The seven deadly paradoxes of cryptocurrency

John Lewis of bankunderground.co.uk has given us a great collection of popular misconceptions about public coin with his recent post there.  Sure some might quibble with his use of the word "paradox" but as studying apparent paradoxes can be a great way to discover our own misconceptions and improve our understanding of the world the term has some merit here.  Both of the regular readers of this blog already know most of the stuff here, but as usual: if it's worth saying once it's probably worth repeating.  Lets dive into his seven issue issue and see what else we can learn.

1--  The Congestion Paradox or "Nobody goes there anymore, it's too crowded".

This is hardly something unique to public coins, there are many useful services we use which become more costly to use as the traffic goes up.  In all such cases a balance must be reached.  If a bitcoin network gets overwhelmed with transactions, it becomes more costly to use the network.  This is similar to the response of some city planners to charge much more for licenses to drive in the most congested areas, or only allow certain plates to travel at certain times.  The precise balance of transaction fees and the competition between different cryptocurrencies for your transaction fee is an interesting dance, but it shouldn't seem too paradoxical to us.  If a restaurant gets too crowded, they might raise the prices, and require us to make reservations in advance.  Depending on the difficulty of these costs for us, we might consider taking our business elsewhere.  Similarly, in the world of public coins, if one network is too expensive to use we will consider using another.  A large spike in congestion on the BTC network last year coincided with an influx in transactions in ETH, LTC, and BCH, and the number of transactions on BTC has remained reduced in response.  Yes, congestion can be a problem but we can understand the market forces at work.

2--   The Storage Paradox  

Here John Lewis tells us that "Each user has to maintain their own copy of the entire transactions history".  However we know from experience that far less than 0.1% of public coin users actively maintain such a copy.  The paradox here is that while the advantage of public coin is that that we can if we choose audit the entire monetary system, simply using the currency requires us to do no such thing.  Paper wallets don't take up much storage space, and neither do SPV (simple payment verification) wallets that seem to be the most popular wallets.  Storage is an issue for miners and various coin service providers (blockchain explorers, etc.), one which adds to their bottom line and must be considered in their business plan.  However for the average user there's no issue here at all.

3--   The Mining Paradox

Here it's not clear what the paradox is.  The author refers to a "tension" between miners and users, but this is nothing new in a marketplace as such tensions exist between buyers and sellers of all goods and services.  Sure, new purchases of the coin support the mining operations, this is why the term "mining" is used here.  However it's unclear how there is an additional paradox over e.g. copper mining operations, where new purchases of copper must support the mining operation.  The size and reduction of the miners rewards above the transaction fees, known as the coinbase transaction, is what decides the monetary supply curve of the coin.  Here there is much room for discussion but the author doesn't mention this.  Instead he refers obliquely to something he calls a "private cryptocurrency".  It's unclear what this might mean as usually the word "cryptocurrency" inherently refers to coins of a public nature.  Something like paypal tokens or alipay tokens might fit the bill as a private cryptocurrency (and indeed M1 dollars fit this name as well) but generally if a money supply is privately controlled there is no need for mineability.  The resolution of the paradox here is likely a better understanding of what public coin is and the market forces that miners compete for.

4--   The Concentration Paradox 

The inequality present in a privately issued currency, that of interest rate apartheid, is that some people are members of the issuance class while others are not.  Public coin does away with this inequality by removing completely the private discretionary issuance of currency.  However this doesn't mean that everyone will have the same amount of money.  There is still inequality of holdings, as we see in any market.  Shares of apple for example, or diamonds, show the same thing - a few players hold most of the asset.  Public coins will be no different.  The only difference here is that the "haves" must work more efficiently to increase their holdings, whereas for a fiat system the "haves" can be as inefficient as they like and still maintain their privilege.  There is a reference to the first 3000 blocks in the article which is also mistakenly used to indicate a trend for the next million blocks, but apart from that the only paradox here is in assuming that removing inequality on one front (issuance) will remove it on another (holdings).  It won't.  As fiat issuers continue to buy up public coins, the inequailty of public coin holdings is likely to grow.

5--   The Valuation Paradox 

The paradox here is that money has value despite the fact that it offers no positive future return.  We value stocks and bonds based on future returns, so why not money?  Well, "it just doesn't work" is one possible answer here.  Econometric literature is filled with various theories to put a price on exchange commodities, usually based on monetary velocity and related concerns, with very little practical success.  In the real world market valuations are not made by super-rational participants in frictionless markets but by real people with various different concerns and in much more constrained markets.  The question of why the dollar and the bitcoin are not both worthless assets is a good one, and perhaps somewhat paradoxical.  The solution comes from that fact that such a thing is needed to make trading and valuation easier, and therefore there is a demand, and some scarcity limits the supply to some degree thus allowing a market price to be reached.

6--   The Anonymity Paradox 

Here the paradox is roughly that sometimes we want anonymity and sometimes we don't.  Sure, it's very hard to match the anonymity of M0 paper cash, 90%+ of which is used solely in black markets.  Sure, it's very hard to match the launderability of the US Dollar, enjoying preferred status amongst criminals for about a century now.  That the bitcoin is public and all transactions are viewable any interested party sounds like it would alleviate anonymity, however the strong pseudonymity allowed by the addressing system as well as the immediate portability and teleportability make bitcoin a natural choice for some people who wish to remain hidden and still do business from afar.

While the author doesn't get into it here, there are some real paradoxes worth looking at here.  Especially true is for some coins which do offer anonymous and hidden transactions, such as Zcash and to some extent Cryptonote coins (Monero, Bytecoin, etc.), and also some Confidential Transacion protocols that ride atop coins like etherium.  In particular, can the user really verify that the network is keeping track of assets as described, and there are no leaks of newly issued tokens into the system?  If we cannot, then we are back to what might be a fiat system, and clearly this is not acceptable for society.  Allowing users to remain anonymous if they choose is worth doing, but if we destroy the very nature of public coin we have clearly gone too far.

