2) shut down or compromise just three ISPs or BRN/FIBRE — a protocol that propagates blocks directly between mining pools; (3) shut down or severely curtail liquidity providers (e.g., require large CEXs such as Coinbase to delist Bitcoin).

Again, we could argue (and Bitcoiners love to argue!) about the likelihood of either occurring but in my view a better illustration of geopolitical resiliency would be proof-of-stake (P-o-S) networks such as Avalanche, Polkadot, or Cosmos which do not rely on easily-identifiable points of failure (e.g., large mining farms) and are therefore mostly immune to scenario 1 (although clearly dependence on centralized cloud providers for any of these can be a weakness).

With that said, going down this rabbit trail clearly would have been confusing to the average reader so it is understandable why this hypothetical wargamming was not included.

Pages 15-17 provided some interesting background on how Bitcoin Magazine came into being (although maybe a missed opportunity to describe how it ultimately turned into a mother-son Bitcoin maximalist operation!).

On page 16, the author identified some good foresight:

Back home in Toronto after his globe-trotting, Vitalik was coding up a client using the language Python for Ethereum, while Gavin and Jeffrey worked on the C++ and Go clients, respectively. (Vitalik wanted Ethereum to work on different software clients so that a bug in one wouldn’t take the whole blockchain down; the entities on the network could run another one while the buggy one was fixed.)

This is an important paragraph and I am glad that Shin mentioned this so early on.

Why is implementation pluralism a good thing? Because as she described, it provides resiliency in the event something catastrophic or existential occurs (such as a bug that knocked 13% of Ethereum validators offline two years ago). Most blockchains, even a few years after launch, still are dependent on a single codebase maintained by a single team. Apart from resiliency (e.g,. a different implementation surviving a bug that knocks other implementations offline), this could lead to some perverse scenarios such as with Bitcoin wherein de facto gatekeepers ossifying around the BIP process (e.g., a priori anti-bigger blocks).

Today, there are at least four different “Eth 2” client implementations that are undergoing stress tests for the upcoming “merge.” Up through the spring, Prysm has been the most popular implementation and is actively attempting to reduce its marketshare by acknowledging that a network is more resilient with more active implementations.

Chapter 2

On a personal level Chapter 2 is interesting because during the time frame it takes place (January 20, 2014 to June 3, 2014) I was also writing a short book and had a chance to interview a few of the people mentioned. I witnessed odd behavior at least once: I had a Skype call with a couple members of the original Ethereum team. During the call, one person pointed a video camera (with its bright light) right back at me and video tapped it. I don’t recall the names but according to Shin, at least one person in that group was actively recording things which kind of seems off (or maybe I’m not sentimental enough!). I also thought Charles Hoskinson (who I separately interviewed) used phrases and words intimating as if he was a middle aged mathematics guru. And only learned he wasn’t through the book.2

Shin does a good job throughout the book articulating what the inner monologue was, what key people were thinking at the time. On p. 31 she writes about Gavin Wood who was brought on as the first developer and learns that the organization isn’t fully formed. Stating, “Why are they discussing this? If Ethereum hasn’t been founded yet, then damnit, I want to be a founder!”

This is followed-up with supporting details two pages later, “Later, Gavin would feel shafted as a lower-tier founder when he says he eventually found out that Charles had gotten into the Skype group only a day before he had.”

Another interesting detail on p. 36, “From Christmas to mid-February, for their respective Ethereum clients, Gavin and Jeff wrote more than seventy thousand lines of code.3 (Eventually, Vitalik’s Python client would mostly be used for research.)

On p. 40 the author pointed out how Charles had told at least one person in the team (Mihai) that he was Satoshi.

But as Shin notes,

The real Satoshi could easily prove his/her/their identity by moving a coin in the first block of the Bitcoin blockchain. There was no need for all of Charles’s hocus-pocus. Ultimately, most of the Zug group decided Charles was not Satoshi.

Pedantically the first sentence is both true and false. The real Satoshi could prove their identity by moving coins in the first block mined on January 9th, but not by moving coins in the actual Genesis block (from January 3rd). Why not? Because the Genesis block was hardcoded into the chain, the coins cannot be spent. Shin’s statement is a good barometer for filtering out wanna-be Satoshi’s, such as Craig Wright.

I’m also glad that Shin referenced Gavin Wood’s original essay on “Web 3” which was published in April 2014. You don’t have to agree with it, but unlike many of the VCs who promote “Web 3” or the anti-coiners who permahate on it, Wood provides some specific characteristics defining it. Is that too much to ask letter campaigns today?

Chapter 2 also goes into some details about the “holons” which I always thought was kind of bananas. Stating, “The Romanian Mihai, the Bitcoin Magazine founder who had lived in anarchist squats, enjoyed drinking, and was sociable, spontaneous, and creative, wanted Ethereum to comprise a series of live-work holons.”

The book goes into some depth about the drama these live-work locations, eventually they were dropped from official sponsorship and funding.

Page 48 mentions people, such as Vitalik, possible being “on the spectrum of Autism” and I seem to recall finger pointing at various events of who is and isn’t “on the spectrum.” Hopefully these antics will retire, there’s no room for the rudeness in polite society.

Chapter 2 closes with some nice imagery:

Vitalik walked out onto the front deck, the larger of the two on the top floor. It was drizzling outside. Beneath his feet were perfectly straight, cherry-stained wooden slats, and off to the side, a black barbecue grill, four black planters with bushes, and a yellow flower pinwheel.

Shin does a good job placing these details throughout the book, helping the reader imagine the scene.

Chapter 3

This is also an interesting chapter in terms of how certain events moved by quickly. For instance, with the crowdsale, on p. 71:

Stiftung Ethereum was finally established on July 9. By Friday July 18, the Ethereum crew had Pryor Cashman’s draft opinion letter. On Monday, July 21, they received it signed. On Tuesday, July 22, at midnight Central European Summer Time, they launched the crowdsale.

On p. 73 it is kind of funny to see some Bitcoin maximalists enter the chat:

Meanwhile, many Bitcoiners claimed “alt-coins” like Ethereum were unnecessary. For instance, a March blog post titled “The coming Demise of the Altcoins (and What You Can Do to Hasten It)” sad, “When people say, ‘But Ethereum can do smart contracts!’ this is actually false… Ethereum will therefore soon be forgotten like the rest once it inevitably fails to deliver on its promise.”

Coincidentally a few months ago I highlighted that same article and how the author ended up kicked out of the little institute he co-created, later joining the Bitcoin SV circus. Without endorsing Ethereum itself, it is empirically clear that it has not been forgotten and has delivered more than most publicly funded blockchain projects. This still doesn’t sit well with vocal maximalists (and anti-coiners).

On p. 84 the author mentions cold storage devices that stored the Ethereum Foundation’s bitcoin and specifically mentioned Michael Perklin.4 The one related anecdote I have about him: I spoke at Devcon 2 which took place from September 17-19 in 2016 in Shanghai. This is about a month after Bitfinex was hacked for around 119,000 bitcoin.

Just a total coincidence but when I got on the maglev, Perklin and I ended up sitting next to one another. Recognizing him, I started peppering him with questions about Bitfinex, who he was helping provide a security audit (he was mentioned in an official blog post on it). If I recall, my argument was that in traditional financial markets, an exchange operator that had suffered a similarly huge loss would have been closed down by regulators, least of all not been allowed to socialize losses and issue a couple of IOUs. Long story short, we disagreed on some fundamental issues and went our separate ways.

Chapter 3 concludes with the formal launch of Ethereum mainnet and the hiring of Ming Chan.

Chapter 4 & 5

Chapters 4 & 5 had lots of interesting anecdotes and drama I was unaware of. Geeky readers may be asking, “what’s with the big deal gossip?” In my view, I find it impressive that anything was built and delivered with the type of work dynamics described, e.g., it’s hard to imagine operating in an environment with a senior leader having loud outbursts throughout every conversation.

Chapter 4 ends with the termination of Gavin from the foundation and Chapter 5 concludes with The DAO being drained. A number of ICOs were mentioned, such as Lisk and DigixDAO. Where are they today? Lisk still exists, maintaining an SDK for developers. Digix suspended its operations five months ago, and is reviewing its license requirements in Singapore. A companion book could probably have been written to discuss (and scrutinize!) the types of ICOs and tokens that were created between the collapse of The DAO and early 2018, more on this later.

Chapter 6 & 7

Chapter 6 was quite the page turner. Even though I was actively providing analysis at that time, it’s always interesting to read a cohesive blow-by-blow, with comments from the key developers and stake holders (the timeline at the end is great!). The fact that Phil Potter had such a dismissive view about Ethereum (calling it a “shit coin” a couple of times, including p. 182), isn’t a huge surprise considering his previous antics of “cat and mouse” bank accounts.5

For instance, I had no idea the role Andrey Ternovskiy, the creator of Chatroulette, had in increasing the drama-per-second following The DAO hack, leading up to the hard fork (he pretended to be the original DAO hacker and tried to social engineer some outcomes).

An interesting technical point from an excellent Chapter 7 (especially the sleepless nights for the Robin Hood Group), on p. 166:

The hard fork was indeed less complicated, especially compared to a similar process on Bitcoin. Because Bitcoin was “a peer-to-peer electronic cash system,” as Satoshi Nakamoto described it in the Bitcoin white paper, it had a chain of custody that could be followed all the way from the creation of a bitcoin to the one (or fraction of one) that someone owned. It made possible the digital equivalent of being able to trace a dollar bill from the time it gets minted to the time it gets used to tip a cab driver, who then uses it to buy flowers from a florist, who then pays bus fare with it. In order to unwind something like the DAO on Bitcoin, to undo the cabbie’s tip, one would also have to rescind the bus ticket and return the flowers.

Bitcoin uses the UTXO model and Ethereum uses an accounts model, in principal, the forking process could work the same way if planned ahead of time. For example, while the flow of funds (payments) between users and merchants were not reversed when Ethereum split into ETH and Ethereum Classic, but with forks like Bitcoin Cash, if a blob of UTXO had ever been used, it really cannot be precisely excised and grafted onto the new fork without having to fully unwind the butterfly effect (see the 2013 accidental hardfork of Bitcoin for the winners-and-losers).

The brief discussion of Bitcoin maximalism on p. 181 as well as the quote from Aaron van Wirdum (a vocal Bitcoin maximalist at Bitcoin Magazine) reminded me of a tweet I posted just after the hardfork:

Source: Twitter

What’s the context of this dumpster fire? Recall that beginning in summer 2015, the Bitcoin “community” was undergoing a (negatively) transformative event: the Bitcoin civil war. At the heart was whether or not to hard fork and increase the block size. Several proposals, such as Bitcoin XT had been drafted up and a vocal wing, primarily composed of Blockstream-affiliated developers and organizations were opposed to any hard fork, let alone one that increased the block size (hence the “block size debate“).

This same group of antagonists regularly claimed that hard forks were unsafe and would lead to disaster, disarray, and the collapse of the entire ecosystem. Seriously, that’s how overdramatic some of these “small blocker” developers came across. Look up reddit and listserve discussions at the time, it was crazy talk.

Suffice to say, you don’t have to have an opinion over whether or not a hard fork should or should not have taken place on Ethereum to simultaneously observe that it did not lead to the collapse of the entire ecosystem. Hence, the egg-on-face, dumpster fire gif above. A number of other major L1s have successfully coordinated hard forks, multiple forks in fact, without leading to total pandemonium.

On p. 188-190, the author discusses the origins behind what is now called Ethereum Classic (ETC) as a separately traded coin. One personal anecdote: I distinctly recall the head of trading at a large U.S.-based exchange reaching out to me during this time period (July 2016) asking if I knew of any Ethereum holders who might be interested in selling their ETC. Worth pointing out, this was before it was listed on Poloniex. So the story of the various parties working in the background to get ETC off the ground probably could be expanded if a second edition is ever written (not that it needs a second edition!).

On p. 189, the author found a maximalist:

On the day of the fork, Bitcoin Magazine, Vitalik’s old publication, wrote an article about “the launch of a spin-off project: Ethereum Classic.” While the author, Aaron van Wirdum, noted that Ethereum Classic, “seems to be a bit of a joke, intended to make a point,” he wrote, the project has been gaining some traction, with a small-but-growing user-base on Reddit and Slack […]”

Fast forward nearly six years by several metrics such as TVL and active full-time developers, Ethereum Classic never really grew beyond its core group of devotees: Bitcoin maximalists who LARPed as Ethereans.6

Just as Litecoin and Dogecoin have not faded away (despite a lack of usage or developer interest), traders will probably continue to trade ETC until PoW coins are delisted for ESG reasons.

Source: Slide 77 from Electric Capital

On this note, on p. 192 the author writes:

They could see that, in the community at large, Bitcoiners in particular felt that Ethereum’s hard fork would illustrate one of Bitcoin’s core features: its immutability.

Two quibbles with this:

(1) some of the largest Bitcoin holders are not maximalists but like Bitcoin for other reasons (e.g., can be used as collateral on other chains);

(2) from a technical perspective, no public chain is “immutable” in the sense that it cannot be forked, if anything immutability describes the one-way hash function. Bitcoin’s development has fully ossified over the past five-ish years, with those interested in building actual dapps having left for greener pastures. Arguably the only thing “immutable” with Bitcoin today is who acts as the gatekeepers to the BIP process: the same self-appointed guards that prevented bigger blocks back in 2015-2016.

Chapters 8 & 9

On p. 198-199 the author mentions some pro-ETC tweets from Barry Silbert (founder of DCG):

Bought my first non-bitcoin digital currency… Ethereum Classic (ETC)

At $0.5.0, risk/return felt right. And I’m philosophically on board

Vitalik was stunned. He had met with Barry at the DCG offices in March, and at that time Barry had offered to help him and be his advisor. Now he was finding out that despite the friendly overture, Barry had never bought ether and now instead had bought ether classic.

Somewhat ironically five years ago, a group of Bitcoin maximalists actually chided Barry Silbert for his tweets (turning it into a full on Medium post). Around the same time, Reuters did a story about whether or not someone in his position would be falling afoul of SEC regulations for the type of tweets he was publishing. Putting personalities aside for the moment, it is worth pointing out that ETC has since had multiple deep reorgs and as shown in the presentation from Electric Capital above, does not really have developer mindshare.

These two chapters also provided some interesting background to both Poloniex (now co-owned by a syndicate led by Justin Sun) and Bitcoin Suisse (who had a change in management last year).

For instance, on pgs. 217-218

The WHG was trying to return people’s money, but instead they’d gotten the majority of it frozen at an exchange. When they asked Polo why it had blocked the trade, Griff and Jordi say the rep asked how Polo was to know the difference between a white hat and a black hat hacker. According to Griff, the rep then said that Polo was going to hold the money because it wasn’t the WHG’s money. Bity and the White Hat Group told Poloniex that it wasn’t theirs either. (Eventually, the WHG would realize that although Kraken was happy to let the Bity account trade, the exchange had blocked its withdrawals.)

Around the same time, someone working in the Bity office, who was then helping the WHG, recalls hearing a rumor from what they believed to be a credible source that the FBI had opened an investigation into the WHG’s activity, which scared the shit out of some group members. For the next two days, they spent a lot of time staring up at a big screen, incessantly refreshing the Poloniex account page to see if the money had been unfrozen. During this stretch of time, they slept very little — going to bed at 8 a.m. the night they realized the funds were frozen — and when people passed out, they did so on the sofas around the office. Weed and bottles of whiskey were strewn about, though the White Hat Group didn’t partake.

