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Elaine Ou
Tech conferences are on hiatus, and virtual ones just aren’t the same. Could cypherpunks have done cool stuff without in-person interactions? I asked Nick Szabo. His response is summarized below. Note: This is the first in a series of questions. Others will be posted pending correspondent appro

Tech conferences are on hiatus, and virtual ones just aren’t the same. Could cypherpunks have done cool stuff without in-person interactions? I asked Nick Szabo. His response is summarized below.

Note: This is the first in a series of questions. Others will be posted pending correspondent approval.

Cypherpunks was a creature of internet mailing lists, a virtual place to exchange ideas. The main purpose of hosting in-person events is to build trust and suss out the sock puppets. Interpersonal trust is important for a subversive discussion group.

It’s possible to do this without local meetups. List membership was generally by invitation — people invited those they had met through other Usenet groups.

That created a self-selection process. In the early 90s, few people had internet access, and fewer still could get on Usenet. AOL served as a honeypot for normies, a shiny diversion where people could feel like they were using cutting-edge technology without getting in the way of hardcore nerds who were actually trying to build things. Kind of like Ethereum.

Cypherpunks were motivated by cool technology rather than money. We were coders, not traders. Today, you have investors assembling mailing lists full of big important people for the sake of discussing Big Ideas, but they end up trying to impress each other or schmooze. You end up with Davos, but on the internet.

Highly motivated individuals don’t need a shared physical space to get stuff done. Most of the cool stuff was done remotely. Lance Cottrell was in San Diego when he wrote the Mixmaster anonymous remailer. Julian Assange first became widely known by his posts from Australia. Adam Back occasionally visited California, but mostly developed hashcash in England. Nick Szabo’s bit gold was inspired and informed far more by mailing list conversations and university library research than by face-to-face meetings.

It also helped that the topics of discussion were mostly abstract and mathematical, reducing the need for empathy and nuance than if you were to discuss, say, blockchain governance.

«Record Scratch»

When you discuss topics of emotionless objectivity, there is no need for empathy and nuance. It’s just logic and math, right?

I asked Nick about the lack of diversity on the Cypherpunks mailing list (I’m woke like that), at which point he hung up on me. But the last statement didn’t seem quite right. People argue about seemingly objective topics all the time, and quite emotionally so — just look at all the Bitcoin forks!

I’m reminded of an interview with Max Levchin, co-founder of Paypal. (The transcript seems to have vanished down the memoryhole.) Levchin attributes Paypal’s early success to the team’s lack of diversity. You don’t waste time arguing about frivolous stuff if everyone thinks just like you do. You also don’t worry so much about empathy and nuance if everyone comes from the same background. Those who complain about a “toxic culture” are probably just too diverse to fit in.

Through a Glass Lightly
Wednesday, 27 May 2020
On May 18, 2020, architecture’s overlong twentieth century was brought to a symbolic close with the simultaneous (second) postponement of the Venice Biennale and the annual flooding of the Farnsworth House. The latter is an object lesson on the failed state of architecture in the evolving situation.
On May 18, 2020, architecture’s overlong twentieth century was brought to a symbolic close with the simultaneous (second) postponement of the Venice Biennale and the annual flooding of the Farnsworth House. The latter is an object lesson on the failed state of architecture in the evolving situation. For precedent: a segue on European Modernism, the […]
Elaine Ou
Good news! Employees of Facebook will soon be able to work from home FOREVER! Not only will Facebook save money on office space and in-house perks; they can reduce salaries to account for lower cost of living as employees flee to the exurbs. In the early aughts, tech companies like IBM and Cisco real

Good news! Employees of Facebook will soon be able to work from home FOREVER!

Not only will Facebook save money on office space and in-house perks; they can reduce salaries to account for lower cost of living as employees flee to the exurbs.

♦Facebook’s campus is like Disneyland. It has catered meals, a climbing wall, an arcade, and an ice cream shop full of cupcakes and candy. And the bathrooms have bidets! It’s like IBM’s country clubs, but for millennials.

In the early aughts, tech companies like IBM and Cisco realized they could save hundreds of millions a year by outsourcing their jobs to India. A lot of people complained about this, but three-time Pulitzer Prize winner Thomas Friedman took the initiative and actually visited an IT offshoring firm in Bangalore.

There, he discovered that the Indian IT workers were using computers and software made by Compaq and Microsoft, drinking beverages made by Coca-Cola, and the firm itself was 90% owned by American investors. Contrary to the popular opinion that offshoring was leaving Americans jobless and poor, it was in fact making Americans fabulously rich. Different groups of Americans, but all white people look same.

There was a time when IBM employees were treated like family. Would you dump Grandma on the street once her maintenance costs exceed her productive value? No! That’s why IBM had a no-layoff policy, along with corporate country clubs and family-friendly Christmas parties. Then the internet came along and made offshoring feasible, the end of the Cold War made globalization politically correct, and post-Bretton Woods financialization made foreign investment attractive. IBM laid off workers, sold the country clubs, and, well, it’s hard to have a Christmas party when the majority of your workforce is in India.

Facebook is an H-1B dependent company, meaning over 15% of its employees are on temporary visas. The obvious thing is for Facebook to send all the H-1B workers back home and have them work from overseas. But I’m reminded of this passage from Antonio Garcia Martinez’s Chaos Monkeys:

Large but unexciting tech outfits like Oracle, Intel, Qualcomm, and IBM that have trouble recruiting the best American talent hire foreign engineers by the boatload. Consultancy firms that bill inflated project costs by the man-hour, such as Accenture and Deloitte, shanghai their foreign laborers, who can’t quit without being eventually deported. By paying them relatively slim H-1B-stipulated salaries while eating the fat consultancy fees, such companies get rich off the artificial employment monopoly created by the visa barrier. It’s a shit deal for the immigrant visa holders, but they put up with the five or so years of stultifying, exploitive labor as an admissions ticket to the tech First World. After that, they’re free. Everyone abandons his or her place at the oar inside the Intel war galley immediately, but there’s always someone waiting to take over.

Strictly speaking, H-1B visas are nonimmigrant and temporary, and so this hazing ritual of immigrant initiation is unlawful. Yet everyone’s on the take, including the government, which charges thousands in filing fees. The entire system is so riven with institutionalized lies, political intrigue, and illegal but overlooked manipulation, it’s a wonder the American tech industry exists at all.

Zuckerberg is a smart guy. He’s also the co-founder of FWD.us, a lobbying group that wants MOAR visas for temporary workers. If employees in Bangalore were just as effective as employees in Menlo Park, Zuck would have enabled remote work ages ago. Immigration is part of the compensation package.

It’s the high-maintenance regular employees that will be sent home. You know, the ones that require a living wage and gender diversity, and stage protests if an exec appears to support Trump. The average tenure of a Facebook employee is only 2 years, so it’s a convenient way to shed some cruft from the workforce.

I guess Facebook is going the way of IBM, but with better marketing.

I have a new Kindle ebook out: Breaking Smart Archives: Selected Newsletters, 2015-19. This is a sequenced selection of 32 of the better essays from the Breaking Smart newsletter from the last few years, covering the period between the original 2015 Breaking Smart essay collection on software eating
I have a new Kindle ebook out: Breaking Smart Archives: Selected Newsletters, 2015-19. This is a sequenced selection of 32 of the better essays from the Breaking Smart newsletter from the last few years, covering the period between the original 2015 Breaking Smart essay collection on software eating the world (also available as an ebook), […]
Gabriel Shapiro
SEC v. Telegram — Three Deeper Takeaways♦


On March 24, 2020, Judge P. Kevin Castel of the Southern District of New York granted the SEC’s motion for a preliminary injunction against Telegram’s distribution of GRAM tokens for its new TON blockchain to investors.

As a U.S. co

SEC v. Telegram — Three Deeper Takeaways♦


On March 24, 2020, Judge P. Kevin Castel of the Southern District of New York granted the SEC’s motion for a preliminary injunction against Telegram’s distribution of GRAM tokens for its new TON blockchain to investors.

As a U.S. corporate/securities attorney, I have been deep in the trenches of the “token vs. security” debate since 2017, advising clients on token issues and participating in numerous public and semi-public debates on the topic with attorneys, regulators and entrepreneurs. The purpose of this article is to outline the most critical takeaways from Castel’s opinion in light of the rich history of the issue.

The case has been widely covered in the media. For more background check out the National Law Review’s summary and CoinDesk’s extremely thorough coverage by Anna Baydakova and Nikhilesh De.

In this article, by “cryptocurrencies” I will be referring to what previously used to be called “utility tokens” — public blockchain-based tokens with no express payment or stockholder-style voting rights. GRAMs are arguably an example of such a cryptocurrency, or in any event were treated by Castel as such since he did not base his opinion on any of the staking features of GRAMs. Of course, it should go without saying that different legal considerations may apply to tokens with voting and/or revenue-earning features that are taken into account.

Takeaway #1: The “Functionality/SAFT School” and “Manner of Offering School” are Dead

In late 2017, when it became obvious that cryptocurrencies frequently implicate the securities laws, securities attorneys and others still disagreed on the details. At the risk of oversimplification, we can summarize the different views as if they came from four different “schools of thought.” Two of the most influential schools of thought were what I call the “Functionality/SAFT School” and the “Manner of Offering School,” which are discussed in this section and I view as clear losers in the Telegram case. The other two schools of thought will be discussed in the next section, and the Telegram case is more ambiguous about them, so both live to fight on in future wars.

  • The “Functionality/SAFT School” believed that promises to deliver cryptocurrencies before the underlying technology is built and deployed — i.e., before the cryptocurrencies are “functional” — constitute securities, because the pre-buyers were supplying risk capital to the developer team and could profit from that team’s efforts by the increase in value between the date of pre-purchase and the date of network launch. However, once the cryptocurrencies were “functional” they would not implicate the securities laws anymore, being mere products or digital commodities. This view was best represented by the SAFT Whitepaper jointly published by Protocol Labs and Cooley LLP.
  • The “Manner of Offering School” believed that cryptocurrencies are intrinsically commodities or products, but that marketing them with words like “investment,” “profit,” “increase in value,” etc. would cause them (or certain transactions in them) to be regulated as securities by creating a reasonable expectation of profit on the part of buyers, contrary to their normal nature as non-securities. If issuers marketed cryptocurrencies consistently as products or currencies and avoided all insinuations of future upside potential, that would be enough to cause cryptocurrencies to be treated the way they should be: as products or digital commodities, not securities. This view was best reflected in aspects of The Brooklyn Project’s Consumer Token Framework and ConsenSys’s Proof-of-Use Approach.

I view the Telegram decision is the last nail in the coffin for both these schools of thought:

  1. The fact that the TON blockchain would be functional when GRAMs would be issued to SAFT holders and sold on secondary markets had zero impact on Castel’s reasoning and opinion. Castel reasoned that despite GRAMs’ functionality and potential usefulness as a mere virtual currency, GRAMs could still continue to appreciate substantially in value over time based on Telegram’s ongoing entrepreneurial efforts to promote GRAMs and the TON blockchain, through integration with the Telegram app or otherwise. Moreover, buyers of GRAMs could still have a reasonable expectation of such future appreciation on such basis due to Telegram’s large holdings of GRAMs, the incentives it had set up for TON developers and its reputational issues around the fact that Telegram, as a technology company that independently has a very popular messaging app, is associated publicly with GRAMs and the TON blockchain.
  2. Prior to the injunction hearing, Telegram publicly disavowed all future efforts to support the value of GRAMs in any way, shape or form. If the “Manner of Sale” school were right, these disavowals would mean that when GRAMs would hit the market, no reasonable person could expect to profit on GRAMs from Telegram’s future entrepreneurial efforts, because there would be a lack of marketing that says people will profit on GRAMs from Telegram’s efforts — in fact, there would be abundant marketing expressly to the contrary. However, Castel’s decision to grant an injunction against the distribution of GRAMs and the way he reasoned about the ongoing objective alignment between Telegram by virtue of holding GRAMs and future hypothetical GRAM buyers strongly imply that “manner of sale” is not dispositive. Rather, Castel’s opinion is best read to imply that even in the absence of any express “investment-style” marketing , the securities laws can continue to apply if the issuer has knowable objective reasons for continuing to make such efforts.

Takeaway #2:We Don’t Know if or when Cryptocurrencies Represent Securities in the Secondary Market

Castel’s opinion does not directly help us decide when cryptocurrencies themselves represent securities or should be regulated as such in secondary market transactions. Thus, it does not help us decide the often fierce debate between the two other main schools of thought on cryptocurrency securities law issues, which I summarize as follows (again, at the risk of some oversimplification):

  • The “Investment Contract Literalism School”: This school of thought assumes that an “investment contract” is literally a contract between a securities issuer and a securities purchaser pursuant to which the purchaser has a reasonable expectation of profits from the entrepreneurial efforts of the issuer. When cryptocurrencies are sold pursuant to such a contract , the securities laws apply — not to the cryptocurrencies themselves, but to the contractual transaction. However, when the cryptocurrencies are later resold without such a contract, the securities laws do not apply because the new buyers don’t have a contract with the issuer. Even if, for some reason, the new buyers expect a profit from the issuer’s ongoing efforts, it doesn’t matter, because, in the absence of a literal contract with the issuer, the expectation is unreasonable — they have no rights against the issuer and should therefore expect no benefits from the issuer. The best representation of this view can be found in “Ain’t Misbehavin’: An Examination of Broadway Tickets and Blockchain Tokens” by Lewis Cohen.
  • The “Investment Contract Functionalism School” Under this approach, investment contracts are typically not literal contracts, but rather are implied-by-law contracts. The law creates these ‘virtual contracts’ whenever there is a transaction that functionally meets the criteria of the Howey test, including when someone buys a cryptocurrency on an exchange. The issuer is a ‘party’ to this ‘virtual’ investment contract by virtue of being the entrepreneurial focus of a Howey scheme. By analogy, consider a paper stock certificate: it is literally just a piece of paper, but because it functions as a representation of the stock, all transactions involving that piece of paper will be regulated as securities transactions rather than paper sales. Like a paper stock certificate, it is almost as if a centralized cryptocurrency simply is a security because practically all transactions in it will satisfy the Howey test. Eventually, based on sufficient decentralization, the Howey factors will cease being met, and the token will cease functioning as or representing an investment contract. That could also happen with a stock certificate — the company could dissolve, and the certificate could revert back to being a meaningless piece of paper. This view is set forth in detail in my “Open Letter to Commissioner Hester Peirce Regarding an SEC Token Safe Harbor” and aspects of it are also reflected in William Hinman’s speech “When Howey Met Gary (Plastics)”.

Judge Castel expressly refused to decide one way or another whether GRAMs would represent securities on the secondary market. Instead, he based his grant of an injunction on the view that the SAFTs were securities and “the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement.” Thus, Castel’s reasoning does not contradict or disprove either the Investment Contract Literalism School or the Investment Contract Functionalism School. However, I believe the overall flavor of the opinion and the reasoning used in it is more consistent with the Investment Contract Functionalism School.

Takeaway #3: Regulation D and the Rule 144 Safe Harbor Do Not Work for Pure Cryptocurrencies

This is the most surprising and controversial result of Castel’s opinion. For effect I am intentionally stating it in the strongest and most provocative possible terms.

The SAFT buyers were all accredited investors and had purchased their SAFTs more than a year prior to the planned conversion of the SAFTs and distribution of GRAMs. Ordinarily, this would mean the sale of the SAFTs satisfied Rule 506(c) of Regulation D and that, even if the GRAMs themselves were securities, they should sellable on the secondary market by the SAFT holders because the 12-month holding period of Rule 144 would be satisfied via “tacking” of the SAFT holding period onto the token holding period.

However, Castel’s opinion clearly contradicts this reasoning and implies, at a minimum, that he viewed the Rule 144 safe harbor as being unavailable. The question is: why? The opinion is not completely clear on the reasoning — it does not even mention Rule 144 — but seems to be based on the view that notwithstanding possible technical Rule 144 compliance, the SAFT buyers were nevertheless acting as underwriters and therefore “the integral scheme” of GRAM sale and distribution never complied with the securities laws, even at the stage when the SAFTs were originally sold:

Everyone needs to pause and appreciate what a surprising result this is. It is very hard to reconcile with standard transactional practice in private stock financings. Typically, in Regulation D transactions, issuers get a flat rep from the investors that they are not acting as underwriters, and also sign the investors up to covenants requiring them not to transfer the securities at least until it is possible to do so within the Rule 144 safe harbor (usually requiring as 12-month lock up and a legal opinion to the effect that Rule 144 is available after the 12 months). This is generally considered sufficient. Before now, issuers have not been tasked with reading the minds of investors to determine if they really are underwriters or not in their heart of hearts. However, in this case Castel found that Telegram had no valid exemption because it failed to use reasonable due diligence to determine that the SAFT buyers were not underwriters. Why the difference here?

Although Castel’s reasoning is not perfectly clear, I have a theory: I believe it is tacitly based on the perception that pure cryptocurrencies — having no dividend or other payment rights — are prima facie absurd for traditional investors like venture capital funds to hold for a long period. Unlike when a VC is buying stock in a private placement for a pre-public Uber or Facebook, or a pre-M&A WhatsApp, with cryptocurrencies there is no pot of gold at the end of the rainbow. There is no natural “exit event” to HODL for — no IPO, no big acquisition by a strategic acquirer, nothing. Instead, pure cryptocurrencies are Ponzi-like in that they primarily become more valuable by more people buying them on the secondary market. Therefore, I think, in Castel’s view, it really beggars all belief that the SAFT buyers intended to hold their GRAMs for a long period as true investments. In other words, Castel must think it is readily apparent simply from the dynamics involved in cryptocurrency price increases, together with the discount schemes that Telegram set up for the investors, that the investors intended to sell the GRAMs very quickly from the start, and thus were acting as underwriters, rather than true investors all along. Therefore, Telegram did not exercise reasonable diligence in confirming that the investors were not underwriters, and no Regulation D exemption was available, even for the SAFTs.

Some may disagree with the implicit anti-HODL assumptions being employed here. But, if I am reading the tea leaves right here, and regulators and other judges end up agreeing with Castel in similar circumstances, the previously popular Regulation D + Rule 144 combo for selling pure cryptocurrencies is dead in the water. In light of this result, I will now be hard pressed to advise a client that they can sell SAFTs — or even just cryptocurrencies in their raw state— in reliance on that one-two punch.

Instead, I will now have to advise clients that there must be a more robustly evidenced basis for believing that the accredited investors truly want to hold the tokens for a long period. As part of that, I might advise them that they should sell a more complex token with some real back-end value, rather than a pure cryptocurrency. If the token has real investment features like the right to receive payments, vote on software upgrades and/or use of funds, etc. —those facts could be helpful in distinguishing the token from GRAMs and pure cryptocurrencies, and could, in theory, be more consistent with the view that the initial investors are not underwriters. But let there be no mistake — there is no quick-fix silver bullet to address this issue. The bottom line is that much more care will now have to taken to look at the motives of token investors, and projects will have to consider longer lock-ups and other measures to support the existence of a true investment intent on the part of early token buyers.

Post-publication update: There are some other possible ways of reconciling Castel’s reasoning with Rule 144:

  • Some SAFT buyers did transfer their SAFTs in secondary transactions during the first 12 months after they were sold, which would violate Rule 144’s conditions — and even though the terms of the SAFT prohibited such transfers, Telegram knew they were happening and seemingly failed to try to stop them from happening. Perhaps this makes Rule 144 unavailable, in some sense, not only for those particular SAFT buyers, but for all of them. Or perhaps it is evidence of a broader failure by Telegram to confirm lack of underwriting intent on the part of all the SAFT purchasers. However, one would think that if Castel were basing his order primarily on this fact, that he would have emphasized it — he did not.
  • Rule 144 is “is not available to any person with respect to any transaction or series of transactions that, although in technical compliance with Rule 144, is part of a plan or scheme to evade the registration requirements of the Act.” The overall GRAM distribution scheme could be seen as such an evasion scheme, and thus Rule 144 may be unavailable. However, if this is Castel’s reasoning, it seems rather circular to me and ultimately just seems like another way of saying that Telegram should have known from the start that the SAFT buyers were really underwriters even if they technically complied with Rule 144.
  • Rule 144 is not available except if the issuer has done a proper private placement in the first place. Telegram committed some minor technical mistakes regarding its Form D filing for Regulation D, and was somewhat wishy-washy as to whether it was relying on Regulation D or the statutory provision it is based on — Section 4(a)(2). Thus, perhaps Castel decided that because the private placement exemption was not properly secured, Rule 144 could not be relied upon either. However, this seems to be very different from Castel’s express reasoning — which related to the SAFT buyers being underwriters rather than any independent technical problems with Telegram’s exemption.
  • Rule 144 applies differently to “affiliates” of the issuer. In the hands of such an affiliate, the SAFTs would be not only “restricted securities” but also “control securities” and would generally not be transferable even after 12 months. Could it be that large SAFT buyers became affiliates of Telegram by virtue of purchasing SAFTs convertible into large amounts of GRAMs and that therefore the SAFTs and associated GRAMs were “control securities”? This would be an interesting way of reasoning about the issue, but I assume this is sufficiently technical and non-obvious that if Castel were thinking this way, he would have said so. He did not.


Although I always predicted Telegram would lose and should lose this case, I was surprised by the way it lost the case. I believed that Judge Castel would need to determine whether GRAMs represented securities on the secondary market, and thus would need to look at whether an average secondary buyer would have a reasonable expectation of profits from Telegram’s future efforts in a common enterprise. I still believe this would have been a better, more coherent way to tackle the case — and it would have resulted in the same outcome.

However, because Castel was reluctant to explore the secondary market issues, we are now left with a much more muddled result that throws into doubt many years of standard practice under Rule 144 and may further discourage blockchain entrepreneurs from trying to comply with securities laws at all. So my overall verdict is: Right result, wrong reasoning. Nevertheless, the decision represents progress in the evolution of cryptolaw and will hopefully discourage the long-derided SAFT model with its built-in gains for wealthy venture capitalists at the expense of ordinary retail investors.

Elaine Ou
As a lifelong student, I have a keen interest in post-pandemic education. Based on my Twitter feed, homeschooling is the future (and the past). Here’s Bryan Caplan with a rundown of how to do it and why. Instead of subjecting his offspring to the one-size-fits-all curriculum known as Common Core, Cap

As a lifelong student, I have a keen interest in post-pandemic education. Based on my Twitter feed, homeschooling is the future (and the past). Here’s Bryan Caplan with a rundown of how to do it and why.

Instead of subjecting his offspring to the one-size-fits-all curriculum known as Common Core, Caplan sends them to play group with Robin Hanson, Alex Tabarrok, Tyler Cowen, Garett Jones, and Nathaniel Bechhofer. Here’s Tyler Cowen describing his efforts to help homeschool Caplan’s children, presumably because Cowen has no children of his own.

Most parents probably don’t have a team of world-renowned economists at the ready. Their most talented coworkers are low-level wage serfs slinging code all day. Come to think of it, what does an economist do? I get that they hold high-ranking positions at government agencies and think tanks, but what is it that they do all day?

Ancient Romans believed that chickens had oracular powers, because roosters crow before daybreak to portend the sunrise. Senators and generals consulted with chickens in an elaborate ritual where a sacred hen was placed in a circle sectioned to represent the alphabet, with grain spread around the circle. The hen’s scratching and pecking patterns were then recorded and interpreted by priests to inform public policy decisions.

The chicken’s magic doesn’t come from its ability to randomly scratch and peck; it comes from people’s ability to convince themselves that the bird knows exactly what it’s doing. Maybe the chicken has a PhD, or maybe it holds a faculty position at Harvard, or maybe it’s a Nobel Laureate. That’s why we should trust the chicken, we reason.

Over time, people realized that chickens were far too delicious to use for policy consultation, and thus the profession of Economist was born.

I don’t mean to pick on economists here. I’m sure a chicken could similarly do the job of a journalist, management consultant, or any of the “experts” trotted out by political entities. Yes, including climate scientists and epidemiologists. Here’s an NBER working paper that examines just how wrong the COVID-19 epidemiology models were (very!), and the policy implications of such wrongness. The conclusion is that we should leave the job to economists next time — presumably the health economists from Harvard and MIT who authored the paper. Or maybe just use a chicken.

Bryan Caplan’s scratchings and peckings are likely correct in this case. The future of education will look a lot like the past, where children of big muckety-mucks hang out with other muckety-mucks and continue each generation in their designated caste. We hide the nepotism of higher education under layers of elaborate rituals to convince the plebes it’s a meritocracy.

In the pre-pandemic era, well-to-do families in China would send their children to study at American universities if they couldn’t test into a top Chinese university. China’s college admission is based entirely on the National College Entrance Exam; no preferential admits for big donors or recruited athletes. It’s really embarrassing if you’re Xi Jinping and your daughter ends up somewhere like Shanghai Normal University. That’s the kind of thing that brings great shame to your dynasty.

On the other hand, Harvard would gladly take the unqualified child of a bigwig.

Colleges in the US are suspending standardized tests as an admission requirement and imposing quotas on Asian admits, frustrating Tiger Moms everywhere. Smart, competitive kids will realize the futility of fighting each other for the privilege of paying a six-figure sum to attend a school that values wokeness over substance. They’ll put the time they would have spent studying for the SATs towards studying for 高考 (Gaokao), or Единый государственный экзамен, the Russian equivalent. Brains will drain to elite universities in the unwoke parts of Asia and Eastern Europe, where they might actually learn something. Those who don’t care to learn will keep doing what they’re doing, and be revered as sacred gods.

Jimmy Song

On block 631058 was mined a transaction which spent an output from February of 2009, that is a month after the Bitcoin network went live. This has caused a bit of a price swing, not to mention, a lot of speculation, about whether this is Satoshi Nakamoto moving these coins or not.

In this ar

On block 631058 was mined a transaction which spent an output from February of 2009, that is a month after the Bitcoin network went live. This has caused a bit of a price swing, not to mention, a lot of speculation, about whether this is Satoshi Nakamoto moving these coins or not.

In this article, I’m going to lay out the case for why it probably wasn’t Satoshi and the bit of digital forensics we can use to figure this out.