Anonymity and privacy concerns are important, but usually there is a solution for those who need a higher degree of privacy.  Even on the mainnet BTC network there are tricks that one can use, including stealth addresses, coinjoins, and mixing, which increase the anonymity for a user but which do not compromise on the public nature of the money supply.

7--   The Innovation Paradox 

The idea here is that if we are excited about this new tech, then we are open to even newer tech which will obsolete the current coin and make it worthless.  There are a few ways out of this one.

The first is that this same paradox applies to e.g. a hard drive.  Sure, we know that in 5 years the hard drive we buy today will be worthless.  However we buy it anyway because we need to use it today.

Another way around this is that newer technologies can be added to the current stack.  Without changing the protocol, bitcoin users now enjoy many abilities they didn't have in the first few years of public coin, such as multisignature transactions, time lock transactions, stealth addresses, and more.  In this way newer innovations can add to the value of the coin rather than decrease it.

Finally, it's worth pointing out that the fundamental innovation, that of using a public money supply rather than a private one, is not one that is likely to change greatly.  Many new layers will be added but the fundamental difference of a money supply controlled by private issuers and one which is publicly transparent remains.

 

 

Bitcoin is Socialist, Return of the Son Of

A couple of years ago we swallowed the red pill (nyuck nyuck) and we wound up discovering here with a couple of blog posts that bitcoin is socialist (1) (2).  This discovery started out with allowing for a broadening of the definition of the term "socialism".  Sure, if you put some constraints on the syllables and say they can only be an indicator of central control by a national government, then this whole discussion is off the table.  However that's not what people mean who take the term seriously.  Therefore if we want to have a meaningful discussion, we need to use words that the other people listening will understand and agree to what they mean - and we need to broaden our definition a little bit.  The other is sacred after all, dear reader.

So for today's venture back into this territory we will consider one set of definitive factors of socialism, a set of 12 core qualities that have something to do with social behavior and a successful socialist society.  We'll tackle each one individually and see how public currency like bitcoin fits the bill, compared with a privately issued currency aka fiat.  Then we'll tally it up and report the score.

So without further ado, Public Coin vs. Fiat Coin - let the battle begin!

富强 - Prosperity.

Yes, public currency means that money issuers are not able to take wealth from the whole society.  If not being robbed is good for prosperity, then a public currency is a big advantage over privately issued currency in this regard.  Even if you are considering as your measure of prosperity only the prosperity of those who are now currency issuers, public coin still looks good!  Even though it won't give them the power of private issuance in the future, they still have the power to issue now and can use this power to accumulate public coin.  Public coin wins this round 1-0.

民主 - Democracy.

Democracy refers to government by the people, which means all the people.  In a well run monetary system, the monetary tokens provide a means for people to voice their support for one institution over another, selecting products and services from one group over those offered by another.  The integrity of this democracy is then the integrity of the monetary system.  If money can be issued privately, then this democracy is completely undermined and the people don't really have any say unless they are issuers.  Public coin would be a huge advantage to this core value of socialism.  Another win for public coin, even before we consider the potential use of blockchains in other kinds of voting.

文明 - Civility

Well sure, if one looks at the loudest folks one sees anything but civility amongst the so-called bitcoin community.  However, this is just the froth on the surface.  In fact the use of an open and transparent digital currency system could be seen as extremely civil.  A triple entry accounting system allows for backup records to be retrieved and payments to be publicly verified.  It allows for millions of currencies providing redundancy and providing cushions against the boom-bust cycles of issuance and the civil disobedience that often results.  I think Charles Barkley would agree: anything else would be less civilized.  1-0 public coin.

和谐 - Harmony

OK so Pythagorean resonant harmony might not be so relevant to bitcoin.  However, financial harmony - stability and avoiding dissonance - is certainly enabled by a public coin.  The turbulent booms and busts present as waves of inflation crest and recede in an economy are simply not present in a public coin economy, at least not in one with a rational money issuance curve.  Music to our ears.  1-0 public coin.

自由 - Freedom

Yeah, well here we have a huge advantage to the public coin.  Anybody can use it any time, right?  Well mostly but not exactly, as there is still the issue of a digital divide facing us where not everybody has access to the technology.  Fortunately that story is improving, as decent bitcoin wallets are available for very little cost in the form of $10 android phones.  It is rather the divide in education that is a bigger problem here towards bringing more individual freedom to all.  Public coins put the money in your hands, if you want it, but many people still opt for custodial accounts if they want them.  There is some interesting irony here, as some people today prefer to use slavery tokens and they are free to do so.  Anyway there's no need for me to expound on the "bitcoin is freedom" meme here, it's already both true and overplayed.  1-0 public coin.

友善 - Friendship

OK lets be honest, bitcoin has little to do with friendship.  Sure this is an important core value and without it we are lost.  However no monetary system addresses this, money is much more of a base quantity nowhere near as interesting or important as friendship so I won't bother to bullshit my way through this one.  Lets call it a draw between the different forms of currency here.  Public coin 1/2 -- Fiat coin 1/2.

平等 - Equality

We've talked about equality here before.  Public coin is absolutely equal with regards to the people that use and issue it, all people must follow exactly the same rules.  Fiat currency is the opposite, forcing a class structure of issuers and non-issuers upon the populace.  Bitcoin is clearly the winner here.  Sure, there are perhaps 1000 people who own 40% of all the bitcoins.  There will always be some inequality in this regard.  However, they can't issue themselves new ones and so they are at least in that regard equal to the rest of us.  Thus public currencies present a clear improvement in equality.  1-0 public coin takes it.

公正 - Justice

Like Richard Pryor said when he went to tour the criminal detention facilities of the justice department, he did find justice - "just us".  If your idea of justice involves currency issuers being allowed to do anything they feel like with no responsibility, then you will like fiat coin as the winner here.  Otherwise, public coin takes it clearly and obviously.  A sound money system is more just.  1-0 public coin.