Another example of a prominent Bitcoin maximalist attempting to derail Ethereum, on p. 221

A few days after Alexis of Bity published a blog post on the status of the ETC refund, which explained why the WHG had first wanted to convert everything to ETH, a Bitcoin maximalist who went by the online handle WhalePanda published a blog titled “Ethereum: Chain of liars & thieves,” in which he delineated the trades that the White Hat Group tried to do on the various exchanges and concluded, “TLDR; We market dumped the illegally obtained ETC to crash/kill ETC but failed and now we want the locked funds back, sorry.”

His real name is Stefan Jespers and despite the fact that he has publicly invested in Ethereum-related tokens, his social media personality is toxic to this day.

Moving along, although I participated at the tail end of Devcon 2, I was completely unaware of all of the drama that was going on in the background.7

For instance, on p. 238

In the end, Bob didn’t even hear the final answer from Gav himself. Brian Behlendorf of Hyperledger had a call with Parity: Gav’s firm had decided not to go through with it. Bob felt Gav was acting out of spite. Bob also wondered if Gavin wanted to kill a potential competitor to Parity. Gav said Parity’s lawyer, who handled the company’s licensing strategy, had decided against it. Parity had partly gotten its VC funding by pitching an enterprise Ethereum implementation, so if the C++ codebase was permissively licensed, it might compete with Parity’s future product.

This was interesting because in retrospect, this future scenario didn’t really happen. While Parity did participate in several “enterprise” pilots and projects, this codebase was ultimately deprecated and turned into OpenEthereum (and later dropped altogether by Gnosis). Also, Pantheon (from ConsenSys) was donated to the Hyperledger project and re-emerged as “Besu.”

On pgs. 245-246 we learn about a possible motivation behind the denial of service attacks that took place during Devcon2

The DoS attacks were finally over. Though the period was stressful, Vitalik found fighting–and winning– this cyberwar fun in a way. Throughout, the attacker’s motivation was unclear. There wasn’t an obvious financial gain, although he or she could have shorted ETH. (The price did slide from about $13 to below $10 over the two months of the attacks.) In fact, he or she had spent one thousand ETH (roughly $12,000) on the attacks, plus the time to research and execute them. Many mused that perhaps the only people with such an incentive would be Bitcoin maximalists. Regardless, Ethereum became stronger and more capable of handling a high load of transactions–a beneficial maturation given what lay ahead.

When discussing the salaries of Ethereum Foundation employees and candidates, on p. 250:

But even her good qualities had downsides. For instance, even after the foundation found itself in a financially comfortable spot, she lowballed potential employees. When Google employees were applying and stated their salary requirements, she would say things like “Nobody gets paid that much” or that she and Vitalik didn’t–as if developers’ salaries should be benchmarked against her own. (Entry-level Google engineers would typically have incomes higher than Ming’s at the time, plus get valuable stock, and senior-level engineers’ compensation could be $1 million including stock.) At least one former Googler at the foundation was paid half his previous earnings; plus he was made a contractor, so he had no leave or benefits; another applicant from Google simply didn’t join the EF.

I don’t think these are good arguments for a couple of reasons:

(1) The Ethereum Foundation, like most coin foundations, is non-profit. We can argue about what the role of non-profits should or not be in society or what the salaries of their staff should or not be, but there is an implicit assumption that Foundations in general typically cannot offer the same types of compensation that many for-profit organizations can. For instance, the executive director role for both Hyperledger Project and the Enterprise Ethereum Alliance is around $400,000 a year. Since there is no equity or coin rewards for that role, is that high or low? Maybe it is low relative to the value that these organizations are perceived to create for the ecosystems they operate in.

(2) Having worked in the Bay area for five years (where my wife as a hardware engineer), with the current mini bear market in tech equities, arguably the salaries of Big Tech (software) employees were inflated. Plus in the case of Google, virtually all of their revenue comes from adtech which effectively monetizes personally identifiable information (PII) which is morally dubious at best. I don’t know what the “fair market value” of a senior engineer at Google should or should not be able to command after this mini bear market concludes, but the author should have used an apples-to-apples comparison: the salary of an experienced, senior engineer at other Foundations, and not with for-profit adtech companies in the Bay area.

Chapters 10 & 11

As mentioned at the beginning I don’t think the book was critical enough of ICOs in general, and specifically the way some organizers effectively fleeced retail by not disclosing much, if anything. Or how in many cases, a token was not needed.

One example of trying to force a token where one is probably unneeded on p. 256:

Many projects were, like the DAO, fund-raising by creating a token designated for use on that specific network. He said these tokens weren’t just being used to line initial coin offering (ICO) issuers’ pockets with ETH; they were actually being used in the dapps themselves. The people who offered services to the network could be pad in that token, which could then be exchanged for other money. Setting these projects apart was the fact that each was not a traditional app with a company at the center pushing out updates and making business deals; these were “decentralized software protocols” (emphasis added). Historically, such protocols had not been profitable. For instance, the people working on simple mail transfer protocol (smtp) for email did not make money. Outlook, Hotmail, and Gmail, the applications using smtp, had. However, now tokens made it possible for protocol builders to reward themselves since tokens could be created with the network, and they could keep some, like retaining equity in a start-up, and allocate some for continued work on the protocol.

A few quibbles about this passage:

(1) What the author (and the VC) is describing is: public goods, problem of free-riders, etc. Basically there is some useful internet infrastructure (smtp) that could be built but… : who builds it, who pays for the labor, who owns the IP, and so forth. The “Web 2” world now dominated by an oligopoly often referred to as Big Tech that sometimes builds out socially useful technology in exchange for monetizing personally identifiable information (e.g., rent-seeking). That is a morally bad exchange that has been normalized. We don’t have time to go into the years of abuse and exploitation (e.g., Cambridge Analytica scandal) that has occurred but this was one of the original motivations for proponents of “Web 3” in 2014. In practice, over the past eight years many VCs attempt to reinsert themselves and/or their portfolio companies (intermediaries like CEXs) in place of these tech incumbents. That’s not really mentioned in the book but probably should in a future edition.

(2) A sundry of ICO issuers did in fact attempt to line their pockets at the expense of retail. While some useful dapps and infrastructure have arisen out of the chaos of the 2016-2018 ICO mania, continually pointing to these is textbook survivorship bias. We don’t have time to go into how crowdfunding should or should not look like, but clearly there were a lot of victims who had no recourse and that’s not typically mentioned by coin promoters (such as the coin VCs of that era). The author doesn’t say it, but others have defended this time frame as “the ends justify the means” and I don’t think that is a good argument either. Nor is having to donate to unaccountable public goods (e.g., Wikipedia) the only other viable alternative.

(3) Unlike anti-coiners, I don’t think it is fair to throw the baby out with the bath water when it comes to creating new methods of funding public goods. Not everything was a scam or a fraud. Even securities regulators are okay with certain forms of crowdfunding from retail. Simultaneously I’ve been consistent over the years that a “tcpipcoin,” if it had been created almost 50 years ago, would have likely led to distractions for the stakeholders of that era, much like today.

For instance, below is a passage from a paper I wrote in April 2015 (pgs 18-19)

Moving along, on p. 257 the author put together a concise (and interesting!) history of ERC-20:

Suddenly everyone was on the hunt for the next big protocol tokens. And creating new ones on Ethereum was so easy. The previous fall, Fabian Vogelstellar of the Robin Hood Group had solicited comments on an idea that Vitalik had long discussed: standardizing a smart contract for creating new tokens. Fabian made it issue number twenty on a board designated for discussing protocol improvements called Ethereum Request for Comments. After 362 comments, they settled on a standard called ERC-20 tokens, which became a class of tokens that, because they were in a standardized smart contact, could be added easily be exchanges, wallets, and so forth.

In the discussion of crowdfunding, on p. 260 the author mentioned a now mostly dead project, Augur:

Right when they launched, the presale for Augur, a decentralized prediction market in which people could make predictions and bet on the outcome, was happening. When Taylor went to put money in, she was stymied, again, by challenging technical instructions. She asked Kosala to make a one-click button for her. He did, and they added an “Augur Crowdsale” tab to the site. Late in the sale, which ended October 1, 2015, teh Augur newsletter gave a shout-out to MyEtherWallet for the button. Taylor and Kosala exchanged chats peppered with “omg omg”–thrilled to have been noticed by others in the community.

Apart from the handful of people who bought it at < $2 immediately post-launch, the insiders of Augur did okay.8 Why? Today at around $8, Augur (REP) trades at roughly the same level as it did five summers ago. While money may not be the motivating factor for all crowdsale participants, ETH grew and sustained several multiples higher over the same time period (e.g., opportunity cost of capital). Apart from betting on the outcome of U.S. presidential elections, the platform – like Open Bazaar – remains a ghost town. To its credit, unlike other ICO survivors from that era, the Augur team converted 90% its ETH holdings for real money to build and deploy a working prediction market that is updated from time to time.

On p. 269 we learn how Poloniex operated a lot like Binance did pre-2021:

By the time of that victory, the exchange was facing a new problem. Due to US sanctions, it needed to block Iranians from using Poloniex. However, it could not, because the exchange did not have a robust know-your-customer (KYC) program to verify customers’ identities. (The one instituted in 2015 was, according to an early employee, “super basic” and “really, really easy to work around.”) It was a three-tiered KYC system that granted users greater trading access in exchange for higher levels of verification, and part of the reason for it was that Jules and Mike wanted to minimize friction for users to sign up and deposit funds. These discussions dragged on from the end of 2016 into the first half of 2017, when Jules and Mike finally relented.

Even cynical readers familiar with the cyber coin world were probably shaking their heads at this passage: how can operators of a U.S.-based CEX enrich themselves for years intentionally slow-walking compliance with the BSA?

It reminded me of when news leaked around Circle’s acquisition of Poloniex several years ago:

Source: Twitter

Speaking of the SEC, to-date they have prosecuted and/or settled with around 60 token issuers since the start of 2017 (collectively Canadian provinces and individual U.S. states have pursued about as many). The book spends a bit of time on The DAO report, published in July 2017, but doesn’t really highlight retail-focused solicitations, such as Kik (e.g., Kik was mentioned on p. 271 but nothing about their very public fight with the SEC). A second edition could include some retrospection around these retail-focused raises; e.g., why did different governmental bureaus in China ban ICOs around the same time frame?9

On pgs. 282-283 Poloniex is described as a panopticon:

In 2017, Poloniex’s volume grew fifty to seventy-five times what it had been in December 2016. With more customers, more volume, and now more processes, the company became buried. About twenty people were managing almost five million accounts, and the owners had not invested in the company at all. Instead of hiring a third-party know-your-customer vendor, as many companies would, to make sure each submitted ID matched the selfie taken and that the address given wasn’t for, say, a strip mall in Nevada, Polo employees had to process IDs one by one. Support was still bare-bones: according to a manager at the time, five people handled more than one hundred thousand support tickets. In the first half of the year, Johnny managed to “poach” a few troll box moderators to be new support agents, brining the total to eight. According to Johnny, Jules made workers put their phones in cubbies upon entering the office, forbade them from listening to music, and though this might also be for security reasons, blocked their computers from the internet so they could only do one thing on those machines: work. They had to wear headphones so that they wouldn’t accidentally overhear any conversations, they were recorded via cameras inside the office, and they were instructed to communicate with each other only on chat. (Later Jules would acknowledge to employees that they were surveilling all staff chats, including direct messages.)

On p. 288 the author mentioned some of the exuberance during the “Consensus” event in 2017:

The next day, EOS, which billed itself as a faster (but more centralized) competitor to Ethereum, kicked off its nearly year long ICO. The month before, it had advertised its sale on a massive billboard in Times Square, during the consensus conference, which had twenty-seven hundred attendees. The advertisement was ironic given that the EOS ICO blocked US IP address. That week, the ETH price again traded with highs in the $330s and lows in the $200s.

I attended this event and recall visiting the “official” afterparty wherein one of Block.One (the commercial backer of EOS) pointed out that the EOS billboard was just aesthetics and wasn’t encouraging anyone to participate in the ICO. One update for a future edition of the book: in September 2019 Block.One, settled with the SEC for a small sum of $24 million. Not-so fun fact: one of the defense attorney’s who worked on that case also (successfully) defended several other 2017-era ICOs that had purposefully focused on retail investors. This is part of the history that anti-coiners, who are new to town, should probably focus their wrath on instead of trafficking conspiracy theories.

On p. 294 we hear a prominent ICO promoter mentioned in passing:

Meanwhile, on the rocky, lizard- and fern-filled island of Ibiza the Parity team and friends were at a lovely terra-cotta-tiled, exotic-plant-adorned home rented by Brock Pierce, the former Mighty Ducks actor turned crypto VC, wrapping up a weeklong retreat that, for at least some attendees, was at times an alcohol-and drug-fueled blur. The previous Sunday, in the VIP room of the club Amnesia, the group had made merry.

There are a number of similar party-the-night-away excerpts throughout the book. One wonders how anything was shipped during this time frame! Speaking of Pierce, in early February 2018, The New York Times published a critical story of Pierce (and his crew) arriving in Puerto Rico to take advantage of the lenient tax treatment of capital gains (and income) without contributing much in return. Later that same month, clearly without any motivation to clear his name, he publicly pledged to donate $1 billion. To-date, there has been no follow-up, despite folks asking what he has done beyond drumming up easy PR. This is a pattern with some of the prominent coin promoters (post ICO mania) who promise big donations, yet little materializes beyond the press release.

Another example of why a future chapter dedicated to ICO then-and-now reflection is found on p. 298,

For instance, on May 26, the day after Token Summit, there was an ICO for something called Veritaseum that hadn’t open-sourced its code, hadn’t published a white paper, and, based on its jumbled marketing, appeared to be a centralized company that could have easily accepted US dollars for payment — not a decentralized network. It did not even take the basic step of having a secure website, despite the hacks rampaging throughout crypto. It raised $11 million. Early on, VERI tokens ranked tenth among crypto assets by market cap. On July 22, the market cap based on circulating supply was $458 million. But accounting for the fact that Veritaseum had only released 2 percent of its tokens, its market cap by the total float was $22.9 billion. By that measure, the one-month-old company was almost twice as valuable as Nasdaq. Its market cap was more than that of Ethereum’s, which on that day closed $21.5 billion. And who controlled 98% of VERI? The founder.

Two things that stuck out:

(1) In November 2019, Reggie Middleton (the founder of Veritaseum) settled with the SEC for about $9.5 million (most of which was disgorgement), this could be added in a future edition.

(2) Intermediaries such as Nasdaq have an oligopoly on the services (and infrastructure) they provide. If anything, the entire “blockchain” set of experiments (including those initiatives Nasdaq has rolled out into production) should highlight the large amount of market share that systemically important financial institutions and utilities are able to capture and hold and gorge upon. Dismissing all alternatives out-of-hand, as most anti-coin commentators frequently do, raises the question: who are anti-coiners actually trying to help? Financial incumbents who get bailed out by governments? Retail who get fleeced with PFOF? If their goal is to somehow “help” the average Joe, then clearly defending the status quo isn’t very helpful either since it largely rewards incumbents who despite having a regulatory moat, in times of need also get bailed out because they are “too big to fail.”

For all of the discussions around The DAO, Slock.it, and securities regulations, there was one interesting info nugget on p. 301:

While the document was incriminating and put the crypto industry on notice, it wasn’t entirely accurate (The SEC, which declined to comment on this matter, had not interviewed Slock.it and reached out only to at least one American curator. An October 2020 FOIA request turned up no documents on any discussion around who deployed the DAO) Slock.it hadn’t set up the DAO-hub forums (though it had set up the Slack), it hadn’t deployed the DAO smart contract (unknown DAO community members had created eight of them and Taylor’s then fiancé Kevin had tossed the coin that had chosen which DAO to use), and the Robin Hood and White Hat groups, which included some Slock.it employees on their own time, helped resolve the attack. Regardless, the SEC had meant the document to be foundational, to show how the SEC was looking at the space. Lawyer surmised the agency had chosen a “21a report”–giving others notice that going forward the commission would likely follow up with enforcement actions for similar behaviors–because the DAO no longer existed and people had not lost money.