What Happened

On May 20, 2020, a transaction with the id of cb1440c787d8a46977886405a34da89939e1b04907f567bf182ef27ce53a8d71 was broadcast onto the Bitcoin network and included in block 631058. The transaction’s input was from block 3654, specifically the coinbase transaction, which was mined on or around February 9, 2009. As the genesis block was created after January 3, 2009, this is a mere 37 days after the Bitcoin network’s inception.

There weren’t that many people mining on the network (or even knowing what it was), so the speculation is that this output may belong to Satoshi Nakamoto. Given that a private key is required to unlock the output, the fact that this output was spent suggests that the spender has access to the private key. If this is Satoshi, this would suggest that there may be a lot more Bitcoins to be dumped. The price of Bitcoin dropped around 5% as of this writing, perhaps based on that speculation.

Bitcoin Back in 2009

February 2009 is about as far back as we can go in Bitcoin. At the time, Bitcoin was known to very few people, mostly people from the cypherpunk mailing list and most were mining because they thought it was an interesting experiment. Back then, there weren’t many transactions on the network other than Coinbase transactions, as people weren’t sending Bitcoins around. One notable exception is in block 170, where Satoshi Nakamoto sent Hal Finney 10 bitcoins.

So for one thing, we know that Satoshi Nakamoto mined block 9, at least, and may have mined more. That said, there were other people mining on the network, not the least of which was Hal Finney:

Because Bitcoin was so new and there was only one choice of software, everyone running the Bitcoin software at the time was mining.

What We Can Infer

Because everyone was mining and there were few, if any, transactions that weren’t coinbase transactions back then, we can try to piece together some information based on the code back in Bitcoin v0.1.

Back in v0.1, there was a specific function in main.cpp that created proof-of-work. Of course, it was very easy to find proof-of-work back then by today’s standards, but it still required a good deal of CPU power to find. We can see the code that creates the coinbase transaction here.

The key piece of information we can gather in the coinbase transaction, besides the output, is something called the extra nonce:

You can see in line 2190 that bnExtraNonce gets set to 0. Further in line 2212, the same variable increments in the while loop for generating coins (aka mining). Lastly, also in line 2212, the bnExtraNonce is added to the the coinbase transaction’s scriptSig via the “<<” operator. This is where we can use some forensics as this variable gets set to 0 and increments as long as the program is running. If the program restarts, this gets reset to 0. Thus, the longer the bitcoin software was running, the higher this number would be and further, this number would show up in the coinbase transaction’s scriptSig field, which we can examine on the blockchain.

This is where Sergio Lerner’s examination of the early blocks have led to his labeling of certain coinbase transactions as having been from “Patoshi”. The coins in the graph are green if spent and blue if unspent with the y-axis being the extra nonce value and you can see the large blue strands:

These are what are suspected to be Satoshi’s coins as the extra nonce value increases when a block is mined. These are also pretty long running processes that seem to get restarted every week or so. To be fair, we don’t know if these are specifically Satoshi’s coins, except something like block #9, but there’s decent forensic evidence given how the blue strands line up (when one ends, another one begins soon after), that these coinbase outputs have a good argument of being Satoshi’s.

The Block in Question

Looking at block 3654, and specifically, the coinbase transaction, we can look at the scriptSig to find the extra nonce value:

The scriptSig has a 4-byte bits number (0xffff001d, which is the proof-of-work threshold) and then the extra nonce, which is 0xdd01. This number is in little-endian hexadecimal, which works out to be 477 in decimal.

Compare this with the nearest blue dots from one of the strands, blocks right before and after this block, which are blocks 3653 and 3655. They have extra nonces of 2367 and 2372 respectively.


It’s possible, of course, that Satoshi was running Bitcoin on multiple computers and that this is from another computer than the blue strands for blocks 3653 and 3655, but given the clear blue pattern of all the coins that haven’t been spent, it seems likely that this isn’t the same person that owns the million or so Bitcoins.

Marcel Burger

Why S2F and bitcoin price can’t be cointegrated.

Continue reading on BurgerCrypto.com »

Why S2F and bitcoin price can’t be cointegrated.

Continue reading on BurgerCrypto.com »

Ross Ulbricht

by Ross Ulbricht

Continue reading on The Startup »

by Ross Ulbricht

Continue reading on The Startup »

Disrupting the House and Home
Monday, 18 May 2020
Elaine Ou
The local stores and gas stations have closed their restrooms to the public. Makes sense; public bathrooms are disgusting petri dishes. But what if I’m out and about and I gotta go? I have an aviation friend who removed a seat from his Cessna 310 to retrofit a portapotty and sink for passengers. Mayb

The local stores and gas stations have closed their restrooms to the public. Makes sense; public bathrooms are disgusting petri dishes.

But what if I’m out and about and I gotta go? I have an aviation friend who removed a seat from his Cessna 310 to retrofit a portapotty and sink for passengers. Maybe I can install the same in the back of my Ford Escape.

What makes a house? Four walls and a roof? Electricity and plumbing? A place to sleep, a place to eat, a place to poop? Then I realized they already make cars you can live in. They’re called RVs, and they’re parked all over the Bay Area because that’s the only way service workers can afford to live. Turns out Silicon Valley has been disrupting housing all along.

But that’s not what housing is about. Housing is, first and foremost, a form of wealth. For most Americans, it’s the majority of net worth, a line of credit, and a retirement plan. A house can’t create wealth by itself; you have to build a pyramid scheme around it. Impose scarcity through zoning regulations, then incentivize jobs to create increasing demand for the few homes that exist. Hence the “Twitter tax break” for tech companies in SF.

If Silicon Valley wants to disrupt the housing market, the solution isn’t to build more homes. It’s to create a new source of liquidity.

Here’s a NYTimes column promoting the idea that women should be paid for the work they do as wives and mothers. That got me thinking. Right now, the only path to compensation is to sue for child support and alimony in the event of a divorce. Until then, spousal transactions are untraced, untaxed, and contribute nothing to the GDP. Why are we leaving so much potential wealth locked up in illiquid marriages?

When lockdown ends, divorce rates will skyrocket. We already saw this happen in China. After sheltering in place for three months, children will sue for emancipation. Those who keep their families intact should be able to borrow against that asset. Loans create wealth!

Maybe this is the economic stimulus we need. You might think that familial relationships are too subjective to securitize, but remember — a house used to be a nonconvertible asset too. The Federal Housing Administration was created in 1934 to encourage people to take out mortgages and boost the Depression-era economy. It was only after homes were appraised and collateralized that they became a path to wealth creation.

RVs may be a terrible place to house a family, but as a bachelor or bachelorette pad, they’re downright adequate. If building homes is good for the economy, wrecking homes must be even better. Okay, I’m a Keynesian now.

Wednesday, 13 May 2020
Gabriel Shapiro


LeXpunK is law unchained from expectations — a disruptive new attorney praxis designed to grab lawyers by their neckties and drag them kicking and screaming into the 21st century.

♦We believe:
  • law is a public good and should be open to all
  • law is dynami


LeXpunK is law unchained from expectations — a disruptive new attorney praxis designed to grab lawyers by their neckties and drag them kicking and screaming into the 21st century.

♦We believe:
  • law is a public good and should be open to all
  • law is dynamic and the practice of law is creative
  • private law is as important as public law; the deal table as important as the courtroom
  • the “law firm” is not the atomic unit of law practice, the lawyer is — and lawyers are inherently autonomous
  • the role of lawyer as civil servant does not kick in after hours, but should permeate a lawyer’s practice and lead lawyers to seek rational, value-maximizing outcomes at all times
  • lawyer/client is a dead dichotomy; lawyers should partner with clients in multidimensional relationships, not merely “serve” them
  • effective lawyering is viral and must not be quarantined inside archaic state boundaries
  • lawyers are incentive programmers; the wisdom of game theory, economics, agile software development and peer-to-peer technologies can enhance legal engineering to yield massive breakthroughs in social scaling
  • lawyers must not be monopolists or protectionists — delivering access to justice requires finding a place for all who’d like to practice law
  • lawyers must not be priests, elitists or fascists
  • lawyers must not be racketeers, creating artificial problems only they can solve just to stay relevant
  • lawyers should be mavericks, not mercenaries
  • good legal-tech makes lawyers cybernetic; bad legal-tech makes robots lawyerly
  • golf is not a lawyering skill; suits and ties are optional
We fight:
  • to always be hacking on the legal commons, creating free open-source frameworks and libraries, legal protocols, and shared standards
  • for the right to act as legal blade runners — client-less, idealistic, fighting for justice on our own terms
  • to let non-lawyers own and participate as equals in law firms
  • to decentralize “The Bar” with new autonomous bar associations
  • to shard lawyerdom, creating dynamic and relevant new guilds, each with its own rules
  • to redesign lawyer ethics for a new world of porous firm boundaries and inspired cross-firm collaborations
  • to get lawyers paid for creative new work in creative new ways
  • to encourage clients to engage in robust self-governance, using private law to opt out of state-imposed defaults
  • for bar associations, model law committees and major conferences to open themselves to all lawyers and open-source their materials
  • to shred the veil of PACER and Westlaw and Lexis put courts and law journals and statutes free and online for all
  • to demystify law for the public with quality education and powerful tools
We assemble:

If you’re a LeXpunK, add “LeXpunK” to your bio, resume, interests, tattoo collection…. rep #LeXpunK on social media…push for the revolution…tell your friends, colleagues, partners, bosses, lovers, professors, dogs...immanentize the eschaton… autonomize the Zone…BE the lawyer that a better future needs…

Telegram: tg://join?invite=ERKAkFBOZOOjf1fcwTXJ8g

In Mr. Turner (2014), Mike Leigh’s lambent portrait of the artist as an old man, the protagonist sits for a daguerreotype. Behind the camera is an American prosopon, whose primordial photographs are advertised to “stand the test of time and climate.” Intentionally or otherwise, the scene establishes
In Mr. Turner (2014), Mike Leigh’s lambent portrait of the artist as an old man, the protagonist sits for a daguerreotype. Behind the camera is an American prosopon, whose primordial photographs are advertised to “stand the test of time and climate.” Intentionally or otherwise, the scene establishes a passing of the torch between light-wranglers. It […]
Fooling the Classifiers (part 2)
Tuesday, 12 May 2020
Elaine Ou
When media outlets get called out for misjudging a character, they tend to overcompensate with over-the-top villainization. Just look at the narrative reversals of Weinstein, Epstein, Sheryl Sandberg, Adam Neumann, Corona-chan, and yes, Elizabeth Holmes. Nope nope nope, we never claimed the coronavir

When media outlets get called out for misjudging a character, they tend to overcompensate with over-the-top villainization. Just look at the narrative reversals of Weinstein, Epstein, Sheryl Sandberg, Adam Neumann, Corona-chan, and yes, Elizabeth Holmes.

Nope nope nope, we never claimed the coronavirus was no deadlier than the flu, and you certainly won’t find our deleted Tweets stating such!

Maybe some of these people really are cartoon villains, but I’m sympathetic to Theranos. Right idea, wrong execution.

Build: Medical Devices

Here’s people in China taking a round of COVID serology tests before a group dinner, like some sort of aperitif.

Why can’t we have this in the United States? COVID-19 antibody tests currently have a low sensitivity rate, meaning they deliver a lot of false negatives. An inaccurate test result might lead to a false sense of security. The obvious solution is to test more, and more frequently, but public health officials think Americans are stupid. To keep us safe, government health agencies prevent anyone from getting tested at all. And that is why it took 25 years for the FDA to approve an over-the-counter HIV test.

It’s possible to fool the classifiers. Just modify the intended use. For example, absorbable sutures are considered a Class III medical device, on par with pacemakers and defibrillators. To get around clearance requirements, manufacturers call their product a “practice suture”, for training and taxidermy. Now they can sell the sutures for less than twenty bucks on Amazon. The sutures are packaged in sterile alcohol, because animal carcasses care about germs. Wink wink nudge nudge.

Another example is 23andMe, a DNA test that maps your personal genome. The original inception provided information about a person’s risk for diseases like Parkinson’s or cancer, but the FDA shut them down for a few years because any kit that diagnoses disease must first gain clearance as a medical device.

To get around FDA restrictions, 23andMe pivoted from health diagnostics to measuring intersectionality. You could be 1/1024th Cherokee and not even know it — Buy our DNA test kit and claim your minority status now! Hence the series of identity politics commercials featuring customers who discover their genetic victimhood.

So here’s how we get home COVID-19 serology tests out the door: Claim they’re for measuring disparate impact, or some similarly woke purpose. If the FDA complains, tell them to take it up with the SPLC.

(To be continued…)


Hi Samuel, you’re making a good point. There are certainly many unideological holders to whom bitcoin is just a number on a screen they can trade.
However, these people don’t shape or buy into any narratives of their own. They don’t participate in governance or shape how the public sees the ass

Hi Samuel, you’re making a good point. There are certainly many unideological holders to whom bitcoin is just a number on a screen they can trade.
However, these people don’t shape or buy into any narratives of their own. They don’t participate in governance or shape how the public sees the asset. I don’t see why they should be included in the dominant Bitcoin narratives over time. (Other than maybe to give an idea of how ideological bitcoin users are as a whole?)

Leaking into the Future
Thursday, 07 May 2020
Liminality is hard to navigate, and one can be forgiven for flailing gracelessly when attempting to do so. What makes me impatient though, is people not even recognizing liminality when it is all around them. People continuing to march into non-existent futures, like non-playable characters (NPCs) in
Liminality is hard to navigate, and one can be forgiven for flailing gracelessly when attempting to do so. What makes me impatient though, is people not even recognizing liminality when it is all around them. People continuing to march into non-existent futures, like non-playable characters (NPCs) in video games making walking motions with noses pressed […]
Elaine Ou
Bernie Madoff: Right strategy, wrong time. Per Minsky, late-stage credit cycles tend to look like a Ponzi scheme. If asset prices go up for long enough, people stop relying on cash flows to cover liabilities and instead borrow against appreciating assets. Take out a second mortgage, then a third. It’

Bernie Madoff: Right strategy, wrong time.

Per Minsky, late-stage credit cycles tend to look like a Ponzi scheme. If asset prices go up for long enough, people stop relying on cash flows to cover liabilities and instead borrow against appreciating assets. Take out a second mortgage, then a third. It’s fine as long as the housing bubble inflates faster than you can draw down your credit.

That’s pretty much where Private Equity’s at these days. The business model consists of borrowing money through the sale of high-yield “junk” bonds, using that money to buy a company, then using the company as collateral to finance the next corporate takeover. Rinse and repeat until the PE firm is the size of BlackRock or Apollo Group, and when an exogenous shock threatens to implode the bond market, get a bailout. (See Also: Is Private Equity Having Its Minsky Moment?)

It helps if public pensions are heavily invested in your funds. It helps even more if Fed Chair Jay Powell has millions invested with you. But the thing that helps most is the ability to convince regulators to classify your Ponzi as “Private Equity”.

We can’t build anything in this country because those with wealth and power use their wealth and power to put up artificial barriers against competition. If Silicon Valley wants to build, it needs to take a page from Wall Street and learn to fool the classifiers.

One thing that Wall Street does particularly well is make illegal stuff look legal. It’s not a bucket shop if you call it “over-the-counter derivatives”! It’s not discriminatory theft if you call it “de-risking”. It’s not bribery if you “hire” presidential candidates as consultants. It’s not price-fixing if you call it LIBOR. It’s not an illegal wash trade if you call it “market making“. It’s not a denial of constitutional rights if you call it “mandatory arbitration”!

Remember that time Elon Musk tried to sell flamethrowers on the internet, but then found out that it’s illegal to own a flamethrower in California, so he renamed the product “Not-a-Flamethrower”? Yeah, we have a lot of work to do.

Build: Healthcare

Why can’t we build hospitals the way China builds hospitals? Because of all these guys:

I am constantly amazed at the level of medical care available for animals. Bring a dog to the vet and you’ll get a treatment schedule, upfront pricing, and an honest prognosis. The more disposable the animal, the less likely a government agency is involved, and the better the service. Look at the huge range of antibiotics you can get for a fish!

Here’s how Silicon Valley can build more healthcare: Open an animal clinic that promotes diversity and inclusion. Like, *real* diversity and inclusion. I mean, take wokeness to the next level: Welcome trans-species patients. We already have dudes identifying as ladies to participate in womens’ sports, it’s only a matter of time before people start identifying as goldfish to score an appointment with the aquatic vet. If the Department of Public Health complains, tell them to take it up with the ACLU.

(to be continued…)

Thank you Asher :)
Wednesday, 06 May 2020
Brandon Quittem

Thank you Asher :)

Thank you Asher :)

Elaine Ou
Vets are considered essential services, so the local animal clinic is practicing social distancing by seeing pets in the parking lot. You stay in the car with the animal and the vet comes out with a little doctors’ bag. Drive-ins, but for dogs. Remember drive-ins? Drive-in theaters, drive-in diners.

Vets are considered essential services, so the local animal clinic is practicing social distancing by seeing pets in the parking lot. You stay in the car with the animal and the vet comes out with a little doctors’ bag. Drive-ins, but for dogs.

Remember drive-ins? Drive-in theaters, drive-in diners. It was a civilized way to bring screaming children on a family outing. Back when the country was great, cars were the size of cruiseliners and the backseat was a fine place to take a date.

Then there was an oil embargo and gas guzzlers fell out of favor. No one wanted to be seen in public with their Ford Pinto or GM Vega, so restaurants created drive-throughs for patrons to discreetly grab their meals and go.

But oil is cheap again! It’s time to bring back ginormous Cadillacs and 20-acre parking lots. Hair salons, restaurants, doctors’ offices should all become drive-ins. No need to sanitize surfaces between customers, and hey, my car already comes with a reclining seat for the dentist.

Remember those electric hoverboards that were cool for about a month? No one born in this century knows how to rollerskate, so carhops can ride hoverboards instead.

Automakers are trying to get another bailout, but a more sustainable solution is to lobby the CDC to recommend vehicles for social distancing.

I On the noon of the seventeenth day of Ramadan, 1164, Hassan II, the hereditary Imam of the Alamut State founded by the Order of Assassins under Hassan-i-Sabbah, immanentised the Eschaton.  In a bravura display of apophatism, he declared quiyāma ―the Islamic Resurrection― with the abrogation of
I On the noon of the seventeenth day of Ramadan, 1164, Hassan II, the hereditary Imam of the Alamut State founded by the Order of Assassins under Hassan-i-Sabbah, immanentised the Eschaton.  In a bravura display of apophatism, he declared quiyāma ―the Islamic Resurrection― with the abrogation of Sharia law; inviting the Nezāri potentates to gather […]
Brandon Quittem
Bitcoin is a Catalyst for Human Evolution (Symbiosis) — Part 4/4

Exploring Bitcoin through the lens of natural selection, evolution, and symbiosis

♦Original Art by FritsAhlefeldt.com

This is a story of how symbiotic relationships can change the course of history forever.

Just as fungi an

Bitcoin is a Catalyst for Human Evolution (Symbiosis) — Part 4/4

Exploring Bitcoin through the lens of natural selection, evolution, and symbiosis

♦Original Art by FritsAhlefeldt.com

This is a story of how symbiotic relationships can change the course of history forever.

Just as fungi and plants formed a symbiotic relationship to successfully colonize dry land, humans can form symbiosis with Bitcoin to improve individually and to advance our species.

In this article we’re going to explore Bitcoin as a catalyst for human evolution, through the lens of geological timescales, evolution, and symbiosis.

Definition of Symbiosis: when two dissimilar organisms live together in intimate association (as in parasitism or mutualism). Example: Clownfish and Sea Anemones

This is part 4 of “The Mycelium of Money,” here’s the whole series for reference.

  • Part 1: Bitcoin is a Decentralized Organism (Mycelium)
  • Part 2: Bitcoin is a Social Creature (Mushroom)
  • Part 3: Bitcoin is the Antivirus to Uncertainty (Medicine)
  • Part 4: Bitcoin is a Catalyst for Human Evolution (Symbiosis) → this one

2020 Update: I published the entire series as a single articled titled “The Mycelium of Money.” Check it out!

Let’s begin.

Bootstrapping Life on Terra Incognita

Five hundred million years ago, all biological life lived in the oceans. Dry land as we know it was a sterile volcanic wasteland devoid of life. That is, until plants and fungi formed a fateful partnership that changed the course of history forever.

This symbiotic partnership created a cascade of evolutionary forces leading to the creation of all terrestrial life, including homo sapiens.

Fast forward to modernity, humans now organize around network based technologies, such as the internet and Bitcoin, which are reincarnations of the ancient mycelial archetype out of which we emerged.

Take a deep breath. Life is amazing.

Ok, so how did we get here?

First, a quick biology lesson. Organisms are classified as either Autotrophic or Heterotrophic.

Autotrophs are organisms that make their food. For example: plants convert sunlight and carbon dioxide into food via photosynthesis.

Heterotrophs are organisms that find their food. For example: lions eat the gazelles and fungi produce enzymes to externally digest their environment.

Like human settlers, organisms colonizing new territory are most vulnerable in the early days. In order for fungi to colonize dry land (terra), they needed to secure a reliable food source.

Fungi effectively domesticated photosynthesis machines (algae) to harness a self sustaining food source. We can think of these algae as little solar panels bolted onto fungal networks which made colonizing virgin dry land possible.

Soon after getting established, the fungi began digesting the volcanic rock upon which they sat. This ultimately liberated valuable nutrients which were then traded with other nearby fungi, algae, bacteria, etc. Together, these early settlers bootstrapped life on dry land. Let’s see how this compares to Bitcoin.

How Satoshi bootstrapped embryonic Bitcoin

In order to colonize the internet (terra incognita) with a new form of money, Satoshi needed to form a symbiotic partnership.

Fortunately, he found the perfect partnership and made a series of wise decisions that maximized Bitcoin’s chance of survival during the bootstrapping phase.

How satoshi “partnered with the algae” to bootstrap Bitcoin’s life on the internet

  • High early issuance rate disproportionately rewarded early adopters (the early issuance rate might have been too aggressive)
  • Launched on the Cryptography mailing list (if anyone could incubate Bitcoin it was the Cypherpunks on that email list)
  • Timing the launch during the 08/09 financial crisis (was this blind luck?)
  • Satoshi’s message in the genesis block “Chancellor on the second brink of bailout” (rallying cry to gain ideologically motivated supporters)
Mutualism or Parasitism: Examining the Cypherpunk-Satoshi-Symbiosis

Were the algae complicit in the fungal partnership (mutualism)? Or were the fungi taking advantage of the algae’s ability to make food at the expense of the algae (parasitism)?

It appears to be mutualism. The algae may have been initially kidnapped, however in exchange for photosynthesizing, they gained a mycelial security system, and the opportunity to colonize a new niche.

Were the cypherpunks complicit and did they benefit in the partnership (mutualism)? Or did satoshi take advantage of the cyberpunks because he needed an initial distribution strategy (parasitism)?

“It’s very attractive to the libertarian viewpoint if we can explain it properly. I’m better with code than with words though.” — Satoshi Nakamoto

Most cypherpunks dismissed Bitcoin initially, however a select few (most notably: Hal Finney) jumped onboard. Considering they were first to learn about Bitcoin, they had a chance to acquire Bitcoin’s native monetary units in exchange for the marginal electricity cost to mine (essentially nothing). With the advantage of hindsight, acquiring Bitcoin during the first few years would lead to wealth beyond measure.

“The possibility of generating coins today with a few cents of compute time may be a good bet, a payoff of something like 100 million to 1!” — Hal Finney
(Economic) Evolution by Natural Selection♦

With the initial conditions of life on land set into motion, the fungal-plant alliance can start welcoming new market participants (organisms) to enter the ecosystem.

Fungi interact with the world through chemistry. They secrete enzymes to externally digest their environment. Volcanic rock was the only restaurant in town. These early fungi liberated molecular resources by metabolizing the volcanic rock upon which they stood.

This enabled a proto-economy made up of primitive fungi, plants, and bacteria. They traded essential molecules required for carbon based lifeforms (carbon, nitrogen, oxygen, etc).

Fungi were essentially turning rocks into fungible biology tokens. These biology tokens were then traded on top of mycelial rails connecting all nearby life. Fungi both created the market and facilitated trade leading to an explosion of biodiversity on dry land.

Terra takes her first breath

Before plants colonized dry land, our earth’s atmosphere wasn’t very hospitable. As you know, plants inhale CO2 and exhale O2. This ultimately led to the formation of our oxygen rich atmosphere — planet earth was taking her first breath.

In a sense, fungi unleashed free market dynamics in a new market which led to an incredible proliferation of life. Now let’s explore the parallels with Bitcoin.

Bitcoin enables a new economic paradigm

Just as novel organisms emerge (via speciation) to occupy newly created niches on dry land, Bitcoin evolves it’s DNA (code) to produce new phenotypes (novel features) to take advantage of new niches.

In other words, Bitcoin enables novel financial use cases that were not possible before. This increases the size of the economic pie, thus generating wealth for society.

Novelty provided by Bitcoin:

  • The first and only implementation of absolute scarcity (hard to overstate)
  • A global, near instant, apolitical, settlement system
  • Neutral money not easily captured by special interests.
  • Uncensorable medium of exchange for black/grey markets
  • Democratization of basic financial services
  • Non-sovereign store of value with negligible barrier to entry
Bitcoin and mycelium improve trade

Mycelial networks act as a resource transport layer and communications network connecting organisms in the biosphere. This enables organisms to voluntarily trade resources and knowledge across species lines. Increasing trade leads to increased specialization (division of labor), further increasing biodiversity (wealth and resilience) in the ecosystem.

Currently, our governments form economic monopolies which prevent many citizens from accessing the global markets.

Think about all the unproductive human capital siloed in countries like Iran, Venezuela, and Argentina. Without access to a common economic language (Bitcoin) many people are unable to participate in global trade.

As Bitcoin becomes ubiquitous, it unleashes human productivity leading to increased innovation, specialization, and trade. We’re already seeing some basic examples such as freelancers in Venezuela using Bitcoin as a bridge currency to access USD which effectively evades financial controls.

We can extrapolate “Bitcoin being used as a bridge currency” into a grander vision of the future where everyone speaks the same economic language. A global market for talent leads to more goods and services produced for a cheaper price. Not to mention, increased trade with developing countries will help lift people out of poverty.