法治 - Rule of Law

This is a rather indirect issue because it's not clear which laws are being claimed should rule.  While we may like the rule of law, we don't like it if the law is unjust.  One might argue that fiat systems could give more power to the enforcers of laws, if those enforcers are supported by the currency issuers, and so the rule of law might be stronger under a fiat coin.  However if the enforcers are not supported by the currency issuers, then public coin system looks much preferable in a rule-of-law sense to what would result.  Being lazy here it might be best to leave this one as a draw  1/2  1/2.

爱国 - Patriotism

At first glance, one might think that fiat money is better for patriotism, as it appears to bear the name of our nations and fatherlands while public coin doesn't usually bear such name.  However, one must differentiate between 很笨爱国 and 聪明爱国, patriotism that actually supports the country and patriotism that in fact weakens the country.  We could all agree that while spending the entire budget of a country on flags might appear to be a patriotic gesture, it really isn't - instead it is weakening the country and not showing 爱国.  In this case, accepting fiat coin is a very similar case - a treasonous act.  Allowing private currency issuers to drain the wealth of your nation is hardly patriotic is it.  A true patriot would refuse to allow such blatant corruption to take over his or her nation.  1-0  public coin.

敬业 - Dedication

It is tempting to bring up proof of work, the open source ethic, and the dedication of public coin educators and speakers here.  However these are anecdotes and not systemic lines of reasoning.  In fact dedication is higher topic here and like friendship we will leave it as a draw for today.  More important than money, so much so that the sloshing of moneys shouldn't affect it.  1/2  1/2  public to fiat coin.

诚信 - Integrity

Well this is perhaps the most obvious of the lot.  A sound money system is integral to integrity, you might say.  The secretive injection of newly issued tokens into an economy is anything demonstrates anything but integrity.  It encourages further fraud and further corrodes any integrity present in a society.  Clear win here for public coin -  1 - 0  public coin.

RESULTS

Final score:

Public coin 10.5
Fiat coin   1.5

Public coin like bitcoin is absolutely clearly more suited than fiat coin to a society in which the 12 core values of socialism are respected.

 

The complete story of price inflation in the last century

Abstract:  The total amount of wealth that has been taken by currency issuers over the last century is usually estimated at about 95%.  This estimate is based on data of price inflation, which given enough time will reflect the monetary supply inflation (issuance) created by issuers.  We show here that this estimate is off by at least a factor of ten, and due to time delay the estimate is off by another factor of 10.  The real loss due to our idiocy and treason inherent in accepting privately issued currency is greater than 99.5%, and more likely as high as 99.95%.

A typical plot showing the loss of purchasing power of the dollar, used to infer the amount disbursed to issuers.

1-  Money supply inflation and price inflation

In a monetary system of privately issued currency, inflation is the lifeblood of the system.  Participants jostle for position near the spigots, or in positions in which this blood will trickle down into their coffers.  The arrival of newly issued and laundered tokens is referred to as "growth".  Some people are able to get their hands on newly issued fiat tokens (dollars, euros, yuan, yen, etc.) easily, while others have to pay dearly for them.  This is referred to as interest rate apartheid, because the inequality is well described by the interest rate that people have to pay.  For the most privileged, in a fiat system, that rate is negative infinity percent.  For those much worse off, not only is the interest rate positive but quite high.  An observer is left with a lot of unknowns watching this system in action, in particular:  how much did they issue?  There is no way to tell how much of a privately issued currency (fiat) has been issued, for obvious reasons.

However, all is not lost for the econometricist of the fiat era.  With enough time, issued currency will trickle down through the layers of interest rate apartheid, finding its way into the hands of the general public, and eventually the larger markets will notice its influence.  The inevitable result?  We will see price inflation.

Understanding all of this, we can in some way quantify how much real wealth the currency issuers have taken from currency users by looking at the eventual price inflation which arrives.  Sure, it takes a generation or more for this trickle-down to occur and really affect the prices, but this might be our only metric to see how much the issuers have been issuing.  How much have they been issuing?

The idea is simple, that if we take the price of a commodity like a sandwich, we see that 100 years ago the sandwich cost 95% fewer fiat tokens to trade for then it does today.  A local eatery might have charged 5 cents for a beer a century ago, today they charge 1 dollar.  So, this means that the currency issuers have absconded with 95% of the currency users' wealth, right?

Historical Context

The problem with the above argument is that it ignores historical context.  In particular, a lot has changed about the world in the last century apart from just the number of fiat tokens floating around.  The technology and infrastructure available today is far greater.  How much did it cost for the brewer to make a bottle of beer 100 years ago?  One had to find a skilled knowledgeable braumeister then, as recipes were not available on the internet.  Making bottles was much harder, as was shipping them.  It took more materials and more energy then, and the designs were not as efficient nor were the machines that produced them.  Even growing the wheat was more expensive, as huge increases in automation, engines, fertilizers, and even irrigation have made it easier to grow wheat today.  Distribution and accounting and business were also much harder then, without computers and the internet.  Finding employees was harder, and finding customers, and procuring all the necessary materials.  You get the idea.  Everything was much harder and more costlier then.  A factor of ten here is a reasonable estimate.

What if there had been no monetary supply inflation over the last century, how much would that 5 cent beer cost today?  The answer is about a half a penny.  It's just way easier today to produce, bottle, and transport the beer.  We have massive trucks and interstate highways, we have bottling machines and pumps and computer aided design now.  The point here is that it's not just the loss versus the 1918 dollar that we need to consider in our estimate of how much the issuers have taken from the users, it is the loss versus what we would have been able to purchase had the issuers not been issuing.  And if the issuers had not been issuing, that 5 cent beer would not cost 5 cents today, it would cost half a penny.  That means we are down by not 95% but by 99.5%!

This is what many analysts miss here: the huge wealth that has been generated due to our technological progress and infrastructure.  To look at the current economic situation and say "It's OK, we still get by at least as well if not better than we did a few generations ago" is missing completely the potential gains that you have missed out on due to currency issuers taking them from you.