What other regulators may have reached out to Slock.it and curators? Was there a line-in-the-sand somewhere?

On p. 307 we learned about one Ethereum co-founder’s involvement in several ICOs:

At this time, during the ICO craze, Anthony had made a name for himself–not necessarily in a good way. He was slapping his name on ICOs as an advisor in exchange for tokens: Civic, Blockmason, Etherparty, Enjin Coin, Worldwide Asset eXchange, Skrumble Network, Cindicator, Polymath, AION, PayPie, Storm, Unikrn, WAX, Po.et, and Veriblock. Although Civic, Polymath, WAX, and Unikrn were somewhat well-known, the others were no-name projects. He’d also invested in two Chinese projects, Vechain and Qtum.

Not sure why the Chinese angle was worth highlighting; also not an endorsement but both Vechain and Qtum are around and still putting out “announceables.” It is worth mentioning that there are a number of high profile coin VCs who have removed or whitewashed their shilly ICO past, to somehow become… thought-leaders. In the U.S. it is more than two hands can count. Despite the collective “coinesia,” retail-focused promoters-turned-investors probably deserved to be named in a future edition.

On p. 319, more interesting information about Poloniex was described:

That fall, Poloniex’s dominance began to slip. If in June it had sometimes seen trading volume of $5 billion per week, early that fall the peaks were more like $4 billion. Still, even with the dip, the exchange was making a killing. One reason for the drop was that competitors were investing in upgrades, but Polo was doing the bare minimum. Seeing competitor Kraken boast about a slew of new features, Polo employees asked, “Why are we not doing this? Why are we just letting them take our business?” One example: Kraken launched an efficient, self-service feature for two-factor authentication allowing users themselves to disable it. Even though customer service said launching a similar feature would cut a third of all open support tickets, Jules and Mike wouldn’t let Tristan work on it. (As far as most people could tell, Tristan controlled nearly every aspect of Poloniex’s code–a grasp of its intricacies wasn’t spread out among a team of people, as would be expected of an exchange transacting in billions of dollars’ worth of crypto every week.) By this point, according to someone familiar with the matter, the exchange had almost half a million open support tickets. Johnny managed to poach more trollbox moderators to act as customer service agents, reaching twelve total by year’s end. He would feel really good the few times in the fall of 2017 that they got the number of open support tickets down to one hundred thousand. Jules and Mike did let them hire a few freelancers, who Johnny, the head of customer support, trained to help out with the backlog of KYC verification. They were good, so he suggested hiring them all immediately. He recall Jules and Mike said, essentially, No, we’re not going to hire anyone. Work with what you’ve got.

It’s interesting to hear this side of the story because throughout this time period, on social media and in chat groups, people would complain about Poloniex’s customer service. Now we know why.

Dentacoin was name dropped on p. 325. It is routinely lampooned for as you can guess, what it is named after.

Chapter 12 & 13

On pgs. 335-336 readers are presented with a thought experiment:

But most of all, things had been different during the DAO drama. Back then, Ethereum had done so many forks before, the community thought forking was without consequences. At that time, not forking was the threat. However, after the DAO, they knew that a hard fork could create yet another Ethereum. And that became the threat. Another factor was that, unlike with the DAO, there was no time pressure. The funds were frozen, and absent any decisions, they would be frozen forever. With the DAO the time for a rescue was limited, and that had prompted people to act. Additionally, with so many new tokens having been built on Ethereum, a contentious hard fork created the risk of producing all kinds of duplicate assets on another chain–Gnosis Very Classic, BAT Very Classic, Status Very Classic, and so forth.

I chuckled at the “Very Classic” names. But truth be told, both Ethereum and Ethereum Classic have had hard forks since the time frame this passage took place (late 2017). So technically speaking, those alt tokens could exist, although to my knowledge no major exchange supported the now-deprecated forks and alts.

On p. 343 we see mentions of Julian Assange and efforts like Pineapple Fund. Assange is frequently lionized by some Bitcoin promoters but he willingly only dumped secrets that damaged one specific U.S. political party and went out of his way not to publish anything that damaged Putin’s government. Ecuador’s government (which allowed Assange to live in its embassy for several years) found direct ties between Assange and the Russian government. In 2017, then-Trump advisor Dana Rohrabacher visited Assange in London and offered a pardon in exchange for Assange publicly stating “the Russians were not involved in the email leak that damaged Hillary Clinton’s presidential campaign in 2016 against Trump.”

Obviously this would have been a distraction in the book but in my mind it is hard to mention this very controversial character without providing context on why he was likely a willing Russian asset.

Epilogue

The epilogue tries to tie many of the threads into complete knots. Some worked, like the Poloniex conclusion on p. 358:

Circle’s acquistion of Poloniex closed on February 22, 2018. Fortune reported the deal was for $400 million, but according to a source familiar with the matter, the actual amount eventually paid out was between $200 million and $300 million. The sale was almost perfectly time to when not only the flood of trading volume began to wane at Polo but also the crypto bubble itself began to burst and volumes globally were lower than at their peak in mid-December. Polo had been shopping itself since the spring of 2017, such as to Barry Silbert’s Digital Currency Group and Blockchain.com. Circle had been hoping to close the deal in November, but Jules, Mike, and Tristan, citing the crushing amount of work (which the staff and another person who worked with them attributed to their “greedy” refusal to hire additional employees), managed to drag it out while the exchange was still bringing in obscene amounts of revenue–and yet to close before the employees’ shares vested. Some early staff calculated they’d been strong-armed out of $5 million to $10 million apiece.

Wow, that sucks. I have some close friends that had a similar story about a different NYC-based technology company during the same time frame.

Other knots didn’t quite close, like the lawsuits between ConsenSys management and its former employees discussed on p. 364-365. One recently settled and at least one of the lawsuits is ongoing and continues to garner headlines and involves a fight over IP rights for infrastructure such as Metamask.

Concluding remarks

From a technical standpoint the book was pretty good, just a few small quibbles. As mentioned at the beginning, while I heard rumors, I don’t know enough about a bunch of the inner circle to comment on a number of the personalities that were the focus of the book.10

There are several other books describing the ins and outs of how Ethereum was created that I hope to read through this summer, and time willing write-up a review. In the meantime, if you are looking for a page turner that doesn’t require a PhD in cryptography to understand, I think The Cryptopians is worth adding to your reading list.

Also, if you’re interested in hearing a credible candidate for who The DAO hacker may have been, Shin published a related thread with links a few months ago.

Endnotes

  1. [Note: there was a footnote from a relevant 2017 CB Insights article. []
  2. The only two interactions I am aware of on Twitter are: (1) when Brian Hoffman, creator of OB1 & Open Bazaar and Charles Hoskinson said I bashed Hoffman’s platform (For the record I repeatedly, publicly said it is unclear why Open Bazaar would succeed when it was relying on users spending bitcoin which historically they had not. Today OB1 no longer exists and Open Bazaar lives on in name only via IPFS); (2) Charles throwing barbs at Vitalik with respect to the then fork between Ethereum and Ethereum Classic. []
  3. These stats are based on their github repo contributions. []
  4. See More questions than answers []
  5. As mentioned in a blog post five years ago:

    This is not the first time Bitfinex has been “debanked” before. Phil Potter, the CFO of Bitfinex, recently gave an interview and explained that whenever they have lost accounts in the past, they would do a number of things to get re-banked. In his words: “We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you… shift to a new corporate entity, lots of cat and mouse tricks that everyone in Bitcoin industry has to avail themselves of.” []

  6. Two of the most prominent Bitcoin maximalists quickly became Ethereum Classic supporters – Nick Szabo and Eileen Ou (note: that in 2015 Ou was sued and settled with the SEC). As noted by Shin, Greg Maxwell heckled Vitalik with a couple of emails during this time as well. []
  7. Technically speaking, I spoke on Day 5 of the International Blockchain Week (agenda), on September 23 entitled: “Opportunities and Challenges for Financial Services in the Cloud: Trade-offs in digitizing and automating finance.” Interestingly, GDPR has not been strictly enforced and public blockchains seem to have gotten a “free pass.” However the lack of data sharing, data portability agreements harmed many “private” blockchain-focused consortia. []
  8. One of the founders, Jeremy Gardner, gave a public presentation in January 2015 highlighting how Augur could be used for “assassination markets.” I challenged him, in front of the audience, why anyone in that room would find that useful. He tried to brush it off and has publicly called me a “derp.” []
  9. Because of rampant fraud, several local and national regulators inspected then banned several dozen trading platforms from offering ICOs on the mainland. []
  10. Over the course of reading the book I compiled a number of personal anecdotes that while relevant, probably should be part of a separate blog post altogether. []

Web3 needs critics and criticism

[Note: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

"I made it up "Source?" Doctor Manhattan Jaw Neck Sleeve Gesture Human anatomy Art Waist Chest Trunk Thigh Nerve Knee Electric blue Symmetry Painting
[A public position lacking specific citations]

As we have discussed before, “Web3” is a nebulous term that has been used to market a slew of products and services, often via “chainwashing.”

What is “Web3?”

This past week 25 guys and one gal signed and published a 741-word letter to senior U.S. legislators calling for “Support of Responsible Fintech Policy.” And while many “Web3” promoters do deserve a good chastising, this letter has many technical shortcomings and is a disappointment to those who have been in the trenches for years… before being a “critic” was considered en vogue. Worst, it doesn’t define what “Web3” or even a “blockchain” is or is not.

But let’s start with a comment that I thought was pretty good, the intro:

“Today, we write to you urging you to take a critical, skeptical approach toward industry claims that crypto-assets (sometimes called cryptocurrencies, crypto tokens, or web3) are an innovative technology that is unreservedly good. We urge you to resist pressure from digital asset industry financiers, lobbyists, and boosters to create a regulatory safe haven for these risky, flawed, and unproven digital financial instruments and to instead take an approach that protects the public interest and ensures technology is deployed in genuine service to the needs of ordinary citizens.”

I – along with a number of other independent researchers such as Angela Walch (who they referenced) – have publicly made similar requests in the past. For instance, the original conclusion in my 2018 WSJ op-ed expanded upon the lack of transparency and surveillance sharing for why the SEC has not approved a bitcoin-denominated ETF by stating, “…the retail public wants seductive narratives and fantastical returns. The supply of fraud will therefore grow to meet that demand.”

To reuse a cliché analogy, throughout most of 2021 you could probably throw a baseball at a collection of dapps and hit one that at the very least, played fast and loose with marketing high APR yields.

This was followed with a quizzical take:

“Not all innovation is unqualifiedly good; not everything that we can build should be built. The history of technology is full of dead ends, false starts, and wrong turns. Append-only digital ledgers are not a new innovation. They have been known and used since 1980 for rather limited functions.”

The first sentence probably has a lot of supporters, including myself, as it relates to non-proliferation of weapons of mass destruction. The somber and horrific legacies of the atomic and hydrogen bombs are certainly an example of something that should not have been built.

But the shade thrown at “append-only digital ledgers” is pretty farcical. Why do these authors get to determine what is or is not useful in the spring of 2022?

For instance, if we look at the core moving pieces of the Bitcoin blockchain, all of the main elements (“prerequisites“) had been around for years. And it was by assembling them together that we have arguably the first blockchain.1 The authors are taking a page from the lazy Maximalist playbook, one that does not withstand empirical scrutiny.

In looking at the “tech stack” of Big Tech, Google maintains a project called “Certificate Transparency” (implemented as “Trillian“).2 Certificate Transparency is not a blockchain, but it is a Merkle tree of things which are interconnected and signed and in production today.

From the Trillian team:

The ideas underpinning Certificate Transparency, Revocation Transparency and related efforts are not specific to certificates, but can in fact be used to make almost anything transparent. These technologies are strongly related to the much-hyped blockchain. The reality, of course, is that there isn’t a “the” blockchain, and that decentralisation is not always the answer. We are not making “the” blockchain, and we do not claim to support decentralisation.

As mentioned in a previous post, the problem with the a priori position that anti-coiners (and many maximalists) have is that over time they continually get backed up into a corner. Why? Because over the past decade we continue to see – empirically – how blockchains and blockchain-like elements are incorporated by a spectrum of organizations from Big Tech and Big Finance all the way down to small startups.

As Matthew Green (a cryptographer) explains in a thread on this topic, the granular fine points around “blockchain technology” is mostly bad:

Unfortunately the authors – while seemingly well intentioned – do not clearly state what parts of a blockchain they dislike, what parts of “distributed ledger technology” that they explicitly think is bad.

Furthermore, the idea of a neutrally owned, shared ledger is not a new concept. Several initiatives in the financial industry — such as a Joint Back Office (JBO) — pre-date the euphoria around blockchains but languished in concept mode.3 What is the lure for maintaining a shared ledger between (competing) organizations? Resiliency and reduction of reconciliation often come up as two of the main reasons but the list is long and deserves its own post. Suffice to say, claiming that “append-only digital ledgers” are a plaything of the ’80s is not even wrong.

Another broad sweeping set of statements that lack precision:

As software engineers and technologists with deep expertise in our fields, we dispute the claims made in recent years about the novelty and potential of blockchain technology. Blockchain technology cannot, and will not, have transaction reversal mechanisms because they are antithetical to its base design.

As Green and Byrne (among other responders) have pointed out, there is a missing nuance by the authors in that there are different types of blockchains. For instance, depending on the implementation some permissioned blockchains allow – in theory – certain participants to freeze transactions.4

Likewise on public chains, administrators of USDC, USDT, and other collateral-backed pegged coins, regularly blacklist and freeze transactions. In fact, any chain with smart contract functionality can provide some form of reversibility (or at the very least, freezing of state). We also see this empirically during and after exploits, with developer teams freezing tokens.

This is a strange miss because one of the signatories is Stephen Diehl, who as far back as July 2017 (when I spoke to him in an official meeting) was/is the CTO and director at Adjoint, which is a British private blockchain firm that has previously announced payment-related partnerships.

This statement starts out good:

Similarly, most public blockchain-based financial products are a disaster for financial privacy; the exceptions are a handful of emerging privacy-focused blockchain finance alternatives, and these are a gift to money-launderers. Financial technologies that serve the public must always have mechanisms for fraud mitigation and allow a human-in-the-loop to reverse transactions; blockchain permits neither.

Green (and suzuha) points out that the authors are trying to have their cake and eat it too:

Source: Twitter

For example, as far back as 2015, banks involved in R3 presented use-cases that required – by law – protection of PII. At the time, any company or organization wanting to engage with regulated financial institutions quickly learned how PII was an unmovable touchstone (see this related presentation). And so from those functional requirements arose different solutions ranging from hardware-based solutions (like SGX) to software-based solutions (like ZK-Snarks). The public chain world was often where these ideas either first originated or at the very least, first tested.5

Over the years I have regularly pointed out how privacy and confidentiality-features could be used for a sundry of illicit activities. But just because it could be used by those types of actors, does not mean it regularly is.

