A Brief History of Bitcoin
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A Brief History of Bitcoin
By Junseth
Posted January 25, 2017
The End of the Bitcoin Natural Ponzi
When the World Bank released its whitepaper on Bitcoin back in July 2014, I was astounded by their stupid. Two years later, I’m humbled by their reasonableness. The abstract of the paper begins with what I think is a very reasonable definition of what a Ponzi scheme is:
Ponzis are among the most ubiquitous and least understood phenomena of economic life. They acquired a certain salience with the global financial crisis of 2008 and the crash of Bernie Madoff’s celebrated Ponzi scheme. This paper explains the structure of Ponzi schemes and argues that what makes this such a troubling phenomenon is its ability to be camouflaged amid legitimate practices. It is shown, for instance, that the common practice of giving stock options to employees could be a potential Ponzi that allows corporations to flourish for a while by borrowing from its own future. The paper discusses the need for intelligent regulation to incise harmful Ponzis (not all Ponzis are harmful) while taking care not to damage the legitimate activities that surround them.
The rest of the paper takes a look at the structure of a Ponzi, and defines them as both fraudulent Ponzis, purposely created to bilk investors, and naturally occurring Ponzi schemes that are caused by raw speculation. The paper is not sophisticated in aspect, but I think it is accidentally prescient. Since it’s release, I think that I have come around to the idea that naturally occurring Ponzis are all over the place. Gold might be one such item. It has very few uses, but is value dense, though it’s notable that its value is almost entirely due to speculation. It works well as money because of its scarcity and its nearly utter uselessness for use anywhere else. That said, it relies largely on speculative inflows.
Bitcoin has been, to date, very similar. It’s slow release schedule (mining) ensures scarcity though math + economics. But, honestly, until recently, its value has almost been completely based on inflows of money. Thanks to Libertarians, much of the value was buttressed by an ideological desire to see government crumble at the site of an alternative to fiat. Since those days, I think that the honest among us have come to understand that without government, there is no use for Bitcoin. Because, while the Libertarians provided what amounted to ideology-based price support, as Bitcoin has matured, we have begun to see its use among those who have no alternatives.
The Beginning of a Circular Economy
When Backpage’s credit processing was pulled (AMEX, VISA, Discover, Mastercard etc), Paxful’s Local Bitcoin-like exchange stepped in. The wonder of this is that the girls who sell their escort services on Backpage, are rarely in a position to pivot with regard to the way they earn money. Simply, they are captured by whatever payment mechanism Backpage mandates. So suddenly, these girls needed Bitcoin. A similar phenomenon happened years ago when the Silk Road encouraged users to buy drugs online with Bitcoin. Drug addicts couldn’t use their credit card or cash, for that matter, to buy their poison, they needed Bitcoin. This sort of necessity of use has begun to usher in a new era in Bitcoin’s history, where people’s ideologies are no longer the sustaining force. Bitcoin is seeing the development of a circular economy. And this, I would assert, is the point at which a naturally occurring Ponzi leaves the orbit of Ponzi-planet and enters the outer space of important utility. It is a thing people NEED, and not just a thing people speculate on. I’m not an academic, so I’m sure there is a lot of nuance that I’m missing here. But this is an important distinction between Bitcoin and other blockchain tokens. There are plenty of other criticisms, like Poelstra’s critiques of non-proof-of-work (POS) coins, or the possibility of the existence of 2 proof-of-work chains. These are important, but tangential, technical debates. In this article, I’m going to focus on the fiduciary side of the blockchain critiques, which I think we regularly ignore. And I’ll do it by giving my version of some history that many of you might not have been around for. I guess, in some ways, it’s a bit of accidental Gonzo journalism. I have always been a part of the Bitcoin story. And I can only really tell it from my perspective.