Imagine that unbeknownst to you there were a package of 1000$ in cash shipped to your residence every week.  Imagine further that a neighbor has been taking it from your mailbox, so that you didn't even know it was arriving.  This is the situation in regards to monetary supply inflation over the last century, as the potential gains of the information age and ubiquitous electric power have been grabbed by currency issuers while fiat currency users are left saying "everything's fine".  Well, really the issuance grab has gone well beyond that and well into taking the direct paychecks too.

Delayed Price Inflation

Once we have considered the changes in productivity due to technological infrastructure, we have an additional factor of 10 or more in our calculation of just how bad our idiocy of accepting privately issued currency has affected our bottom line.  However there is another factor we will need to consider, namely the delay present between the issuance and the price inflation.  This delay is due to the fact that large holdings of a tiny portion of the population don't immediately affect the prices at walmart.  Prices have a certain inertia to them and the issued currency won't affect the price until it has trickled down into the economy to the point where a substantial fraction of customers have a piece of this money.  One guy in the town with a trillion in cash stored in his garage isn't going to mean the local shops jack up the prices - until the guy hires a small army of extremely well paid servants who also shop there.

If we assume that this process takes roughly a generation (this depends highly on spending habits and population size), then we are left with the conclusion that issuers had taken 99.5% of the nation's wealth as of 35 years ago.  This means another factor of 10 in our estimates of how much the issuers have taken as of today.  After all, the money supply gains since we all started talking about quantitative easing still haven't affected food and energy costs.  OK they may have affected some real estate markets and the most expensive art auctions, but not what we typically refer to when we look at price inflation.

The final estimate?  99.95% of all capital has been collected by money issuers and those whom they have bestowed financial favor upon in the last century.  No wonder we are desperate to pull out all the natural resources we can, it's really hard to stay ahead in this game (hint - you never will unless you are an issuer).  The whole thing is just inexcusable really, the enabling of wholesale corruption and squandering of resources by people who should know better.  Sure, it's an episode you might expect of primitive man, an interesting story from marco polo and a lesson to learn from.  But in the 21st century?  People are engaging in the crime of accepting privately issued currency for real goods and services?  Really?

 

 

Bitcoin Emissions

If we step back for a minute from our cryptocurrency focus and look at a different picture, one in which our concern is survival of life on Earth,  then these recent headlies do provide an interesting turn of events in the dialog concerning climate change and predicting the course of the anthropocene era.

The bigger context in this picture is that not only do we have just one spaceship in which we can sustain life (lets hope dear reader you can see how this isn't optimal), but also we see that the conditions of the life support on this one remain poorly understood and are certainly under stress.  We are living now during a mass extinction which is taking place faster than any in the geological record.

If we turn our attention to these issues, loosely referred to as climate change, we can look at the scientific discourse and see many different factors discussed as reasons for this problem.  Some writers discuss overpopulation, economic inequality, poor governance, problems with educational systems, and various other things.  However until now we have not seen a direct blame or attention given to a currency token as a factor here.

But why not?  After all, what has caused 90% of the life in the oceans to die in less than a century?  Perhaps one of the bigger culprits is the Japanese Yen.  People are pulling the fish out of the ocean, killing them, and trading them for Yen.  Thus perhaps we should see some headlines such as:

"Yen to kill 95% of ocean life by 2050"

..

"Brazilian Real destroys Amazon Rainforest by 2100"

..

"Federal Reserve Dollar will desertify 50% of North America in this century"

 

For these are all at least as accurate as Nature's

"Bitcoin emissions alone could push global warming above 2 degrees C"

The idea that bitcoin has emissions is an interesting one, seeing as I have a bitcoin paper wallet here under a fume hood just in case, and it is not emitting anything.  However it is true that the network takes some energy to process blocks, and the minimum necessary energy to mine a block is in fact greater than zero.

What is the minimum energy required to mine a block of bitcoin?  Well we can use Landauer's thermodynamic argument as a basis for this calculation.  The validity of the Landauer principle is debated in the academic literature but it can give us a rough idea how much energy is truly required to process a block of transactions:

E = k T log(2)   per bit.

At standard temperature of 0C = 273K this works out to 2.65 E-21 Joules per bit.  Therefore to create a 1MB block, just to create the block here not including the hashing and signature verification or transmission costs, will cost us 2.65 E-15 Joules of energy.

If we use the same conversion of kWH to grams of Carbon emissions that the Nature article and the Digiconomist do (1 kg CO2 per kWH) this happens to work out to almost exactly 100 molecules of CO2.

100 molecules might not seem like a lot of CO2 but consider that there's a block every 10 minutes, which works out to 5.2 million CO2 molecules per year.  For 10,000 nodes that's approaching a femptogram of CO2 annually!  This is more substantial but still quite a bit less than the 70 million metric tons which miners of the currency apparently are producing according to the linked articles.

--

Ok so while it's true that there's a minimum energy requiremennt for the processing of bitcoin transactions, and it's not true that there's a minimum amount of tuna killed to process Yen transactions or a minimum amount of rainforest burned to process Real payments, effectively this minimum is zero.  And the minimum doesn't matter here anyway because the fact is people are willing to throw a lot of energy and efforts into things that can make money, even if they appear stupid otherwise.  Why are people choosing to throw so much energy at bitcoin mining, when the network doesn't require it?  It's because they are competing, trying to stay ahead of inflation, trying to obtain the necessary tokens that enable them to obtain food, deal with the local authorities, purchase travel papers, etc.  The same reason others are overfishing, overdeveloping, and overmining.  It is the broader economic system of fiat feudalism that these people are living in which encourages them to make money desperately in any way they can.

This is where we begin to approach the problem in a practical manner, when we consider the economic incentives to individuals who wish to burn hydrocarbons to mine bitcoins, trawl oceans and sell fish to obtain yen, or destroy rainforest and plant sileage to obtain Real.  In all these cases, the predominant system in place regarding peoples economic systems is a privately issued currency or fiat.  People feel the need to obtain as much as possible quickly here for many reasons, but the fact that the issuers of the currency can at any time take all of the assets away from the individuals is not optimal for the strategy of conservation.  If you have no means to save financially, you will find it hard to stay ahead and will even consider drastic measures such as mountaintop removal and coal fired bitcoin mining to get that extra edge.  The issuance class will take all the valuables from the rest of the population, this is the heart of the fiat system, and the issuers will have no economic incentive at all to do anything useful with these valuables.  We are left with a desperate population struggling to survive.  This is not a system designed with conservation in mind.