On that point, in 2016 I helped edit a paper on this very topic. It was co-authored by Danny Yang (founder of Blockseer), Zooko Wilcox-O’Hearn, and Jack Gavigan. Wilcox-O’Hearn and Gavigan are executives at the Electric Coin Company, a for-profit company leading the development of Zcash. Worth pointing out that one of the signatories on the letter above amplified false information about myself two months ago, claiming I was not an advisor at Blockseer. Not only is this false, but I still own the equity in DMG Blockchain (which acquired Blockseer four years ago). This calls into question the credibility of the individuals amplifying information they did not fact check. What other false information are they claiming about blockchains?

Scare quotes is not the only thing that harms this section:

By its very design, blockchain technology, specifically so-called “public blockchains”, are poorly suited for just about every purpose currently touted as a present or potential source of public benefit. From its inception, this technology has been a solution in search of a problem and has now latched onto concepts such as financial inclusion and data transparency to justify its existence, despite far better solutions already in use.

The paragraph preceding this one also mentions “public blockchains” but doesn’t use quotes around it. And neither defines or provides nuance to explain the differences between “permissioned” (or private) blockchains compared with “public” (or anarchic) blockchains.

Either way, the authors make a good argument about how pulling on the heart strings of financial inclusion is mostly bupkis and I agree, and others have pointed that this rings hollow too.6 To strengthen this, the authors should have provided a citation or at least an example of “far better solutions already in use.” For example, Raúl Carrillo (who is not one of the listed authors) has pointed to Postal Banking as a possible avenue for (re)banking not just marginalized persons. Blockchains aren’t need for that or arguably for other retail activity.7

The next part of the paragraph is painfully arbitrary:

After more than thirteen years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions.

First of all, the first web browser (appropriately called the “WorldWideWeb“) was launched in 1990. It wasn’t until 2004 that Google revealed Ajax-based Gmail followed by Google Maps. If the authors are trying to make the claim that anything (everything?) useful should have been invented in 13 years then they should hold other tech initiatives to the same standard.

The lack of nuance in this letter is striking because not every blockchain is based on the purposefully limited architecture of Bitcoin. Between 2009-2015, a typical on-chain user could only access Bitcoin or a Bitcoin-based fork or clone (like Litecoin). Ethereum and other chains with a virtual machine, did not launch until the summer of 2015.8 That is part of the reason why regulated financial institutions (Big Banks) and large technology companies (Big Tech) began deploying resources in this sector in 2015: first with consortia and later setting up their own internal teams of subject matter experts. What a user could do with a blockchain changed over time thus a priori declaring “almost all applications” dead is incredulous.

And again, the authors provide no examples of what “existing non-blockchain solutions” they are referring to. For example, every single major vendor that provides core banking software for banks — such as FIS, Fiserve, and Jack Henry — have integrated tools that enable the software to interact with or hook into a blockchain. Every major Big Cloud vendor provides both tools for blockchain node operators as well as dedicated “Web3” development teams to compete with Alchemy and Infura. Several CSDs and CCPs have invested in a blockchain-focused company (like Digital Asset or Axoni) and have announced blockchain-based pilots. Pretending that this digitization and tokenization trend is not occurring beyond niche NFT art collections is intellectually dishonest.

I agree with most of this statement but it needs nuance:

Finally, blockchain technologies facilitate few, if any, real-economy uses. On the other hand, the underlying crypto-assets have been the vehicle for unsound and highly volatile speculative investment schemes that are being actively promoted to retail investors who may be unable to understand their nature and risk. Other significant externalities include threats to national security through money laundering and ransomware attacks, financial stability risks from high price volatility, speculation and susceptibility to run risk, massive climate emissions from the proof-of-work technology utilized by some of the most widely traded crypto-assets, and investor risk from large scale scams and other criminal financial activity.

The nuance these authors need to include is defining what “blockchain technology” is and is not. Trillian is not a blockchain but shares several common elements. Thus throwing the baby with the bath water flies in the face of the empirical reality.9 As far as criticisms around the negative externalities created by proof-of-work-based blockchains: I 100% agree. I have written on this topic roughly every 18 months. What would strengthen their statement is to provide actual statistics and data regarding each of their points (the data exists from companies like Chainalysis or previously, Blockseer).

Their polemical statement meanders on a bit more but this statement is worth assessing:

The catastrophes and externalities related to blockchain technologies and crypto-asset investments are neither isolated nor are they growing pains of a nascent technology. They are the inevitable outcomes of a technology that is not built for purpose and will remain forever unsuitable as a foundation for large-scale economic activity.

The second sentence falls under Hitchens razor: that which is presented without evidence can be dismissed without evidence. In fact, we do know why Bitcoin was built, Satoshi explained it at length on mailing lists and in the white paper. And Bitcoin was just the first “blockchain,” other chains have arisen later that fulfill other requirements. Onyx from JP Morgan is now being used for trading intraday repos. Maybe Onyx is just a flash in the pan, but it serves as a narrative violation — and there are more than a dozen other examples that the authors are likely unaware of, just read Ledger Insights each week.10

Lastly, in the Financial Times, one of the authors was quoted saying:

“The computational power is equivalent to what you could do in a centralised way with a $100 computer,” said de Icaza. “We’re essentially wasting millions of dollars’ worth of equipment because we’ve decided that we don’t trust the banking system.”

This is true with respect to proof-of-work-based blockchains but not at all relevant to alternate Sybil resistant models like proof-of-stake (P-o-S). Conflating the two is not accurate. Also, de Icaza and others needlessly defend the status quo, both with comments like this as well as the letter itself. Fortunately for retail, “the banking system” is not completely static and changes over time (it is also not a single monolithic entity). Also, not a single author listed works for a financial institution yet opines on it; there are plenty of blockchain “skeptics” within the financial industry why not find one?

Which brings us to the next section.

(Un)intentionally defending the status quo

The only reason to publicly identify themselves is to give weight or credibility to the matters discussed in the letter. Even though this letter was directed at U.S. congressmen and women, more than half of the signees are neither US residents or citizens. Even though more than a handful work at public tech companies or large organizations that rely on donations, let us give them the benefit of the doubt that they were not explicitly defending the status quo.

Yet without offering specifics beyond vague “non-blockchain solutions,” the authors are implicitly defending both systemically important financial institutions (SIFIs) and systemically important cloud providers. Both are bad for society and we should not defend their existence.

It is worth pointing out apart from two or three, most of these authors were not actively critical during the very public 2017-2018 ICO boom.11 What has motivated them to self-deputize and attempt to police what can and cannot be done with a blockchain in 2022 and ignore those who have been pathfinders in prior years? Perhaps there is a good reason, busy solving other worldly problems. I am certainly a fan of more introspection by disinterested parties!

I have written about it before but if the aim is to (1) influence policy makers and work with (2) regulators, there are at least two ways to achieve their goals:

  1. Set up a not-for-profit lobbying organization modeled after Coin Center… the Anti-Coin Center. Hire former regulators and policy makers and re-use the lobbyist blueprint to engage with decision makers. A couple of years ago I wrote out a general overview to a couple L1 creators, it’s not complicated. You don’t even need a blockchain. But it does require some capital to hire for various roles, so it is not completely lean (e.g., would probably need to hire an actual blockchain engineer instead of relying on IT administrators). Oh and someone who posts frivolous memes all day is a must.
  2. About four months ago, I asked one of the authors to submit their concerns directly with various agencies, such as the SEC and CFTC. This can be done formally through a whistle blower process (I’ve done it!). An ad hoc Hail Mary… is to informally do so through letter writing campaigns coordinated on social media. And as they haven’t stated otherwise, instead of submitting paperwork, some of these authors spend all day engagement farming on social media. If the outcome is “to get regulators to do something” this seems suboptimal because U.S. regulators typically need a paper trail to get the bureaucracy moving.

The blockchain world needs critics and criticism but it also needs criticism that is technically valid. And this letter is not only imprecise but sounds like something incumbent technology firms would write to defend their turf (which probably isn’t how it originated).

Bonafides

Over the past 18 months, the most recent coin bull market brought in a slew of new commentators a few of whom have attempted to co-opt the term “critic.” Clearly no one owns this term, there is no monopoly on it. Heck, I’ve even been labeled a “crypto” or “bitcoin” critic on more than one occasion. Yet we are seeing a cottage industry of professional “skeptics” who have a priori made up their mind irrespective of the evidence presented.

In addition to writing the most widely cited paper on “permissioned” blockchains, I wrote the first long form discussion on potential systemic important cryptocurrency networks in 2018 and think it is a bit absurd that some anti-coin commentary claims that cyber coins currently threaten the entire financial system. Feel free to disagree, but the onus is on the party making the positive claim. The counterfactual occurred the past five months: more than half of the aggregate coin marketcap evaporated. As collateral-backed pegged coins unwound, they did not lead to massive treasury liquidations crushing the traditional financial market.12

This is not defending the way centralized, commercial-bank backed pegged coins arose or currently operate.13 Rather it is a statement of fact: today the cyber coin world is not “too big to fail” and hopefully it never will be. Contagion can be real and should be simulated and stress tested!14 There are plenty of good criticisms to be lobbed at the “Web3” world, none of which requires making up fanciful conspiracies or playing fast and loose with technical verbiage.

If we are going to (rightly) criticize startups, investors, and other interested parties for mis-marketing “Web3” we should provide specific reasons as well as definitions. And while we are at it, let us bring a fine comb and scrutinize other hyped tech verticals that dramatically impact the well being of individuals such as: A.I. and workplace discrimination, privacy rights over data (including identity).15

Crusades can be big tent and incorporate more than just a small echo chamber of folks who (rightly) point out that a lot of cryptocurrency buzz is likely a financial grift with little real utility. Yet it is not a coincidence that perhaps the best critics are actual practioners, engineers, and architects who saw the limitations or drawbacks in certain blockchain designs and decided to build a different way. If there is a second version of this letter, it is highly recommended that input from outsiders be solicited. Including the world’s richest man, Colin Platt!

Or maybe we’ll just have to settle for a Kimberley process for Web3 claims, for both promoters and pundits alike.

End notes

  1. Depending on how it is defined, a candidate for the “original blockchain” was the Haber and Stornetta timestamping system published in 1990 (and thrice cited in the Bitcoin whitepaper). Therefore archaic blockchains had a useful niche before Bitcoin but were not capable of moving assets without a third party. Note: as they failed to provide a definition of a “blockchain” in their letter, the authors overly broad usage of “not useful” could encompass e-signature providers such as DocuSign and HelloSign. []
  2. One of the authors, Kelsey Hightower, works at Google, and a couple others work for large tech companies partly reliant on adtech revenue [e.g., monetizing personal information and data.] []
  3. SIFI intermediaries such as Swift, Euroclear, and CLS have done deep dives and pilots into “DLT.” A quick literature review pulls up the following relevant papers that the anti-coin authors may be unaware of: Distributed ledger technology in payment, clearing and settlement from the Bank for International Settlements; Distributed ledger technology for securities clearing and settlement: benefits, risks, and regulatory implications from Randy Priem; Distributed ledger technologies in securities post-trading from the European Central Bank; Distributed ledger technology in payments, clearing, and settlement from the Federal Reserve Board; The Tokenisation of Assets and Potential Implications for Financial Markets from the OCED; Digital Securities Management Bringing Private Markets Infrastructure Into the 21st Century from the DTCC. []
  4. At one point Accenture proposed an “edit” feature that does not appear to have been adopted by any chain. Stellar has implemented a feature that allows developers to “burn an asset.” []
  5. The experiments in the “dangerous” public chain space are funding and battle testing some of the new privacy and tech stacks that ‘Big Banks’ were not incentivized to build. Two examples in the U.S.: the FTX clearing proposal might be a better “exchange stack” than existing traditional finance operations and the Silvergate banking API (SEN) quickly confirms transactions based on on-chain data. Both services might not have been built even in the private blockchain world; at least they have not thus far. []
  6. To be fair, a number of financial incumbents and non-blockchain-related fintechs market their products and services as “financial inclusion.” They all attend many of the same events and sit on the same panels too. []
  7. See also the proposed E-Cash Act co-authored by Rohan Grey. []
  8. Technically Mastercoin, Counterparty, and several colored coin projects launched before Ethereum did, but they did not include a virtual machine that can run arbitrary code. []
  9. For balance, traditional financial markets also facilitate the transfer of illicit funds (money laundering) and ill-gotten gains from scams and fraud. The authors would have a stronger argument if they provided actual stats, e.g., what percentage of on-chain transactions involved illicit activities. []
  10. For instance, this coming October, a tokenized pound (‘synthetic CBDC’) on a blockchain platform operated by Fnality International will go-live in the U.K. Uptake may be slow in part because of issues around composability and because initial participants are banks that need to change the way they make payments. AntChain from Alibaba is a production chain used to settle e-commerce payments (connecting their banks to their merchants). Another example would be “perpetuals” which were conceived by Robert Shiller in 1992 and first implemented in 2016 by Bitmex, and now widespread on many major CEXs and a few DEXs. []
  11. At least two of the authors have previously cited my article on this crazy time period: Eight Things Cryptocurrency Enthusiasts Probably Won’t Tell You. []
  12. Yesterday the Japanese parliament passed a bill aimed at clarifying the legal status of “stablecoins.” Similar laws and/or guidance are expected to be brought up in other countries. []
  13. See Parasitic Stablecoins. []
  14. The Federal Reserve Board annually conducts stress tests of the U.S. financial system. Similar tests occur in other countries. Researchers at the IMF recently released a paper describing the underlying framework of GST. []
  15. U.S. legislators at the national level have failed at providing a comprehensive digital rights and privacy framework, as well as A.I. auditing guidance. These issues are arguably just as important and impactful as cryptocurrency-related topics. []

Bitcoin and other PoW coins are an ESG nightmare

[Note: an IPFS and PDF version of this paper is available. The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

Abstract

This paper looks at the energy consumption of seven proof-of-work-based anarchic (public) blockchains such as Bitcoin and Ethereum.  By using a hashrate division method – similar to the Cambridge Bitcoin Electricity Consumption Index – a lower bound and upper bound of mining hardware are provided.  Based on this method we are able to show that proof-of-work chains continue to consume resources in direct proportion to the underlying coin value.  Due to the rapid increase in coin value, proof-of-work-related activities – such as semiconductor manufacturing – are once again squeezing supply chains and retail channels, crowding out socially productive goods and services from entering the marketplace.

The model identified a bounded range for energy consumption.  If we took the most efficient energy consumption assumptions (the lower bounds), these seven proof-of-work chains in aggregate consume 59.3 TWh per year, or roughly the footprint of Kuwait.  In most cases – such as with Bitcoin itself – the lower bound is not realistic because the necessary amount of hashing equipment (miners) for that degree of efficiency has not been manufactured.  In contrast, if we took a less conservative assumption and used the upper bound these same proof-of-work chains in aggregate consume 180.1 TWh per year, or roughly the footprint of Poland or Thailand.  The upper bound scenario is likely unrealistic for coins that have seen their value (measured in USD) decline or stay the same (such as Litecoin).  For those that have seen rapid appreciation (such as Bitcoin), it is possible that older equipment has temporarily been reconnected.

The paper is organized into several sections.  Sections 1-4 provide a foundation for understanding how traditional financial market infrastructure, such as a real-time gross settlement (RTGS) system, operates, and uses Bitcoin and Ethereum as examples of how proof-of-work-based systems inherently result in socialized losses and e-waste.  Section 5 contains calculations of smaller proof-of-work networks.  Section 6 is a summary of the calculations found in the preceding sections.  Sections 7 and 8 briefly look at misinformation spread as memes on social media.  Sections 9 and 10 look at news reports covering several large ASIC and GPU mining operations.  Section 11 provides several recommendations framed as a Call to Action.

(1) Background

This paper is a sequel to our occasional series on the energy consumption of proof-of-work (PoW) cryptocurrencies such as Bitcoin.