Bitcoin enables economic evolution by natural selection

Darwinian evolution by natural selection is a biological engine designed to reward successful actors and eliminate unsuccessful actors. When the antelope gets eaten by the lion, it dies, no one bails out the antelope. Nature has skin in the game. This feedback loop is crucial. Individuals are fragile in order to ensure the system is antifragile.

Market based economics is an engine designed to seek more efficient uses of capital by rewarding successful ventures and punishing the unsuccessful. However, our current form of “capitalism” is more like cronyism or as Travis Kling said: “socialism for the rich.”

Instead of letting companies fail, we bail them out. This results in broken incentives which create a moral hazard making the entire system more fragile. Not to mention, disproportionately hurting the working class. Heads I win, tails you lose.

A sound money system (like Bitcoin) improves this economic engine by tightening the feedback mechanism that rewards value creation and punishes failure. In a Bitcoin world, bailouts aren’t really possible because monetary expansion is restrained by a fixed monetary base. Bitcoin ensures individual people/companies are fragile in order to ensure the economic system remains antifragile.

In other words, Bitcoin increases economic “skin in the game” which improves the feedback loop leading to economic evolution by natural selection. Economic Darwinism for the win.

Taming of the Tenrec♦Tenrec: the ancestor to all living placental mammals

Due to a symbiotic relationship with fungi and plants, and evolution by natural selection, our pale blue dot was transformed from a barren rock to the garden of eden. Truly marvelous.

Let’s zoom in to the tail-end of the Cretaceous period (~65 million years ago). The planet was dominated by dinosaurs both on land and in our oceans. Mammals were hardly relevant. Narrator: but things were about to change.

A giant meteor crashed into present day Mexico ending the dinosaurs and most life on planet earth. The impact caused a short term spike in surface temperatures followed by an extended cooling due to debris blocking out sunlight.

Although most organisms were culled during the cataclysm, some species thrived during the chaos. Most notable for our story are Fungi (of course) and a small shrew-like mammal known as the Tenrec (surprising).

Without sunlight, most plants quickly perished. However, the Fungi thrived because they don’t rely on sunlight (remember they find their own food). Fungi were happily decomposing all the newly deceased organisms.

What about the Tenrec?

As temperatures declined and food became scarce, most animals who survived the initial shock were killed by fungal pathogens or eventually starved to death as the global food chain seized up. However, not the Tenrec.

Tenrecs are humble shrew like mammals that lived underground which protected them from hostile conditions on the surface. Their favorite foods (insects and aquatic plants) were relatively unaffected.

Tenrecs are capable of hibernating for up to 9 months at a time. This protects them from short term volatility and enables them to outlast their competition. The best offense is a good defense.

Bitcoin reminds me of the tenrec, both live underground and thrive on volatility. Like the tenrec, Bitcoin simply needs to outlast it’s competition.

“If you wait by the river long enough, the bodies of your enemies will float by.” — Sun Tzu

Give thanks to the tenrec

Turns out, the tenrec is the common ancestor to all living placental mammals. In other words, the only reason both you and I are alive today is because the tiny tenrec survived the dinosaur-ending apocalypse 65 million years ago.

Standing on the Shoulders of Mycelium

Although mammals got off to a slow start, we’ve really come into our own over the last million years. One particular great ape, the homo sapien, achieved global dominance in a relatively short timespan.

Current evidence suggests Humans have only been around for about ~500k years, making us a relatively young species. For comparison, modern elephants have been around for ~5m years.

Like our fungal forefathers, humans have formed symbiotic relationships with our environment throughout history. In fact, we owe our lives to the networked based organisms we call fungi.

Humans begin to settle down

One especially relevant fungal organism is Saccharomyces cerevisiae, otherwise known as brewers yeast.

Human agriculture appears to have begun around 11,500 years ago (although it might be much older). Interestingly, the first crops we cultivated were also the best grains for brewing beer. This begs the question: did we settle down for food/stability or to brew more beer?

Turns out fermented drinks (beer, wine, etc) provided a safe way to stay hydrated as water often contained pathogens that killed ancient man.

Although we didn’t know it at the time, humans formed symbiotic relationships with fungi in order to produce healthy drinking options that saved many lives.

Unbeknownst to most moderns, we still heavily rely on our fungal allies today. Without fungi, say goodbye to all beer, wine, chocolate, bread, and many medicines such as penicillin.

Like ancient man partnered with fungi to survive, us moderns have a similar opportunity to partner with Bitcoin…

Achieving Symbiosis with Bitcoin

We’ve established how both fungi and Bitcoin symbiotically partner with other organisms to bootstrap life and build antifragile ecosystems. Now let’s finish up by exploring how humans can partner with Bitcoin to improve individually and to advance our species.

“The real problem of humanity is the following: we have Paleolithic emotions; medieval institutions; and god-like technology.” — E.O. Wilson

Money is the most important coordination mechanism for society and our existing fiat system is driving our species off a cliff. Instead of arguing red vs blue, it’s time we address the root cause of our societal malaise. It’s time to unfuck the money.

Fiat money has appeared periodically throughout history, however, it’s the exception not the rule. Throughout most of history, humans coordinated around a free market for money. Gold and silver, mainly. Time to wake up from our fiat money coma.

Bitcoin is an Extended Phenotype for humanity

Extended Phenotypes are behaviors that extend an organism’s natural capabilities. Beaver dams are a good example. Bitcoin is an Extended Phenotype for humanity — it lowers the trust required for a global society to communicate value, which enables more sophisticated cooperation.

This offers a unique opportunity to re-architect society based on the separation of money and state aka “natural money.” A huge win for humanity. As such, it’s our duty to form symbiosis with such a force.

Take another deep breath as we’re fortunate to be alive during such an inflection point.

It all starts with individuals forming symbiosis with Bitcoin

Bitcoin was the best performing asset of the last decade. This created unimaginable wealth for early adopters. Besides financial gain, individuals also can benefit from bitcoin in other ways. Interestingly, the values imbued into bitcoin seem to rub off on its adherents.

As a deflationary asset, Bitcoin teaches us to delay consumption today in order to reap greater benefits tomorrow (low time preference).

In a world fulfilled with uncertainty, Bitcoin provides something to be optimistic about. Rather than change the system from the inside, we can put our energy towards a parallel system.

Bitcoin forces us to take personal responsibility for our wealth, both a blessing and a curse. In a world that doesn’t value personal responsibility, Bitcoin serves as a wakeup call.

Partnering with Bitcoin is good for the individual but is it good for mankind?

Cryptography is fundamentally about defense

Bitcoin is the largest implementation of public key cryptography the world has ever seen. A world with strong cryptography shifts the balance of power towards defense. Defense from tyranny, censorship, overarching governments, and surveillance capitalism.

Cryptography allows us to assert our natural rights. Bitcoin protects free speech, ensuring we can “vote with our money.” Free speech is the foundation of open societies. Forming symbiosis with Bitcoin preserves freedoms for our future generations. A cause worth fighting for.

Bitcoin metabolizes fiat infrastructure

We can use fungi to clean up oil spills, halt erosion, create natural pesticides, and even decompose nuclear waste at Chernobyl. In a similar manner, Bitcoin can be used to clean up our dilapidated fiat infrastructure.

Fungi Fact #1: Fungi have already solved many of our problems, yet we barely understand them. Mycoremediation is a promising new field that leverages our understanding of mycology to improve our environment, essentially “applied mycology.”

We’re experiencing a period of unprecedented monetary expansion. Bitcoin as a fixed supply monetary good serves as a counter force to unfettered money printing. Short term, individuals using Bitcoin to avoid capital controls and hedge against local currency risk. Long term, Bitcoin may force conservatism onto central banks, starting with developing nations.

In the richest country in the world (America), average people work for 40 years and never get ahead. The legacy system was designed to siphon wealth from the bottom to the top, most notably during each financial crisis. Since time is money, this forced wealth transfer system should be considered systemic time theft. Make no mistake about it, we should be radicalized by this.

Every time you buy Bitcoin you’re selling dollars. It’s time to join the peaceful revolution. Occupy UTXOs.

Opportunity cost of delaying Bitcoin

Think of all the waste created from a fiat system. Bank bailouts, never ending wars, and capital misallocation are greatly reduced (if not eliminated) under a hard money system.

Each year we delay, we incur increasing opportunity costs. Instead of destroying wealth unnecessarily, how can we invest precious capital into worthy causes?

“We were promised flying cars and all we got was 140 characters” — Peter Thiel

What about colonizing mars? Or reducing the risk of civilization “enders” such as pandemics or nuclear war? How about dyson spheres? Asteroid mining? Or eliminating infectious disease and infant mortality for good?

Let’s embrace the Bitcoin renaissance.

Bitcoin wears risk on its sleeve

Rather than persist in an opaque financial system designed to enrich the few at the expense of the many, let’s embrace a more transparent financial system. A system where risks are laid bare for all to see, rather than buried under bureaucracy and deception.

Fiat money is an inorganic system similar to a monocrop industrial farm. Centrally planned, susceptible to disease, unsustainable, and fragile. Fiat offers short term price stability, at the expense of long term systemic risk. In other words, we don’t account for the “fat tail risks” such as banks blowing up or global pandemics. Both examples lead to wealth transfer furthering wealth gaps.

Bitcoin, on the other hand, is an organic system similar to an old growth rainforest. Fierce competition, incremental growth, sustainable, and antifragile. Bitcoin accepts short term price volatility in exchange for long term systemic stability.

Bitcoin enables an antifragile monetary system, a huge win for humanity.

Bitcoin promotes energy independence

Bitcoin has an insatiable demand for low cost energy. Miners scour the earth for cheap energy assets, acting as the energy buyer of last resort. This incentives innovation in low cost energy production such as excess natural gas and stranded hydroelectric.

Hash rate has been steadily rising, even when price is not. Bitcoin miners are inherently long BTC. What do the miner’s know that you don’t? Rather than putting our heads in the sand, it’s time to form a partnership with reality.

Bitcoin’s hash rate continues to rise (source)

Let’s assume Bitcoin continues it’s monetization path. Eventually, Bitcoin mining becomes a matter of national security. Those countries who produce their own energy (and mine Bitcoin) will have further geo-political advantage over countries reliant on importing energy.

Fungi Fact #2: fossil fuels (hydrocarbons) carry the energy of ancient sunlight originally captured by plants through photosynthesis. Interestingly, earth’s entire supply of coal was formed during the “carboniferous” period which ended ~300m years ago when fungi learned how to digest lignin. Lignin is the polymer that gives plants their rigid structure AND it’s a prerequisite to forming coal. Coal is simply plant material that was “half-digested” by primitive fungi. Modern fungi digest lignin which prevents new coal from being produced.

This creates another incentive for nations to secure local energy sources — whether from fossil fuels, nuclear plants, renewables, or otherwise. Long term, a world with more localized energy production is a more robust world. Like fungi, Bitcoin is an invisible membrane improving the health of the ecosystem it occupies.

Humanity will coalesce on neutral money

The current geo-political game rewards those who exert influence over money production. This means large powerful states, politicized money, and special interests groups competing for influence.

“Give me control of a nation’s money and I care not who makes the laws.” — Mayer Amschel Rothschild

Instead, Bitcoin is a neutral money. A system designed to prevent special interests from exerting undue influence over the money. This creates a more fair game.

Why would any government give up control of their printing press?

In a post-dollar regime, nation-states won’t agree on a new reserve currency. Logically, each state prefers to settle debts in their own currency. We’re already seeing cracks in the dollar hegemony coming out of places like China, Russia, and Iran. Bitcoin is well suited for this problem.

Bitcoin is fully auditable, hard capped, and offers final settlement quickly. The perfect neutral money for untrusting nation-states to settle debts. Under this light, Bitcoin is money for enemies.

It’s time to upgrade humanity by forming symbiosis with Bitcoin.

Let’s Wrap Up

The story of life on earth can be summed up as: success comes to those who form symbiotic relationships with network based organisms (particularly fungi).

As humble apes, it’s our duty to form a symbiotic relationship with Bitcoin. We must strive to understand this phenomenon so that we may shepherd her through adolescence.

Just like fungi colonizing dry land was the catalyst for biological evolution on terra, Bitcoin is a catalyst for human evolution.

Let’s embrace Bitcoin or suffer the fate of the dinosaurs.

Thank you,

Let’s Connect: Follow me here on medium, check out BrandonQuittem.com, and come say hi on twitter.

P.S. I published the entire series as a single articled titled “The Mycelium of Money.” Check it out!

P.P.S. Who’s driving the ship?

Fungi enabled complex life on earth, which eventually gave way to humans. Now humans are creating the internet (and Bitcoin) which both embody the same mycelial archetype of which we came.

We didn’t consciously choose to mimic mycelial networks in these designs. However, animals did taxonomically branch off from fungi millions of years ago. Humans came full circle, the student became the teacher.

Was this inevitable?

The mycelial archetype appears to be embedded into our species. Over time, network based structures continually appear whether due to embedded wisdom or blind luck. These Mycelial inspired network technologies, once discovered, seem to persist due to their antifragile nature.

Many people claim we “discovered Bitcoin.” I’m sympathetic to this idea, however it’s more accurate to say we rediscovered Bitcoin. The mycelial archetype is an emergent property of biology which means Bitcoin was inevitable.

  • Thanks to Gigi, Robert Breedlove, and Nic Carter for providing thoughtful notes during the editing process
  • Thanks to the mycological community for inspiring my fascination with fungi (the bitcoin community welcomes you)
I tweeted a sketch of the view from my balcony, from an abandoned project to make a proper art piece, and slashdottir made this rather snazzy quick study out of it. Sometimes twitter is very liminal. Also check out people’s interesting art projects.
I tweeted a sketch of the view from my balcony, from an abandoned project to make a proper art piece, and slashdottir made this rather snazzy quick study out of it. Sometimes twitter is very liminal. Also check out people’s interesting art projects.
Is Bitcoin Compatible with Banking?
Thursday, 23 April 2020
Zane Pocock
♦Photo by Jason Pofahl on UnsplashYes, but banking must be disintegrated

In the past, banking served two distinct functions, typically operated by separate businesses: warehousing wealth and facilitating loans.

These services are immensely valuable and typically harmless on their own. But it

♦Photo by Jason Pofahl on UnsplashYes, but banking must be disintegrated

In the past, banking served two distinct functions, typically operated by separate businesses: warehousing wealth and facilitating loans.

These services are immensely valuable and typically harmless on their own. But it was an integration of banking functions that ultimately cemented the normalization of today’s fractional reserve banking system, allowing for market distortions that gave rise to precarious debt-fuelled bubbles like the one we’re watching unfold right now. It thus incentivized a structural fragility that placed commercial banking in a position of outsized importance to the functioning of society. Banking used to be about providing services to the free market, not the centrepiece.

The instrument that was manipulated to conflate these two banking functions was commodity money — a cumbersome monetary technology that was inevitably centralized, captured and manipulated to the point that paper claims on it were no longer redeemable.

With its absolute scarcity, Bitcoin is positioned in stark opposition to the monetary and banking status quo, and can serve as the medium for a philosophical and practical resurgence against the fiat monetary paradigm. Further, it is designed with explicit provisions that can be programmatically harnessed to keep banking roles separate once again.

While I argue that the Bitcoin communication protocol should explicitly not be defined as “money” in the legal sense, its scarce information space has accrued value such that those who exercise control over some of it have inevitably sought solutions for its security and leverage (warehousing and loans). By understanding the history of traditional banking institutions and the unique features offered by Bitcoin, participants in the Bitcoin network can acknowledge the value offered by these services whilst being careful to harness Bitcoin’s assurances to continue separating these roles.

A Brief History of Banking

In his great treatise on money and money substitutes, Theory of Money and Credit, Mises demonstrated that fractional-reserve banking was the root cause of the business cycle, arguing that the issuance of uncovered money titles reduced the interest rate in the credit market below its natural level. If, for every dollar of silver held at a bank, the bank had issued two dollar bills with legal title to the one underlying silver dollar, then the circulating supply of money would have doubled. The law of diminishing marginal utility dictates a reduction in the relative demand for the new money and thus reduces the price that can be demanded for access to it (interest rates). Thus, businesses are likely to borrow beyond what they should (it’s cheap to do so), ultimately becoming overleveraged and misallocating resources before a market downturn corrects these inefficiencies.

♦How money substitutes are inflated from an underlying asset (fractional reserves). Source

Mises’ student, Murray Rothbard, made the mechanics of this lesson more accessible to the layperson in his book The Mystery of Banking. Rothbard argued that it was thanks to the confluence of two distinct forms of banking that a fractional reserve banking system was able to flourish, ultimately creating the fiat paradigm we live under today. These distinct banking functions were those of deposit and loan banking.

A money warehousing business (a deposit bank) would offer centralized security services to safeguard monies in exchange for a fee paid by the customer. With commodity monies, the returns to violence are high — it makes economic sense for savers to employ a service responsible for defending against theft or loss. These commodity monies also suffer from inconveniences in divisibility and transportability, so another role of the deposit bank was to provide money substitutes (bank notes) that could be carried and exchanged more freely between participants in the economy, with those notes directly convertible to the real money (such as gold) held on deposit at a moment’s notice.

Separately, credit banking businesses, such as those observed in Venice in the Middle Ages and the Scriveners of 17th C England, might explicitly borrow money from depositors and pay them in the form of interest for the privilege and risk. These certificates of deposit would identify a fixed term; at maturity, funds would be returned to the creditor with an interest payment for taking on the default risk of loaning to the bank. The bank would make money by then lending these funds to other businesses and individuals, say for mortgages, charging a higher interest rate than they were paying to the initial client and pocketing the spread. Risk officers for the credit institute would ensure their debts reached maturity after the money they loaned out was repaid, thus remaining solvent.

Rothbard’s insight was to acknowledge that both forms of banking businesses would fail occasionally, but that this was a good thing. Bank runs on deposit banks running fractional reserves would hurt defrauded depositors, for the institutions were effectively operating whilst insolvent. But such failures encourage greater due diligence and maintain the money supply in the long run by weeding these institutions out of the economy. Meanwhile, loan banking is explicit in its risks: there is a palpable chance that a credit institute might default if it mismanages its risk exposure. In simple terms, interest rates are the market rate for 1) buying current access to monetary instruments (the time-value of money) and 2) pricing their default risk.

Rothbard posits that a marriage between the two banking functions put an end to this age and was critical to today’s self-reinforcing cycle of fractional reserve banking, monetary inflation and central banking. He illustrates that central banks lifted the restraints on fractional reserve banking by putting a floor under the whole system that ultimately allowed for excessive credit expansion (printing money) before finally severing any relationship to an underlying asset at all (fiat money).

Legal paradigms

Another great work of economic literature was written on this issue more recently. Where Mises and Rothbard arrived at a discussion of banking by first analyzing how money comes to be used, Money, Bank Credit and Economic Cycles by Jesús Huerta de Soto starts with the two forms of banking before going on to derive the economic and legal implications of such a system.

Irregular deposits

De Soto argues that deposit banks dealing in fungible goods like commodity monies were dealing in irregular deposits, meaning that the same precise gold bar didn’t need to be returned to the depositor. Legal ownership of the specific gold bar was transferred to the bank on the proviso that gold of the same quality and quantity was available instantly to the depositor (ipso facto requiring 100% reserves) — the certificate of deposit was a fully covered money title.

What makes this important for the present discussion is by contrasting it with regular deposits, such as custody of an artwork. Irregular deposits technically transfer legal ownership of the gold to the bank while requiring that it remains fully covered, whereas custody of an artwork clearly doesn’t involve the transfer of ownership. This created a paradigm where the bank was held responsible even for an “act of God”. Thus the bank acted not only as a safekeeper, but the debt they owed to a depositor was so senior that the institutions came to serve as a form of insurance. This would be a moot point for custodying something non-fungible; a destroyed painting can clearly not be returned to the rightful owner.

If the institution is responsible even for black swan events, then the flaw in any form of fractional reserves is obvious: de Soto compellingly summarizes that “if the depositary has acted fraudulently and has employed the deposited good for his own personal use, he has committed the offense of misappropriation.” Thus, if an institution serving a warehousing role at any point does not have 100% reserves, it is comparable to a painting loaned to a gallery being sold by that gallery. The legal paradigm upholding this intuition existed until surprisingly recently: de Soto draws our attention to a decision by the Court of Paris in 1934 that convicted a banker for violating the expectation of 100% reserves.

Unfortunately, this rich history and legal precedent has been rendered trivial for now. The technical transfer of ownership involved in irregular deposits allowed for a dishonest play on definitions, with arguments successfully being made by legal counsel that conflated credit contracts (loans) and deposit contracts (warehousing) as essentially the same thing. These functions of banking are now joined at the hip.


If uncovered money titles are the root cause of the business cycle, fraudulent, and enabled by contemporary banking structures, then in Bitcoin it will pay to strictly adhere to a different framework. Fortunately, the “not your keys, not your bitcoin” meme has lent prominence to a particular legal relationship for assets held under custody: bailment.

When an art collector lends a painting to a gallery, that painting is still the collector’s property. It doesn’t matter that the owner doesn’t currently exert possession or physical control over it. This is called bailment: when physical possession and control are handed to a third party, but the original owner retains legal title.

As Caitlin Long has been fighting for in Wyoming, legal recognition of a bailment relationship between depositors and a Bitcoin custodian is likely to be an important line of defense for those who need to employ the services of a custodian. Importantly, in a bailment relationship the asset never touches the custodian’s balance sheet, meaning a properly-written contract will ensure that rehypothecation is not legally possible in this scenario (where the custodian uses deposited assets as collateral against their own business loans). By extension, liens ought not be placed on collateral by the business’ debtors (where another party engaged by the custodian, such as an investor, might attest to seniority over assets under custody in a liquidation event).

Bitcoin Fixes This

Aside from correcting legal definitions, the Bitcoin protocol offers certain assurances that deserve far greater attention in conversations about its custody. Most importantly, if parallels between Bitcoin services and banking are to be found, it should be observed that Bitcoin natively offers tools that can be employed to explicitly delineate between custody and loans.

Bitcoin is a communication protocol, so it is helpful to first consider two distinct types of Bitcoin information: UTXOs and private keys.

UTXOs (unspent transaction outputs) encumber the protocol’s scarce information space. Think of the Bitcoin network as if it has space on a hard-drive, except instead of documents adding in size to 120GB, we have UTXOs adding in size to 21M BTC. When people say that there will only ever be 21 million bitcoins, what they mean is that there will only ever be a combined total sum of 21M BTC shared among all UTXOs on the network. It’s the information space encumbered by these UTXOs that has accrued market value.

Bitcoin UTXOs are scarce because one script, and only this one script, is locking up their value on the network. This script is unlocked by a corresponding private key. As far as the Bitcoin protocol is concerned, if one can resolve this script to the network by using the right private key, then they have the right to create a transaction with the UTXO. Because UTXOs are consumed in transactions (resulting in equally valued outputs at the other end), it is notable for our purposes here that they are best employed to explicitly transfer or lend this information space to a third party.

Private keys, on the other hand, are simply the secrets that allow this activity on the Bitcoin network. Because of the value that these secrets can be used to unlock, safeguarding them is imperative. These secrets can be known by a specialized third party offering certain assurances, much like a password manager, and thus they are well-suited to being “warehoused”.

Private Key Warehouses

In legacy finance, the role of a qualified custodian has typically been to safeguard legal title to financial products like securities. Perhaps because of confusion around what Bitcoin is, we have seen the emergence of institutions structured more like securities custodians than contemporary banks entering the space. Specialized custodians are explicitly aiming to fill the warehousing role, and they leverage the unique properties of the Bitcoin protocol to achieve this. At Knox, for example, there isn’t simply a big central storage unit and database of “bitcoins”. Customer UTXOs are encumbered by completely segregated private keys in an auditable multi-signature scheme, geographically dispersed and insured for the value of the UTXOs over which they exert control. The infrastructure is set up such that UTXOs can’t be unilaterally spent by internal operators–that requires the cryptographic authorization of the depositor that is in control.

The importance of this can not be understated. Whilst all Bitcoin participants should still be strongly encouraged to retain exclusive knowledge of their private keys, for many individual and corporate use-cases this is not practical. But warehousing private keys like this is not “reinventing banking” in the way detractors think it means.

Bitcoin private key warehouses (“custodians”) are tasked with occulting the knowledge of the private key that locks up the network value of their clients.

Given appropriate legal structures to ensure that keys are shared in a bailment relationship, technical assurances that these third parties cannot single-handedly consume UTXOs, and providing auditability through public addresses on the network, fractional reserves under such a system should not even be possible. At their most basic, these companies simply offer a private contract to keep a secret and occult their customer’s private keys. They’re security services for valuable, secret information with two major functions:

1. Act as a computational service provider
Apply signatures (information, text) with secret values (information, text) propagating the results of the computation (information, speech)
2. Act as a storage service provider
Hold onto secrets (information, text), to make 1. Possible

One of the reasons for using irregular deposits to custody fungible goods is that it’s impractical and prohibitively costly to return the exact same gold bar to its original depositor. But in Bitcoin, if it’s defined that the private keys themselves are what’s being shared, this is not only possible, but inherent to the system. While it is by no means trivial to provide these assurances and ensure rigorous key segregation, an advantage of Bitcoin’s digital nature quickly becomes apparent: once the methodology is defined and implemented, keeping private keys separate scales incredibly well, unlike a physical gold warehouse where costs would increase in lockstep with the number of customers.

Furthermore, Bitcoin participants shouldn’t trust that the services they employ are keeping these promises. While a certain segment of the Austrian school would argue to let a self-correcting free banking system simply run its course, we needn’t be so cavalier in Bitcoin. If a Bitcoin holder engages the services of a private key warehouse, auditable addresses should be demanded for the UTXOs that can be controlled by those keys.

In this context, Bitcoin’s apparent lack of fungibility (distinct UTXOs can be identified) is a feature, not a bug. Irregular deposits as defined by de Soto need not exist when we have a system that can functionally scale to segregate each customer’s private keys and addresses, while also being audited by the customer without needing to query the business’ servers.