Bitcoin’s earliest mark of distinction is in its rise and rise. From having no articulated value to its famous, and sudden rise to over $1,000 in what seemed like no time at all in 2013. This is following subsequent sudden rises, such as the one that occurred right after Chuck Schumer declared that children could buy drugs on the internet. Shortly after, Bitcoin peaked at around $30 and suddenly dropped back to just over $1. Amidst the crash, Wikileaks declared that it was going to accept Bitcoin for donations.
Dumpy Butts and Fancy Shoes… the Beginning of Everything
There is little doubt that the rise brought with it a wave of speculators. Everyone everywhere heard the news of the once-cheap asset that had made its early adopters ungodly sums of money. Mere weeks after Bitcoin had hit $1,000, the North American Bitcoin conference was underway in Miami. Chris DeRose and I made our way to the event, one of many we would attend throughout the years. There, as Bitcoin hovered around $850, I was astounded by the newly minted millionaires of the ecosystem. Bitcoin had been priced between $7 and $14 not less than a year earlier. It had hit $100 around August. And by January had increased 8-fold.
Yet, there, on stage, a venture capitalist declared that he was an old-timer. “I’ve been in Bitcoin since it was about $100,” he said. “I’ve seen the ecosystem really evolve since then.”
The irony struck me. Everyone here wants to be an early adopter,I remember thinking to myself. While Chris and I had put in our time, we had been watching and playing with and talking about Bitcoin since before Schumer. We were here before the NPR reports. We had paid our dues. And here we were, hearing that old-timer meant arriving only 7 months ago. What’s more is that to date, I remember feeling like I had come to Bitcoin late. I had never thought to call myself an old timer. I felt like I had missed the early days having come around right after Laszlo had bought the Bitcoin Pizza for 10,000 BTC. And here, on stage, a Venture Capitalist had the tenacity to declare himself an old timer.
The conference might have been one of the most remarkable conferences in the history of the space. The rise of Bitcoin had given a number of people enough money to make the flight from wherever they were. The chairs were replete with 16 year olds dressed in new, odd, but very expensive clothes. Ridiculous Givenchy shoes, Armani suits, or clothing that could have at least passed for it, adorned the backs of everyone in the conference who had, just weeks before, never needed to cope with the trappings of wealth. What’s more, for those that could reflect honestly, many of their earnings had come from the change they had kept around after purchasing drugs on the Silk Road or other darknet markets.
The fevered pitch of anarchic dilettante was pervasive. We all discussed ending the fed, the evils of inflation, and we generally agreed that our purchase of tickets had landed us on this or another watch list of sorts. At the conference Vitalik Buterin, a young boy around whom there was no mythic glow, took the stage and described a system he was working on called “Ethereum.” A group of developers who had put together a project called colored coins did a presentation, as did Neo & Bee. Charlie Lee took the stage in another room and discussed Litecoin, what people at the time referred to as the silver to Bitcoin’s gold. And then there was the special guest. Bernard von NotHaus, creator of the Liberty Dollar. He was in between his trial and sentencing, and had made the trek to Miami to be a secret speaker. He made brazen challenges to the feds whom he said he was certain were in the room watching him and us. But his speech had almost nothing to do with Bitcoin, and amounted to little more than an anti-government screed lauding the Libertarian mentality steeped in the likes of Bastiat, Hayek, and Mises. At this point, I was familiar, and even excited about the underlying assumptions: there is good money; there is bad money; gold is good money; government taxes are theft.
The party that evening was a festival filled with pretty girls, surrounding a dumpy, tall man whose pants didn’t fit very well around his butt. He commanded a group of people as he spewed what sounded like nonsense. He was touting his new bank-killer Bitcoin-like app called Bitshares. I remember being completely perplexed by the marketing. It seemed like they had a ton of money, and I couldn’t figure out exactly what it was, but it smelled fishy. Was it a Bitcoin bank? Was it a different blockchain? No one who heard the pitch knew. But everyone seemed to think it was going to make them some money. Since then, I think that most of us have become very familiar with Bitshares. And I think this is where our story begins. Because reflecting back on this conference, I think I realize that this is where much of the modern narrative about Bitcoin began, and this is where everything went wrong… and right.