We will get to resource consumption in the next section, but let us start in reverse order this time.   

Many Bitcoin promoters conjure a future world in which the future of finance clears and/or settles on the Bitcoin blockchain, and in which that the demand for PoW generating equipment (miners) will simultaneously usher in a greener world.

Source: Twitter

Putting aside the continual greenwashing that many advocates are guilty of, some of the same promoters are unaware of how clearing and settlement occur in existing financial market infrastructure.1 Take for example, a real time gross settlement (RTGS) system such as Fedwire.

Fedwire is categorized as systemically important financial market infrastructure due to the enormous amount of value it transfers and secures.

According to (Bilger 2020):

In 2018, Fedwire executed 158 million transfers with an aggregate value of $716 trillion (Federal Reserve, 2019). While many of the fund transfers executed by Fedwire were of small value, the average value per transfer in 2018 was $4.5 million.

Bureau of Economic Analysis (2019) estimated that 2018 total gross domestic product (GDP) was $20.5 trillion (para. 12). Fedwire may be viewed as a kind of force multiplier for the American economy by processing annual banking payments at 35 times the country’s GDP. Further evidence of Fedwire’s role promoting the efficiency of American financial markets can be seen by considering Fedwire payments against the aggregate value of all deposits at U.S. lending institutions – $12.6 trillion in March of 2019 (Federal Reserve Bank of St. Louis, 2019). Fedwire payments for the previous year were 57 times this figure.

We have discussed these types of large aggregates before in the past.  For instance, a December 2015 paper from the Federal Reserve Board pointed out that, in the aggregate, U.S. payment, clearing and settlement systems process approximately 600 million transactions per day, valued at over $12.6 trillion.

Per day!

Source: Fedwire

When we mention these large, socially significant aggregates in conversations and debates at cryptocurrency-related conferences and events, many promoters are at a loss for words because they are unaware of these post-trade processes.  

Another group – typically self-deputized coinfluencers – will proclaim that Bitcoin can move and secure the same value if not more, via metaphors.

Source: Twitter

The container ship fetish is a sleight-of-hand trick because Bitcoin versus a RTGS is not even a false dichotomy.

Why?

Simply: the Bitcoin blockchain only transfers and secures bitcoins.  It does not move actual money like Fedwire does.2 In point of fact, all ramps into and out of the Bitcoin network necessarily involves connections and hooks into traditional financial infrastructure.  Bitcoin is co-dependent on traditional finance, not the other way around.  In other words, Fedwire can (and does) live without Bitcoin but Bitcoin intermediaries cannot live without Fedwire or other RTGS systems.

A tangentially related argument is that Bitcoin transactions are structured to move blocks of data that can include additional information beyond bitcoin itself: even if a single coin is a ‘container ship,’ Bitcoin structurally has more capacity or flexibility than traditional networks. 

The problem with this argument is that it is entirely possible to do that with a non-proof-of-work system as well.  In fact, a blockchain may not be necessary at all.  The fact the U.S., or international co-ops like SWIFT, set up its payments system to move around specific types of (messaging) data was a generational choice but not a permanent design constraint.  In other words, a PoW-based network architecture does not have an exclusive monopoly on richer or broader forms of data.  That is a red herring when comparing the two systems.

What about “stablecoins” piggybacking on top of Bitcoin?

The ongoing growth of parasitic stablecoins (such as Tether) rely on reliable banking access, specifically dollars cleared by the New York Federal Reserve.  Not to mention all the new traditional-style institutions and intermediaries hooking into Bitcoin for custody and trading.  Don’t like old, monocle-wearing trusted third parties?  Here are newer, hoodie-wearing trusted third parties to hold your coins!

More to the point, the majority of Bitcoin transactions today are simply bitcoins moving from one known intermediary to another, typically between coin exchanges for speculative purposes.  If most of the endpoints and miners are self-doxxed then there is no longer a Sybil attack problem, removing the raison d’etre for proof-of-work.

How can we visualize this?

Source: Chainalysis

The monthly line chart (above) shows the USD value of bitcoins received by merchant services during the four year period (January 2017 – December 2020).  Merchant services include processors such as BitPay, whom we have written about many times.3  

Despite oodles of free marketing that bitcoin has received, payment-related activity is still lower than during the 2017 bubble.  By some measures it is a zombie chain because Bitcoin users do not spend volatile chainletter earnings.  Or more precisely, merchant processors handled less than $4 billion of bitcoin last year.

What is another key difference between an RTGS and proof-of-work chain such as Bitcoin?

Settlement finality.4

We have discussed this multiple times but it bears repeating: proof-of-work chains – by design – allow mining participants to fork or reorganize the chain.  Block making is permissionless.  Now in practice, this does not frequently happen because the cost to acquire hash-generating equipment needed to successfully double-spend or reorg a chain is often quite prohibitive.

Either way, all a proof-of-work chain can guarantee is probabilistic finality that some type of confirmation has occurred but that there is a possibility that a well-funded attacker could reverse or reorganize the chain.  For example, in August 2020, Ethereum Classic was hit by three separate 51% attacks, one that was more than 7000 blocks deep.

In practice, the way some financial institutions involved in the cryptocurrency world (such as trading desks) mitigate the risk of a double-spend or reorg is requiring a certain amount of blocks confirmed (often 3-6 confirmations) before allowing users to have access to recently transferred funds. 

In contrast:

Fedwire transfers are one-way, which means banks can wire funds out, but cannot debit other banks and wire funds in. Fedwire is a payment system and does not perform the traditional banking functions of managing deposits and withdrawals. It simply transfers funds between accounts within the Federal Reserve System. Once Fedwire transactions are complete, they are irrevocable.

What about the actual network infrastructure?  Surely Fedwire needs millions of hash-generating machines to secure all of those transactions each day!

According to (Bilger 2020) Fedwire has around 6600 nodes, 25 which are considered “core” which also have backups in case of disruption.  Critically: none of the nodes in Fedwire is purposefully consuming oodles of extra energy to generate hashes.  

Why not?  

Because there is no Sybil attack problem in Fedwire, there are no nyms.  Anarchic chains such as Bitcoin – by design – allow pseudonyms to participate in block making.  To make it expensive to double-spend or conduct a block reorganization, proof-of-work was purposefully integrated in Bitcoin so that the attacker has to expend real economic resources to succeed.  

This entire kludge is negated in Fedwire because all participants are known: it is permissioned.

What does this image (above) represent?   

A single day of Fedwire transactions in 2004.  According to (Bilger 2020), a group of researchers isolated links and the nodes that connect them, that team was able to determine that just 66 nodes and 181 links comprised 75% of the value of daily payments. These core nodes and links are illustrated above.  And as mentioned a moment ago, the inner ring of approximately 25 densely connected financial institutions is also evident.

What does this all mean?

The participating computing infrastructure for Fedwire involves between ten and twenty thousand computers, none of which need to generate SHA256 hashes.  Its participants securely transfer trillions of dollars in real value each day.  And most importantly: Fedwire does not take the energy footprint of Egypt or the Netherlands to do so.

As we will see below, the more than 2 million machines used in Bitcoin mining alone consume as much energy as Egypt or the Netherlands consumes each year.  And they do so while simultaneously only securing a relatively small amount of payments less than $4 billion last year.  

In other words, Bitcoin currently uses about three orders of magnitude more computing machinery than Fedwire yet processes and secures significantly less.5 It is monumentally less efficient per watt on purpose.

Remember, the original purpose of Bitcoin was to enable P2P payments between unknown participants without intermediaries.  Today, it has metastasized into a network that is primarily used for speculators to trade various coins and rarely used for actual payments. 6 And it involves a vestigial PoW infrastructure whose participants are identifiable because nearly all of the miners and major endpoints are self-doxxed. 

This oxymoronic phenomenon — a resource intensive permissioned-on-permissionless infrastructure — has led to Ray Dillinger – one of the first Bitcoin users – to declare Bitcoin a disaster:

Bitcoin mining has encouraged corruption (Because it’s often done using electricity which is effectively stolen from taxpayers with the help of government officials), wasted enormous resources of energy, fostered botnets, centralized mining activity in a country where centralization means it’s effectively owned by exactly the kind of government most people thought they *DIDN’T* want looking up their butts and where the people who that government allows to “own” this whole business work together as a cartel.  

There’s a pretense of monitoring the network to guard against a 51% attack, but to me it seems pretty clear that what they’re guarding against is merely the mistake of the cartel failing to give the latest warehouse full of miners a distinct network identity.  The whole idea of proof-of-work mining is broken the instant hardware comes out which is  specialized for mining and useless for general computation because at that point the need to have compute power for other purposes is absolutely irrelevant in having any effect on mining, and there ceases to be any force that causes mining to be distributed around the world. It becomes a “race to the bottom” to find where people can get the cheapest electricity, and then mining anywhere else – anywhere the government tries to make sure ordinary people actually get the benefit from electricity bought for tax money, for example – becomes first pointless, then a net loss.

We interviewed Dillinger a couple of years ago.  Be sure to check it out.

Nornickel is a Russian mining and smelting corporation.  Last year a series of news articles described how BitCluster, a Russian cryptocurrency mining company, was building a mining farm above the Arctic Circle in Norilsk.  It chose this location in part because of the natural ambient cooling and in part to re-use land from a closed nickel smelting plant.  The farm will utilize a local coal power plant to generate 11.2 MWh to power bitcoin miners. 

The next several sections will dive into the energy consumption of the largest proof-of-work chains, including Bitcoin.  As we will show, PoW chains are the equivalent of adding an undead country – a zombie chain – to the power grid: one that consumes energy and produces little beyond emissions.

If you are an asset manager considering whether or not to include proof-of-work coins in your portfolio – and have an ESG mandate – or a policymaker considering whether or not to encourage the proliferation of these types of coins in your jurisdiction, it is pretty clear that PoW coins such as Bitcoin are an ESG nightmare and not a suitable fit.  If and when some (or all) of these coins transition to proof-of-stake is beyond the scope of this article.

(2) Bitcoin

There are multiple ways to estimate how much energy and how many resources (mining equipment, physical plant) are used generating hashes for a PoW chain.

One involves surveying miners and mining pools, and hoping they provide accurate self-reported information.  Another method involves a bit of detective work, physically visiting locations or obtaining purchase order documents from mining manufacturers.  However, this makes it hard to ascertain how much second hand equipment is being re-used.

For example, Bitcoin has a carbon footprint comparable to that of New Zealand, producing 36.95 megatons of CO2 annually, according to Digiconomist’s Bitcoin Energy Consumption Index (BECI).  According to this tool, Bitcoin consumes as much power as Chile — around 77.82 TWh.

The Cambridge Bitcoin Electricity Consumption Index (BECI), a separate tool from researchers at Cambridge University, shows a much larger figure of 121.88 TWh — more than the entire annual energy consumption of the Netherlands.

There is one more simple method that everyone can do at home on their own computer.  One that can create lower and upper bounds with a high degree of confidence.  This is the hashrate division method which we have used multiple times in the past.

The way this works is by taking the publicly known hashrate of a network and dividing it by common hashing (mining) equipment metrics.

Source: BitInfoCharts

For example, on December 30, 2020, the Bitcoin network hashrate momentarily spiked to a record high 178.6 EH/s.  That is exahashes per second (an exahash is one million terahashes).

How can we derive aggregate energy usage from this singular number?

Last May, Bitmain began shipping its Antminer S19 Pro.  There is a bit of public information on how much each of these hashing units consumes and performs.

On paper a single S19 Pro generates a maximum hashrate of 110TH/s or terahashes per second with a power consumption of 3250 watts.

If the entire Bitcoin network were solely comprised of S19 Pro’s (which it is not), it would consist of around 1.624 million hashing machines consuming 46.2 TWh in a year.  According to estimates from the EIA, that is about as much as Portugal or Singapore consumes each year.  This is a likely lower bound for how much energy is being used.

But wait, where does the Egypt number come from?

Recall that the S19 Pro is basically the most efficient, mass produced machine available today.  Due to variance (the inhomogeneous Poisson process), the network hashrate varies day to day.  In the process of writing this article it has gone from as low as 140 EH/s to the spike mentioned above.

Due to the rapid increase in Bitcoin’s price over the last few months — because hashrate follows coin value — over the next several months it is likely that the hashrate will continue to grow as purchase orders are fulfilled and hit 200 EH/s by the end of this summer.  This is why manufacturers like Bitmain are crushing it, with $327 million in cash holdings as of last month.

In practice, the network is not comprised of 1.6 million S19 Pro’s because Bitmain has not even produced half a million of them.

To get a more accurate figure we must look at older, but more common systems that are still running.

For instance, the Antminer S17e system can churn out 64TH/s running at around 2880 watts.  If the entire network was comprised of S17e systems there would be about 2.8 million machines involved.

That’s about 70.4 TWh in a year.  Which is about as much energy as Colombia or Bangladesh use.

But that is still not the upper bound.

Enter the older, but reliable Antminer S9i first released in May 2018 which can churn out 14 TH/s and consumes 1320 watts.

If the whole network was using S9i’s, then there would be about 12.8 million of these machines churning out hashes.

In a year these would consume 147.5 TWh or roughly the same amount of energy that Malaysia or Egypt use each year (this is larger than either Chile or the Netherlands).

While there are probably botnets trying to use CPUs or GPUs to mine bitcoin, the amount of hashrate generated by them is likely marginal.  Thus the S9i approximation is probably the upper bound.

Manufacturers such as Bitmain, MicroBT, or Canaan will eventually reveal how many systems they have sold which will give us some better refinement on the lower bound, the minimum amount of machines being used.

But it is clear that the spectrum is at a bare minimum Portugal and likely closer to Malaysia or Egypt, especially with so many people and companies trying to bring on older systems right now.  This would put Bitcoin around the 27th largest ‘country’ by energy consumption.

Is the hashrate division method a better estimate than the Cambridge or Digiconomist BECI models?

They both have their tradeoffs.  The Digiconomist model is inherently more conservative because it is based on miners’ income, whereas the Cambridge model uses a similar framework as the hashrate division method, starting with mining hardware that is available.

In any case, it is clear that while the energy consumption is somewhere between the Netherlands and Egypt, there is not an equivalent economic gain to the same degree.  

Another way to say this is that: historically as a country develops it produces more economic output per unit of energy input, getting more output with less input.  For example, U.S. energy consumption has been relatively flat since 2000 yet its GDP has more than doubled over the same period.  Likewise following reunification, Germany’s GDP growth rapidly outpaced energy consumption.

But the opposite occurs with Bitcoin and other PoW coins.  The more valuable a PoW coin becomes, the more energy is used to extract (mine) it.  We have written about this phenomenon before, in which the marginal cost to mine eventually equals the marginal value of the coin (MC=MV).7

As a result, PoW is clearly not something a fund with an ESG mandate should want to be involved in.

(3) Socialized losses and e-waste

Source: YouTube

Speaking of older systems, because these hash generating systems are single use ASICs (i.e., they can only do one specific thing: generate SHA256 hashes), they are often discarded in a time frame of 18-24 months.  Some parts are salvaged and reused – such as the power supplies – and sometimes a new buyer is willing to acquire used machines second hand (as in the case of North Korean coin miners).  

One estimate is that around half of all data center energy usage is now tied to Bitcoin mining.  In fact, the energy consumption of Bitcoin is more than the combined energy use of Amazon, Google, Microsoft, Facebook, and Apple.  And the e-waste that is generated annually from discarded mining equipment is roughly equivalent to what Luxembourg throws in the trash each year. 

This also does not include the socialized costs – and privatized gains – that miners place on specific geographies due to the type of energy used in generating the hashes.