Customers might also consider storing individual keys from a multi-signature wallet across different private key warehouses to provide an extra level of risk segregation assurance, thus requiring an incredibly complex, multi-party collusion to violate their expectation of safekeeping.

This is the technical, practical and philosophical beauty of multisig: it is consensus-enforced (non-simulated) shared ownership of a scarce asset. Until now, the concept of scarcity has described the exclusive usage and ownership of a given good by a specific individual. If someone is holding the only axe in the village, another can’t hold the same axe at the same time. It is scarce. There can be private contracts that simulate shared ownership amongst many peers, but these are not inherently enforceable, as any party can cheat. Thus, we need legal systems to punish such cheaters after the fact. Bitcoin, however, enforces this shared ownership in its very protocol, to such an extent that Max Hillebrand argues it is no longer simulated, but actual shared ownership. Of course, all of this is under the assumption that the right people keep their secrets safe.

With the fundamentals established, these assurances can be extended to services where Bitcoin is posted as collateral against a fiat loan. Obviously, a customer posting collateral can’t retain exclusive control over the asset — for example, the service might be forced to liquidate based on certain predefined scenarios. But there are interesting models such as Unchained Capital’s collaborative custody, where collateral posted against a loan is held in a 2-of-3 multi-signature scheme. Unchained Capital holds one key, another is with a third-party key agent (Citadel SPV), and the customer holds the final key. An auditable address for collateral is derived such that the customer can keep an eye on it, and having multiple parties involved can offer certain assurances. The third-party key agent must verify that a liquidation event is legitimate before Unchained Capital can claim those assets, while the customer can also work with the key agent to have collateral returned in the event that Unchained Capital fails or is otherwise unavailable. Remember, the business model for collateralizing loans ought not to be lending collateral back out as if the bank owns it: the model is instead to earn interest on the fiat loan. The collateral can simply be seen as insurance against default, and multisig schemes can be used to enforce this.

One final note: another reason for the deposit banks of old was for scalability. Bank notes served a legitimate use-case for divisibility and transport in a commodity money system. While there’s no guarantee for future scaling, the Bitcoin network doesn’t yet need the financial intermediary role of a money substitute, and it is hoped that the Lightning Network Protocol or a future protocol layer will provide this scalability that banknotes once provided without needing to derive centralized substitutes.

UTXO loan-banking

A clearly distinct class of financial infrastructure has also emerged in the early financialization of Bitcoin: interest-bearing accounts. If someone sends UTXOs to Ledn on the promise of earning a 3.6% return, it should be distinctly understood that the legal title to the information space encumbered by those UTXOs no longer belongs to the depositor. Rather, Ledn exercises property rights, ownership and control, with a debt owed to the depositor and interest paid out as a fee for the privilege.

As in historic loan banking, these UTXO loans function largely as you’d expect. There are typically term requirements for the deposit (the depositor can reclaim possession of the information space after a month or longer), and it is understood that the depositor is taking on the default risk of the company with which they hold this interest-bearing account.

If there is any gripe with this model, it ought to be in the marketing. Often, these products are implicitly marketed to help Bitcoin holders “start saving”. Where the loan banking model explicitly carries more risk than one would expect from a contemporary bank account (e.g. there is no lender of last resort and no FDIC-style depositor insurance in Bitcoin for now), it’s a savings account at a traditional bank that this market positioning brings to mind. To be blunt, these loans are more like an investment in the default risk of a fintech startup, while “saving” in the Bitcoin paradigm is a term best suited to securing private keys. After all, the supply cap of Bitcoin theoretically means that the purchasing power of UTXOs is preserved, unlike in the inflationary fiat paradigm where purchasing power is systematically diminished and investment is required simply to save. That aside, the fact that this loan structure has emerged clearly separated from the role of private key warehouse is welcome.

Subversion of Bitcoin

Having spelled out the features that Bitcoin offers its network participants, now isn’t the time to be complacent. Note that some companies are, indeed, engaging in practices that might simply recreate the trappings of the legacy financial system. Individual caution is needed.

I have written in the past about my thoughts regarding BlockFi, for the company appears indifferent to the opportunities of the Bitcoin protocol put forward in this article. BlockFi’s interest-bearing account is very high risk, but this is transparent enough and one might have few qualms with that (an 8.6% return on some deposits should be the only market indicator you need to establish this conclusion).

What might be worth more consideration in the context of the current thesis is that Blockfi also offers a bitcoin-collateralized loan. Presumably, one might expect the company to hold the Bitcoin collateral in an auditable, segregated wallet under a bailment relationship — as with Unchained Capital, you’d expect that their business model is to earn interest on the fiat loan being repaid while safely custodying the UTXOs posted as collateral. Alas, the UTXOs held under both the interest-bearing and collateralized schemes appear to be commingled and the company reserves the right to rehypothecate — that is, Bitcoin posted as collateral can be re-lent by BlockFi as if it were theirs, exposing depositors to additional counterparty default risk. This is very much akin to the contemporary banking system. The market is the great arbiter of such trade-offs, but given the assurances offered by the Bitcoin protocol it might be considered that competitors provide better assurances in the way they handle collateral.

Bitcoin Can Work With Banking

As most would have expected, it’s becoming very clear that Bitcoin is being financialized at a rapid rate. Fortunately, the nature of something truly scarce means that fractional reserves can not be sustained for long. Whether by design or accident, such schemes will tend to be discovered and collapse in the absence of a lender of last resort. But while this secures Bitcoin against any systemic risk — blocks will still be mined every ten minutes, oblivious to what participants do with it — such failures can cause a lot of suffering to those defrauded by them.

Bitcoin offers assurances that ought to be harnessed by alert network participants to ensure the safety of their holdings. By forcing a segregation between services akin to deposit banks (custodians) and loan banks, and demanding certain verifiable assurances from both, these services and participants alike can thrive while supporting the early financialization of Bitcoin and avoiding the trappings of Wall St. Both of these banking functions, with their different risks, are likely necessary for the ethical financialization of Bitcoin, so long as one remains alert.

Special thanks to Max Hillebrand, Ben kaufman and Ben Prentice for review and guidance, Stephan Livera for pointers and as always Thib and Daskalov for brainstorming, support and reviews.

Knox is working on the ethical financialization of Bitcoin with a focus on private key custody. If you would like to know more about how Knox can support the security of private keys, attempt to poke holes in our model or otherwise hear more, please reach out and speak to our team!


Is Bitcoin Compatible with Banking? was originally published in Knox Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Ross Ulbricht

By Ross Ulbricht

I was told there were some questions about my wave labels in BbR #9, notably the intermediate subwaves of waves Ⓑ and Ⓒ of II. If you aren’t an Elliott Wave geek, you can safely skip this. Or, if you want to become an Elliott Wave geek, jump right in!

Taken out of con

By Ross Ulbricht

I was told there were some questions about my wave labels in BbR #9, notably the intermediate subwaves of waves Ⓑ and Ⓒ of II. If you aren’t an Elliott Wave geek, you can safely skip this. Or, if you want to become an Elliott Wave geek, jump right in!

Taken out of context, wave Ⓑ could look impulsive at first glance. The 3rd wave extension in wave (C) makes wave (C) dominate the whole structure. Wave (C) is an impulse, so the whole thing starts looking impulsive. One could label (A) as (1), (B) as (2), 4 of (C) as (4) and 5 of (C) as (5). However, to me, this looks very ugly in the cycle-degree superstructure. Wave Ⓐ would have to be seen as a puny wave II that did not match the psychological extreme of wave I. Or, if you took the labels down two degrees, interpreting Ⓐ as (4) and Ⓑ as 1 of (5), the waves look way too massive to be of intermediate and minor degree. Given the choice between the three, the way I labeled Ⓑ in BbR #9 seems best.

Regarding the subwaves of wave Ⓒ, someone correctly pointed out that according to orthodox Elliott Wave Theory, there is no 3–3–3 correction. A zig-zag is 5–3–5, a flat is 3–3–5, and a triangle is 3–3–3–3–3. You can also have double (and triple) 3s in which two (or three) of the above three structures are connected by one (or two) of those structures. In that case, instead of labeling the correction A-B-C, it is labeled W-X-Y (or in the case of a triple: W-X-Y-X-Z) with W and Y (and Z) being the “3s” and the Xs being the connecting waves.

In practice, there is no difference between a double 3 with two flats connected by a zig-zag for example and a 3–3–3 structure, except you have to use the XYZ labels.

I see no reason to make the distinction and find the XYZ labeling confuses more than it illuminates. To me, it makes more sense and is easier to follow if you use ABC labeling for double 3s, so I have opted to do that here. Still, my labeling of the wave Ⓒ substructure was only tentative in BbR #9, so it may turn out that wave II is an orthodox flat, and wave Ⓒ will subdivide into 5. Time will tell.

Ross Ulbricht

by Ross Ulbricht

I was glad to hear that my last post (BbR #9) got everyone thinking and talking about the future price of bitcoins. I have mentioned it before, but I just wanted to clarify why I am doing this series in the first place. As everyone knows, I was one of the first to recognize

by Ross Ulbricht

I was glad to hear that my last post (BbR #9) got everyone thinking and talking about the future price of bitcoins. I have mentioned it before, but I just wanted to clarify why I am doing this series in the first place. As everyone knows, I was one of the first to recognize the potential of Bitcoin. I was a bit preoccupied at the end of wave ③ (I saw a chart of that peak for the first time at my own trial). But later, I saw that wave ④ was over before wave ⑤ had progressed more than 1%. And finally, I called the wave ⑤ peak on the nose, though I was unsure if it was (5) of ⑤ or (3) of ⑤.

♦Fig. from previous post (BbR #9)

Until that last call, I had kept those insights to myself, not wanting to mislead anyone, especially because my access to information is so limited from within prison. However, it felt good to help someone lock in profit at $20,000 and avoid the brunt of wave II. So, cautiously, I decided to start this series so that I might be able to help others navigate what is an extremely volatile market. It may be that I even have an advantage being in prison because I am less influenced by day-to-day events and can take a detached, long-term perspective.

Speculative markets like bitcoin are psychological traps. In hindsight, anyone can look at the spectacular rise of Wave I and say “if you just buy and hold, you’ll get fabulously rich,” but to actually do this is not easy. Those primary-degree waves (circled numbers and letters) end with extreme psychological consensus. The $20,000 peak was not that long ago. Do you remember what the consensus was like? Extreme optimism reigned. Six- or seven-figure prices were just over the horizon. Every alt-coin was the next big thing. Everything pointed to one conclusion: buy now! Anyone issuing warnings to get out were ignored, laughed off stage or buried with a thousand “good” reasons why prices could only go up.

The sad thing is the exact opposite will be true at the bottom of wave II. There will be a thousand reasons to sell, and anyone calling it a huge buying opportunity (as I have) will be ignored or worse. Or, if wave II drags on long enough, it could be that Bitcoin just becomes uninteresting, like yesterday’s news, with wave I feeling like a hype cycle that has played out. That is also a hard environment to hodl through or buy into, but to get the most out of wave II, one must.

Of course I could be wrong. No one knows the future, and no one controls this market. What I am trying to do is merely map out the most likely scenarios as I see them, so if they play out you won’t be as easily caught up in the drama of the moment and can act instead of react. Are there still short-term bullish possibilities? Yes. No view of the market is ever 100% certain, and you never bet the whole farm on it. That’s the nature of forecasting. And you must be ready to adjust your view as new information comes in.

Thankfully, you don’t need to be right 100% of the time to be a profitable investor. In fact, you can be wrong more often than not, so long as your winners are big enough and your losers small enough. I recommend “Trade Your Way to Financial Freedom” by Van Tharp for the fundamentals of risk management and systematic investing, and “The Elliott Wave Principle” and “The Socionomic Theory of Finance” by Robert Prechter for an intro to Elliott Wave and its broader socionomic context.

For those of you upset by my short-term bearish forecast, I want to reiterate I am still bullish long-term. It is possible that wave III will be even more impressive than wave I, as 3rd waves often are. If we consider $0.06 to be the start of wave I and $20,000 the end, then wave I drove prices up by 333,333x. If wave II takes prices down to $1,000 and wave III is as big as wave I, then wave III will drive prices to $333 million. Assuming 21 million bitcoins, that’s a market cap of $7 quadrillion. That’s more than ten times the current GDP of all humanity. So the point is — long term — the sky is the limit. The remainder of wave II and the start of wave III will seem like insignificant fluctuations by the time wave III is under way. Decades from now, anything below $20,000 will seem cheap.

With all that being said, what you can count on from me is my honest view of the market, regardless of how popular that may be. As noted above, it will often be most unpopular at just the times when it is needed most. In fact, if I find everyone agreeing with me, that will be a red flag and I may be in the market’s psychological trap and need to consider other possibilities!

Bitcoin and The Business Cycle
Thursday, 16 April 2020
Ben Kaufman

For centuries, production in capitalist countries seems to progress in some kind of “cycles”. Every few years, the economy experiences a period of sharp economic growth which is then upset by a collapse of businesses and a high unemployment rate — a recession. This cyclical movement of the market

For centuries, production in capitalist countries seems to progress in some kind of “cycles”. Every few years, the economy experiences a period of sharp economic growth which is then upset by a collapse of businesses and a high unemployment rate — a recession. This cyclical movement of the market, repeatedly going from an economic boom to bust, is known as the “business cycle”. Social scientists of multiple disciplines have suggested numerous explanations for this phenomenon, from “under-consumption” to some psychological propensity. Yet, so far, no popular counter-measure pursued has solved this problem. Central banks have evidently failed to “cure” this alleged “market failure”, and despite the enormous, continuous growth in their power and influence, we once again seem to be at the beginning of a devastating recession.

Despite the confidence on the side of central bankers in their ability to handle this issue, it seems that, especially since the last crisis of 2008, the public is losing patience with the current system. People are getting fed up with footing the bill for the mistakes of the financial system, and very justly so. The scheme at work is already clear and visible. The economists grievously fail, and the taxpayer pays the costs (and their salaries)¹. It’s obvious that this system cannot continue. Yet, the right alternative — the solution — is still far from obvious. Nevertheless, the mainstream and most academia appear to agree on one thing, that money must be managed by the government, that is, through central planning.

They tend to look at the economy as a machine — some kind of a black box which is running on an engine fuelled by money. The more “fuel” you throw in, the quicker the engine will go, and the faster the economy will move. While the different economic schools and doctrines usually provide different theories and explanations, their practical controversies and disagreement are primarily around at what point injecting more “fuel” would cause the “machine” to run too fast, overheat and eventually blow up. That is, how much money would be too much for the economy and lead to problems or even to hyperinflation. Regardless of the many differences between the popular doctrines, the issue of money is where you will find their most enthusiastic agreement. The money supply² must always increase! Printing, bank credit expansion, “liquidity injection”, “quantitative easing”, public deficit spending, even outright handouts — just throw it out of a helicopter if that’s what it takes — but you must never let the inflow of money slow down!³

This approach of monetary “engineering” is undoubtedly the most popular, and has guided policies for more than a century. But, considering its failure to deliver on any of its promises⁴, there seems to be a good reason for questioning this approach. In fact, if there is anything to learn from the last hundred years, it is that government control over money, namely central banking, doesn’t promote prosperity. Expanding money and credit does not cure the problem of the business cycle (or any other issues for that matter) — this approach has failed every time. The common analogy that the economy is like a machine operated by the state fueling it with money might sound sensible to some, but does it really fit? Is the theory we have learned to accept, quite by default, actually correct?

In this article, I will present the “heterodox” approach of the “Austrian school” of economics. The Austrian school approaches the questions of economics from the view of individual actions and incentives, looking at the economy as an “organic” complex resulting from the many actions of individuals. Its theory of the business cycle is probably one of its central, though most controversial, achievements. The purpose of this article, however, is not merely to explain the Austrian Business Cycle Theory (ABCT), and certainly not to justify its validity. Many other books already provide such brilliant expositions⁵. The goal of this article is to discuss the possibility of economic reform which builds upon the theoretical works of the Austrian school. My aim here is to lay down the argument for how Bitcoin could be the key to preventing the business cycle — enabling greater and more sustainable economic growth.

Economic Growth

So to begin our discussion, we shall first look at how a healthy economy grows. Adam Smith, the “father of economics,” has attributed economic growth chiefly to the division of labor, that is, to the specialization of individuals in performing specific tasks. However, there is a much more critical aspect of human progress which Smith overlooked. As Carl Menger, the founder of the Austrian school of economics explained, it is the availability of “factors of production,” that is capital, on which economic growth is dependent, and which also sets the limits for the division of labor.⁶

Capital, or capital goods, are the goods which are not used for direct consumption, but are used in the process of producing other goods, eventually reaching to consumers as “consumption goods.” Menger has explained this difference by referring to different “orders” of goods. The goods which consumers directly use, like food, clothes, and cars, are the goods of the “lowest, first order.” If we take bread, for instance, then we could say that flour is a “second-order” good in the process of producing it. Wheat can then be called a third-order good, and the land on which the wheat grew upon a fourth-order good. The order of a good is nothing inherent in it, but is rather “a product of reasoning” based on how a person intends to use it. Therefore, the same good can be of different orders when employed at different stages of production. The point here is, of course, not the assignment of the specific orders of goods, but understanding that production is a structure with varying “depth”. Furthermore, as we will now see, the higher the orders of goods we use in a production process get, that is, the “deeper” our production structure is, the more we will be able to produce.

As an example, consider a lumberjack cutting wood with an ax, as compared to another one which uses an electrical chainsaw. Clearly, the latter will be much more productive at his work, as the capital good he employs is much superior to the one used by the former lumberjack. But, it is no less clear that the chainsaw requires the employment of much higher order goods to assemble, its production process is longer and more complex. While an ax could be produced even by primitive people, from quite simple raw materials, the chainsaw requires the use of industrial equipment, like an engine and a power source, which by themselves require the use of many other goods, and so on. In other words, the chainsaw necessitates the accumulation of much (much) more capital and the use of much higher orders of goods to produce — it needs a “deeper” production structure.

Menger’s student, economist Eugen von Böhm-Bawerk, has termed this property of increasing length and complexity of production, the “roundaboutness” of production processes. The more “roundabout” a production process is, the more and higher-order capital goods it means are employed. His choice of the term “roundabout” attempts to signify a crucial concept. To produce more and better consumer goods, we must first take the time to create more capital goods. By “deviating” from the straight line we wish to follow to get to our main goal of producing the final consumption goods (like firewood), taking the additional effort and going first to produce something else (the capital needed, like the ax or chainsaw), we can manufacture much better, or a greater quantity of, final products. The process of human progress, of improving welfare and material conditions of people, could most adequately be described as the process of capital accumulation. Our development and economic growth is dependent on and limited by the availability of capital goods for production. Thus, to understand the actual process of economic growth, the next step to look at is how capital accumulation works.

Accumulating capital means increasing the level of savings that a person holds. It means withholding consumption of goods and, instead, saving them and employing them in further production. When considering an individual working alone, like a fisherman building himself a fishing rod, the process of capital accumulation is quite straightforward. The fisherman delays his “production” of fish in the present and instead takes the time to build a fishing rod. He will need to postpone his consumption of fish while producing the rod but will later be able to use it to catch many more fish. Eventually, he will have more capital savings (the rod) and will be able to produce (fish) more efficiently. However, when discussed in the framework of the market economy, the process suddenly becomes much more “abstract” and harder to follow. Therefore, it is of the utmost importance to understand the specifics of capital accumulation in the market economy.

The market economy is a system of the division of labor. It is a “framework” in which private individuals own capital, exchange goods and services, and cooperate to achieve their ends. Its most important property is the existence of a pricing system for all traded products and services, denominated in a common medium of exchange — money. Therefore, the allocation of capital in the market economy is done mostly by using the money prices of goods.

Most people tend to confuse money and money prices. When we say, for instance, that our lumberjack saved 100$ by producing firewood, what we mean is that he created something priced on the market as worth 100$. If he decided to use the firewood for consumption, he may do so either directly — for example by using it to make fire, or indirectly, by selling it for 100$ of cash, spending that on something he will actually consume. If, however, he prefers to increase his savings, he could refrain from consuming the wood, storing it for later, or using it to make new work tools (capital). Or again, as the usual course of the market economy goes, he could sell it for cash, and either save that money to spend later, spend it now on buying more capital goods to use, or lend it to or invest it in some enterprise. The more capital goods people accumulate, either directly by owning them, or indirectly, through money savings, lending, and investing, the more will the economy progress.⁷

As we now see, the most important force of economic growth is saving and accumulating capital, which requires deferring consumption of the goods produced. Therefore, we now face a new question. How long will a man be willing to defer his consumption in order first to accumulate more capital? In other words, how does a man, and eventually the economy as a whole, decide the length of production? That is, whether to focus on short term production of relatively fewer consumer goods sooner, or longer-term production, employing more “roundabout” processes to produce more (or better) consumption goods later.

The answer is that people decide according to their time preference. It is a generally accepted⁸ that all else being equal, a person will always prefer to satisfy his needs sooner rather than later (as for every person time is finite and the future is uncertain). This means that, for people to defer their present consumption, the future output expected from taking longer (more roundabout) production efforts must be high enough to compensate for this delay in consumption. Put simply, people value time, they prefer to attain their ends sooner rather than later, and the extent to which they value the present more than the future is their level of time preference.

Having high time preference, a person will be less willing to defer his consumption, and will be more present-oriented in his economic activity. In contrast, a person with lower time preference will prefer to wait longer and take more roundabout processes, as they will sufficiently compensate him for the increase in production length. We may say that the time preference of people is what regulates the length of production in the economy.

The lower time preference is, the more future-oriented people are, and the more capital they save and accumulate to enhance productivity and develop the economy.⁹

Again, in the case of an isolated economy of a single individual, there will not be much further question of how the process goes. In such a case, the same person does everything by himself. Just to clarify, retaking the example of a fisherman, if his time preference is relatively high, we will not be willing to defer his consumption to make the fishing rod first. However, if he has a low enough time preference, he will prefer this more “roundabout’’ process of making the fishing rod while catching no fish at first and then use it to increase his productivity. But as we said before, the process looks different when we introduce the division of labor of the market economy. In the market, production is directed according to consumers’ demand¹⁰, reflected through the price system.

Time is a factor of production. In fact, it is the only factor of production without which no production is possible. As such, time, that is, the time preference of the consumers, also has its money price in the market, namely, the interest rate. The interest rate is the price required to withhold capital from others for a certain time¹¹. As people save more, thus lower their time preference, it means that they are willing to delay their consumption for a lower “compensation”¹² compared to what they used to, and will accordingly offer their funds at a lower cost (interest rate).

As the interest rate gets lower, capital becomes cheaper for entrepreneurs to obtain. Projects which were previously too long or too capital intensive to be profitable suddenly become viable investments, as more capital is available at lower costs. Thus entrepreneurs will find it profitable to expand their businesses and open new initiatives, and consequently will expand and deepen the production structure by taking more roundabout production processes. What happens is that, by taking on more loans (or investments) from savers, entrepreneurs will be able to purchase the capital saved by the people who lowered their time preference (as lower time preference means more saving). This is how new capital accumulated gets into the production structure of the market economy, how resources are mobilized and the division of labor taking place. Prices serve as the guiding indicator for producers in the market economy, and the price of time, the interest rate, serves as an especially important indicator, as it is present in all imaginable processes of production and regulates their length and use of the available resources.

As these more roundabout processes of production mature, there will be a greater supply of goods (could be both capital and consumption goods) in the economy. People will then be able to lower their time preference and increase their savings without diminishing (or even while increasing) consumption. In a sense, there is a positive feedback loop, where lower time preference and longer-term view allows production to expand, eventually making more goods available, allowing to reduce time preference even further and so on. This is the process of civilization, by which humans have raised themselves from poverty and destitution to the modern prosperity, relative to past generations, that we have today.

♦The Business Cycle

So far, we have not seen any issue which should lead to the appearance of the business cycle — the recurring periods of great economic boom followed by a collapse of projects throughout the whole economy. So now we shall turn to our main problem here, what, indeed, is the cause of the business cycle?

According to the Austrian theory, developed initially by Böhm-Bawerk’s student, economist Ludwig von Mises, the root of the problem is to be found in the intervention of governments and central banks with the money supply, more accurately, with their efforts to increase the money supply and expand credit.¹³ In simple terms, what credit expansion means here is the creation of money, out of thin air.¹⁴ There are many ways today by which governments aim to expand credit, like Quantitative Easing, fractional reserve banking¹⁵ — which is insured by the taxpayer (implicitly or explicitly) and fully regulated by the state, and various other accounting schemes and financial “tools.” Still, the essence of all those schemes is to increase the supply of money and credit in the economy, essentially out of thin air.

So what are the effects of such credit expansion on the process of economic progress we have discussed thus far? The initial effect from such credit expansion will be a drop in the interest rate. As the new money finds its way to (or, as usually happens, originates in) the banking system, banks will be in a position to offer cheaper loans, simply from having a greater supply of money available. This reduction of the interest rate has, for a long time, been the main (declared) objective of governments when pursuing credit expansion.

As we have seen, a lower (natural) interest rate is indeed correlated with economic growth, as it reflects lower time preference. From this, many economists have taken the leap to the conclusion that a lower interest rate promotes economic growth, and that it is therefore the government’s responsibility to push it as low as possible. However, we know that the interest rate is not like a metric on a machine, it is the reflection of the time preference of people. Attempting to promote economic growth by lowering the interest rate with credit expansion is like trying to “promote” rain by pushing down the pointer on a barometer. You will achieve nothing more than rendering the barometer defective and cause those who rely on it to make wrong projections. This is exactly what happens with the interest rate. As we said, entrepreneurs and businessmen rely on the interest rate to determine the length and complexity of their production efforts. The interest rate is their indication for how much capital is available to use for production. As central banks lower the interest rate, it lures entrepreneurs into expanding production and to commit to more roundabout processes than they otherwise would have taken. It distorts the economic data guiding entrepreneurs, leading them to make systematic errors, and ultimately misallocating capital.

At first, the expansion in production will cause an apparent economic boom, with more businesses opening, new constructions launching, wages rising and a general increase in economic activity. Nevertheless, this economic boom is necessarily unsustainable, as it relies on a defecting indicator for capital availability — the artificially low interest rate.