OK, so it's not my purpose to lay it out precisely for you here.  Rather, the point is that the authors of this Nature article and others who are beginning to look towards a currency system as a source of destructive human behavior are just maybe on the right track.  Perhaps it's worth considering whether a reliance on a currency system might have some influence on the destructive behavior of its users.  What do you think?

 

 

 

 

Regulating Regulates Regulations: How Bitcoins are Already Regulated

Over the years in this forum we've looked at things people get wrong about bitcoin.  The trouble is one that is present in any field, that of the quick formation of memes and soundbites which are immediately grabbed onto by our feeble minds and repeated regardless of their applicability or accuracy.  In this case we are going to be looking carefully at a statement I'm going to wager you have heard:

"Bitcoin is unregulated"

Yes, perhaps you've heard it: the unregulated currencies, an unregulated space in which unregulated currency evades regulation.  Trouble for the regulators.  Bitcoiners demand regulation!

Well let's stop for a minute and ask:  what are we talking about?  If we ask this question clearly we find immediately that this is total nonsense, as bitcoin and all public currencies are in fact much more well regulated than any other.

What would it mean for a currency to be regulated?  Well there are a few things that are important to have regulation of:

1-   Money Supply  

This is probably the most important thing to look at in terms of managing a currency, and regulating it.  Who can create new units and when?  Bitcoin here is both algorithmically and transparently regulated, with the money supply increasing by a known amount and the records of all creation events being public and viewable by any interested auditor.  Let's stop and compare this to some other currencies here.  Are there any that are so well regulated?  No there aren't.  Obviously fiat currencies are grossly unregulated in this regard, as nobody can know how much was created and no issuance events are publicly verifiable.  Even gold doesn't compare to the regulated nature of bitcoin as issuance events (gold mining) is again not publicly viewable.  Sure, companies might issue statements reflecting what they have done but that is hardly up to the regulated nature of a public currency.  In fact many critics of cryptocurrency highlight this over-regulated nature of bitcoin as a weakness - in that it doesn't allow for people to evade the regulation in times of emergency, to increase the money supply in an economic downturn for example.

2-  Transactions 

Another thing that can be regulated is transactions.  Who is allowed to pay whom and how much and when, that kind of thing.  Here we see that public coin is again regulated algorithmically and transparently, under the watching eyes of all participants and anyone else who cares to look.  Transactions must have the proper form and are broadcast publicly so that all can confirm the amounts, origins, and final destination of the funds.  Compare this to the various transmission of private coins and again we see that bitcoin is more regulated.  How many alipay bucks were sent in total last month?  Well you can find some people to tell you that number but they might not agree and you can't verify it.  How many recipients received paper federal reserve notes?  No way to know that or to regulate it.  How much gold changed hands really?  Well we can't know that either.

To be fair, we also don't know exactly how much bitcoin changed hands because people can pass private keys to each other or use other off-chain mechanisms, and also can generate transactions to themselves to make it look like transactions took place.  So the regulation of bitcoin transactions isn't perfect, but it sure is better than private coins like dollars and wechatbucks.

3-  Commerce

Regulation of people doing business isn't regulation of a currency, so it shouldn't be described as such, but will discuss it here anyway because this the small grain of truth that built up to the grossly erroneous "Bitcoin is unregulated".  If a person wants to do business with another, perhaps trade for an item from them, work together, or otherwise: sometimes conflict can arise.  There are a whole slew of regulations about this, to deal with these potential conflicts.  There are procedures for those who have been defrauded, procedures for paying taxes in various jurisdictions, procedures for dealing with accusations of price gouging and more.  Public coins are simply tradeable commodities, like any other monies or goods, and so are traded in the same way.  Thus they are already regulated by all the regulations regulating trade and commerce.  So what's the problem?

There are two things that have led to this claim of unregulated currency.  One is that many new businesses are popping up, and when new businesses pop up new problems pop up with them.  A new dunkin donuts might appear and people might make an illegal U-turn to enter the drive through.  Then we could call these "unregulated donuts".  There simply aren't time-honored and well established through generations protocols to deal with various problems that can arise, so we say "unregulated".  The term is accurate in the sense that we might refer to some parts of Chicago as "lawless", despite the fact that the state of Illinois does have laws and they technically do apply even in those areas.  Yes, people accepting bitcoins have been known to run off with them.  It's not that bitcoin is unregulated, or even that bitcoin commerce is unregulated - it's that you'd better watch your ass when you are in the wrong area of Chicago - or watch your private keys carefully if you have coin.

The other new issue here is that public coins provide the potential for instant physical delivery.  A lot of commerce doesn't allow for such a thing, as physical delivery typically requires a truck or an airplane and a lot of work, at least a business day or so.  The novelty of this arrangement and what it means for markets and for mistakes and conflicts again has elicited the term "unregulated", simply because we aren't used to it yet.

Where do we go from here? 

One option is to find some used car salesmen who can advertise their prices as "unregulated".  We can have "unregulated cola" advertised for sale and "unregulated fitness" clubs.  This will take some of the sting away from the word.  Until then I have another proposition:  we regulate it.  Regulators of regulation will ensure that discussion of regulation and use of the word regulation conform strictly to regulations.  In case of regulation regulators falling to regulatory capture, regulators of the regulations regulators can be employed to regulate the regulation of regulator regulation.  The departement of RRRR can be formed with a new seal to be approved by the regualatory commission on regulation of regulatory commissions.  Or perhaps we could just STFU and deal with problems in a rational manner as they arise, and acknowledge that bitcoin and public coins are the most regulated currencies ever developed by man.  What do you think?

How will the miners get paid?