Below are several recent examples:

  • In December 2020, Gazprom (the state owned petroleum company in Russia) announced that a natural gas subsidiary in Siberia was setting up coin mining equipment on-site.  Based on recent stories, similar setups have been built in natural gas fields in the U.S.
  • Another example of socialized losses and privatized gains: the Republic of Georgia.  Bitfury Group used its political connections to obtain property at below-market rates and now the Republic has the distinction of having 10% of the country’s energy production siphoned off by Bitfury’s mining operations.
  • A coal-fired powered plant in Yates County, NY was converted to natural gas back in 2017.  The owners of this 20 MW plant are trying to expand it to 106 MW, to mine more bitcoins.  Putting aside the emissions this plant will create, it will also consume vast quantities of water – 150 million gallons per day – which will get discharged back into the lake solely to provide cooling to machines that can and do one thing: generate SHA256 hashes.  Unsurprisingly the locals sued.
  • Miners in southern China depend on coal-fired power plants, especially during the winter.  Due to trade frictions between Australia and China involving coal transportation ships – PoW miners which depend on these taxpayer financed coal-fired plants – are struggling with the ensuing power shortage.
  • Kazakhstan is allocating taxpayer funds to build more than a dozen mining farms.  These are mostly powered by coal-fired plants.  Miners at a 180 MW facility in Ekibastuz will consume as much electricity as needed to power 180,000 U.S. homes.
  • Due to concerns that the record price for PoW coins like Bitcoin could cause an energy crisis in Abkhazia, the state-owned utility (Rosseti) has banned all coin mining.  

Why?  Because state-run facilities are regularly targeted by electricity thieves:8

Beginning with the 2017 “crypto boom,” Rosseti started noticing abnormal jumps in electricity consumption in numerous Russian regions. The firm identified unauthorized cryptocurrency mining farms and estimated the damage to be over 718 million rubles—about $9.5 million—a significant part of which has already recovered through court procedures.

The “black” miners are known to do more than just tap into power lines. Illegal Bitcoin operations actually build their own transformer stations.

This is by no means an exhaustive set of sources on the topic.  The examples serve to reinforce how PoW mining can be a one-way wealth extraction (privatizing gains) whilst externalizing environmental costs.

(4) Ethereum

Like Bitcoin, the past month has seen Ethereum (ETH) hit several new record prices.  Unsurprisingly this has also led to a new record in hashrate, at over 360,000 GH/s.

Source: Etherscan

In December 2020, a mining manufacturer in China, Linzhi, revealed an early demonstration of its new Phoenix mining machine via F2Pool.  According to the demo, the Phoenix could generate 2,600 MH/s and consume 3,000 watts.  It has not shipped any to the retail market and it is unclear when it might.

In contrast, the most efficient ASIC mining system on the market today (for Ethash) is the InnoSilicon A10+ Pro.  A single A10+ Pro can generate 500 MH/s and consume 1,300 watts.  This is just slightly faster than the A10 which the previous article used as a baseline.

The Ethereum network hovers at over 360,000,000 MH/s per day.  That is equivalent to 720,000 A10+ Pro’s.

Annually these machines would consume 8.2 TWh.  That’s about as much as the Congo (DRC) or Trinidad and Tobago consume.  This would probably be the lower bound.

As mentioned in the previous article, there are many mining farms that still use GPUs to mine Ethereum.  So much so that it has led to a massive, publicly reported on shortage of high end cards from Nvidia and AMD.

Without any modifications, the top-of-the-line GeForce RTX 3090 can churn out 122 MH/s and consumes 350 watts. ((With some tweaking this can reportedly be increased to 150 MH/s.)) This makes it about 50% faster compared with the 3080.

A network entirely composed of 3090’s would involve 2.95 million GPUs.  Altogether they would consume about 9.1 TWh per year.  This is about as much as Bolivia or Panama consume annually.

As you can see, as these GPUs have closed in on the previous generation of ASIC, this has led to some speculation that GPU manufacturers such as Nvidia may once again roll out GPUs just for cryptocurrency mining (again).  The last time was a major dud as Nvidia had to write-off over $57 million in hardware due to a glut in 2018.

What is an upper bound for Ethereum mining?

This is a bit harder to guesstimate compared with the upper bound for Bitcoin or Bitcoin Cash, because of the unknown factor: how many GPUs are being used.  Anecdotally it appears that a lot of less efficient GPUs and older ASICs are likely being used due to the run-up in ETH.

For example, an overclocked RTX 2080 can generate 35.3 MH/s and consume 235 watts.  

An entire network of overclocked 2080’s would consist of 10.2 million GPUs.  These would consume about 21 TWh per year.  This is about as much as Azerbaijan or Ecuador uses annually.  

In the summer of 2018 it was estimated there were around 10 million GPUs churning hashes for the Ethereum network.  For instance, JPR Research estimated that 3 million GPUs were sold to cryptocurrency miners in 2017.  During those heady days, mining farms such as Genesis Mining, rented 747s to fly large batches of GPUs to its mining farms.

Because of the mix of older, less efficient GPUs (such as the RTX 10 series) or first generation ASICs that have been switched back on, it is likely that the network hashrate is closer to the upper bound of Ecuador than mid-range of Bolivia or Panama.  This would put Ethereum around the 70th largest country by energy consumption.

Unlike many Bitcoin promoters, most Ethereum developers – and even some miners – believe that this energy footprint is temporary, pointing to an ongoing transition to proof-of-stake which started with the Beacon chain (Phase 0) launched last December.  Obviously the work-in-progress towards PoS has been known since before mainnet was even launched, yet it has been a slow slog.  

Despite the desire of developers to quickly sunset proof-of-work, last month we contacted Vitalik Buterin who pointed out that there is currently no EIP to switch over from PoW to PoS.  Based on the roadmap at least one EIP is expected to be crafted during the year.

It also bears mentioning that Buterin – unlike Bitcoin promoters – recognizes the large aggregates of energy consumption that PoW chains account for.  In an interview three years ago he explained:

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

While “DeFi” usage and total-value-locked (TVL) has soared since the previous two articles on this topic were published, this would be an ends-justify-the-means argument.  Not a fallacy per se, but also not a frequently used argument, because greenwashing is not part and parcel to the Ethereum ecosystem.

(5) Other large PoW chains

(5a) Litecoin

The fact that Litecoin is still a “Top 10” coin in 2021 should indicate how ridiculous proof-of-work coins are for society.  No one really uses it for anything.  Except one guy who invested more than he could afford to.

In fact, the hashrate is roughly the same today as it was two-and-a-half years ago because — as pointed out many times — hashrate follows coin price.  Its most recent surges were due to PayPal adding it as an option users could buy or sell with, and an adult website (PornHub) that announced it would accept it as a form of payment.

Despite having launched several years ago, Bitmain’s Antminer L3+ is still basically the top ASIC mining unit that is used today.  It generates ~500 MH/s with ~800 watts. A slightly more powerful L3++ is on the market as well.

At around 300 TH/s, there are the equivalent of about 600,000 L3+ machines generating hashes for Litecoin.  In aggregate, these machines would consume 4.2 TWh per year.  It would be placed around 130th, between Namibia and Cyprus.

The Antminer L3++ specifications are similar:

  • Hash Rate: 580 MH/s ±5%
  • 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. 9

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

How is that a socially useful innovation?

(5b) Bitcoin Cash

Unlike Bitcoin, Bitcoin Cash has seen a dramatic decline in hashrate since it briefly peaked at over 5 million TH/s in 2018.   In fact, it is now oscillating around 1.3 million TH/s, or half of what it was 15 months ago.

The calculations for Bitcoin Cash are very straightforward since it is just a modified version of Bitcoin.

Recall from above that a single S19 Pro generates a maximum hashrate of 110TH/s or terahashes per second with a power consumption of 3250W.

A network consisting of just Bitmain S19 Pro systems would comprise about 12,000 systems.

In a given year these would use about 336 GWh, this will serve as our lower bound.

Not counting e-waste, that would put the energy usage of Bitcoin Cash somewhere around 174th or about the same as Burundi. Despite the fact that BCH has almost doubled in value since the last article, the hashrate decline is likely due to more efficient hardware now available.  

This presents a problem for potential malicious forks as an attacker could rent hardware (via NiceHash) or purchase older discarded hardware previously used for Bitcoin mining.  There are disagreements as to how to prevent this but most of them involve some kind of centralized group of developers manually inserting themselves into the validation process (via block signing).

For an upper bound, let us use an S9i for approximation.  Recall it churns out 14 TH/s and consumes 1320 watts.  That would involve about 93,000 systems consuming 1,073 GWh placing it somewhere between Fiji and Benin at 160th place.

Unlike last update, there is relatively little economic activity beyond speculators moving coins from one intermediary to another.  In fact, an economist with Chainalysis noted that Bitcoin Cash saw less merchant processor volume, about $12 million in 2020.10

Clearly on-chain payments is not the use case, even though the infrastructure exists to do so.

(5c) Monero

Unlike the previous article, it appears that the decision makers behind Monero stopped trying to fork it every six months to prevent involvement from ASICs.  

At the time of this writing Monero’s hashrate is hovering near its all-time high, likely due to the fact that XMR’s price has also risen, reaching a two-and-a-half year high.11

Compared with the previous article, the hashrate has increased nearly six fold to about 2 GH/s. And it is believed that most of this hashrate is still generated by GPUs and CPUs.

There are lots of how-to guides for building a CPU-focused Monero mining system, and NiceHash even has an easy-to-use profitability calculator.  

In the previous article we looked at a Vega-based GPU build, which could still work, but again, CPU mining is still typically used for Monero.  Currently the top performing CPU system on Monero Benchmarks is a modified 3990X Threadripper which generates 64,000 hashes/s and sips 600 watts.  Note: these are self-reported, user-submitted numbers.

If the entire network were composed of just this type of machine, there would be 31,250 systems running.  They would consume 164 GWh annually.  This would place it around 195th, between American Samoa and Saint Kitts and Nevis.  This would be the lower bound.

For comparison, a slightly more common Ryzen 3600 generates 7,400 hashes/sec and consumes 100 watts.  A network would consist of around 271,000 systems.  They would consume about 237 GWh annually.  This would place it around 190th between Chad and Sierra Leone.

In terms of GPUs, a RTX 3090 generates 2053 hashes/sec and consumes 350 watts.  A network of these would involve 974,184 systems.  Altogether they would consume about 2,987 GWh per year.  This would place it around 136th, between Montenegro and Jamaica.  This is not the upper bound.

As you can see, just like ASICs in sections above each older or slightly less energy efficient CPU or GPU system will incrementally increase the aggregate energy consumed.

For instance, in the previous article we looked at a 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.

That’s about 854,335 GPUs each sipping 160 watts. Altogether these consume 1,197 GWh annually.  This is still not the upper bound.

What is the upper bound then?

Without knowing how many large scale (organized criminal botnet) farms there are, it would be hard to guess because of how easy and common CPU mining is, especially CPU-cycle theft.  For instance, cryptojacking malware is so common today, that there is a distinct possibility that you know someone who is a victim, it might even be you.  Monero is typically the top coin mined in this process.  We could do an entire article on all of the variants that have come and gone.

A few months ago a manufacturer, ASICLine, claimed to be shipping a mining system that can generate hashes for Bitcoin, Litecoin, Ethereum, and Monero.  Because of how inflexible ASICs are, it is unlikely that their claim is true.  While we would like to be able to say for certain how much energy Monero is consuming, there is a possibility that someone has built a custom ASIC (or FPGA) which could throw off our estimate.  

Based on the same electricity consumption chart as the others, we can guesstimate that Monero drinks around 1 GWh a year and would be placed somewhere definitely above Chad and probably below Montenegro

(5d) BSV and ZEC and DOGE

There are hundreds, if not thousands, of dead PoW coins.  Three proof-of-work coins that have remained in the “Top 50 as measured by USD” over the past few years are Bitcoin SV (BSV) and Zcash (ZEC) and Dogecoin (DOGE).

BSV was created (forked) by Craig Wright, an Australian who claims – without sufficient evidence – to be Satoshi Nakamoto.

Due to a lack of interest beyond a core group of his followers, BSV — as measured in USD — has declined relative to its cousins BTC and BCH.  As a result, its hashrate has also declined.  At the time of this writing it is just over 600 PH/s, which is a two-and-half-year low.  This makes it relatively inexpensive to successfully double-spend or reorg the chain.12

If the BSV network was composed only of S19 Pro’s there would be around 5,454 systems consuming 155 GWh per year.  That is about as much as America Samoa at around 200th place.  This is the lower bound.  An upper bound is unknown but if we re-use the S9i there would be about 43,400 of these systems consuming 502 GWh.  That would put it around Andora or South Sudan, around 170th place.

There are a number of gambling-related apps that have been built around BSV, but no substantive economic analysis beyond the regular speculation that dominates in other chains.

Zcash received a lot of attention when it first launched for its privacy and confidentiality (opt-in) properties.  For one reason or another, it has not seen as much market interest as Monero (despite arguably having stronger technical capabilities).

Either way, at the time of this writing Zcash’s current hashrate (6.79 GH/s) is hovering near its all-time high.  That may sound like a relatively small number compared to Bitcoin or Ethereum, but it uses a hashing algorithm called Equihash, which is more difficult to generate hashes.  Unlike Monero, it is primarily mined via GPUs instead of CPUs.  There are a variety of online calculators and guides comparing different setups.  

There are also multiple ASIC miners for ZEC available including the Antminer Z15.  The Z15 churns out 420 KH/s and consumes 1,510 watts.  If the entire network were comprised of these ASIC machines there would be about 1,620 of them. Altogether they would consume 21.4 GWh each year.  It would rank around 215th, near the Falkland Islands and Kiribati.  This would be the lower bound.

One of the slightly dated comparisons involved tweaking a Nvidia 1080 Ti. One user was able to achieve around 641 H/s at 300 watts.  A network of these GPUs would comprise 1.06 million GPUs.  These would consume about 2,783 GWh.  That would place it around 140th, between New Caladonia and Mauritius.  While there may be older GPUs and even some CPUs mining, this is probably closer to the upper bound.

What about Dogecoin?

We wrote a bit about Dogecoin in 2014 but stopped because it merge mined with Litecoin in September of that year.  While it is no longer independent — as it piggybacks off of Litecoin mining — people still mine it with the same L3+ machines mentioned above (both Litecoin and Dogecoin use the same hash generating algorithm called ‘scrypt’).  Despite new record highs in prices, Dogecoin’s hashrate is about 30% less than its all-time high.  In fact, it is nearly identical to Litecoin’s hashrate because it uses the same farms and pools.  While some have suggested that this is an efficient usage of resources (two-chains-for-the-price-of-one) it creates a top-heavy situation that in theory, makes them both less secure.

(6) Status check

With all of these numbers and calculation spread around, let us briefly collate them in an easy to view section.

If the entire Bitcoin network were solely comprised of:

  • S19 Pro: it would consist of around 1.624 million machines consuming 46.2 TWh in a year.  That is about as much as Portugal or Singapore consumes each year.  This is a likely lower bound for how much energy is being used.
  • S17e: it would consist of around 2.8 million machines consuming 70.4 TWh in a year.  Which is about as much energy as Colombia or Bangladesh use.
  • S9i: then there would be about 12.8 million of these machines consuming 147.5 TWh or roughly the same amount of energy that Malaysia or Egypt use each year.  While there are probably botnets trying to use CPUs or GPUs to mine bitcoin, the amount of hashrate generated by them is likely marginal.  Thus the S9i approximation is probably the upper bound.