The essential problem caused by the artificially low interest rate is that it creates the illusion that there is more capital available for production than there really is. A “real” drop in the interest rate comes from a drop in the time preference of people, from the greater accumulation and saving of capital. The price system is the information system of the market economy, and the interest rate is the indicator informing entrepreneurs of changes in savings, in the capital available for production. However, when the government artificially lowers the interest rate, there is no change in the available capital. People did not reduce their consumption, nor did they increase their savings in any other way. There is no new capital to use in production, but with the artificially lower interest rate, entrepreneurs already rely on the existence of such additional capital in order to complete their expanded production processes. In other words, the increase in production started during the boom is unsustainable, it is impossible to complete, and will therefore have to end with a collapse.

But let us take a moment to see what this process would actually look like. With lower interest rates, as we said, entrepreneurs will expand production. They will take on new loans and use them to buy more capital goods. Now, since the supply of capital did not increase, but the demand for it from entrepreneurs rose, the prices of capital goods will have to rise to match the new demand. As the prices of the higher order goods rise, entrepreneurs will be forced to take new loans to obtain the capital they need to complete production. There will be a higher demand for loans and the interest rate, still artificially low, will be pushed back to the level where it corresponds to the true time preference of people. With the interest rate back up, and with the prices of capital goods adjusted to the new money supply, the shortage of capital to complete all production becomes apparent. The submarginal projects started during the boom, or malinvestments, as Mises called them, will again appear as unprofitable and will have to be liquidated. The final result of this process is a massive collapse of businesses across all the economy and a consequent high unemployment, that is, a recession.

During the recession, malinvestments are liquidated, and the capital invested in them is either lost or reallocated to more profitable projects. The recession is, in a sense, the re-adjustment of the market to the real capital and time preference of people. It is the market curing itself and recovering, wiping out the mistakes made on the basis of distorted information, stopping to waste scarce capital on unrealisable projects, and reallocating capital based on the corrected information.

In short, the business cycle is a period of unsustainable expanded production, induced by lower interest rates, followed by the realization that the expanded production is unsustainable, and the consequent collapse of businesses.

So what can we do to stop the recession? Unfortunately, once credit expansion has started causing the illusory economic boom, the eventual bust is inevitable. Capital is being wasted, and there is no way to make such malinvestments truly sustainable. Yet, basing their efforts on a different theory, governments and central banks still believe it is possible to artificially “combat” the recession by accelerating credit expansion even further. However, their repeated failures to handle those cycles leaves us a very good reason to question their theories and approach.

If the government pushes credit expansion even further, it will be able to reduce the interest rate again, essentially returning us to the first step of the cycle, but with the malinvestments made continuing to waste additional capital. Still, it is crucial to understand that they cannot do this forever. The boom is unsustainable, and preserving the malinvestments it induced by lowering interest rates at an accelerating pace will not change this fact, but only postpone it from being exposed, further delaying an amplified and inescapable market adjustment. Eventually, either capital is exhausted or a hyper-inflation ensues.¹⁶ Delaying the bust only aggravates the issue, causing a greater bust later, as it allows malinvestments to continue to waste scarce capital.

As the cycle becomes inevitable once the interest rate is distorted, the only way to stop the business cycle is to prevent interest rate manipulations. That is, we must prevent credit expansion from taking place. This is the approach taken by the Austrian economists, of which many, including Mises himself, suggested such reforms for preventing credit expansion. These were usually along the lines of returning to a rigid gold standard, having free market competition in money, or making large banking reforms, but among all their proposals, two, unfortunately contradictory, things are common.

First is their goal — their essence is limiting the power of governments and their control over money and credit. Second is their practical approach, which essentially amounts to limiting the government’s power *by asking the government* to limit itself. Such a thing is quite unprecedented. Governments will not voluntarily reduce their power over anything, nor will they admit of making such a huge mistake as causing business cycles for so many years, as adopting any such proposal must mean.

Many of the Austrian economists have realised this fault in their works to achieve any practical result, which led Friedrich A. Hayek, Mises’s most well-known student, to the following conclusion:

“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.” — F. A. Hayek

This is precisely where Bitcoin comes in. While Hayek’s quote is from 1984, about two and a half decades before Bitcoin was invented, hardly anyone has ever described Bitcoin better than that. The idea of Bitcoin, as Satoshi wrote, is to create “a peer to peer electronic cash system”. That is, money which is operated by a global and open network, without depending on any central authority. No single participant or a specific group is necessary for operating Bitcoin — no one can shut it down, because there is no one Bitcoin depends on to continue to work. It is as Hayek said, a system which takes “the thing” (money) out of the hands of government, and that they can’t stop.¹⁷

This is the most important difference between Bitcoin and gold, which most Austrians still currently endorse. The gold standard was operated by governments and banks, and cannot work without such a system of a few central institutions holding most of the gold reserves. Without such a system, all gold payments will have to be physically delivered. Such an option was already impractical decades ago, but today, with all the digital payments made, it is just unthinkable. This means that the gold standard can only function if approved by governments, but is doomed as soon as the political attitude shifts unfavourably. It is this very weakness of the gold standard that enabled governments to effectively confiscate it (Executive Order 6102) and eventually completely remove it (Executive Order 11615). This weakness of gold is what Bitcoin aims to fix. It is “an unstoppable force” — money which does not ask for permission from politicians to operate.

Bitcoin and the Business Cycle

But assuming for a moment the use of Bitcoin as money, there is still the question of how would it help prevent the business cycle? Bitcoin has a few notable attributes in this regard.

First, Bitcoin has a predetermined fixed supply limit. It is produced by a mechanism of proof of work, a digital “gold mining” like process, and limited to 21 million units ever to be created. This is slightly different from gold, where mining can continue to unknown extent, but the important property they share is that their supply cannot be manipulated by government decree. No paper signed by politicians could make more Bitcoin or gold appear, unlike the system of fiat money we have today. This means that, with Bitcoin, governments will not be able to inflate the base supply of money. This is the first necessary step towards limiting credit expansion in the economy. But, while necessary, it is not enough by itself, as it still does not directly limit the ability of banks to expand credit.

This leads us to the second important way by which Bitcoin could help prevent the business cycle, and on which we have already touched briefly. It is the fact that Bitcoin works without intermediaries, it is peer to peer cash. It allows people to hold their money by themselves, without having to give (more correctly, lend)¹⁸ it to a bank to be able to make transactions. This will ensure a clear separation between money held by individuals for their regular expenses (as cash balances), and the money they wish to save and can be invested productively in the economy through the banking system. In other words, it could limit the part of the money, the reserves, held by banks, thus limiting their power to excessively expand credit. When people can use their money — without relying on financial institutions to make the transactions — they can choose what amount they wish to hold themselves to transact from, and what they prefer to save and invest in the economy, and entrust banks with managing the latter. Such a system will make sure that the supply of money and money substitutes (credit) in circulation remains stable, preventing credit expansion and the consequent business cycle.

Even if banking for “demand deposits”, that is for money held for regular expenses, continues, the fact that Bitcoin has a rigid supply will force banks to be responsible with their credit issuance or they will risk a bank run. Furthermore, since Bitcoin is a digital asset, it is much cheaper to store, verify and transfer than with physical assets. That is, Bitcoin does not need a Fort Knox to benefit from economies of scale in storing and handling it. Therefore, the barriers of entrance for new competing banks will be lower, and there will be better grounds for free competitive banking. This improved competition could force banks to be more responsible in managing reserves¹⁹, thus limiting credit expansion more effectively even in such a “free banking” scenario.

The Road Ahead

Now that we see the main economic reason for transitioning to Bitcoin, we can discuss how such a transition could take place. In fact, I would argue that this transition has already started. In just about a decade, Bitcoin has grown from being a mere idea on a mailing list to a global network serving millions of people, having cleared trillions of dollars worth of transactions. Many businesses have already started accepting it, people are hodling it, and we may even say that there is a new, alternative, financial system already developing around it. Despite the impression some people get from its short-term price volatility, the trend is clear, Bitcoin is going forward. It is not waiting for politicians to approve it (like gold or Libra do), or central bankers to adopt it, or for “economists” to embrace it — it is growing in spite of their current objections.

This present trend though is by no means inevitable. While it is unlikely that Bitcoin itself can be stopped, its adoption could very well be. In the end, Bitcoin is just a tool available for people, but it is the public which decides if they wish to pick it up and use it. Like with all other economic and political changes, the success of Bitcoin depends on public opinion. It is not enough that we have Bitcoin if people don’t see its benefits, or refuse to use it. Unfortunately, the most prevalent views of today, both in economics and politics, see Bitcoin as useless, harmful and even “evil”. The idea of money not controlled by the state is rejected by all popular doctrines of today, and the only view somewhat receptive to it, that of the Austrian school, has been on the losing side of public opinion for many decades.

However, it seems that together, by combining Austrian economics as a theoretical framework, with Bitcoin as the practical approach, we could have an incredible opportunity to sway public opinion. While the Austrian framework provides the theoretical explanations of the benefits of having sound, hard money, Bitcoin demonstrates them in reality. And while it is unclear what further consequences would result from adopting Bitcoin, the Austrian approach to economics can clarify that. The Austrian view is the only one which is able to provide an explanation for the success of Bitcoin, and even simply for its existence. In other words, Bitcoin exposes the public to the possibility of having a different kind of money, not controlled by the state, while the Austrian theory explains why such money can be so beneficial and desirable. Every day in which Bitcoin continues to operate is a slap in the face of the mainstream economists. It is a living proof that their theories might not be right after all. That the free market does not need the state to set and manage the money, and can produce a better monetary system by itself.


To briefly summarise, the unique properties of Bitcoin — being digital, peer to peer, unstoppable hard money, have the potential to make a real transformation in the economy, preventing the business cycle and allowing for sustainable economic growth.

For millennia, governments were entrusted to manage the money for their citizens, but history is flooded with examples where this power was abused.²⁰ While in the past, such abuses were shameful acts committed secretly by rulers against their citizens (like coin clipping), today — in the age of populism — the rulers are no longer ashamed of it, but to the contrary, they proudly announce those acts, backed by the “intelligentsia” providing excuses for how this is done “for the people” to “stimulate the economy”.

As Mises explained on the essence of sound money:

“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the non-observance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage. It was later carefully elaborated and perfected in the age which — through the experience of the American Continental Currency, the paper money of the French Revolution and the British Restriction period — had learned what a government can do to a nation’s currency system.” — Ludwig von Mises

Money is the backbone of the market economy, it is what coordinates the action of everyone, which is why it must be neutral — resistant to manipulations and forced debasements. It is time that we take the thing out of the hands of the state, back into the hands of the people. It’s time to move to Bitcoin.

[1]: There are enumerable examples of such cases, just for example: Former U.S. Federal Reserve Chairman Yellen’s contradictory statements: 1, 2 Economist J. Stiglitz’s failure to see the issues of Fannie Mae and Freddie Mac
[2]: In the broadest sense, including both money and money substitutes.
[3]: This might be disputed as an oversimplification, but I would maintain it does not distort the essence of the practical recommendations of the popular economic schools (new/post/Keynesians, Chicago, MMT)
[4]: See this article on the failure of the Federal Reserve system to achieve its goals.
[5]: Some notable examples are: ”Human Action” by Ludwig von Mises, “Prices and Production” by Friedrich A. Hayek, “Economic Depressions: Their Cause and Cure” by Murray Rothbard, and “Money, Bank Credit, and Economic Cycles” by Jesús Huerta de Soto”.
[6]: “The Causes of Progress in Human Welfare” — Carl Menger, “Principles of Economics” 71–74.
[7]: For a comment on the difference between savings as “hoarding” and savings as lended and invested money see mises.org/library/analysis-relationship-between-hoarding-investment-and-economic-growth
[8]: Or at least axiomatically assumed, since time is both scarce and necessary for any action.
[9]: This does not express any value judgments, a person with high time preference will in the long run produce less compared to another identical person with lower time preference, but this is his preference, it is the option which he believes serves him better.
[10]: See the following article to avoid confusion on the matter of demand and production: medium.com/@ben_kaufman/keynesian-errors-on-time-and-demand-80eeae2c7110
[11]: It is worth mentioning that the interest rate as seen on the market includes more than just the pure “reflection” of time preference. For instance, the most notable of these other components of the interest rate is a premium on the risk of default. Yet, all other influences on the actual market rate of interest are secondary, since they are not a necessary part of the phenomena of interest rate. Only the pure “reflection” of time preference (the “originary” interest rate) is necessarily taken into consideration when a people set their interest rates.
[12]: By “compensation” I do not mean some guaranteed reward merely for delaying consumption. The compensation is the expected value to be gained from withholding consumption, instead using the resources productively (either directly or through lending/ investment), thus gaining higher output.
[13]: Note that with credit expansion, I refer to credit issued beyond the limit imposed by voluntary savings, not to any form of credit.
[14]:I shall leave out the discussion on money vs. money-substitutes as irrelevant for today’s financial situation, when the distinction became quite irrelevant.
[15]: I will leave out the discussion on the influence of FRB specifically too. While there is a strong case for why FRB in a free market will not cause credit expansion, today banking is so far from a free market that it is almost nationalized, which makes the discussion irrelevant. Here are the main cases for and against in the controversy: 3 part serious by George Selgin: www.alt-m.org/2018/08/16/fractional-reserve-banking-and-austrian-business-cycles-part-i/. Paper by Jesús Huerta de Soto: mises.org/library/critical-note-fractional-reserve-free-banking-0
[16]: mises.org/wire/era-boom-and-bust-isnt-over
[17]: The entire idea of Bitcoin is based on this assumption, this axiom: github.com/libbitcoin/libbitcoin-system/wiki/Axiom-of-Resistance
[18]: Since the legal case of Foley v Hill, all bank deposits are officially considered loans given to the bank, and are therefore the property of the banks, not of the depositors. en.wikipedia.org/wiki/Foley_v_Hill
[19]: In order not to be drained by their customers or by other banks.
[20]: You can find a description of multiple such cases in “Money Dethroned: A Historical Journey” by Emil Sandstedt.

This article is based on a lecture given at the Value of Bitcoin Symposium which took place in March 2020, Vienna. The full video of the lecture is available here

Special thanks to Ben Prentice (mrcoolbp), David Lawant (DavidLawant_BTC), Emil Sandstedt (bezantdenier), Keyvan Davani (keyvandavani), Thibaud Marechal (thibm_), and Stefanie von Jan (stefanievjan) for all the feedback I received from their reviews, comments, and suggestions which helped me shape this article.

Bitcoin and The Business Cycle was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.

Gabriel Shapiro
♦The Growing Relevance of Decentralization to Law

In recent years, “decentralization” has become an important concept for purposes of the law. Consider:

  • Regulators such as the Securities & Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) have recognized
♦The Growing Relevance of Decentralization to Law

In recent years, “decentralization” has become an important concept for purposes of the law. Consider:

  • Regulators such as the Securities & Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) have recognized that the applicability of financial regulations to blockchain systems can depend on the degree of control people have over them, with certain regulations being inapplicable when a system is “sufficiently decentralized” or “non-custodial”.
  • U.S. politicians have even learned to discern among decentralized cryptocurrencies and centralized cryptocurrencies, and to view the centralized solutions with more skepticism, as evinced in the U.S. Congress’s recent hearings on Facebook’s Project Libra.
  • Courts have held that the decentralized, trust-reduced nature of blockchain systems can affect how property laws and tort claims are interpreted — for example, the information in blockchain systems can form a foundation for property rights in tokens such as Bitcoin, even though information is typically not treated as property in other contexts.

Unfortunately, lawyers, regulators and politicians might not always fully understand or explain what they mean by “decentralized”, nor why they believe decentralization has legal significance. Worse still, there is not even a clear non-legal meaning of “decentralization”. Some argue that even fully read-/write-unpermissioned blockchains like Bitcoin are not decentralized, while others have argued that blockchains like Bitcoin and Ethereum are truly decentralized but other systems (like enterprise blockchains) are not.

The purpose of this article is to remind people that understanding when a system is decentralized for legal purposes is a critical task, to explain in more detail what I think a reasonable legal test of “decentralization” will look like and to encourage other attorneys and technologists to work on this important issue.

Why Do We Need a Legal Test for Decentralization?

Much has already been written about why the law does apply or should apply differently to decentralized systems than centralized systems. Thus, I will not attempt an in-depth policy justification of that position here, but for the most part will simply assume it is true. For those who may doubt the premise, I would suggest reviewing some or all of the resources listed under the endnotes for this article.

Assuming the law applies differently to a “sufficiently decentralized” system than to a centralized system, it is imperative that lawyers, judges, regulators and others involved in the legal industry develop a common understanding of what “decentralization” means. Otherwise, they will not know how to apply the law. I believe that a test for when a system is decentralized will be the best way of creating a consistent understanding.

A Legal Philosophy Interlude — Principles vs. Standards vs. Rules

The task of explicitly building the concept of “decentralization” into law could be approached in various ways, each of which has pros and cons.

The pros and cons of formulating laws as principles, standards or rules have been discussed extensively in legal philosophy generally, as well as specifically in the context of securities law reform. Although the subject is nuanced, in general it may be said that:

  • A principles-based approach is the most flexible and likely to yield consistently sound results, but is slow and provides little ex ante certainty to market participants.
  • A standards-based approach is slightly less flexible while still having many of the advantages of a principles-based approach, but provides more clarity and predictability — though still typically will require extensive and costly legal analysis (the “Howey test” being a great example).
  • A rule-based approach is the most clear and provides the most ex ante certainty with the lowest transaction costs, but therefore must also be the most conservative and probably yield many ‘false negatives’ — i.e., proscribing activity that would be considered legitimate under a more principles-based or standards-based approach.

The best legal systems combine the strengths of all three approaches to the law. U.S. securities laws provide an excellent example of this tripartite strategy. For example:

  • Section 4(a)(2) of the Securities Act of 1933 (the ’33 Act) exempts from SEC registration requirements “transactions by an issuer not involving any public offering”;
  • standards and practices about the meaning of “public offering” developed over some decades, through court opinions, regulatory action and consensus of the legal profession; and
  • in 1982, the SEC implemented Regulation D as a bright-line, non-exclusive “safe harbor” defining some clear circumstances in which a securities offering would not be deemed a “public offering” — such as a sale only to accredited investors.

It is important to note that, in this evolution from principles to standards to rules, the rules do not override the standards, and the standards do not override the principles. Instead, all three forms of law remain available to market participants, who may select among them depending on their needs and risk appetite. A market participant who is highly risk-averse or cannot afford (in time and/or money) the costs of a very bespoke approach will opt to take advantage of the bright-line safe harbor rule. A more sophisticated market participant can, if they so wish, retain advisors to help them structure an offering that is legally compliant when considered in light of the deeper principles and policy considerations embodied in the statute.

My contention is that it should also be the same way with determining the law around “decentralization.” First, we need a flexible, rich and nuanced jurisprudential standard for assessing when a system may be sufficiently decentralized. Then, Goodhart’s law notwithstanding, there should also be a clear, bright-line “safe harbor” encompassing a subset of systems for which it is particularly obvious that they are decentralized, and market participants who wish to do so should be able to follow the conservative path set out in that safe harbor without fear of legal reprisals. Of course, non-legal principles of blockchain governance will continue to play a role, and should inform how the legal standards and rules are applied; a great example is Donald McIntryre’s “10 Principles for Blockchain Governance”.

In this article I will attempt to propose both a more flexible standard and a bright-line safe harbor for assessing whether a blockchain system is decentralized as a matter of law.

A Taxonomy of Blockchain Power Forms

In order to determine whether a blockchain system is “decentralized,” we must first itemize the various potential forms of power over a blockchain system. Only if control over each of them is “decentralized” should the system as a whole be considered to be clearly and indisputably “decentralized” as a matter of law.

1. Validation Power

Validation power refers to the ability of persons participating in or relying on the network to read and validate its data. Aside from certain read-permissioned enterprise blockchain systems, the validation power of most blockchain systems is decentralized because the blockchain data is freely accessible to anyone through the peer-to-peer network and uses a cryptographic scheme that enables any person with the right software and understanding to independently verify the validity of state changes by running the data through cryptographic checks. Decentralization of validation power also requires that all relevant software code be publicly available for review and operation.

Since decentralization is not all-or-nothing, some blockchain systems may decentralize validation power better than others. A blockchain system with serious “state bloat” may require such a large amount of data to be downloaded and validated, or the state transition rules may be so computationally challenging, that only enterprise-grade computer systems are up to the task. The validation power of such a blockchain system is still decentralized, but not as decentralized as in a system that is more lightweight and can be affordably and quickly validated by consumer-grade equipment. Validation power on the system with heavier state should be considered to be less decentralized than on the system with lighter state, but may still be sufficiently decentralized for purposes of the law.

2. Consensus Power

Consensus power refers to the ability of persons to write data to the blockchain. To write data to the blockchain is typically a two-step process: (1) a properly formed proposal to add a block must be made; and (2) that proposal must be accepted by the other nodes on the network in accordance with the consensus protocol embodied in the software client(s) those nodes are running.

Because Step 2 (accepting blocks) is essentially automatic and passive, Step 1 (proposing valid blocks) is the primary vector for potential “attacks” on the system. Thus, most protocols permission the power to propose blocks:

  • In open proof-of-work-based systems such as Bitcoin and Ethereum 1.x, block production is permissioned by the protocol’s requirement that valid block proposals be accompanied by a hash meeting certain criteria, which can only be generated by running real-time computations on expensive computer hardware. Yet, anyone who has such hardware can propose a block— they do not need to be accepted into the network based on identity.
  • Delegated-proof-of-stake blockchains such as EOS and Cosmos protect against sybil attacks by only allowing a finite number of identified block proposers who are elected to serve that role. Their permissioning is identity-based and election-based.
  • Direct proof-of-stake systems use a stake-weighted random block proposer and validator function, which allows them to have an indefinite number of potential block proposers whose incentives are secured by their stakes. Overall permissioning takes the form of having put up stake, and per-block permissioning takes the form of randomness.

Since the power to propose blocks is, in one sense or another, permissioned, it is also scarce and therefore valuable. Therefore, the circumstantial prerequisites of block proposal power may be analogized to ownership of the “means of production” within traditional capitalist economies — a “means of block production,” as it were.

When a single person or group of affiliated persons controls a very large percentage of the means of block production, that person or group also controls the consensus power of the network for most practical purposes, because the blocks proposed by that person or group will outpace those proposed by a minority of block producers and will be accepted and added to the blockchain automatically by the other nodes on the network in accordance with the consensus rules. This gives rise to the notion that consensus attacks on a blockchain, such as the notorious “double spend,” are possible.

The possibility that some person or affiliated group of persons could dominate consensus power reveals that, at least in the short term, the integrity of all blockchain systems depends on an honest “majority” assumption. Depending on the architecture of the protocol, “majority” may mean different things — in some cases even control of less than 50% of the means of block production can effectively provide control over the blockchain system. For example, on the EOS protocol, an honest majority means 2/3rds of block producers are honest, so control of 34% of the block producers would be enough to credibly threaten a consensus attack.

For a blockchain system to be considered legally decentralized, the consensus power, and thus the means of block production, should be decentralized. For example, on EOS, 2/3rds of block producers should be not only honest in practice, but also unaffiliated such that the honesty of each must be and can be tested separately. If it turned out that 2/3rds of EOS block producers were all entities owned by the same parent corporation (or were otherwise closely affiliated — for example, operating under a joint venture agreement providing for shared governance and incentives), the consensus power on EOS would not be decentralized.

Decentralization of consensus power may be less important technically and economically than it is legally. It has been persuasively argued that consolidation of hashpower in proof-of-work systems is unlikely in itself to result in consensus attacks, because the block producers, although powerful, have strong incentives to preserve the value of their capital by maintaining the integrity and neutrality of the system. This could be considered a reason why decentralization of consensus power is not important in assessing when a system is sufficiently decentralized as a matter of law.

For purposes of the law, however, this pragmatic consideration has limited implications. Regulatory law is paranoid and proactive. Thus, it does not merely seek to punish bad behavior by the powerful after they have abused their power, but should impose disclosure and compliance obligations to prevent harm by those who are particularly well positioned to inflict it. For example, under SEC rules, directors and officers of public corporations are not only required to disclose their bad conduct, but are required to disclose their structural conflicts of interest and lawful self-interested transactions.

From a purely legal standpoint, regulations or heightened duties of disclosure and care should apply to affiliated miners or other types of block producers who dominate the consensus power of a network to the point where they could inflict significant damage if they wanted to, even if they have good incentives and in practice have not (so far) abused their power. Thus, consensus power should always be considered in assessing decentralization.

However, in systems with otherwise good cryptoeconomic incentives (such as the non-repurposable sunk capital costs assumed by PoW ASIC miners), concentration of consensus power may be the least worrisome form of concentration of power. Thus, it may be that there can be significant concentration of consensus power, but the system as a whole may still be decentralized if there is competition for the means of block production and the persons who own the means of block production do not also possess a significant amount of other forms of power over the system.

3. Protocol/Client Power

Protocol power refers to the ability of persons to define or influence the blockchain system’s protocol.The protocol is comprised of various rules and procedures, including rules and procedures for determining which version of the blockchain is considered canonical, the circumstances under which new tokens can be minted, the validity and ordering of transactions, the range of allowable scripting logic and other matters defining how the blockchain system should operate.

Client power refers to the ability of persons to change the code of the software clients run by nodes on the network. Client power is closely related to protocol power, because the protocol must be expressed and implemented in the code of the software clients. People who wish to transact on the network must either download and run these clients or (via APIs) route transactions through others who have done so.

Protocol power and client power are theoretically separate. In Bitcoin, BIP 0014 introduced a distinction between the Bitcoin protocol and the dominant Bitcoin client, Bitcoin Core — a distinction that is expressed by creating a separate versioning scheme for the protocol. In practice, however, protocol power and client power tend to blur. For example, the Bitcoin Wiki’s entry on protocol documentation states that “[t]he Bitcoin protocol is specified by the behavior of the reference client,” and the reference client is defined as Bitcoin Core.