I've always been a big fan of Rick Falkvinge's work.  His attendance at the Prague bitcoin conference in 2011 is part of what made me attend.  And everybody who has thought about the issue knows he is dead right about so-called intellectual property law and how it is a lead weight tied to the leg of humanity, holding us back from progress (scientific, technological, medical, etc.) and prosperity.  What do you think, has Rick's involvement with public coin helped or hurt his work in that fight?   At any rate, I simply had to take some issue with his recent video with the same title as this post.  There are some inaccuracies here.

As to his first point here, he is taking Knuth a bit out of context.  Making sure there is an incentive for folks to confirm transactions isn't an optimization in the algorithmic sense that Knuth meant.  Thinking ahead isn't always bad computer science.  As to the second point, I would say it is very much our problem to solve.  It was Satoshi's problem to solve, and we are all Satoshi (as Rick's channel title suggests), ergo our problem.  As to "not a problem in the first place", well that's what we're here to talk about today.

One inaccurate claim with potentially false implications from this presentation is that the problem of reducing coinbase reward won't be an issue until 2140 when the reward drops below one satoshi.  In fact we were half way to zero reward in 2012.  Then we were another halfway there in 2016 (3/4 of the way there).  As we all know, the coinbase subsidy for the miners drops by half every 210,000 blocks or roughly four years.  This means we are exponentially approaching zero coinbase reward.  The exponential might not seem so severe because of such a long time constant (four years), but exponential it is.

Scenario:  A bus is headed straight for you.

Response:  Don't optimize prematurely!  This won't be an issue until the bus touches your skin.  It's the you in that future time that needs to worry about this, not the current you.

So at what point does this become a problem?  It becomes a problem when the fees are a substantial fraction of the block reward.  This has already occurred, for a short time, when fees went very high.  People fled the network in droves, creating the BCH fork and starting a large ramp-up in the use of other public coins driving down the BTC dominance.

In the near future this will become an issue again.  In 2032 the reward will drop below 1 BTC per block.  At this point we have a few alternate forces at work.  With less reward, there will be less power thrown at the network and the network will be less secure against double spending.  In addition, higher fees which could compensate for the coinbase drop will drive the value of the coin lower (as coin users part with their coin in favor of another offering cheaper transactions), further lowering the value of the coinbase reward.  One likely outcome is that commerce will seek a blockchain with a more stable reward curve, one that provides miners a substantial reward to secure the network so that transaction fees can remain small, with continued security.

Of course this miners reward does need to reduce, otherwise inflation of the money supply will slowly drive down the value of a coin and reduce the use of the coin as a store of value (reduced hodlability).

 

Is there a money supply curve which avoids these issues?  Which can provide a miner with an early-adopter advantage at any date, can avoid runaway inflation, and maintain network security without oppressive fees?  I claim that there is, and the curve is the logarithmic money supply curve, as demonstrated by the LOG coin.  The money supply is capped at 28 million LOG, the reward is lower at every block, and yet substantial rewards will continue far into the future.

To recap:

Good economics to solve this problem.

Our problem to solve.

A current problem, not one that will show up only in 2140 but one which becomes twice as urgent every four years.

Addendum:

Consider that Rick might be exactly right here, that it doesn't matter what the miners are paid.  There are in fact some coins which simulate late-stage exponential release coins.  The first I was aware of was NXT but there are others now, with a 100% premine and no mining subsidy.  The mining is presumably maintained in this case not by the fees but by the holders of the coin who wish it to still work as a means of exchange, either by a central group who maintains the coin or by individuals who are motivated to see their holdings increase in value through the use of the system.  While one is tempted to argue that such centralization is not optimal due to potential corruption and misuse of these powers, the proof of the pudding will be in seeing how these coins fare in the coming decades.  If it doesn't matter what the miners are paid, then maybe we should pay them nothing right from the start.

 

 

 

 

Rat Poison

Five years ago in May of 2013 Charlie Munger quipped when asked about bitcoin that "I think it's rat poison".  You might be surprised to hear me say it but we should listen carefully to Charlie Munger et al., and that indeed there are a few ways that bitcoin is rat poison.  So it's been five years, have we poisoned any rats yet?  Well not so many.  It's slow acting rat poison.

You see public coin has no room for counterfeiters.  You can't counterfeit a public coin because the list of all valid coins is public and anyone can check your coin against it quickly and easily.  Counterfeiters, or private money issuers, are in some ways similar to rats living off the grain we have in our kitchen cupboards.  Without doing any useful work they can grow fat and lazy, and such behavior leads to the spread of disease and inefficiency, not to mention malinvestment, ecocide, and stagnation.

By using public coin, we can effectively kill the rats because they will have nothing to eat.  In such a way, bitcoin is indeed rat poison.  Are there some brokers profiting by overselling stocks which they don't really have?  Maybe.  If so, putting securities on public blockchains will poison such people.  Instead of having MyBroker[TM] tell you that you have 5 shares of MyCorp, and MyNewsPaper telling you that there are 10 million shares outstanding, you can now hold 5 share yourself, know which shares they are, and verify how many are outstanding yourself.

So bitcoin poisons the rats who are compromised private money issuers or issuance fraudsters.  Are there any other rats around for bitcoin to poison?

Well yeah.  Plenty.  As public coin continues it's rise towards eventual fiat jubilee there will be many who see this bubble as an opportunity to get rich quick.  The "get rich quick" folks might not be rats of the same caliber as the issuers but this is likely because they don't have the 关系 (they don't know the right other rats).  So instead they will push company coins, pump and dumps, and various other short term schemes which might look good for some short time but eventually leave the rats flat on their backs with their feet in the air.  The gamblers will get zhou tonged, trading on leverage.  Meanwhile the casino operators will get fat and lazy.  Both are victims of rat poison.

While the idea of some rat poison in our financial system is hugely appealing, we shouldn't get carried away with thinking that our extermination might be successful.  What doesn't kill the rats makes them stronger and we can count on graft, fraud, and other idiocy to continue in many forms.  After all it is the rat race.