If the entire Ethereum network were solely comprised of:

  • A10+ Pros: it would consist of about 720,000 machines consuming 8.2 TWh.  That’s about as much as the Congo (DRC) or Trinidad and Tobago consume.  This would probably be the lower bound.
  • GeForce RTX 3090: it would consist of 2.95 million GPUs consuming 9.1 TWh per year.  This is about as much as Bolivia or Panama consume annually.
  • GeForce RTX 2080 (overclocked): would consist of 10.2 million GPUs consuming about 21 TWh per year.  This is about as much as Azerbaijan or Ecuador uses annually and is a possible upper bound.  Because of the mix of older, less efficient GPUs (such as the RTX 10 series) or first generation ASICs that have been switched back on, it is likely that the network hashrate is closer to the upper bound of Ecuador than mid-range of Bolivia or Panama.  This would put Ethereum around the 70th largest country by energy consumption.

If the entire Litecoin network were solely comprised of:

  • Antminer L3+ there would be about 600,000 machines consuming 4.2 TWh per year placing around 124th, between Moldova and Cambodia.
  • It is commonly believed that there are few, if any, dedicated GPU miners due to the inefficiencies relative to ASIC equipment.  Hypothetically these GPUs would serve as an upper bound. 

If the entire Bitcoin Cash network were solely comprised of:

  • S19 Pro: would involve about 12,000 systems consuming 336 GWh, this will serve as our lower bound.  Not counting e-waste, that would put the energy usage of Bitcoin Cash somewhere around 174th or about the same as Burundi
  • S9i: it would involve about 93,000 systems consuming 1,073 GWh placing it somewhere between Fiji and Benin at 160th place.  This is a possible upper bound.

If the entire Monero network were solely comprised of:

  • A single (modified) 3990X Threadripper: there would be 31,250 systems consuming 164 GWh annually.  This would place it around 195th, between American Samoa and Saint Kitts and Nevis.  This would be the lower bound.
  • A single Ryzen 3600: would consist of around 271,000 systems that consume about 237 GWh annually.  This would place it around 190th between Chad and Sierra Leone.
  • An RTX 3090: a network of these would involve 974,184 systems consuming about 2,987 GWh per year.  This would place it around 136th, between Montenegro and Jamaica.  Because of rampant CPU-cycle theft and cryptojacking, this is not the theoretical upper bound.

If the entire BSV network were solely comprised of:

  • S19 Pro: there would be around 5,454 systems consuming 155 GWh per year.  That is about as much as America Samoa at around 200th place.  This is the lower bound.  
  • S9i: there would be about 43,400 of these systems consuming 502 GWh.  That would put it around Andora or South Sudan, around 170th place.  This is a likely upper bound.

If the entire ZEC network were solely comprised of:

  • Antminer Z15: there would be about 1,620 of them consuming 21.4 GWh each year.  It would rank around 215th, near the Falkland Islands and Kiribati.  This would be the lower bound.
  • A tweaked Nvidia 1080 Ti: would comprise 1.06 million GPUs consuming about 2,783 GWh.  That would place it around 140th, between New Caladonia and Mauritius.  While there may be older GPUs and even some CPUs mining, this is probably closer to the upper bound.

What does this all mean?

As mentioned above (and in numerous previous articles) there are hundreds if not thousands of dead or dying PoW chains.

If we took the most efficient energy consumption assumptions above (the lower bounds), these seven PoW chains consume 59.3 TWh per year.  Roughly the footprint of Kuwait, around 46th place.  But in most cases – such as with Bitcoin itself – the lower bound is not realistic because the necessary amount of efficient hashing equipment (miners) have not been manufactured.

In contrast, if we took a less conservative assumption and used the upper bound these same PoW chains consume 180.1 TWh per year.  Roughly the footprint of Poland or Thailand, around 25th place.  The upper bound scenario is likely unrealistic for coins that have seen their value (measured in USD) decline or stay the same.  For those that have seen rapid appreciation (such as Bitcoin), it is possible that older equipment temporarily comes back online until newer replacements are installed.

And yet, in either scenario, these PoW networks are not also adding the equivalent GDP output of similar sized countries.  Society is in effect, at a net loss.

How so?

As we have mentioned in this article and others, historically, as a country industrializes, its growth is often limited by access to energy which throttles its energy consumption.  Simultaneously, as it grows and develops, it becomes more efficient per wattage of input. 

For example, according to the Energy Information Agency:

In the United States, energy intensity has been declining steadily since the early 1970s and continues to decline in EIA’s long-term projection. A country’s energy intensity is usually defined as energy consumption per unit of gross domestic product (GDP). Greater efficiency and structural changes in the economy have reduced energy intensity.

Despite dozens of RTGS systems being deployed across the world, in no instance do any of them consume the footprint of a small or medium sized country to operate.

The next section will look at some of the coin promoters and how they try to whitewash this issue away.

For instance:

Source: Twitter

Only two nuclear reactors have been built in the U.S. in the past 25 years.  One of the reasons why others may not be built in the future: the shale boom.

Interested in hearing the twenty-first century equivalent of “smoking is good for you”?

Source: Twitter

On with the show!

  1. Coin promoters

No, Bitcoin is not a battery.

Contrary to the musings of venture capitalists with a heavy stake in coins (and coin mining), mining PoW chains is not the same as a battery.  It should be obvious that energy used in mining is not reusable, it is turned into heat as it enters the environment.  When miners pay bills they convert some of their holdings into actual money, energy is not released in this process because no energy was stored to begin with.

It is hard to know where to start with this batch of Bitcoin promoters, nearly all of whom work for prominent cryptocurrency intermediaries.

Fun fact: despite continual claims that Bitcoin will spur development of Thorium-based nuclear power plants, to date, there have been zero Thorium plants built let alone funded by Bitcoin personalities.

What about stranded energy?

In practice “stranded energy” means there is some kind of inefficiency in storage and/or the transportation grid.  In some cases capital could be used to increase efficiencies (e.g., new pipelines) which could reduce the price of energy extraction or transmission.  Yet because it is stranded, it centralizes PoW mining in that specific area.13

But what about renewables?

Source: Twitter

Hitchen’s Razor: That which can be asserted without evidence, can be dismissed without evidence.

Even when a region has hydroelectricity available, the hydro power is not consistent throughout the year.  Consistent energy generation has led Bitcoin miners to areas which they perceive as stable, which often involves coal power. The “renewable argument” that many Bitcoin promoters use, neglects to account for the ‘seen and unseen’ opportunity costs involved.  For example, solar panels and wind farms still require land that could otherwise be used for different, more productive purposes; likewise dams can be deconstructed allowing habitats to regrow and rivers restored. 14

In terms of cyclical generation, even in the summer, when hydroelectric dams are at their peak output in the northern hemisphere, Cambridge BCIE estimates that more than half of energy generation still relies on non-renewables such as coal or gas.  

Many miners themselves do not provide any reason to believe this. Cambridge surveys miners, and they indicated that while a majority has renewables in the energy mix, only 39% of mining is done with renewables (as it can be a small part of the energy mix).

Source: Digiconomist

The location data above is from Cambridge, sourced from mining pools rather than a survey.  If you look at where miners are situated most of the time, you also see that while they use some renewables during the summer (wet season) in China, they are using fossil fuels the rest of the year.

According to Stoll et al., the carbon intensity of the energy used for mining Bitcoin was 480-500g CO2 per kWh in 2019 and went up to more than 550g CO2 per kWh recently due to increasing popularity of Iran and Kazakhstan.  8% of miners are now using sanctioned Iranian oil-based energy to mine.

There is also a steady stream of on-the-ground local stories providing anecdotes to the rush for relatively cheap energy.  For instance, clandestine Bitcoin mining in Iran is believed to be one of the reasons for a rash of blackouts (and smog).

Lastly, even if Bitcoin miners were mostly run on renewables (which is not occurring) Bitcoin mining could not be considered environmentally friendly.  Why?  Because of the regular cycle of e-waste that is created as next generation ASICs are introduced.

(8) Whataboutisms

Whataboutery is commonplace and normalized in the cryptocurrency world.  

Tired of policy makers pointing out that illicit activity is attracted to KYC-less chains?  Whatabout HSBC!  Dislike the moans from hospitals impacted by Bitcoin-funded ransomware operations?  Whatabout nuclear warfare!

This fallacy rears its head in the discussion of energy consumption: ignore this category of waste because there is also a category of waste there!

Source: Twitter

This is not a contest to waste as much energy as possible.  Aircraft carriers, submarines, and airborne infantry divisions do not protect RTGS systems. All wasteful activities – such as nuclear warhead production – can clearly be categorized as bad and undesirable.  It is also unclear from that thread how Bitcoin can end war or reduce military spending.

Speaking of poor analogies:

Source: Twitter

If we are going to play along with this game above: we actually know who participates in Federal Reserve decision making processes.  Whereas we still do not have a regularly updated list of who funds those with merge control in the Bitcoin Core github repo.

At the time of this writing about 70 RGTS systems are live across the world.  But only a small handful of countries with an RTGS also have nuclear weapons and/or aircraft carriers.  And only six have both. 15 This illustrates that you can have one – a secure large value transfer system – without the other.

Source: Twitter

Held’s argument is a Whataboutism.  Why?  Because this is not a contest over who wastes more (or less).

As Galloway correctly points out in that thread: no one is trying to run a PoW-based payment system with Christmas lights.  Christmas light operators are not incentivized to string up more lights as the aggregate market capitalization of light manufacturers increases.16

Source: Twitter

No one is trying to run a PoW-based payment system with smartphones.  Furthermore, telecoms do not need to consume oodles of more energy per extra unit of phone added to their networks.  PoW chains empirically and theoretically will consume energy in direct proportion to the value of the coin price.  That is why we continue to see ever larger amounts of ASIC machinery sold by Bitmain and MicroBT to miners, not less.  Yet PoW chains do not have a monopoly on securing permissionless payment systems.

Proof-of-stake (PoS) chains require some electricity too.  If this was a comparison of say Polkadot or Avalanche (both of which are PoS-based), they would consume several orders less than Bitcoin does today.  

And if these were compared to running full nodes (since there is no hash generation needed)? 

For instance, according to Bitnodes there are approximately 9,415 nodes relaying transactions on the Bitcoin network (including the 25 or so mining pools).  

At the time of this writing, there are about 110 validators alive on Polkadot and about 830 up on Avalanche.  Yet both PoS networks are arguably just as secure as Bitcoin yet neither requires burning mountains of coal to stymie malicious actors.  While we could debate ways to quantify “decentralization,” more is not necessarily better. 17 In this case, the thousands of extra non-block making validators in Bitcoin are essentially superfluous.

Source: Twitter

Source: CNBC

Virtually every sentence is incorrect.  And this is all Whataboutery.  Bitcoin mining usage could boil the ocean?  But what about banks!

For what it is worth, nearly every large bank has announced some kind of carbon neutral initiative or has attempted to provide some semblance of where the energy is sourced. 18 That is not an excuse to justify their wastes or privatized gains (and socialized losses).  

The bar should be: how can a value transfer system reduce its energy consumption and externalities, not to distractingly point fingers at other entities that also waste.  

Speaking of which, in her examples above, it is also a different type and magnitude of waste.  Banks do not generate more revenue if they leave their computers on 24/7 whereas PoW miners have to be left on around the clock to generate hashes in order to compete for block rewards.  

Furthermore, banks as a whole provide many more services (and products) beyond just processing payments.  In contrast, Bitcoin has very limited functionality, including the inability to do any on-chain lending.

Source: Bloxlive

That is not an accurate description of boiling gold (alchemy?) or what proof-of-work is as described by the original creators (Dwork and Naor).  Neither its supply schedule nor energy consumption is what creates value for PoW coins, external demand is.  

Claiming that PoW imbues a cryptocurrency with value because it requires real effort to produce it is a variation of the Labor Theory of Value.  And saying PoW can promote energy efficiency is like saying paying people to dig holes and fill them up again helps the economy. 19

Source: Twitter

The chart (above) that Held uses, does not actually describe what he is saying about Kardeshev scale civilizations.  If anything, assuming a “million dollar” bitcoin happens, PoW will actually drag Norway, China, and the U.S. back down towards Afghanistan.  Why?  Because if energy consumption goes up in those countries (via PoW mining), per capita GDP is decreasing because Bitcoin itself does not really produce anything.20 As a result, productive capacity for goods and services is being squeezed (or crowded out) by PoW-related endeavors.

In his accompanying article for this image Held states that: “The pressure to find cheap electricity sources will accelerate the effort to build fusion reactors.”

But that basically saying if you leave your car running it is good because it incentivizes finding alternate power sources.

Speaking of which:

Source: Twitter

Due to the demand shock from COVID-19, depending on geography, the cheapest sources of energy today might actually be oil and gas.  Perhaps the near-future of mining are cars parked outside of refineries in Houston, churning up hashes for PoW networks.

And last but not least:

Source: Twitter

According to modeling from the Resources for the Future, a think tank, Miami will become the most vulnerable major coastal city in the world with “100-year floods” occuring every few years rather than once a century in many locations.  A quarter of all homes at risk from flooding due to climate change reside in Miami-Dade county.  If the mayor wanted to stave off this crisis the last thing he should be encouraging is direct investments in proof-of-work based cryptocurrencies.

(9) Competing for scarce resources

Due to the rapid rise in some cryptocurrency prices, foundries that churn out semiconductors have months of backlogs due to GPU and ASIC demand.  Why?  Because there are only a small handful of foundries capable of manufacturing state-of-the-art chips and as a result there is a limited capacity irrespective of what the ultimate destination may be.

This has led to a shortage of chips used in automobiles to the point where large manufacturers such as Ford or General Motors (GM) have announced plant shutdowns.  In its most recent earnings announcement, GM estimated that:

The semiconductor shortage will shave $1.5 billion to $2 billion off adjusted earnings before interest and taxes this year.

How much semiconductor output capacity is being squeezed because of PoW miners?  

Digiconomist estimates that TSMC – the largest semiconductor manufacturer in the world which produces most, if not all, ASICs for cryptocurrency mining – would need 3-4 months at full-capacity of its 7nm output just to produce the ASICs for PoW mining equipment that have been ordered. 21 

This also impacts any industry or job that needs cutting edge GPUs, including squeezing smartphone manufacturers, console manufactures, graphic designers, and e-sport gamers.  Why?  Because the surge in mining demand has resulted in street prices for GPUs doubling what the original MSRP is.

History repeats itself: in November 2017, Chen Min (a chip designer at Avalon Mining) gave a presentation which noted that 5% of all transistors in the entire semiconductor industry were used for mining and that was driving up DRAM prices.  Last cycle this negatively impacted a variety of ancillary set of actors, such as astronomers who rely on GPUs to chug through cosmic signals.  

We are witnessing a similar phenomenon today.  For instance, MSI announced that it may launch mining-specific GPUs this year.22

The current surge in demand for GPUs for mining has led some participants to acquire hundreds of gaming laptops en masse, crowding out, again, anyone who needs a high performance GPU.  The image (above) comes from a Weibo account tracking various China-based miners who are showing off their GPU farms consisting of high-end laptops.  

“Laptop mining” has pushed new buyers down the performance curve, to hardware that is two generations old.

Below are three publicly listed companies that have announced large purchases of mining equipment in the past several months:

  • Riot Blockchain – which pivoted during the last bull run from a biotech company (Bioptix)   to a coin mining company – announced it was purchasing and installing about 10,000 S19 Pro’s from Bitmain.
  • Hut 8 purchased 5,400 mining machines from MicroBT for $11.8 million
  • The9, a gaming company, purchased 26,007 mining machines from Canaan

A few days ago UK-listed Argo Blockchain announced it would build a 200 MW mining facility in West Texas.  