Although nodes on Bitcoin and Ethereum are in fact using a variety of clients, each network has a clear dominant client — Bitcoin Core in the case of Bitcoin and Go-Ethereum (Geth) in the case of Ethereum. Developers for these “core” clients have the most funding and influence. Maintainers of the minority clients tend to make conforming changes from the core client without significant political debate. I am unaware of any past situation in which the maintainers of the minority clients, for political or philosophical reasons, affirmatively refused to adopt a protocol change that was implemented by the maintainers of the dominant client. Accordingly, for purposes of testing decentralization, I will discuss protocol/client power as a single form of power.

Protocol/client power tends to be permissioned. For example, only a few individuals have “merge authority” over the official code repositories for Bitcoin Core and Geth. These persons are typically referred to as “core ‘developers,” and I will adopt this terminology going forward. Most of the time, core developers are not expressly acting agents or fiduciaries of any other person in pursuing their core development work, meaning that they can make changes to the client at their discretion. On the other hand, those individuals may also be funded by other sources of potential centralization — for example, by a “Foundation” which controls all or most of the capital generally available for funding development. These funding relationships may create agency-like pressures on core developers even if there is no formal or legal agency relationship.

Because protocol/client power is held by core developers, such power may superficially appear very centralized. However, there are at least two very important checks and balances on such power: (1) the clients for most blockchains (including Bitcoin and Ethereum) are open-source software; and (2) with certain exceptions (such as Tezos), the core developers do not have the power to push a client update to the nodes running the client on the network or otherwise compel persons running nodes to adopt a client update.

The combination of these two factors means that the broader community of people running nodes on the network — including miners, cryptocurrency exchanges, hobbyists, dApp providers and others, who for simplicity I refer to collectively as “users”—also have power. The users must (again, with certain exceptions, such as Tezos) voluntarily and affirmatively accept any new version of the client, and (in theory) have a viable alternative to doing so: They can continue to run the prior version of the open-source client, or can modify the new version of the open-source client to remove any changes that are objectionable and run that modified version. I refer to this countervailing power as “user power,” which is analyzed in a separate section below.

The nuances involved in measuring protocol/client power do not end at pointing out the balance between core developer power and user power. Even without taking user power into account, client/protocol power may be more decentralized if the core developers receive funding from various unaffiliated sources (rather than a single Foundation) and the commit process involves a complicated multisig scheme where keys are held by unaffiliated individuals.

The existence of multiple clients, while it has not to date been a significant catalyst of protocol politics, may operate as a subtle constraint on the discretion of the core developers, since if the maintainers of another client that has substantial popularity dissent, there is a risk of a contentious protocol fork and thus also a contentious network/chain fork.

Fear of potential legal liability for causing users to lose funds, though it has yet to be tested by the courts, likely operates as a similar subtle constraint, which core developers have sometimes expressed being conscious of. Core developers will also tend to care about their reputations, which would be harmed by bad conduct or mistakes.

Just as protocol/client power can be less centralized than it superficially appears, user power may not be as effective of a counterbalancing force in practice as it is in theory. The damage users can suffer from a contentious protocol/network fork mean that those who would like to dissent from a protocol/client upgrade must weigh the value of their dissent against its cost. If the name of the system and/or ticker symbol for the cryptocurrency are trademarked and that trademark is owned by, say, a Foundation, that Foundation has very potent protocol/client power, because it gets to decide legally which version of the protocol/client can use the trademark.

Accordingly, only protocol/client upgrades which are either extremely objectionable to a minority-in-power of users, or are (weakly or strongly) opposed by a majority-in-power of users, will fail to be adopted. Moreover, core developers are free to bundle protocol/client changes together so that users who object to one aspect of the changes will still accept the new version because they agree with other aspects. Finally, many users may be uninformed or apathetic — the classic ‘free rider’ problem — yet, unlike passive stockholders in a corporation, do not have ‘representatives’ advocating for their interest in a fiduciary relationship. These types of factors subtly constrain user power and make user adoption of a client upgrade, by itself, an inadequate measure of protocol/client consensus and legitimacy. Thus, in systems like Bitcoin and Ethereum, core developers’ power is checked by user power only in extreme cases, which is not as good for decentralization as if user power were a potent check on core developer power across the full spectrum of potential protocol/client changes.

Arguably, separation of concerns — separating the governance mechanism from the upgrade mechanism — could deliver better decentralization of protocol/client power. As noted above, Tezos is dissimilar to Bitcoin and Ethereum inasmuch as it allows protocol/client updates to be ‘pushed’ to users, which in itself would seem to be an indicator of centralization. This might make Tezos look more centralized, but Tezos has other checks on protocol/client power — including a less clear division between core and non-core developers and a token-voting mechanism for approving client upgrades. However, the Tezos approach has other disadvantages and has sometimes been described as plutocratic, because it shrinks the class of “users” (as I have defined it) to token holders only, and thus risks sacrificing the possibility of richer political debates accompanying a proposed protocol/client change. For more on this issue, see under “User Power” below.

4. Economic Power

Economic power refers to the ability of persons to affect token price through the funding of research and development or token trading activity.

Although economic power may sound complex and difficult to measure, in practice I believe the main sources of economic power are ownership/control of a sizable percentage of the blockchain system’s native token and ownership/control of capital that was raised and set aside for research, development and/or marketing purposes by selling the token in an ICO, IEO or other similar investment scheme.

An example of a blockchain system with highly concentrated economic power would be MakerDAO, because the Maker Foundation has sold MKR tokens to investors, controls the capital from such sales, controls a substantial percentage of MKR tokens and through such MKR tokens controls parameters of the system that can auction new MKR tokens at any price. An example of a system with somewhat more decentralized economic power would be ZCash, where the development fund is co-governed by a non-profit Foundation and a for-profit technology company, which are legally required to be unaffiliated under the terms of their agreements, and the spending of the fund is managed by a board which is additionally required to have representation that is independent from both the Foundation and the technology company. (Incidentally, the ZCash trademark and logo are also jointly owned by the Foundation and technology company.)

Of all the forms of power over a blockchain system, economic power is the most potent, because it overlaps with the other forms of power. In proof-of-stake systems, economic power may overlap substantially with consensus power. If a person with substantial economic power over a proof-of-work system also has substantial consensus power through ownership of mining ASICs, that person may have much greater control over the system as a whole than would an ordinary dominant miner. Economic power representing control over capital earmarked for the system may also overlap with protocol/client power, since ordinarily he who controls the purse strings for funding the protocol and client also controls the protocol and client themselves. In systems with on-chain governance, economic power may also overlap substantially with both user power and (more directly than through funding mechanisms) protocol/client power.

Accordingly, in any legal test for determining decentralization, economic power should be assessed the most stringently of any of the forms of power over a blockchain system. Thus, while a relatively high concentration of consensus power may be tolerable in a system like Bitcoin while still asserting that Bitcoin is legally decentralized, a similarly high concentration of economic power should not be as tolerable.

5. User Power

User power refers to the ability of persons who do not have a significant amount of consensus power, protocol/client power or economic power to influence or resist those who do have a significant amount of such power. If user power is very strong, then even if the other forms of power are somewhat more concentrated than one might hope, the system may still be decentralized.

In systems without formal governance, like Bitcoin and Ethereum, “user” can have a very broad meaning, and includes, for example, token investors, token holders, companies running dAPPs, hobbyist node operators, small-scale miners, non-core protocol/client developers, other developers or professionals who make their living advising about the system or businesses or governments that use the system as part of their infrastructure.User power primarily takes two forms: (1) moral/reputational rewards and punishments effected through social signalling; and (2) adversarial forking. There are other forms of user power— such as the power of token holders to sell tokens and thus adversely affect price or the power of dApp devs to migrate their users to another blockchain system — but there are also significant costs to such types user power, and, more importantly, not all types of users share those types of user power in common.

Even the relatively brief histories of Bitcoin and Ethereum provide some excellent examples of how powerful users can be. In Bitcoin, the threat of a user-activated hardfork, made credible through a joint exercise of user power and protocol/client power over Bitcoin, was instrumental in activating SegWit on terms different from those struck under the so-called “New York Agreement” by a small group of persons having substantial consensus power and economic power over Bitcoin. This has rightfully been touted as a watershed moment revealing the power of users (see here, here and here). The arguable success and persistence of various adversarial forks from Bitcoin (Bitcoin Cash, Bitcoin Satoshi Vision, et. al.) is likewise a testament to user power in another form — since users who dissented from the triumph of “small-blockers” could fork away and start a system intended to cater more to the payments use case. On the Ethereum side, the persistence of the original Ethereum blockchain as “Ethereum Classic” after TheDAO hardfork shows that user protest to chain reorganizations decided by those with significant protocol/client power can be effective.

In systems like Bitcoin and Ethereum, user power depends on the ability of a wide group of unaffiliated community participants to coordinate with one another. In general, it will require that the protocol/client is fully open source and that core devs do not have the ability to push updates to the client, so that adoption of client changes is voluntary and the threat of an adversarial fork is credible. Ideally, to make the threat of a fork effective, ownership of the brand and ticker symbol for the blockchain should be ‘up for grab’ by users, but other forms of decentralized brand ownership (such as the co-ownership arrangement by two independent organizations observed in ZCash) may also be effective. Other factors, like full nodes being easy to run, and a wide variety of unaffiliated, well-funded businesses being included in the user base, can be very helpful in bolstering decentralization through user power.

However, there are also constraints on user power in systems like Bitcoin and Ethereum — see above under “Protocol/Client Power” for a discussion of some of them. Arguably, Ethereum may have much less user power today than it did at the time of the ETC hardfork, because the dApps built on Ethereum are interdependent. Accordingly, in all but the most egregiously offensive exercises of protocol/client power, major dApp developers, who otherwise could operate as a source of independent user power, will tend to value staying on the same fork as one another more highly than asserting their individual political views.

In systems with formal on-chain governance, user power can assume additional forms, but they tend to belong to only to one category of user: the token holder. In delegated proof-of-stake systems, token holders have voting rights and the analysis of user power can become very complicated.

For example, if token holders can appoint block producers through their user power, consensus power is less centralized because it is constrained by token holders much more directly than Bitcoin users can constrain Bitcoin miners. However, if in such a system economic power is also very concentrated, then most users may actually have less power over consensus than they would in a system like Bitcoin, because a voting-minority is much more ineffectual in a system of formal governance than a vocal moral-minority can be in a system of multi-polar governance. If economic power happens to be concentrated in the hands of those holding substantial consensus power, the formalism of the system can lead to endless rent-seeking under the guise of formalist legitimacy. Similar pros and cons apply to on-chain governance of protocol/client development.

Although the analysis of user power is very complicated, in general it may be said that the broader and more diverse the base of “users” and the more power they have, the more likely a system is to be decentralized under the law.

A Flexible Test for Decentralization

A flexible test for decentralization would consider all the forms of blockchain power referred to above as factors, would assess each factor in light of the detailed facts and circumstances of a particular blockchain system, and would decide whether the system is sufficiently decentralized for legal purposes based on a kind of fuzzy logic about the extent to which each form of power is decentralized and how each form of power relates to the others in each specific case. This is, in effect, a form of lawyerly voodoo, but such tests — the Howey test being an example that is particularly notorious in the blockchain community — are common in the law, and can yield very good results and a degree of predictability as good judges consider cases and build up a body of precedent.

Here is my first stab at a flexible, rich legal test for determining whether a blockchain system is legally decentralized:

General Statement of Test. A system is sufficiently decentralized if that system is an open network system and control over that system is widely distributed among independent persons.
Open Network System. An open network system is a peer-to-peer network of free open-source software clients which send, receive, validate and record data states on a distributed ledger in accordance with a protocol that is enforceable and verifiable by operation of the software clients.
Detailed Statement of Test. In general, sufficient decentralization will be found if, in light of all facts and circumstances, either:
(1) no single person or group of affiliated persons controls the open network system or the consensus, economics or software protocol/client of the open network system; or
(2) if any person or group does control one or more aspects of the open network system, control over other aspects of the system is widely distributed among independent persons in a manner that substantially limits the controlling person’s or group’s ability to interfere with or alter the open network system or other persons’ use and enjoyment of the open network system.
Rebuttable Presumptions to be Used in Applying the Test
(1) There is a rebuttable presumption that a person or group of affiliated persons owning or controlling more than 20% of the native tokens of an open network system, or who own or control token-sale proceeds the fair value of which exceeds 20% of the market capitalization of such token, has or have control over the economics of the open network system.
(2) There is a rebuttable presumption that a person or group of affiliated persons owning or controlling enough of the means of block production to violate the ‘honest majority’ assumption applicable to the open network system has or have control over the consensus of the open network system.
(3) There is a rebuttable presumption that a person or group of affiliated persons controlling a software client used by more than 50% of the nodes on the network has or have control over the protocol/client of the open network system

This will typically be a difficult test to meet. And it should be a difficult test to meet. The purpose of finding that a blockchain system is sufficiently decentralized as a matter of law is to declare that since no person controls the system, no person is legally responsible for it and it is not subject to regulations, such as securities laws, that would ordinarily apply in similar circumstances. For this, the blockchain system must essentially be an un-owned, public commons. To qualify as such, it should truly exist for the benefit of and under the control of the public, rather than predominantly serving the interests of any specific person or group. Since power is subtle and omnipresent, a test of power must be rich, probing and comprehensive. One could analogize the difficulty of passing such a test to the difficulty of passing a “strict scrutiny” test under constitutional law.

However, the test is also very flexible and allows for balanced, fact-specific reasoning. Thus, under this test, a judge would be free to consider very nuanced check/balance dynamics such as those I raised in the previous section. For example, a judge would be free to declare that Bitcoin is legally decentralized even if there are facts in evidence showing that ASIC ownership is highly concentrated. After all, the judge could be persuaded that the power of any substantial ASIC owner would be checked by users through the threat of an adversarial fork or massive sale of BTC.

A Bright-Line “Safe Harbor” for Decentralization

Although a broad, conceptual test like the one set forth in the prior section will be the most flexible, accurate and complete method of determining whether a system is legally decentralized, I believe it would be insufficient by itself. Participants in blockchain systems should have more ex ante certainty about how the law applies to them than can be afforded by a complex, “fuzzy logic”, multi-factorial test. Accordingly, it would be highly desirable to propose a bright-line “safe harbor” identifying a subset of systems that are clearly decentralized based on simple facts (or so likely to be decentralized based on those facts that it is not worth regulators’ or judge’s time to undertake a closer inquiry).

Like other safe harbors (for example, the SEC’s “Regulation D”), reliance on such a safe harbor should be non-exclusive — i.e., anyone who wishes to adopt less conservative assumptions should still be free to prove decentralization through the broader, looser, conceptual test set forth in the prior section. It may also be necessary to define different safe harbors in different contexts — for example, a different safe harbor for considering decentralization under the Bank Secrecy Act than the Securities Act of 1933.

Here is a simplified version of the safe harbor I have proposed in the context of the securities laws. The full version of my proposal can be found here, and my open letter to the SEC explaining the rationale behind the proposal was published here.


I have done my best to efficiently set forth a reasonable starting point for legally testing when a blockchain system is sufficiently decentralized. However, it is only that — a starting point. A great deal more work is needed by a great many people to gain confidence in testing the existence and effects of decentralization for legal purposes.

Both the flexible test and the safe harbor set forth above in this article are available here. I have no illusions that I have developed a perfect test, and thus would highly encourage anyone interested in this issue — including but not limited to lawyers and coders — to ‘fork my legal code,’ as it were, and suggest alternatives and improvements. Only through such a collective effort will we will arrive at a satisfactory understanding of decentralized blockchain systems under the law.


I suggest reading these sources to better understand how decentralization affects the application of law to blockchain systems:

William Hinman: “Digital Asset Transactions: When Howey Met Gary (Plastic)”

Hester M. Peirce: “Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization”

Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies

Peter Van Valkenburgh: “The differences between Bitcoin and Libra should matter to policymakers”

Peter Van Valkenburgh: “Electronic Cash, Decentralized Exchange, and the Constitution”

Suffering comes from a cycle of craving and disconfirmation, a cycle that can be broken in two ways.
Suffering comes from a cycle of craving and disconfirmation, a cycle that can be broken in two ways.
One of my favorite jokes in Herge’s Tintin comics is a bit in Prisoners of the Sun (1949), where the Thompson twins ask Captain Haddock what’s in a pile of sacks on the dock labeled “guano.” The captain umms and ahhs a bit, but then a seagull poops on one of the Thompson twins
One of my favorite jokes in Herge’s Tintin comics is a bit in Prisoners of the Sun (1949), where the Thompson twins ask Captain Haddock what’s in a pile of sacks on the dock labeled “guano.” The captain umms and ahhs a bit, but then a seagull poops on one of the Thompson twins’ hats, […]
Genesis Node
By Genesis Node on The Capital

Ever wanted to know why the media and ‘economists’ get it so wrong about Bitcoin? Here’s the Genesis Node point of view on some of the most fundamental topics that regularly appear about Bitcoin in the mainstream media, which are typically biased or poorly presented.<

By Genesis Node on The Capital

Ever wanted to know why the media and ‘economists’ get it so wrong about Bitcoin? Here’s the Genesis Node point of view on some of the most fundamental topics that regularly appear about Bitcoin in the mainstream media, which are typically biased or poorly presented.

♦Photo by Elijah O'Donnell on UnsplashBitcoin is private and can be used by criminals and terrorists

This is a favourite of the media and hostile regulators. The fact is that Bitcoin operates using the most transparent, verifiable, and traceable accounting ledger that has ever existed. It is true that identity verification is not always required to create a wallet and send or receive transactions so in this regard there is a level of masking that is provided, however, blockchain forensics is a new and emerging capability that could help to track and trace any funds being used for illegal purposes. Danish police made the news in 2017 when they traced criminals through their Bitcoin transaction activity. It is worth remembering that the current banking system is still the most effective means of laundering money in the world with an estimate of $3 Trillion being laundered through the US system annually, so it seems somewhat hypocritical for lawmakers, media and financial services firms to lay the ‘Bitcoin is used by criminals and terrorists’ argument at the door when the current system is guilty of much worse.

♦Photo by Markus Spiske on Unsplash

There are other cryptocurrencies such as ZCash, Monero, and the newly developed MimbleWimble protocol that underpins Grin and Beam, which use privacy features to obscure the sender and the recipient. There is certainly a theoretical case to be made that these protocols would be more effective at money laundering, however again, transaction volume analysis suggests that any illegal activity funding taking place over these networks is incredibly small if at all present compared to the volumes being transacted through USD.

At a more philosophical level, here we can also return to whether censoring money is an attractive trait. Ultimately, in a free society, an individual ought to have the ability to transfer value for whatever means and ends they desire and any attempt to monitor, trace or prohibit this can be viewed as censorship…any society where a nation state tries to impose censorship and de-platforming upon its citizens is a society where the citizens desperately need the means to transfer value as required, unencumbered.

Bitcoin mining wastes energy♦Photo by American Public Power Association on Unsplash

This is a particularly sensitive topic and one which the recent trend of climate change activists are sure to latch onto. The truth is that yes, Bitcoin energy consumption is huge, roughly the same as the annual consumption of energy in Ireland or the Czech Republic. The equally huge counter to this that is an uncomfortable truth is that a large percentage of this energy consumption uses green/clean or renewable energy, estimated between 30–70% clean. The range is so high as data is very difficult to verify and as such, allows biased narratives to be deployed by the media.

Further to the country comparisons, it has been reported that the US military alone is the 58th largest consumer of energy in the world — where is the media outcry against this energy consumption?

Whilst that seems a lot, let’s consider some other data points:

  • The USA Christmas lights consume more energy annually than some developing countries at around 6.63 billion kilowatt-hours whilst countries like El Salvador uses 5.35 billion kilowatt-hours per year
  • The streaming of X-Rated videos from the internet globally is believed to consume as much energy as countries such as Belgium, Bangladesh, and Nigeria contributing c4% of greenhouse gas emissions globally and could rise to 8% of global emissions by 2025

The above are simple examples but the oft used phrase is “we could use that energy for something else.” The challenge here becomes a question of libertarian ideology as there is no royal “we” to centralise and co-ordinate energy consumption globally, ultimately if a user pays for the energy they consume and the market is willing to produce and supply it then what that energy is used for is entirely up to the discretion of the consumer.

The incentives of the Bitcoin network align so well that they promote efficient deployment of capital and operational resources by Bitcoin miners. In other words, Bitcoin miners locate their operations in parts of the world that offer the most cost-effective access to energy and to this date there is no market whereby energy consumers pay more/less for the end, usage of their electricity and until a market develops, which ensures that Bitcoin miners need to pay a higher rate for electricity then they will continue to consume at the market rate. Typically, this is either through use of green or renewable energy sources, which explains why Iceland, with its abundance of geothermal energy, is a key global Bitcoin mining centre.

It is often the case that unused electricity is deployed for use by Bitcoin mining entities, by ‘unused’ we refer to electricity that is generated by a power station, typically through hydroelectric power but an excess capacity is created over and above the required demand so the electricity is lost as it transmits throughout the network, eventually going unused. In this instance, mining companies set up their operations in remote locations in countries such as China and strike deals for excess energy directly with the energy provider themselves. So whilst a popular argument is — “but the human race could use that energy to much better effects” in many cases, much of it is already going to waste, and it cannot be transmitted for use over vast distances anyway. In a somewhat philosophical view, one could counter-argue that such ‘lost’ electricity is actually turned into a commodity money (Bitcoin) and sent globally over the internet making its utility, production, and shipping costs infinitely superior to other global commodities.

In an example of well-aligned incentives a Canadian mining company ‘Upstream Data’ recently developed a product that allows oil drillers to attach a Bitcoin mining rig to their methane gas flares in oil and gas fields to convert the excess energy burned off to power a mining rig and re-use some of the energy by-products of drilling that would have otherwise been lost — incentive alignment works.

As Saifedean Ammous, author of the Bitcoin Standard writes in his research blog:
“Everything in our lives is related to energy. Transportation, manufacturing, cooking etc. requires energy. Thus, efficient energy production is essential to our everyday lives. Bitcoin incentivizes efficient energy production and therefore sets the correct incentives for the energy system as a whole.
In addition, Bitcoin is a serious alternative to the current financial system. Bitcoin has the features to be a qualified, stateless, world currency since it is censorship-resistant, permissionless, and trustless and since it provides instant settlement. The network is open and censorship-resistant through proof of work. Essentially, Bitcoin is a common good from the people for the people.
The correct incentivization inherent in the Bitcoin protocol and the importance of Bitcoin as an alternative to the financial system justify the massive use of energy for mining.”
Bitcoin can’t be used to buy coffee (micro-purchases)♦Photo by Clay Banks on Unsplash

Anyone using this argument is focussing on the wrong metrics and not comparing like for like and even worse, being dragged into the somewhat fanatical and disingenuous world of the white paper title outlining that Bitcoin was intended to be ‘peer to peer electronic cash.’ Over time, Bitcoin has developed and grown to becoming more akin to a form of digital gold, and to an extent, is a ‘heavy’ digital asset to use as it takes longer than others to confirm transactions on the network. So whilst this comment is partly true as it could take an hour or more to confirm the transaction, it is wrong to compare Bitcoin transaction speed and scalability to that of the Visa, PayPal or Venmo networks.

Essentially Bitcoin is a network for final settlement — it probably is not important to use the Bitcoin network to record your coffee transaction on the most immutable and transparent ledger…for ever.

As Bitcoin and blockchain researcher and thought leader Nic Carter states, Bitcoin is best thought of as a large container ship transporting expensive goods over long distances rather than the local postman delivering letters and parcels over the final mile.

When humans began to deploy fiat or paper money for use in an economy in place of a specie backed currency such as the gold standard, this can be referred to as a ‘Layer 2’ technology. Use of precious metals in direct exchange is layer 1, the addition of a 1:1 backed paper is the second layer making portability much easier. Layer 2 or 3 solutions on top of Bitcoin such as the Lightning network, may well deliver the scalability in Bitcoin that many are asking for so it can be used for micro-purchases. Even a bi-metallic standard equivalent digital asset protocol that is less energy intensive than Bitcoin and serves as a ‘Silver’ or a ‘Copper’ to Bitcoin’s gold could develop.

Ultimately there is a cost to write transactions on the Bitcoin blockchain, in future, this may rise, and as such, these transactions may be pooled and netted off on a less frequent basis in a similar way that central banks settle balance of payments deficits today.

In summary, comparing Bitcoin to Visa, PayPal and Venmo is the wrong comparison to make at this point, but over time, Bitcoin may well have additional layers of technology to solve the scalability challenge, and this may also extend to the inclusion of some form of privacy.

Bitcoin isn’t backed by anything / has no intrinsic value♦Photo by Jacek Dylag on Unsplash

Since 1971 and the complete separation from the gold exchange standard, the US dollar has not had anything backing it. Fiat currency is an established medium of exchange, however, in some countries, it does not serve its purpose well as a store of value or a unit of account due to hyperinflationary challenges. However, if we set these to one side, the notion that fiat currency is backed by anything is a severely misguided notion. It is true that governments mandate the use of fiat currency and as such, they ‘back the use by Law.’ This does not give fiat currency any real value, however, and if the government and central bank mismanage the economy, they undermine the value of the currency and cause inflationary challenges as we saw in countries such as Argentina, Zimbabwe and many others throughout the 20th century.

Money is a collective belief system and anyone who wants to argue that fiat currency is ‘backed by fundamentals’ is essentially saying, they don’t really understand how money works, they trust central banks and governments because they haven’t researched or analysed any other potential system, their belief systems, frameworks, and mental models allow them to shortcut thinking and analysis of this nature by buying into the notion that ‘the gold standard failed’ and that we now live in a modern banking world. These arguments will ignore the failures of old that are creeping back into the system today and may very well lead to a Roman Empire style collapse of the global economy. We know for certain what the monetary policy and scarcity of the Bitcoin network will be for the next 120 years — we have no idea what any central bank or government may do to monetary and fiscal policy from one week to the next.

If anything, Bitcoin is ‘backed’ by the laws of mathematics and code and unlocking these laws costs time, resource (both human and capital), and energy. Whether Bitcoin has any value is determined by the market forces, and the Austrian economics school theories of Mises and Menger with their notions of subjective value theory and the regression theorem of money — ultimately we view Bitcoin as a Veblen good, and it has only ever served the purpose of value transfer.