 

 

 

 

 

 

 

 

 

150 billion funbux

It hardly seems noteworthy I know, you are disappointed already that I might have even noticed that this story had risen in media outlets.  The story is that Jeff Bezos of Amazon has 150 billion dollars worth of stock.  In the linked article Annie Lowry does a good job of giving respects, pointing out that the guy knew well how to navigate the financial waters, and points out various problems with the big picture here such as gross income inequality and consumerism.  However in this post we are going to treat this as a very basic lesson in fiat finances.

One might naively expect that Jeff Bezos made his fortune because Amazon makes money by earning it from sales to customers.  This is a traditional idea of a business, but in fact it isn't correct.  Sure, Amazon makes revenue from customers - and the revenue is greater than the expenditures (profit margin), and this produces earnings.  However the earnings reported by AMZN last year (trailing twelve months) were about $8 per share, which for 490M shares outstanding comes out to a total earnings just shy of $4 billion.

OK four billion funbux is serious earnings no doubt, but the first thing to note here is that there's no way Mr. Bezos made his fortune from the earnings of Amazon.  There just was never any 150 billion in earnings.  The total earnings since the company were founded are far less than 150 billion.  So where did his fortune come from?  In fact the question becomes more pertinent when we realize that the company has never paid a dividend, meaning the the earnings were always spent by the company rather than given to the owners.  We see that in fact Mr. Bezos never got a cent from the earnings of Amazon, at least not directly.

So where did his fortune come from then?  It came from investors.  Investors worried about FOMO and investors who were on the lower side of the interest rate apartheid walls.  Investors who were currency issuers or well connected to them.  It's the currency issuers that matter in the fiat economy, not the customers or the bottom line (unless indirectly because that matters to some investors and issuers).

Other folks have even claimed Bezos is the richest person in history.  Certainly Mansa Musa appears to be a vastly stronger contender for that title.  Mansa Musa was in fact a currency producer (issuer, in this case controlling gold mines), in the golden age.  Currency issuers today can create trillions of dollars with the press of a button.  I'm sure they laugh at the notion that Bezos is the richest.  For the rest of us however, who cares?  It's what you do that matters - not what numbers are written on your bank statement.  Sure, measuring wealth in fiat is insane, but really - measuring wealth in gold or bitcoin still isn't all that much of a useful metric in the long run.

 

 

 

 

 

 

 

Issuance Malfeasance

What is the problem that cryptocurrencies solve?   ..asks the noted economist and New York Times columnist Paul Krugman [link].

We have addressed this question before in this forum.  The question today is how somebody could be a serious scholar of economics, or even open ones eyes in any populated area of the planet, and somehow not know the problem that cryptocurrencies solve.  This problem is everywhere.  The valuations of stocks, the urban development, the Dubais and the Vegases, the Venezuealas and the Zimbabwes, the Pentagon and the DC Lobbyists, the bicycle sharing overproduction, the Monacos and the Caymans, and the communist party loyalists with suitcases full of house deeds.  London real estate prices.  Bitcoin prices.  Quantitative easing and the deep state.  All related to issuance malfeasance.  How could somebody not know about this problem?  Well they should, so it behooves us to state clearly once again the problem (and the solution).

“The power to make a small piece of paper, not worth one cent, by the inscribing of a few names, to be worth a thousand dollars, was a power too high to be entrusted to the hands of mortal man.” [John C. Calhoun, speech, U.S. Senate, Dec. 29, 1841]

Counterfeiting is unauthorized currency issuance.  But what if you are an authorized currency issuer?  What if somebody then puts a gun to your head and asks for a million fresh dollars which you can easily create with the push of a button?  Who do you need to pay off to maintain your position as issuer?  Who do you issue money to and how often?  What if you could create 5 trillion dollars with the push of a button, what would you do?  It doesn't take more than a rudimentary imagination to understand the answers to these questions.  Creating money without telling the public about it is suspicious don't you think?  We refer to this authorized issuance of currency, in a manner unjust and hidden from parties not privy to the issuance, as issuance malfeasance.

Cryptocurrencies handle the problem of issuance malfeasance by requiring that all issuance events are public - with no exceptions.  Therefore counterfeiting and other issuance malfeasance are simply impossible.  Well, that's not entirely true.  Those public coins which are centralized and have provisions for issuance events (such as e.g. USDT) still have some room for issuance malfeasance.  At least for these curreencies however, the public does know how much was issued and when.

To treat this situation in all generality we are left with three possibilities here concerning Krugman's claim that he doesn't see the problem solved by cryptocurrencies:

1-- There really is no problem of issuance malfeasance, all currency issuers are benevolent authorized players who not only don't create any more then exactly what society needs to be created but also fend off all less benevolent people who might seek that power, with no exceptions.  This of course seems impossible to me but who knows, it could be that I am somehow blind here.  If you think this is what's going on please do comment and let me know.

2-- Krugman understands the problem of issuance malfeasance but is a paid mouthpiece of people who wish to badmouth cryptocurrencies at this juncture for one reason or another, or simply is hiding his knowledge of the problem for his own purposes.  This seems exceedingly unlikely to me for a few reasons.  One is that it doesn't really matter to public opinion all that much what he says.  Another is that cryptocurencies are not a problem for the rich and powerful, even for those who are benefitting from issuance malfeasance.  In fact cryptocurreencies are a boon for these people because they can be obtained via trade for newly issued currency, thus enabling issuers to ensure their personal wealth in perpetuity.  Finally I don't believe the guy is lying to us, he seems like an honest bloke to me and I know some people who know him personally who agree.

3-- This leaves us with the final option, which is some kind of self delusion.  When something surrounds us our whole life, we sometimes don't see it as anything out of the ordinary or worth reporting - especially when doing so might tear down other symbolic structures we might have built up in our attempting to label the world around us.  If currency malfeasance is just the way the world works, then we don't see it as a problem.

What do you think, is issuance malfeasance enabled by the use of fiat currencies a problem worth solving?  Let me know in the comments please.