Private companies have also announced large purchases of coin miners.  For instance, last month Blockstream announced that it had purchased $25 million worth of equipment from MicroBT and that this would be part of its 300 MW of mining capacity.  

And an anonymous buyer in Russia, recently acquired 20,000 mining systems that consume 70 MW for a new farm in Bratsk, Siberia.

And this is just the tip of the iceberg.

Source: Tech ARP

A GPU farm of 78 GeForce 3080s was photographed (above) churning up hashes for Ethereum last month.  

An entire paper or two could be written on large bulk purchases of ASICs or GPUs which crowd out other industries that need the same resources for actual productive activities.

(10) Undead countries are an ESG nightmare

Is it a stretch to call Bitcoin a ‘smoldering Chernobyl sitting at the heart of Silicon Valley’?  

In May 2014 we briefly discussed a hypothetical “million dollar” bitcoin.  At the time, Bitcoin’s price had dropped below $500 and we were already able to empirically discern that hashrate grows (or declines) directly proportional to coin value.

In the previous articles we found that, despite the introduction of increasingly energy efficient hardware, a PoW network like Bitcoin consumes ever larger amounts of energy.  That is because of the Red Queen’s Race: miners do not downsize farms in aggregate, they simply replace aging hardware with newer ones; they must run faster in order to stay in the same place.

That is why anyone that has access to a hashrate chart can project with decent certainty what the likely outcome of a “million dollar” bitcoin will be in the future.

If a $40,000 bitcoin has already led miners to consume the energy equivalent of the Netherlands or Egypt, a million dollar bitcoin would be about 25 times as much.

What does that mean in actual numbers?

  • If the Netherlands is the proxy: 2,757 TWh, roughly midway between India and the U.S.
  • It Egypt is the proxy: 3,764 TWh, roughly the same as the U.S.

Critical to any analysis of energy usage is economic output.  In a million dollar bitcoin world, society would be bearing the externalities of mining activity that does not produce a proportional amount of GDP.  For instance, much of the coin mining industry is reliant and dependent on taxpayer funded utility companies and grids.  As a result, we would see the equivalent of an additional U.S.-sized energy usage without seeing anywhere near the economic output, this would be a huge net loss.

This also does not take into account e-waste that is created via discarded single-use ASICs.  And it does not take into account other PoW networks such as Litecoin which are basically ghost towns yet consume country-sized energy units too. 

Miners will surely lead to greener sources of energy production, right?

This is a red herring.

Through the usage of either permissioned systems (like an RTGS) or a proof-of-stake chain, the energy consumed by PoW chains did not need to take place at all.  In fact, PoS chains can provide the same types of utility that PoW chains do, but without the negative environmental externalities.  PoW chains are the equivalent of adding an undead country – a zombie chain – to the power grid: one that consumes energy and produces little more than emissions.  

Because of disputes among its undead participants these zombie chains must utilize the judicial and legal resources of third party countries. The chains also have a parasitic relationship to other government-run services that they continue to rely on such as taxpayer-financed energy grids.

(11) Call to Action

What can be done?

For starters, do not patronize coin lobbying organizations that weaponize misinformation.  They are not dedicated to protecting consumers or the environment.  Their mission is to convince legislators around the world to take a hands-off approach to regulations, including potential taxes on miners.

Source: Twitter

Nearly three years ago, the executive director of Coin Center, Jerry Brito, solicited names to hire to whitewash easy-to-prove energy consumption numbers.  

Why?  Because it is bad for business. Some Bitcoin promoters like to present themselves as being part of the cutting-edge future, one disassociated with the ancien régime.  But as we have seen repeatedly in this paper, PoW miners compete for the same scarce resources and capacity that society relies on to generate real goods and services.

Source: Twitter

This is not true.  Agrawal, who works with Brito at Coin Center, attempts to limit the available options when there are a wide range of other possibilities.

For instance, according to The New Republic:

In 2020, Tesla sold about $1.58 billion worth of these [carbon] credits—almost exactly the value of the Bitcoin purchased.

Tesla is going to account for its Bitcoin holdings as intangible assets (goodwill) which is not how this line item was intended for.  This is clearly shrewd opportunism (and accounting), not some re-imagination of resource consumption.

According to Digiconomist

If 12 million people used Bitcoin to buy a Tesla, it would be enough to completely offset the combined total of CO2 saved by these EVs (by Tesla’s own account).

Elon Musk says he is now a fan of Bitcoin but PoW miners are directly cannibalizing the chip production capacity required to produce Tesla vehicles, a point that Tesla’s latest 10-K filing indirectly touches on.

Like parasitic stablecoins, miners in proof-of-work networks such as Bitcoin piggyback on top of the current energy extraction and generation infrastructure. 23 Furthermore, Bitcoin itself is not an alternative to an RTGS (traditional finance) so much as it is a shadow payment service that enables illicit activities to occur via a spectrum of intermediaries (e.g., underregulated coin exchanges).  Continually comparing one versus the other is specious because one fully depends on the other to exist.

What can you do?

Most developed and developing countries levy taxes on polluters or “sin” activities. 24 Clearly proof-of-work mining falls into both categories.

Contact your local Public Utility Company and explain the socialized losses and privatized gains that are possibly accruing to miners.  In addition to levying a tax on coin mining activity, perhaps introducing a tax on PoW-based holdings at intermediaries could be discussed since they directly benefit from miners providing the underlying blockchain infrastructure.

And if you are a user of a cryptocurrency, publicly advocate for switching to proof-of-stake (PoS) chains or accelerating such transitions if they are already underway.  You can still enjoy decentralized finance in a way that does not dramatically contribute to climate change.25

Acknowledgements

Thanks to the following people for their helpful feedback: CK, JG, VB, RG, KR, JH, MW, and AV.

Endnotes

  1. As one reviewer noted: this leads to a Bastiat-esque “what is not seen” argument: if Bitcoin forces really smart people to work even harder on renewable energy, that would come at the cost of those really smart people working on other things that could easily be just as important. You can’t just make people do more stuff in the abstract by throwing more problems into the world and expect the result to be better on-net.  If that were true, then we should advocate destroying cities to help promote the development of next-generation construction and medical technology. []
  2. There is a clear distinction between Bitcoin and actual money that is beyond the scope of this article (it partially has to do with the unit-of-account).  We could focus on the non-money-moving-related functions of the financial system that of course Bitcoin does not provide at all (although “DeFi” on Ethereum partially does).  However, for the purposes of this article, the act of securing, transferring, and verifying payments is what we wanted to highlight. []
  3.  In 2016 I visited Hong Kong a few times. On one visit I met with a couple of executives at a coin exchange.  They said that their number one product was pre-loaded debit cards that were sold to mainlanders, typically to skirt capital controls and/or bribe folks with.  Some of the large cryptocurrency payment processors (like BitPay) also provide payroll services, perhaps some of those coins are miscategorized as “payments.”  In another anecdote, one commenter explained that: I can say w/ high confidence that most of that volume in ’17 was related to bitcoin wallets converting BTC to USD through Bitpay in order to load funds to prepaid cards – up until Visa killed that product in early Jan 2018. So not really representative of “BTC payment activity”. []
  4. This dovetails into conversations around legal recourse and recovery due to disputes.  See also: Settlement Risks Involving Public Blockchains and Code is not law []
  5. One counter-argument from promoters is: “what about stablecoins” such as Tether that piggyback on top of Bitcoin via Omni?  Through an FMI lens, a lengthy rejoinder can be found in Parasitic Stablecoins.  Through a technical lense, it bears mentioning that these piggyback coins arguably make the underlying PoW networks less secure; see Watermarked tokens and pseudonymity on public blockchains. []
  6. According to Chainalysis, more than three quarters of on-chain activity in a given day for Bitcoin are transfers between intermediaries, specifically exchanges.  Due to volatility, users typically resort to utilizing ‘parasitic stablecoins’ – such as USDT.  In this case, PoW chains are superfluous due to the usage of permissioned end points. []
  7. One reviewer commented: From an outside view, even taking into account economies of scale and miniaturization, it is extremely rare that consuming more of something takes less energy than consuming less of something.  A contrived example is: ‘if you invade a country with more soldiers you could lose fewer soldiers because the war finishes more quickly.’ But that’s not really the same situation at all. []
  8. Several months prior to that report, Rossetti announced that it had been victim to at least $6.6 million in stolen electricity via coin mining.  Following the run up in coin prices in 2017, one of the culprits believed to have stressed parts of the European power grid in early 2018 were coin miners. []
  9. A network of only L3++ would comprise 517,241 machines and consume 4.3 TWh. []
  10. Private correspondence, February 10, 2021 []
  11. The XMR price is still well below the highs from late 2017 – early 2018.   []
  12. Due to the size of its blocks, BSV also regularly sees orphans and accidental reorgs. []
  13. PoW mining might also be inadvertently subsidizing energy that would otherwise be anathema (e.g., “dirty” hydrocarbon extraction due to its lower costs). []
  14. Another unseen cost: scarce resources such as rare earth minerals used to construct solar panels or PoW equipment (and the e-waste it generates) that could have been used in more productive endeavors or not consumed at all. []
  15. The six countries that have both are: China, France, India, Russia, the U.K., and the U.S. []
  16. There are some good jokes waiting to be made about “alternative” Christmas light implementations.  With faster or slower blinking; or larger bulbs! []
  17. One model to measure could be “sliding windows” as described in Measuring Decentralization in Bitcoin and Ethereum using Multiple Metrics and Granularities from Lin et al. []
  18. In 2019 over 50 banks and other financial institutions launched the Partnership for Carbon Accounting Financials (PCAF) to assess and disclose the impact their loans and investments will have on climate change using common carbon accounting standards.  Several other initiatives track the aspirations of banks including Mighty Deposits and Bank Track. []
  19. Ironically they do not yet realize it but PoW proponents are embracing a type of impaired Keynesianism. []
  20. Bitcoin-focused intermediaries (such as coin exchanges) do enable trading of various financial products (such as derivatives) which likely contribute to some kind of economic output.  But these trusted third parties are – from an accounting perspective – separate from the Bitcoin network which only produces intangible bitcoins. []
  21. According to Digiconomist: 28 TWh annually of Antminer S19 Pro’s is about a month of capacity.  If the Bitcoin network doubles from current levels, it will take about 3-4 months (not including replacement of older ones).  And that is just production for Bitcoin-specific hardware. []
  22. Tom’s Hardware recently compared 30 different GPUs to find out which ones had the best return-on-investment for Ethereum.  Surprisingly, it was the Nvidia 1060 first released in July 2016. []
  23. Again, PoW chains such as Bitcoin often involve hundreds or thousands of superfluous nodes that maintain copies of the blockchain and verify balances; all of this subsists on top of the existing energy exploration and production infrastructure. []
  24. Another consideration that funds with an ESG mandate should consider is not just the environmental impact of PoW mining but also the human rights that may be violated in the production of said coins. []
  25. Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets by Fabian Schär []

Parasitic stablecoins

Leech - Wikipedia
Source: Wikipedia

[Note: this is a sequel to my previous post: Systemically important cryptocurrency networks, which critically examined how certain digital tokens parasitically leech off the U.S. banking system. There is an accompanying Appendix to this document as well.]

The second half of 2020 saw a large set of draft regulations and proposals surrounding cryptocurrencies and specifically, “stablecoins.”1

For instance, in July, the influential Group of Thirty published its investigation into digital currencies and stablecoins. In late September, the E.U. announced an expansive regulatory framework called Markets in Crypto Asset Regulation, or MiCA.2 A month later the Financial Stability Board (FSB), the top global stability watchdog, released its “final” report on what they called global stablecoins (GSCs). A month after that, the Bank for International Settlements (BIS) released a report specifically looking at stablecoins.

A few days later there was a flurry of tweets and articles written up in response to the newly proposed STABLE Act in the United States. And coincidentally, this past month the President’s Working Group on Financial Markets released a report on stablecoins that came out swinging against “multi-currency” projects like Facebook’s Diem (formerly Libra) as well as broad pieces of enabling infrastructure. 3

While each was written by different sets of authors in different jurisdictions, all had some common ground: regulation and risks of panjurisdictional commercial bank-backed “stablecoins.”4

This post will go through some of the background for what commercial bank-backed stablecoins are, the loopholes that the issuers try to reside in, how reliant the greater cryptocurrency world is dependent on U.S. and E.U. commercial banks, and how the principles for financial market structures, otherwise known as PFMIs, are being ignored.5

Let’s start in reverse order.

PFMIs

What are the PFMIs?

We have discussed the Principles for Financial Market Infrastructures (PFMIs) before. It is an evolving set of principles and guidelines for financial market infrastructures (such as CSDs, CCPs, payment systems) that are maintained and updated based on research and collaboration between two international regulatory bodies: BIS and IOSCO. Their joint 2012 paper is considered the gold standard and is frequently cited in the press, academia, and regulatory bodies.

For the purposes of this article, we will look at just once slice of the 2012 document. Principle 9 of the PFMIs states:

An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

We have ample evidence from the 2007-2009 Great Financial Crisis (and other eras) that dependence on commercial banks is subpar and adding yet another (underaccountable) layer on systemically important financial institutions (SIFIs) is not ideal. 6

Without going into weeds, the PFMIs and the committees involved in drafting them, state and then re-state the importance of reducing credit risk exposure to commercial banks. Yet in all instances today, almost every collateral-backed stablecoin that has thus far been issued does so through tokenizing deposits custodied at commercial banks.

This is improper for a variety of reasons and there are remedies and solutions. For instance, while we await liberalized access to central bank digital accounts (CBDAs) or currencies (CBDCs), setting up “narrow banks” or FedAccounts have been highlighted as complimentary solutions in the United States.78

When presenting these alternatives in public — especially on social media — a noticeable amount of “fist shaking” and “pearl clutching” occurs from partisans unaware of how reliant stablecoins are on the U.S. and E.U. commercial banking systems. 9 10

For example, a number of prominent cryptocurrency promoters claim that draft legislation (such as the STABLE Act) would destroy innovation or even blockchains themselves. 11

As it stands today, non-compliance with the Bank Secrecy Act (BSA) is strictly speaking not “innovation.” It is regulatory arbitrage which can create a race to the bottom that may harm consumers.1213 Commercial bank-backed stablecoins are ‘innovative’ insomuch as they are not playing by the same explicit rules that other bank-like entities have to.

We will discuss them at length further below but currently – as measured in trading volume – the two most “popular” commercial bank-backed stablecoins are USDT (Tether) and USDC (USD Coin).14 Both claim to be collateralized by U.S. dollars held in custody at commercial banks. Together they accounted for nearly 90% of all stablecoin trading volume this past year. 15

How big is that volume?

As an aggregate, in 2020, on-chain volume alone from these stablecoins reached more than $1 trillion. That does not count the exchange-based (off-chain) transactions that also use these collateral-backed coins. And problematic for policy makers: the on-chain volume was exchanged with limited oversight or surveillance sharing, which is part of the reason why various governments are moving quickly to pass laws to deanonymize self-hosted wallets that are exchanging this parasitic “e-banknote” or “shadow deposit.”161718

For example, Tether and USDC are not being stifled through the proposed STABLE Act, rather they would be required to jump through the same hoops as anyone else providing similar financial services.19 Based on how their product is used, these issuers are arguably a form of wildcat banks (from the 19th century) or what is called a shadow bank or shadow payments today. Lots of shadows!

What is a “shadow bank”?

The term itself is just over a decade old but these entities existed prior to 2007. In general they are “non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations.”