Before the conference, scams and schemes had abounded. The pirateat40 Ponzi scheme, Tradefortress and his/her problems, Bruce Wagner and the MyBitcoin.com theft, Bitcoinica, and many many smaller schemes had all come and gone. Some of the problems with getting money into Bitcoin had been solved by Gox and Shrem’s BitInstant. BitStamp had come around. Coinbase came around. And the market started to mature. To date, however, most of the scams had been Bitcoin-based. There had been a few alt coins launched including Litecoin. But they were mostly an afterthought. At the time, no one really knew what this thing was. We were all pretty convinced that altcoins had a place in the ecosystem. I remember even discussing with Chris the possibility of setting up endpoints around town at Starbucks coffee shops and using their internet to mine TorCoin. This is a fact I am a bit embarrassed to admit, but I think that it would be imprudent to wash my own history here. TorCoin’s proof of bandwidth consensus mechanism is (I’m sure) as stupid as it sounds. But back then… how could we have known?
And that’s what happened to everyone. People showed up, they looked around, and they were struck by the magical superpowers endowed to anyone with a penscient for the Dunning-Kruger complex. I summed it up years later, with the now well-used Bitcoin meme, “I Just Heard About Bitcoin… I’m Here to Fix It.”
This is the mentality of everyone who looks at Bitcoin. It’s a large, inefficient data structure, that requires massive amounts of energy to be burned in order for it to work. All of this happens to be for very good reason. In fact, I might go so far as to say that Bitcoin is big and unwieldy for the same reason that government is big and unwieldy. The problem it solves, the Byzantine General’s problem, is a corruption problem. And, as any regulator will tell you, the way to do deal with corruption is to develop massive infrastructures for rooting it out. Bitcoin is the un-regulated example of this. Its infrastructure costs are a software’s version of compliance costs. But those inefficiencies, to a newcomer, look like opportunities. And while, I think, simple abstractions like this one can get ridiculous, this is the closest I’ve come to making the necessity of the inefficiency of a blockchain simple to understand.
Larimer’s Moonshot and the Beginning of the Miami Bitcoin Meetups
When Larimer, the man with the dumpy butt who commanded attention for Bitshares back at The North American Bitcoin Conference, launched his blockchain it was the beginning of a new era in Bitcoin, I think. When Bitshares’ blockchain launched, the price began to rise. Up and up and up it went. What it was for, nobody really knew. All anyone would say is that it was a better, newer version of Bitcoin. Bitcoin was the old Model-T, Bitshares was a new shiny Ferrari. It rose to a value of just under $90 million in short order. Other coins, at the time, had reached impressive heights. Doge Coin had a much vaunted rise not so long before this, AuroraCoin was apparently worth $367 million in March of 2016, and there were numerous other coins that had made a mark on the ecosystem. But none had seemed so cultish to me as Bitshares.
It was around this same time that Chris and I began running the South Florida Bitcoin Meetups. It was our first real view into the Bitcoin ecosystem escaped from the insularity of our shared office space. We had new Bitcoiners coming every week, and we noticed that all of them would follow the same journey. They would come to get rich, asking questions about mining. We were uneducated in the subject of mining, but were pretty sure that it was not a good idea based on our having seen hundreds of people lose their shirts trying to build mining operations. It is largely unknown that DeRose and myself had strongly considered mining Bitcoins back in 2012, though we had decided against it (thankfully). We would have the occasional miner show up, and they would tell us all about their setup. The local hobbyist miners were always the most arrogant. And they always seemed to know the least about the subject matter.
Then There Was James…
James was a Bitshares believer. James was a family man. James had a wife, a kid, and was doing his best to provide for them. James got sucked into the Bitshares phenomenon, each week coming to the meetings giving us updates about the Bitshares blockchain. James was a programmer, and James knew what blockchains were. He was a competent coder who always had a strange side-project. His schemes were always hair-brained attempts at making money, but they were always pretty impressive as far as the technical abilities they betrayed. The week that Bitshares popped and rose from a tawdry market cap of around $16 million to its height of $90 million (August 15, 2014-August 26, 2014), all the believers went out and did the same thing that the Bitcoiners did at the end of 2013.