 

 

Why premines are not not ideal for a currency

This post is part of the "stuff we thought was dead obvious" series.  The series includes "How racists are dumb", and "How rapists are despicable morons" and "Shooting yourself can be dangerous" along with the classics "water is wet" and "the Earth is an oblate spheroid".

Five or ten years ago I would not have thought to write this post.  The phrase "premine" was considered somewhat insulting already, because it was assumed that people understood that this practice was suspicious, scammy, and thus unlikely to provide a stable currency.

So what is a premine?  The idea is that some currency is created before the ledger is operational; that some privileged people can get ahold of a substantial amount of coin before the mining even begins.

The practice became more common amongst the lower quality altcoins.  The authors wished to reward themselves monetarily for their work (being amateurs they were just in it for the money) and adding a premine to the code seemed one way to do this.

Then came the arrival of the 100% premine.

The 100% premine. 

If you thought adding a hard-coded premine to the codebase of a coin was scammy, you would be rather shocked at the blatancy of a 100% premine.  In this scheme, not only some but in fact the entire supply of a coin (that's all the coin that ever will be produced) is created in advance and given to the devs or early investor groups.

The first coins I came across that did this were NXT and XRP.  Both simply created the entire supply out of nothing, with no monetary policy afterwards, and then started selling the supply.  Who would buy such a thing?  This was my thought, that nobody would consider it.  However I was wrong.  Hence returning to this post to see where I went wrong.

In fact the 100% premine coins have grown.  33 out of 50 of the top digital currencies listed on coinmarketcap.com are 100% premines.  They are marked with an asterisk for easy identification.  Here are some of the big 100% premine coins:

1-- Ripple [XRP]
2-- EOS [EOS]
3-- Stellar [XLM]
4-- Cardano [ADA]
5-- IOTA [MIOTA]
6-- (etc)

So let's explore why this kind of monetary policy is a bad idea first, and then we can come back and look at some of the justifications people use for such a practice.

Centralized  

One problem with the 100% premine is it forces a centralization of ledger control.  Who secures the ledger in a public coin?  Why, the miners do of course.  And who are the miners?  Well in a 100% premine coin, there are no miners.  This means that there is no financial incentive for any new players to secure the coin, and that it will be secured solely by the bagholders or premine recipients trying to popularize the network.  "The company" secures the network, because these coins are company coins, and here "The company" refers loosely to whoever holds most of the premine, enough to give them incentives to run the software.  These players also have a role to play in exchange markets, but we will return to that.

One possible way for a 100% premine coin to not be ledger-centralized is for miners to be given transaction fees.  This would mean however that transaction fees would need to be substantial, and there aren't a lot of teams trying to push their high-fee coin.  Instead the purveyors of 100% premine coins tend to claim that the transactions will be cheap or free.  The idea here is to get more people to buy into the system, so their premine will be worth more.

Centralization alone is not necessarily a problem, but it is a risk factor to consider.  It means that the operation could be shut down, could go bankrupt, go under, get bulldozed, be attacked.  It is a point of weakness where corruption or legal troubles could cause problems in use of the currency.  It's not ideal for a currency to be thusly centralized wouldn't you agree?

Manipulated Markets

Another problem with the 100% premine is the effect it has on the exchange value of the commodity, namely preventing a natural supply-demand market price discovery system from working.  A mineable asset has a newly issued supply continuously appearing.  This supply forms a counterpart to the demand, enabling a fair price to be discovered.  This is the theory, but in practice markets of all kinds of assets are controlled by large players known as market makers.  You might think that allowing any kind of downward pressure on the price to be a bad thing.  Mining provides such a downward pressure by giving people new coins they could dump on the market.  So you might think mining will drive the value of the coin down.  Isn't this bad?  Well not really; in fact a coin is more usable if it can find a natural price point and this requires a balance of upward and downward pressures.

The 100% premine is basically a carte blanche for the early recipients of the premine to manipulate the market as they see fit.  There are no natural market forces so any participants are completely at the mercy of these market makers.  The point here isn't that mineable assets have natural, clean, uncorrupted markets..  of course they don't!  The point is that there are no market pressures at all to combat such pump-and-dump bubble blowing with a 100% premine coin.

Corrupt Devs

It's pretty clear that the 100% premine is about the designers of the coin grabbing some money.  It's also clear that doing so isn't part of a coin being able to improve on human interactions or to increase our chance of making it to stars or even surviving as life-on-earth.  However lets assume for a second that the consensus algorithm simply wouldn't allow for anything but a 100% premine (hah) and that the developers really are trying to make a product for the good of mankind.

The trouble here is that once there's a ton of money in the bags, even after this assumption of good intention, there's a lot of incentive for certain elements of society to try to get some of the money in the bags.  This leads to an element of "we're just in it for the money" in the people working with the coin, regardless of any initial incentive.

Rationalizing the Premine

Some assets in fact do need to be 100% premined.  Bus tickets.  Stock certificates.  These things aren't intended to be pure exchange commodities (currencies), in fact they come with promises from a central authority of future returns or redemptions.  If your token comes with promises of receiving some dividends, goods, or services, the premine might be just what you are looking for.  However this doesn't appear to be the case for most of the premined assets people are calling cryptocurrencies.

Another justification for a premined scam is that mining is energy intensive.  Well yeah, shared consensus is energy intensive.  Shouldn't we just let the king decide?

A final justification I have seen is that the 100% premine was "fairly distributed", in some auction or token-issuance-period.  While it may be possible for some to be more fairly distributed than others, the notion that a premine is a fair distribution for a currency is very misguided.

Conclusion

If you're a speculator or currency user, stay away from the 100% premine coins.  The price will be unpredictably manipulated and eventually the company controlling the ledger will run into problems effectively killing the coin eventuallly.  It will be very hard to move forward after the initial hype of the premine-holders marketing their way to monetization.

If you're a currency or blockchain developer, pick a monetary policy that doesn't suck right out of the box.  I like logarithmically growing supplies, but hey there are a lot of options.  All of them are better than the 100% premine.