The next week, when James showed up at the next meeting, he had a new shirt on, new pants, and new shoes. He hadn’t overdone it like the 16 year olds. He was a family man after all, more risk averse. But he was given to the same proclivities to spend his gains as his 16 year old counterparts, just a bit more tempered. “I’m moving to North Carolina,” he told us. He had been hired by Bitshares to work full time on their code and he wanted to be nearer Larimer and the team. He was to be paid in BitUSD - Larimer’s attempt at a simulated federal reserve that, through a decentralized market, would peg the value of the coin to the USD. The project was soon to launch. And, while ridiculous, was one of the first attempts at what has come to be known as a “Stable coin.” It was on a different blockchain than Bitshares, which by this time had become a bit of a blockchain fart factory, and was the kind of idea a child might have.
Needless to say, James packed his bags and left for the hills of North Carolina with his kid and his wife. I don’t know what happened to him. I hope he’s doing well. But somehow, as he was a believer, holding on to his coins for dear life, no matter what the evidence would have otherwise suggested, I imagine he has ridden Bitshares from its peak valuation of nearly $90 million, all the way back down to its current value, hovering somewhere around the still surprising market cap of $12 million. At the very least, it’s back to where it was when James couldn’t afford the nice new shirt, shoes, and pants. But with it, I imagine, James probably purchased a lot of Bitshares all the way down. Somehow, while I hope he’s doing okay, I imagine that life for James is significantly harder now than it was when he was earning money from his blockchain programming.
Larimer Exits His Ponzi and Turns it Over to the Community
Nearly one year ago, Larimer announced on Let’s Talk Bitcoin, that he was abandoning the Bitshares project, and turning over the blockchain to the community. His team was moving on to an even newer project, a sort of Bitshares 2.0. Now, not so long after the initial launch of the Bitshares blockchain, it seemed that Larimer believed the original project was the new model-T of crypto. The move was unprecedented. Consider if you will, the fact that the investment in Bitshares was largely an investment in the team that created Bitshares. Larimer was who people were betting on. And for those that rode the rise in price, Larimer is still lauded as a man who can truly return value, though everyone will acknowledge that attempting to make money on the rise was a bit like trying to catch a falling knife. In his interview, as Levine points out, “this is the 3rd or 4th reinvention of the project.” Though Levine lacks the ability to understand the obvious fact of the matter: Bitshares was the first mass exit of what is probably a legal Ponzi scheme built on the back of information asymmetry.
Larimer’s team released a feature list that they said made their blockchain different from Bitcoin. And sure enough, the feature list was and is very impressive. Those who look at it will certainly acknowledge that Bitshares, on paper, is the Ferrari to Bitcoin’s Model-T. But the difference is that while Bitcoin was created in a world of 0 blockchain alternatives, Bitshares was created in a world of at least 1 alternative. The only way to purchase Bitshares and its subsequent experimental tokens like BitUSD, was to first go through Bitcoin. So it stands, that even those who wanted to purchase Bitshares, like the girls of backpage, they needed Bitcoin. Though unlike Bitcoin, no one needed Bitshares. Moreover, despite having an impressive feature list, Bitshares had plenty of other problems going for it such as its reliance on a nonsense non-work based consensus mechanism - which was its biggest feature. But like my admission that I had been taken for a ride by a proof of bandwidth based consensus, for the lot of us who were new to blockchains, how could we possibly have wrapped our minds around the claims back then? Dunning-Kruger is a disease of the human mind.
The astounding thing about these non-Bitcoin blockchains was the temerity of the believers to accept all claims without question. While Bitcoin’s solution to the Byzantine General problem was its reliance on simple, elegant Proof of Work, a young, barely 20 year old man, came along and claimed that he had also solved the problem using no work - perhaps the hardest problem ever solved in computer science. Throw in “consensus mechanism” and it was enough to draw in anyone who loved Bitcoin but who also had in their ideological framework an important place for environmentalism. Those with such a complex agree (even to this day) that Bitcoin’s proof of work is wasteful, and that we should, at all costs seek out alternatives. But the claim is to utterly misunderstand the process of proof of work. And as proof of stake (as the Larimer alternative has come to be known) has gained a foothold in the architecture of every subsequent blockchain, the criticisms of the most competent people in the room have been realized time and again: namely, all consensus mechanisms revert to work and as such, POS is nothing more than the process of obfuscating the process of that reversion. And thusly, with each new iteration, the proponents of proof of stake demonstrate the farthest reaches of the Peter Principle wherein a person obfuscates to their degree of comprehension. When there, they cease to be able to see the problems and all things are suddenly reducible (more on this later).
The Anatomy of Blockchain as Ponzi
The Ponzi scheme represents a belief in perpetual motion. People will invest in obvious Ponzis because they believe that this time, it’s different. This time, the Ponzi will go ever up and never down. But as the World Bank said, “The catch lies in the fact that there is no stopping point. Since old investors get paid with the deposits made by the new investors, you need an ever-growing pool of investors. This cannot happen endlessly in our finite world. So the tragedy of the Ponzi is that it has to crash.” Alas, the deeply seated belief of the investor in pyramid schemes of these sorts is that the inflows will never end. It is the perpetual motion machine of finance. Likewise, the belief that blockchains can work without power, which was what Larimer set out to do, is a claim equally as absurd as saying a Ponzi will continue to grow forever. It is a mechanical engineering claim that the world’s biggest problems are reducible to systems with no opportunity cost. And so it goes, the mentality of Ponzi investors and the mentality of blockchainists are the same, just in different realms.
Consider that the entire history of Bitshares was controlled by a single person. Larimer had all the information about when features would be released, announced, and, more importantly, when he was going to announce his exit from the project. He was in full control of when the inflows of money would suddenly be made less attractive. The dirty secret is that no one ever used Bitshares. Almost all of its funds were kept near at hand, where individuals could sell in exchanges. No one ever knew whether the features promised by Larimer ever worked. As such, the entirety of the value was based on the speculative interest in the feature set and Larimer’s ability to develop that feature set. For those that were competent enough to actually use Bitshares, they will tell you that the blockchain and its software have never really worked at all. None of what was promised was delivered. But it didn’t matter anyway, since no one ever needed the Bitshares blockchain. And so, filled with regret, Larimer was able to do whatever he wanted with his funds before making announcements about the project. While I have no evidence he did it, I can only assume that he and his team regularly bought before feature announcements were made, and sold before events like Larimer announcing his exit. The small team of developers were completely in control of the speculative inflows and completely aware of when those inflows would stop. And when they stopped, the team walked away from the project. And as the project slowly collapses on the believers, the team will be able to say very simply that when they left the project, everything was a-okay. And the guidance of the community that took over its development is how their blockchain lost its way.
This is the nature of blockchains. Insofar as we can agree that they are (somewhat) organic structures, built on the backs of faithful participants who host them on their computers, before a blockchain develops a circular economy it looks very much like the World Bank’s description of a natural Ponzi. And insofar as this organic structure can be conjured up in the same way a seed can be planted by a person and gives rise to a tree, a team or an individual can direct the growth and subsequent downfall of the blockchain Ponzi with little to no legal ramifications. Larimer did it with Bitshares. He’s doing it again with an even more sophisticated version of it now in his promotion of Steemit, a blockchain that solves all the problems Bitshares was plagued with - at least that’s his claim. The feature-list of Steemit, hilariously, is its Ponzi-like illiquidity mechanism which prevents users from exiting their position by locking up their funds with a promise of big returns. But this time, it’s different. This time, they will tell you, the inflows will never stop. Right?
Enter the Bankers….
(To Be Continued)