Bitcoin could be hacked♦Photo by Clint Patterson on Unsplash

Hacking Bitcoin is next to impossible. It has been in existence for 10 years, and any kind of threat or attack that exists that could disrupt it has already been attempted. It is reported that eccentric millionaires have even paid teams of hackers $1m over the course of a year to hack the network, and they have not been able to yield any success.

When we discuss hacking Bitcoin, there are two obvious options:

  1. To hack the software itself
  2. To undertake a 51% attack

Hacking the software itself is next to impossible as a result of the verification and mining consensus rules any attempt to alter the software will be rejected by each miner running an up to date version of the software and similarly any attempt to process a fraudulent transaction will be detected by each node and rejected.

People often wonder what makes the Bitcoin blockchain secure, and it is often said that a key risk to Bitcoin is the fact that it is software and software could just be hacked, if not now, then in the future with a quantum computer. The reality is that the Bitcoin blockchain is secure as a result of the multiple different failsafe mechanisms that guard against attack, the energy, and computing power used to continue the longest chain of transaction records and the game theoretical nature of the outcome of such an attack.

To unpick this further, Bitcoin uses complex and advanced cryptographic techniques to guard against a 51% attack. That is the idea that if enough miners grouped together 51% of the total mining resources, then they could unpick the blocks one by one and change the history on the digital ledger to move transactions to other accounts that they hold the private keys for. Such an attack is virtually impossible as the size, cost, and complexity of the attack would require a large number of nation states to work together — a level of cooperation which has never happened in history aside for coalition forces during world war 1 and 2.

To firstly gain access to the necessary computing power and energy required to undo the confirmed transactions would be no mean feat and would effectively result in a split or a fork of the chain as the history and record would now be different from the original. The actors would then need to undertake the attack all the while being watched and monitored by the other 49% who would continue confirming blocks on the original chain. This means that for the attack on the original chain to be successful, the attackers would also need to amend all the new blocks confirmed every 10 minutes since the attack began — otherwise, the attacked chain of the network would have no value. So the attacker would then need to continue spending money on computing power and energy to catch up to the rest of the 49%, which would be a long drawn out process and would likely bankrupt the malicious attacker. It is estimated that a 51% attack on the Bitcoin network would cost an attacker almost $600,000 per hour.

So, in summary, the incentive to launch a 51% attack and change the ledger is just not present. Similarly, any actor attempting to exploit the code or vulnerabilities in the network will have their attack rejected as each node runs a copy of the Bitcoin client and as such, any attempt to make a change to the code will be rejected by the network as all the other nodes will be running a copy of a different software.

Another popular example the media likes to use is that Quantum computing would break the Bitcoin private key encryption — this is akin to saying that you don’t need to worry about ageing because someone will invent time travel before you die. Quantum computing is at least 30 years away and the current claims regarding quantum computing are overstated. That said, the entire Bitcoin development community are already considering how to respond to quantum computing threats and how to embed quantum resistant cryptography into the core software so by the time a legitimate quantum threat exists it is highly likely that a legitimate quantum resistant defense will emerge and the entire Bitcoin code, network, and mining equipment will shift to adopting quantum resistant technologies.

Bitcoin is too volatile to be a store of value♦Photo by Claire Satera on Unsplash

We are only 10 years into its lifecycle, so speculation and large holders could manipulate price movements, however, it is important to remember the concept of how commodity money goes through various stages of development. Bitcoin has successfully transitioned from being a collectible to the early stages of a store of value. Once more liquidity comes into the Bitcoin network, then it will be harder for large holders to manipulate the price. At some point, these holders will sell and take their profits to spend on whatever they please. Those coins will then be available on the market for new entrants, and in turn, these individuals may well hold for a long time to watch their value increase and more liquidity comes into the system, again, at a certain point, these people will sell their holdings. The pattern will continue, and there will be severe price appreciations and declines, however, these will become less severe as liquidity increases — once this happens, the store of value stage will be complete, and Bitcoin can then progress to becoming a Medium of Exchange and a Unit of Account.

So at present, volatility attracting new market entrants all the time, however over the long term, the rollercoaster needs to settle into a more traditional, long term market cycle for institutional investors to feel comfortable allocating a significant portion of their assets into it.

For others around the world though, Bitcoin already operates as a store of value in countries where governments and money have failed. Countries such as Venezuela, Argentina, Zimbabwe, and Turkey have all seen appreciations in Bitcoin purchases, and despite price declines from c$20k to $3k, this has been a better place to store wealth than the local currency.

Bitcoin is not regulated and governments will just kill it♦Photo by Sebastian Pichler on Unsplash

Regulation doesn’t solve problems entirely. There is no government in the world that can actually regulate the Bitcoin network. Governments can take action around the edges of the network, but even officials within the US Government finally recognise that they cannot stop the Bitcoin network or Bitcoin transactions.

Governments are, however, able to regulate the edges of the network such as the fiat on/off ramps which are typically subject to ‘know your customer’ regulations and ID checks. Governments are also able to regulate activities such as Bitcoin ownership and Bitcoin mining if they wish. Some governments have banned Bitcoin mining as an activity, and others have gone as far as to outline that only the state is allowed to provide Bitcoin mining facilities.

What is clear is that as a protocol, Bitcoin cannot be shut down. Governments do not have the ability to stop it or come anywhere close to killing it. What regulators are looking at and in particular, US regulators is the introduction of investment-friendly vehicles. These will serve as fiat on/off ramps and will allow institutions access to Bitcoin. A key concern is the notion of custody, who will hold the private keys to access the funds on the Bitcoin network? There are proposals in place at present, and it won’t be long before a Bitcoin ETF (Exchange Traded Fund) exists so in some form or another, a regulatory framework will emerge for Bitcoin and the entire cryptoasset industry.

Bitcoin has no CEO♦Photo by Hunters Race on Unsplash

That is exactly the point. The decentralised nature means the network is upgraded by consensus and any miner that disagrees with the update can choose to ‘fork’ and continue a separate chain. Not having a CEO means there is no single person or entity that can choose the direction and design of the protocol without vigorous debate with the whole community first. A CEO can be called in to testify in government hearings or pursued for mismanagement of funds — without a CEO the Bitcoin network becomes an entity that is not subject to the normal laws of power, control, coercion, intimidation, manipulation, and corruption — this is one of its greatest assets.

Bitcoin is the first and first doesn’t always mean success

Bitcoin is the 5th iteration since 1990s of a digital money, and it is the first to fully succeed in generating a system that removes centralised 3rd parties and creates digital scarcity. Bitcoin draws upon other previous protocols such as eGold and Hashcash and implements it in a fully decentralised way.

Bitcoin is opensource so it could just be copied/forked and improved

The game theory involved in creating a fork of the Bitcoin code is such that any fork is unlikely to take a significant amount of value, network, or mining power away from the core BTC code. In 2017 a disagreement about transaction scaling ensued where one group wanted to maintain a low block size at around 1 Mb per block, and another group wanted to increase the block size which would, in turn, increase the throughput and speed of transactions. In principle, the idea seemed logical however an entire debate and discourse erupted around the broader risks and challenges that ‘big blocks’ present. One key issue is that the mining ecosystem would no longer be possible for single and small entities, rather it would start to require a more industrial size and scale — this would put control of mining operations more in the favour of large, server farms and corporations who could afford the CAPEX set up and open running costs of such a huge operation. To maintain decentralisation the original chain was maintained whilst a splinter group forked the Bitcoin blockchain and continued transactions using bigger blocks. This was called the Bitcoin Cash or BCash chain. Not long after, further divisions occurred within the BCash community and this chain then split into BCash ABC and BCash Satoshi’s Vision. Needless to say, all of these actions have been almost catastrophic for these chains as they now have next to no value being transferred over them and the mining rewards and incentives are not there as the value of the coins on these chains is very low — the low hashpower as a result also opens up these chains to a 51% attack. The hourly cost to launch a 51% attack on Bitcoin is estimated at $600,000, the equivalent for BCash is $7,500 per hour.

It is by studying the outcomes of chain forks that the beauty of the Bitcoin network, game theoretical reward mechanisms and the in built self-reinforcing incentive mechanisms that one can really appreciate the brilliance of the system.


If you have managed to stay focussed and read through to this section then you deserve a medal! But more importantly, you should now be able to see how and why the media gets the coverage so wrong. The cornerstone of so many articles is put in the wrong place and often intentionally so to present a biased view of ‘why Bitcoin is a failed experiment’ without informing readers or viewers that there is a different viewpoint. For many, Bitcoin is just too complex to understand and they are happy to accept the word of elected officials at the Treasury or Government regarding what money is and how they should interact with it. Typically, economists find it hard to reconcile that commodity money and Austrian economic principles may actually be a better option than the fiat, state-controlled, centrally managed monetary system that is in place globally which they are likely to have studied for 10+ years and committed a significant portion of their time and energy into contributing to. For these people, the truth that Bitcoin is the most effective form of money the world has ever seen is too painful to accept and as an American writer, Upton Sinclair once said,

“it is difficult to get a man to understand something when his salary depends on him not understanding it.”

About us: Genesis Node is an executive training organisation focussing on helping businesses and individuals to understand Bitcoin, digital assets, blockchain, smart contract technology, how they fit into the world and how they might disrupt existing operating models. For more information please contact david@genesis-node.com regarding future webinars and face to face seminars in London, UK.

The Capital


Bitcoin mythbusting was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

Rusty Russell

TL:DR; ATO treats forks as creating a “new asset” causing unexpected tax burdens for any Australian taxpayer holding cryptocurrencies in future.


I got a nasty surprise when preparing my 2017/2018 tax return. I had sold my Bitcoin Cash as fast as possible, and gotten around to sell

TL:DR; ATO treats forks as creating a “new asset” causing unexpected tax burdens for any Australian taxpayer holding cryptocurrencies in future.


I got a nasty surprise when preparing my 2017/2018 tax return. I had sold my Bitcoin Cash as fast as possible, and gotten around to selling other minor forks just before the close of the financial year. The ATO then decided that those sales were (1) assets under 12 months old, and (2) a cost-basis of 0. The result was that they wanted 48% of the amount in tax; over twice what I was expecting and had set aside!

In Australia, you (generally) pay Capital Gains Tax on the difference between the purchase (“base price”) and sale prices, but you only pay half of the amount if you held it for 12 months or more.

The ATO’s Reasoning

The ATO reasoned that a fork creates a new asset valued at zero and the new asset is the one whose rules have changed. I can see how they arrived at this, and am kicking myself for not getting involved earlier: having a real technical expert involved might have avoided the shallow understanding which lead to this.

A Split is Not a New Asset

The idea that a new asset is created is the base misunderstanding, and to see why, we need to go beyond simplifying nomenclature like “wallets holding bitcoins” and “tokens” and understand what’s actually happening.

Bitcoin is a network of independent nodes, each maintaining its own ledger attaching amounts to keys which can spend them. When I say “I own 1 bitcoin!” what I mean is that all up-to-date nodes on the network have a current entry in their ledger which indicates that 1 bitcoin can be spent using a secret key that I hold. Normally the bitcoin protocol ensure that over time, nodes will come to consensus the contents of their ledgers. This controlling an entry in this consensus of ledgers is what bitcoin actually is, and all bitcoin is: this is what people mean when they say “bitcoin is unbacked”.

Consensus that I control an entry in the ledgers is the asset, because that’s what bitcoin actually is.

Bitcoin has value because people respect these ledger entries as currency, and as long as the network is functioning normally I can use it to send an instruction to update the ledgers which will spread through the network and eventually be entered in all the ledgers (in particular, the one trusted by the “recipient”).

What did change with the Bitcoin Cash fork was nor normal though: One (larger) part wanted to update the ledger rules to allow a new appendix with each entry, the other wanted to update the ledger rules to simply expand the allowable number of entries. The network split into two irreconcilable parts which no longer talk.

My key didn’t change, or even gain any additional capabilities. The consensus of ledger entries I controlled split into two groups, but an asset split is not a taxable event. If I own gold and split it into different isotopes, that is not a taxable event, does not change its cost basis, and does not change its acquisition date.

Over time, the market decided that ledger entries of the smaller group (now called Bitcoin Cash) were worth less than those of the larger group (now simply called Bitcoin).

When the ledgers split into two groups, the asset (lines in the ledgers) split. This is not a taxable event.
The ATO’s Workaround I: Asset Valuation

Once they decided to treat it as a newly acquired asset, the ATO instantly had a new problem: how to value the new asset? If you gain an asset, you have to pay income tax on it! Yet clearly the user did nothing, and hitting them with a random tax bill seems unfair (especially if they couldn’t spend it before the price dropped precipitously). To work around this, they chose a value of 0.

The first taxation officer I spoke with declared that they chose a value of 0 as it was the most favorable to the taxpayer, the second insisted that the value of 0 was a “matter of fact”.

You could actually trade Bitcoin Cash before the fork (though you had to send your Bitcoin to an exchange to do so), and there were various other future markets available. I agree that the market was far too easily manipulated and shallow for this price to be a reliable signal, but it’s clearly not zero. Picking 0 is unlikely to draw immediate ire from taxpayers (though see below!), but it’s very hard to defend: as a tax payer I certainly can’t decide to value “hard to assess” assets at 0!

The ATO’s Workaround II: The Technical Test

When deciding which was the new asset, the ATO chose a technical test: the one one whose rules hadn’t changed was the original asset, and the one which had was a New Asset. This often gives the same results as you’d expect if you assumed a “market” test (i.e. biggest market-cap fork is the original, or the one with the original name is the original).

However, it reflects a lack of understanding of how cryptocurrencies work. For all the talk of “immutable ledger”, they change the rules with some regularity. I can think of five bitcoin rule changes, but there were more and we anticipate another one this year (2020).

In particular, while Bitcoin Cash was forked by changing a consensus rule (making it a New Asset according to the ATO), this was a mere technicality: two weeks later Bitcoin also changed, as they locked in the Segregated Witness soft fork. As this change was opposed by Bitcoin Cash proponents, it was necessary they fork first[1]. It could be argued that at the time Segregated Witness activated, the Bitcoin Cash protocol was more similar to the original rules than Bitcoin itself was!

Absurdities That Follow

If you assert 1+1 = 3, things tend to break down badly. The results here are the same: by asserting that a new asset is created, you create a bunch of new problems:

  1. If you held Ethereum across the Ethereum Classic Fork, Your Cost Basis is 0.
    Ethereum became a New Asset on July 20th 2016. This was confirmed verbally by the current chair of cryptocurrencies at the ATO. This means that if you sold Ethereum since then you probably didn’t pay enough tax, and if you sold it before July 20th 2017, you’re not entitled to a capital gains discount. Surprise!
  2. Bitcoin may have become a New Asset at the first halving.
    Greg Maxwell once told me that a number of miners tried to continue to grant themselves 50BTC rewards after the first halving. Their fork quickly petered out, but it’s easy to argue that their fork was following the original rules, and thus Bitcoin is a New Asset. If true, and you held it across November 2012, your cost basis is now 0, and no capital gains discount is available if you sold before November 2013.
  3. Bitcoin may become a New Asset on any Soft Fork.
    Since any rule change can create a fork, you may find yourself holding a New Asset, with cost basis 0 and no CGT discount until 12 months after the fork (unless, of course, it forks again!), should some fool decide to do so. It’s unclear whether you need to be aware of the fork, or how serious it needs to be, but it would be an interesting business model to offer the ATO a contract to create such a fork to create a taxation windfall!
  4. Bitcoin will become a New Asset on any Hard Fork.
    Experience has shown that any Bitcoin hard fork will be controversial; if the original chain is continued (as expected), Bitcoin becomes a New Asset with cost base 0.

In these last cases, you have no control over whether this happens, creating massive taxation risk.

What I’m Doing About It

Clearly, if we want people to actually hold or use cryptocurrencies in Australia, these rules are impractical. Given they’re wrong on a fundamental level, I’ve already spent thousands of dollars on a Private Ruling and objections. At the end of 2019 I engaged a law firm for further research; their professional advice was that it was going to be expensive, and difficult.

Reluctantly, I have folded on this. It seems the only hope for reasonable outcomes in future in Australia would be legislative change.

[1] Technically, they had to change to implement replay protection, otherwise in theory they could have waited for the soft fork and then mine an invalid segwit tx to fork off afterwards. That would have been an impractical method, however.

Now Reading: Pandemic Edition
Monday, 13 April 2020
Just updated my Now Reading page. I have suspended my regular reading queue for the most part (except for continuing to work through Terry Pratchett) and made a special section for Pandemic reading. Here’s a quick rundown on what I’ve been reading/plan to read, and why. Themes I’ve
Just updated my Now Reading page. I have suspended my regular reading queue for the most part (except for continuing to work through Terry Pratchett) and made a special section for Pandemic reading. Here’s a quick rundown on what I’ve been reading/plan to read, and why. Themes I’ve picked, or am looking for, books to […]
Ross Ulbricht

By Ross Ulbricht

On December 10, 2019, I wrote the following (see here):

“A drop below the beginning of wave 2 (around $4,200) would invalidate the impulsive count of wave (5) because wave 4 cannot overlap wave 2 ...This would indicate a much greater likelihood that our second

By Ross Ulbricht

On December 10, 2019, I wrote the following (see here):

“A drop below the beginning of wave 2 (around $4,200) would invalidate the impulsive count of wave (5) because wave 4 cannot overlap wave 2 ...This would indicate a much greater likelihood that our second scenario is playing out.”

Since then, the price of bitcoins has dropped down to ~$4,000, fulfilling the above requirement. With the bullish count invalidated, the picture is becoming clearer. The cycle-degree bull market — from Bitcoin’s beginning to the ~$20,000 peak of late 2017 — is over. We are now in the last wave (wave ⓒ) of Bitcoin’s first cycle-degree bear market (the largest yet). Figure 1 shows the five primary-degree waves up (①, ②, ③, ④, ⑤) in wave I along with the three primary-degree waves down (Ⓐ, Ⓑ, Ⓒ) in wave II, with the end of wave II estimated.

♦Fig. 1

Estimating the extent and duration of wave II is difficult and imprecise. There is no limit to how low it can go (except $0) because wave I started at $0. And there is no hard limit to how long it could take. However, corrections will often end in the price range of the previous fourth wave of one less degree. That was wave ④ from back in 2014. Its price range was $175–$1,240. The two previous bear markets (of primary degree) reduced prices by 86% and 94%. An equivalent reduction by wave II would take prices to $2,800 or $1,200. Wave Ⓐ of II reduced prices by 84%. An equivalent reduction by wave Ⓒ of II would take prices to $2,200.

In terms of duration, if wave Ⓒ lasts as long as wave Ⓐ, it will end around June or July 2020. However, waves (C) of ② and (C) of ④ (not labeled in Figure 1) were considerably larger than their respective (a) waves. If wave Ⓒ of II conforms to this pattern , it could drag on into 2021.

♦Fig. 2

Figure 2 shows a closer view of wave II to date. Wave Ⓐ brought prices down to $3,200, and wave Ⓑ brought them back up to nearly $14,000. Wave Ⓒ should bring them to new lows below $3,200, completing wave II. I have tentatively labeled the move from the end of wave Ⓑ to the low near $7,000 as wave (A) and the counter-trend rise above $10,000 as wave (B). The low near $6,400 is not the end of wave (A), but is rather wave (b) of (B) in a pattern called a “running flat.” So now, we are in the final wave (C) of Ⓒ of II. A break below the major low of $3,200 will be a solid confirmation of this, at which point we will be trying to determine when the final low is in. This will be a major buying opportunity. If the price rises above the peak near $14,000, we will have to reevaluate our interpretation, but at this point that seems like a very unlikely scenario.

As noted before, the end of wave II will be accompanied by extreme pessimism and possibly antagonism toward Bitcoin on par with the extreme optimism that accompanied the end of wave I. It will take fortitude to buy in such an environment, but the rewards as wave III takes prices to new highs will be well worth it.

Elaine Ou

Some years ago, anthropologist and Wall St Occupant David Graeber wrote a history of Debt in which he debunks the “myth” of barter. In his telling, barter never exists in human history – Any transfer of property is the result of an exploitative power relationship, therefore ownership is theft, debt

Some years ago, anthropologist and Wall St Occupant David Graeber wrote a history of Debt in which he debunks the “myth” of barter. In his telling, barter never exists in human history – Any transfer of property is the result of an exploitative power relationship, therefore ownership is theft, debt is slavery, and socialism is the answer.

In short, Graeber was questioning Adam Smith’s thesis that the division of labor leads to the voluntary exchange of surplus goods, which leads to the emergence of money. Chartalism vs Metallism.

George Selgin debunks Graeber’s “debunking” by pointing out that barter is an unstable system, and any population that engages in barter will quickly progress to monetary exchange or perish from unmatched needs. Anthropologists rarely encounter barter societies in the wild because it’s a temporary state.

Here we are in the time of coronavirus, where preppers and hoarders have emptied store shelves and I’m forced to violate social distancing to trade toilet paper for distilled water from a neighbor. Barter is back. Will TP become the new store of value, or shall we starve?

In California, anti-gouging laws prevent retailers from raising the price of goods to meet heightened demand. Six months ago, Clorox disinfecting wipes averaged $3 a can. Today, it’s illegal to charge more than $3.30 even though I would gladly pay twice that.

This isn’t barter; it’s demonetization. Dollars no longer serve as an accurate unit of account for Clorox wipes, especially since no amount of dollars can buy wipes that are out of stock. This is the point where essential items should gain intermediate commodity status and evolve into money.

Except that can’t happen. The FBI has a Hoarding and Price Gouging Task Force that prevents enterprising citizens from providing much-needed liquidity on scarce products. It’s illegal to even source them from elsewhere. My mother tried to buy a box of Chinese KN95 respirator masks for my brother’s hospital, but the masks were seized by customs at the border.

Even in the brief historical periods where barter may have existed, it was never really barter so much as bilateral monopoly. Do you think tribal chiefs allowed members to freely negotiate with hostile tribes? Of course not – some of the earliest traded goods were women and children.

So Graeber was wrong. Power isn’t the ability to assert ownership over property. Power is the ability to control how others assert ownership over property.

Marcel Burger

Avoid getting REKT by knowing the risks of your derivative positions

Continue reading on BurgerCrypto.com »

Avoid getting REKT by knowing the risks of your derivative positions

Continue reading on BurgerCrypto.com »

Privacy isn’t free
Thursday, 09 April 2020
Zane Pocock
♦Photo by Brandon Wong on UnsplashDon’t take your rights for granted. If you care, defend them.

Governments the world over have long sought to cripple the assurances of consumer encryption. They back it up with strong, emotional reasoning. They pull on the heart-strings by illustrating how encrypti

♦Photo by Brandon Wong on UnsplashDon’t take your rights for granted. If you care, defend them.

Governments the world over have long sought to cripple the assurances of consumer encryption. They back it up with strong, emotional reasoning. They pull on the heart-strings by illustrating how encryption tools allow global pedophile rings to organize their operations and distribute their content. A disgusting thought. Or they imbue the populace with fear, illustrating how a terrorist cell might use this technology to organize an attack, safe from the prying eyes of the brave men and women tasked with “protecting our freedoms”.

Leveraging a world thoroughly distracted and frightened by the Coronavirus, the US Federal Government is now using the shock doctrine to try their hand once more at undermining this technology. Called the EARN IT Act, a fittingly dystopian doublespeak, the proposed law relies on a sleight of hand to form a law-enforcement run committee responsible for regulating online platforms, ultimately granting it the authority to unilaterally undermine encryption (while not explicitly saying this). The legislation had been circulating for a while with apparently little chance of passing. That is, until the pandemic opened the legislative buffet. Now it’s looking like it might just pass after all.

So, what’s the big deal?

The Long Game

Government has a history of attempting to undermine encryption tools harnessed by everyday people. Clearly visible attempts reached a crescendo with the Crypto Wars of the early 1990s, before they were forced underground into the controversial operations of today’s NSA. But they’ve never lost sight of the prize: a window into the activities and thoughts of everyone in the world.

In 1991, Phil Zimmermann invented an encryption program called Pretty Good Privacy (PGP). We will explore a little more how this works later, but briefly it allowed for two things: end-to-end encryption, meaning individuals could obscure messages to each other such that the intended recipient was the only person able to read it; and digital signatures, meaning the author of a message could certify that they themselves created it. Governments, particularly the US, had been keeping close control of encryption programs because of their military usefulness: if they met certain criteria they were legally defined as munitions. Zimmermann had written quite the program, the first major consumer challenge of these controls, and soon he was the target of a criminal investigation for “munitions export without a license”.

Zimmermann was never formally charged, but his creative defense set the groundwork for a vital legal precedent for our online lives. He published the PGP source code as a book, meaning that global distribution was protected by the First Amendment to the United States Constitution (the one about free speech, for those unfamiliar):

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Tying the use of encryption programs to the US Constitution, ensured that it was upheld as a basic legal right. While Zimmermann never had to defend formal charges himself, his defense was integral to two later legal cases that established the legal precedent.

Since then, the US government has continued to take pot-shots at encryption, but largely focused its energy on the clandestine activities of the Deep State. Attempts to change the status quo have been largely unsuccessful, with the Fifth Amendment (the right not to self-incriminate) used to set the precedent that a suspect can’t even be forced to reveal a password. But privacy advocates shouldn’t be taking victory laps: the CIA was recently revealed to have owned a major distributor of government encryption software, Crypto AG, which it had used to spy on foreign governments for decades, by inserting vulnerabilities. Meanwhile, the NSA has illegally conducted widespread mass surveillance of the American population, after leveraging new capabilities granted to it under the Patriot Act. For exposing these crimes, Edward Snowden is forced to hide in Russia. On the bright side, he also revealed that these agencies still have no way to break PGP.

The Principled Objection

It was around the time of the Crypto Wars that the cypherpunks came to prominence. Timothy C May was early, writing The Crypto Anarchist Manifesto in 1988. He predicted nothing short of a revolution arising from the technologies he could see being developed. He foresaw that a technology like PGP was just around the corner, and that this would herald the rise of a sovereign online individual. An individual able to act entirely anonymously, in a world where reputation was tied to verifiable pseudonymity rather than government identity. He foresaw that the state would try in vain to stop such progress, but championed a principle that needs no argument among free people: liberty.

“Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions. Combined with emerging information markets, crypto anarchy will create a liquid market for any and all material which can be put into words and pictures.” — Timothy C May, The Crypto Anarchist Manifesto

More directly concerned with privacy, Eric Hughes wrote A Cypherpunk’s Manifesto in 1993. He made the case that “privacy is necessary for an open society in the electronic age,” defending that privacy is something humans have always been able to rely on finding. Before the electronic age, “people have been defending their own privacy for centuries with whispers, darkness, envelopes, closed doors, secret handshakes, and couriers.” But with the dawn of communications technologies gaining traction as he wrote, it was foreseeable that without defending the assurances encryption offered, this important element of a society was in danger.

Meanwhile, Hal Finney, who would go on to receive the first ever Bitcoin transaction 15 years later, identified in Politics vs Technology that there was a tendency among the cypherpunks to prematurely celebrate victory and avoid the political. He astutely drew attention to the fact that cypherpunks harnessing such simple tools as text and communication protocols, could end up in jail if participants didn’t engage the political sphere. And indeed, this is what we see now in the high profile cases of Julian Assange and Ross Ulbricht.

“The notion that we can just fade into cypherspace and ignore the unpleasant political realities is unrealistic … Have people forgotten the PGP export investigation? Phil Zimmermann hasn’t. He and others may be facing the prospect of ten years in prison if they were found guilty of illegal export. If anyone has any suggestions for how to escape from jail into cyberspace I’d like to hear about them.” — Hal Finney, Politics vs Technology

It is with Hal Finney in mind that we push back, both in principle and in regulation, against encroachments on these hard-fought liberties.

“Fundamentally, I believe we will have the kind of society that most people want. If we want freedom and privacy, we must persuade others that these are worth having. There are no shortcuts. Withdrawing into technology is like pulling the blankets over your head. It feels good for a while, until reality catches up.” — Hal Finney, Politics vs Technology
You’ve got something to hide

People have been trained to see privacy as malicious. But as Eric Hughes put so simply in A Cypherpunk’s Manifesto, “privacy is the power to selectively reveal oneself to the world.” If one tries to make the argument for privacy to someone who isn’t particularly concerned by it, the common response is to observe that they “have nothing to hide”. While this speaks volumes of the comforts and security people have been offered in life, it betrays a lack of concern for the multitude of scenarios where someone might have something to hide. What’s legal is not necessarily what’s moral; indeed, laws are often changed by the activities of people doing that which they are not supposed to be doing.

Take same-sex relationships, for example. There is an increasingly clear consensus in most Western societies that these relationships should not be oppressed by the state (even while there is disagreement on whether they are culturally acceptable). While recent legal victories to this end have been celebrated as examples of the system allowing for real freedoms, it’s often forgotten that these victories would not have come to pass if people did not have the ability to privately break the law. What’s also forgotten is that these relationships and religious freedoms remain forbidden in large swathes of the world. A successful attack on encryption would move societies closer to that hypothetical world where every single law is 100% perpetually enforceable. Would-be offenders would know they have a guaranteed jail term for crossing the line, so in the present example, same-sex relationships would rarely happen in the first place. This is the Big Brother argument: the very act of mass surveillance changes behavior and suppresses the human will. Some might like this idea, but many would see a tragedy in it: how would these relationships come to be legal if so few had ever experienced one? It would be astonishingly naive to suppose that no other such cases are out there, still pending the official stamp of approval.

“I have nothing to hide” is also an attitude that betrays an assumption of guilt: the opposite of a legal tradition that presumes innocence until proven otherwise. The EARN IT Bill is playing a clever positioning game in its name, leveraging this assumption. It implies that the government gives people their rights, and they must therefore earn the right to privacy, but this is the wrong way around. If one charitably assesses the purported goals of democracy, it is the process by which a citizenry chooses which liberties they might forgo for the collective. Government does not have the power to grant people the right to privacy. They already have it. Rather, people have the power to surrender that right.

Privacy and secrecy are not practically separable

People half-sold on the argument for privacy technology, often attempt to delineate between privacy and secrecy. Their argument is that you have a right to privacy in the sense that you can close the door to the bathroom when you’re using it. But you don’t have the right to secrecy — if you’re suspected of doing something nefarious behind that closed door, they argue that bursting in would be in service of a “greater good”, and that the ability for our enforcers to do so is a critical capability.

The people making this argument appear to intuitively understand the importance of privacy technology, but have been so deeply compromised by the narrative that they can’t see the flaw in such an attempt at bifurcating between privacy and their definition of secrecy. For the two cannot be practically separated. In the connected world, either all the information you’re sending is able to be snooped, or none of it is. This is a fundamental, practical limitation. But once a secure communication is complete, nothing is stopping an individual from divulging a secret from that communication. The answer to this conundrum isn’t spying, it’s old fashioned police work.

The “greater good” argument can also be turned on its head, particularly when it comes to the state. One of the strongest cases for encryption is accessible human resilience in the face of tyranny. As most people sit at home, locked up with their liberties suspended for the “greater good” in the face of the Coronavirus, it should be increasingly clear how easily tyranny can be leveraged against people in the modern age, despite the assurances they’ve told themselves about how democracy fixes this. This is true even if one charitably grants that the current response is justified. Today, the average person’s fragility is strikingly clear. Their capacity to conduct activities in secret if needed ought to be obvious, not just in principle, but in the increasingly likely case that they need it.

The Fallout

Putting aside the philosophical reasons that one might care to protect encryption, it’s arguably the practical implications that make a stronger, more immediate argument. A successful attack on encryption undermines the fundamentals of many tools and practices we have come to rely on.

A sly, roundabout attack on encryption

The EARN IT Bill requires that all online platforms comply with a list of as-yet undefined “best practices”, that will be created by a commission of 19 people controlled by US Attorney General William Barr and law enforcement agencies. These committee members will have the power to unilaterally define and enforce criteria that online platforms must meet in order to retain legal protections from criminal and civil liability for user-generated content under Section 230 (47 U.S.C. § 230). Typically Orwellian, they’ve even managed to word it such that encryption might be theoretically nullified without mentioning the word:

“This bill says nothing about encryption. Have you found a word in this bill about encryption?” — EARN IT Bill co-sponsor Sen. Blumenthal

So, you ask, if the criteria are yet to be drafted, and the Bill makes no mention of encryption, what’s the cause for concern here?

To those paying attention, this is transparently the latest in a slew of attacks on encryption that have ramped up dramatically in the past year. The primary indicator is to observe who, exactly, is expected to be involved in this commission:

  • In December, Senator Lindsey Graham (co-sponsor of the current bill) threatened tech companies that “you’re going to find a way to do this or we’re going to do it for you,” with regards to routine surveillance.
  • US Attorney General William Barr, who will ultimately be running the commission with the ability to approve or veto anything, has attacked encryption so consistently during his term that it’s increasingly become his MO.
  • And the VP at the National Center for Missing and Exploited Children (NCMEC) was strikingly transparent in a hearing of the Bill, saying that he wants every message sent on the Internet to be read by government-approved scanning software, with findings reported to law enforcement. By implication, the companies operating as the pipes and platforms for the Internet in effect wouldn’t be able to securely encrypt anything.

As the EFF points out:

“You can’t have an Internet where messages are screened en masse, and also have end-to-end encryption any more than you can create backdoors that can only be used by the good guys. The two are mutually exclusive. Concepts like “client-side scanning” aren’t a clever route around this; such scanning is just another way to break end-to-end encryption. Either the message remains private to everyone but its recipients, or it’s available to others.”
A primer on encryption

To understand why attacks on encryption are so damaging, it’s important to have a base level of awareness about how encryption works. To dramatically oversimplify, encryption is the process of encoding information in such a way that only authorized parties can access it.

Early encryption followed a method known as symmetric key cryptography, meaning both the sender and receiver required the same knowledge to obscure and reveal a message. For example, a symmetric encryption algorithm might require iterating each character by one place in the alphabet. ABC would be encrypted by moving to the right and becoming BCD. The recipient could decrypt it by reversing the same algorithm: moving each character by one spot to the left and arriving back at ABC. Think of it like a sender and receiver sharing a post box to which they both have an identical key. The sender opens the box with his key to deposit a message, and the recipient uses their identical key to retrieve the message from that same box in order to read it.


Recently, encryption has been employed asymmetrically, known as public-key cryptography. Rather than having a single point of failure as in symmetric key cryptography (where both sender and receiver have the same key), everyone has their own unique private key from which they can derive a public key. We needn’t go into the technical here, so to simplify, this public key can be seen as an address that can be published publicly. A sender can encrypt a message to the recipient’s public key, and only the recipient can ever read it by using their private key. To use the post box example again, it’s like everyone having their own box which only they can open, but they can share the address with correspondents. PGP, discussed earlier, was an early example of this being used at a consumer level, and it is still rather successful.

♦SourceYou use encryption every day without knowing it

At a pragmatic level, attacks on encryption threaten the most basic technologies you’ve come to rely on, for both the meat-space and internet economy. These should be increasingly obvious if you consider the needs of all the individuals around the world working from home under quarantine.

End-to-end encrypted messaging and voice calls allow for distributed teams to securely discuss sensitive topics. It ensures that important documents can be verified as coming from who you think they’re coming from, and that those containing sensitive material — such as claims on your health plan — haven’t been exposed to malicious actors. That little padlock icon you see in the address bar of your browser is telling you that your connection to the server hosting this blog post is secure. It verifies that the information rendered on this web page has been sent from the server you think it was sent from, without a malicious actor injecting code or other content in the middle, or snooping on your credit card details.

Beautyon has even pointed out that an attack on encryption would be game theoretically stupid for America in today’s connected world:

“The men advising Trump can demand that encryption has back doors in America, but they cannot demand that anyone anywhere else follows her. This would mean that only US web sites and services are vulnerable; the entire US internet would be globally recognized as an unsafe zone for e-commerce. It would be a disaster for the tech sector of the US.”

The central, practical problem with attacking encryption is that it introduces a fundamental weakness in this infrastructure. What these actors want is something known as a backdoor: an intentional exploit, known to law enforcement, that can be selectively used in the course of an investigation. Leaving aside the unearned trust that law enforcement will not abuse such access, the most obvious problem is that other bad actors will find these exploits. Even without the intentional addition of weaknesses, the pace and magnitude of these exploits is already growing at a concerning rate: just look at how malicious actors are able to gain access to Amazon’s Ring cameras, or how almost half of America had their social security numbers exposed by Equifax.

While the arguments above should all be considered of utmost importance, here’s the real kicker: even with a backdoor, law enforcement won’t be able to achieve their goals. These laws are futile for their purported aim. Encryption standards are open source and broadly distributed. If you need to use it, you’ll be able to. The end result is mass surveillance of average citizens in exchange for trivial improvements to the efficacy of law enforcement. The EARN IT Bill, enforceable at the platform level rather than targeting encryption programs themselves, only violates those who don’t think they have “anything to hide” and thus don’t bother to find alternatives. If the government forces a backdoor into iMessage, for example, those that wanted to would still be able to send encrypted messages with a little more effort. They would simply encrypt messages on their computer before copying it over to the communication application. The recipient would also have to take a little more effort to decrypt the message, but the result would be the same. Those snooping on iMessage would just see what appears to be a long string of random characters. If a group is sophisticated enough to run a global pedophile ring, they’re going to do this. But if you’re telling your friend that you’re going for a cheeky second run in violation of your quarantine quota, you might not bother to encrypt it and soon get a knock on the door.

Rise up

Security researchers often argue that the government shouldn’t be in the average person’s threat model. The argument is that you’re probably not important enough for them, but if you are, then they will always get you anyway — so what’s the point. They point to Julian Assange, a heroic activist against tyranny, detained and tortured in London. Aaron Swartz, who wanted people to have access to the research they had funded, driven to death by DoJ bullying at the behest of academic publisher JSTOR. This case is particularly jarring amidst the Coronavirus crisis, as JSTOR has been seeking brownie points by temporarily allowing open access to a limited subset of its database. Ross Ulbricht, set up with egregious false accusations, dropped before trial, to sway the jury’s perception. These are the sorts of online actors who know many of the best practices for covering their tracks, but they are hunted relentlessly by the full scope and fury of the state.

Yet these same people also demonstrate the exact activities that should be a rallying cry for why encryption is so important. Maybe stories of child abuse can pull at your heartstrings (and obviously one shouldn’t diminish these stories: it’s the purest evil), but the same tools in the hands of a principled, independent journalist can be harnessed to expose the child abuse rampant among the world’s most powerful people themselves, as with Jeffrey Epstein’s network. Maybe the specter of terrorism is a strong argument for you as to why such powerful tools shouldn’t be in the hands of the layperson. But without encryption, Julian Assange’s Wikileaks might never have been able to pull off the clandestine operations required to expose the Obama administration’s role in arming ISIS. If terrorism is such a threat, it might be beneficial to understand exactly who’s involved.

This argument — not to bother evading the government — is defeatist, but it is also incorrect. These attempted abuses of our liberties, and the government’s role in feeding the problems they profess to solve, demonstrates that the government should be the centerpiece of everyone’s threat model. The cynical nature of the EARN IT Bill demonstrates that they are one of the greatest threats to human life and liberty.

The second- and third-order effects of a successful attack on encryption are poorly understood and dramatic. Honest citizens will lose their liberties while the worst people will continue to find workarounds. There’s a counter-intuitive rationale to expect that the fight against child abuse can actually be more effective by strengthening encryption, not undermining it, as it serves to protect investigative journalists and encourages whistle-blowers with stronger assurances of anonymity.

It’s an intellectually lazy mental shortcut to think that attacking encryption would magically improve things. If anything, it will make things worse.

Encryption is antifragile. Encroachments by malicious actors will only strengthen the need for it, and the assurances that its developers seek to offer. It also forces knowledgeable users to broaden the scope of their threat model. Using free and open source software like PGP and Signal, the everyday person can build a web of trust including people who can verify the software they’re using and certify who they’re communicating with. Begin to do the hard work. Fight for your right to privacy.

Sincere thanks to Alex, Thib, hodlonaut, Max Hillebrand, Matt Odell and Hass McCook for their help with this piece.

If you want to learn about responsible Bitcoin custody for your fund, exchange, or other vehicles, have strict LP and risk management requirements, or otherwise appreciate a trust-minimized profile, we’d love to talk.

Please email us at custody@kn0x.io


Privacy isn’t free was originally published in Knox Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Marcel Burger

Have you checked the earlier published articles? Residual studies were conducted indeed.

Have you checked the earlier published articles? Residual studies were conducted indeed.

Pandemic Dashboard: 3
Wednesday, 08 April 2020
Unanticipated Consequences Accidents down, so insurance companies refunding some premiums. Billboard advertising down because nobody out to look at them. Crime down. Beyond Fat and Lean Food getting tossed at farms while people face shortages. Toilet paper panic is partly legit because office/commerc
Unanticipated Consequences Accidents down, so insurance companies refunding some premiums. Billboard advertising down because nobody out to look at them. Crime down. Beyond Fat and Lean Food getting tossed at farms while people face shortages. Toilet paper panic is partly legit because office/commercial toilet paper supply chain is different. The Great Indoors Not everything about […]
Blame China
Saturday, 04 April 2020
Elaine Ou
VP Mike Pence, asked by CNN's Wolf Blitzer if the the U.S. was slow in reacting to the coronavirus outbreak: "The reality is we could have been better off if China had been more forthcoming." — Peter Nicholas (@PeterAtlantic) April 1, 2020 China lied about their numbers. Ohhh, I am

VP Mike Pence, asked by CNN's Wolf Blitzer if the the U.S. was slow in reacting to the coronavirus outbreak: "The reality is we could have been better off if China had been more forthcoming."

— Peter Nicholas (@PeterAtlantic) April 1, 2020

China lied about their numbers.

Ohhh, I am so mad. The local stores have been out of toilet paper for four weeks. I asked why they didn’t restock in greater quantities; the stockers said their shipments had been calibrated to China’s Numbers. Health care workers don’t have protective gear – turns out our Strategic National Stockpile was downsized according to China’s Numbers. Hospitals, facing immediate bankruptcy, are forced to reduce physician pay and furlough staffers – a key component of their annual budget hinges on, what else, China’s Numbers.

Turns out China’s Numbers are a lot like LIBOR, a reference rate that serves as a keystone for the entire economy. The US Surgeon General, CDC, World Health Organization, are still advising us not to wear masks. Mask effectiveness models undoubtedly based on China’s Numbers.

The medical community made — interpreted the Chinese data as: This was serious, but smaller than anyone expected. –Dr. Deborah Birx, Deep State Department

This is stupid, but remember Russia? They spent a few rubles buying Facebook ads in 2016, and set off a butterfly effect that hacked our election, undermined democracy, and placed a Putin puppet in the Oval Office.

Initially, no one believed the DNC’s excuse that Russia had thrown the election. Even Mark Zuckerberg said the idea was crazy. But a constant drumbeat of establishment figures chanting nonstop about Russian hackers and Russian disinformation campaigns, and anyone who disagreed was accused of being a Russian shill. It turns out if you bleat nonsense for long enough, people… well, people still aren’t dumb enough to believe it, but they’ll accept it. They’ll pretend to see the Emperor’s clothes to avoid being canceled.

So even Trump had to play along, acknowledge the Russia narrative.

♦Billboards at the Moscow airport

Anyone could appreciate the value of having a general-purpose scapegoat. Vermont’s power grid went down – blame Russia! Yahoo suffered a major data breach – definitely Russian hackers. Experian loses everyone’s social security number – Russia again!

If China didn’t exist, we’d blame Iran for lying about their numbers. Or Russian disinformation campaigns.

The real victims in all of this are not the COVID-19 patients who will die, but the journalists hoodwinked by public health officials. Excuses are now acceptable substitutes for results. After multiple generations of rewarding failure, we’ve come to believe that everything will be fine as long as we can blame someone for our oppression.

And maybe this works in the West. Maybe if the virus had originated in Germany, we could cry foul and demand another century’s worth of reparations. But it didn’t, and we can’t. Strange, that the Marxist countries that celebrated class struggle refuse to recognize our victimhood.

Ruben Somsen

There currently is a glaringly huge incentive problem in blockchains. It is worth experimenting with new chains and technology, but in order to do so, each chain needs its own token. And whenever a token is involved, human greed inevitably takes over and even the most well-intentioned projects tur

There currently is a glaringly huge incentive problem in blockchains. It is worth experimenting with new chains and technology, but in order to do so, each chain needs its own token. And whenever a token is involved, human greed inevitably takes over and even the most well-intentioned projects turn into marketing-driven price pumps. What I propose here instead, is a viable way to allow for new experimental chains to be linked to Bitcoin in such a way that speculation is largely taken out of the equation. The one caveat? It won’t be able to act as a store of value like Bitcoin.

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 — @SomsenRuben

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Back in 2014, one area of exploration was the decentralized two-way pegged sidechain. If it were possible to trustlessly move coins from one chain to another, then Bitcoin’s 21 million coin limit could be used as a base upon which all experimentation takes place. This was once thought to be possible through the use of SPV proofs, but was quickly abandoned due to being insecure.¹ Perhaps in the future zero-knowledge proofs can reliably provide this functionality, but as of today, the closest thing we have are Drivechains (a somewhat controversial idea which relies heavily on miner incentives and UASF) or trusted federations (e.g. Liquid or Statechains).

This brings us to the one-way peg — burning bitcoins in order to receive tokens on another chain. Burning one bitcoin would be equal to receiving one token (preserving the 21M limit), and moving back would be impossible. Projects have done this in the past (e.g. Counterparty), but they only allowed burning for a limited period of time, after which speculation would still run rampant. What I propose here instead, is a perpetual one-way peg (P1WP), meaning users can move to other chains at any time they want.²

♦As Sam once said: “There’s some good in this world, Mr. Frodo… and it’s worth burning your bitcoins for.”

From a value perspective, the main thing to notice is that this makes BTC the superior speculative asset, since you always have the option to convert it. Anyone who thinks that one of these new P1WP sidechains might be better than Bitcoin, should therefore logically still prefer to hold BTC. This means speculating on the new asset is near-pointless³, and Bitcoin’s network effect is retained as new technology gets developed on top of these sidechains.

If a new sidechain does well, more and more people will want to burn their coins.⁴ If it doesn’t do well and dies off, it only affects those who were brave (or foolish) enough to use the sidechain. They will have burned their BTC for what is now effectively a worthless token. The key here is that in either scenario, Bitcoin holders are strictly positively affected, since their coins increase in value when others burn theirs.

But why would anyone be willing to burn their bitcoins? There can be only one reason: there is an immediate need to use that token to pay for transaction fees. The token essentially reflects the current demand for block space on the sidechain. You can think of Bitcoin as an orchard and the token as apples. You only buy apples when you are hungry (for block space), not because you think someone else will pay more for them next week. Apples are a bad store of value. If you want to invest in the future of apples, you invest in the orchard (Bitcoin).

♦No, that man with the cool sunglasses is not Bitcoin Core developer Sjors Provoost (I think)

The inability of moving back to the Bitcoin blockchain (other than trading with someone) essentially means the sidechain tokens will never be an appealing store of value, but every other use case becomes possible without needing to introduce yet another highly speculative token. Think colored coins with privacy features (enabling federated BTC two-way pegs), experimental smart contracts, DAOs, DeFi, or any of your other favorite buzzwords.

Ironically, the P1WP actually realizes a famously misleading marketing claim Ethereum made at launch: it’s just “gas” and not competing with Bitcoin as a store of value.⁵

While the P1WP can function on a sidechain with its own independent consensus algorithm, it makes a lot of sense to utilize Blind Merged Mining (BMM), since that’s another mechanism that synergistically ties it to Bitcoin.⁶ BMM essentially outsources the act of mining to the Bitcoin miners without requiring them to validate the BMM blocks. Anyone can create a BMM block and have miners include it in a block by paying them a regular Bitcoin fee. Since this transfers all the fees in the BMM block to miners, this increases the PoW security of the Bitcoin network.⁷ My fully functional design for bringing BMM to Bitcoin can be found here.

So there you have it. If your chain is not trying to be a store of value, you have no more excuse. You don’t need to issue a new speculative asset — all you need is the perpetual one-way peg.

Thoughts? Comments? Join the discussion on Twitter or Reddit.

♦Is he looking determined or about to cry from having sand in his mouth? I can never tell.

¹ The general issue was that 51% of all miners could create a fake SPV proof and take all the coins, which would be particularly problematic if the sidechain has low security and stores many coins.

² Adam Back entertained the idea back in 2013. Note that a perpetual peg means that the parent chain needs to be continually validated in order to witness when new coins are created through the burning process. SPV proofs are also an option, but less secure.

³ If too many bitcoins are burned or demand drops, it’s possible for the token to become worth less than one bitcoin. Consequently, if demand picks back up, the token will go back to being worth one bitcoin. This is an event that can still be speculated on.

⁴ While extremely unlikely, it’s even possible that the new sidechain is so popular that everyone moves over, making this essentially an opt-in hard fork.

⁵ First finish reading this article, then see the picture below these footnotes.

⁶ There is a theoretical problem where the Bitcoin blockchain gets reorganized after a burn, causing unbacked token inflation. BMM makes this impossible, because a Bitcoin reorg would also mean the BMM chain gets reorganized.

⁷ This may prove to be crucial in light of the subsidy decreasing and the block space market needing to compensate and generate a higher fee income for miners.

♦The Ethereum foundation had the right idea, despite their “speculatory oopsie-daisy” in terms of execution.♦
Flattening the Curve We’ve moved on from the innumeracy edition to the “spot the inflection” phase as bureaucrats everywhere try to solve for the flattening and claim success. PPE Shortages Now it looks like a bustling brokered market in N95 masks is seeing bureaucrats getting outbi
Flattening the Curve We’ve moved on from the innumeracy edition to the “spot the inflection” phase as bureaucrats everywhere try to solve for the flattening and claim success. PPE Shortages Now it looks like a bustling brokered market in N95 masks is seeing bureaucrats getting outbid by foreign buyers. Peter Navarro could have done one […]
Racist Virus? (part 2)
Thursday, 02 April 2020
Elaine Ou
This was supposed to be an appendix to the last post, but there were too many images. Here’s a breakdown of NYC COVID-19 cases by zip code. Census data here, but this map may be more informative (most commonly-spoken language after English and Spanish): COVID-19 cases by zip code in Seattle: Ce

This was supposed to be an appendix to the last post, but there were too many images.

Here’s a breakdown of NYC COVID-19 cases by zip code.

Census data here, but this map may be more informative (most commonly-spoken language after English and Spanish):

COVID-19 cases by zip code in Seattle:

Census map here.

Analysis left as an exercise for the reader.

(Census data may be more useful for showing population density than racial distribution)

Update: I’m a little hesitant to link to this, as it appears to be the sort of website one might get canceled for reading. The author is doing a COVID-19 analysis for Los Angeles by zip code. (02-Apr)

Ross Ulbricht

By Ross Ulbricht

Every time a block is added to the Bitcoin blockchain, the miner who discovered it is rewarded with new bitcoins according to a schedule set up when Bitcoin was first launched. The reward started at 50 bitcoins per block and is cut in half every four years, eventually reach

By Ross Ulbricht

Every time a block is added to the Bitcoin blockchain, the miner who discovered it is rewarded with new bitcoins according to a schedule set up when Bitcoin was first launched. The reward started at 50 bitcoins per block and is cut in half every four years, eventually reaching zero. The next halving is set to occur in May 2020, reducing the reward to 6.25 bitcoins. This has led to speculation about how this event might affect the value of bitcoins.

The reasoning goes that, if the rate (or flow) of new bitcoins being added to the current total stock of bitcoins is reduced, then the value of all bitcoins should increase. This so-called “stock-to-flow ratio” is a measure of how hard a currency is (how hard it is to debase through inflation). The harder a currency is, the better it functions as a store of value, which is one of the essential properties of money.

This sounds reasonable, so we should be able to look at how the value of bitcoins changed after the last two halvings and see the effect. The block reward halved from 50 to 25 bitcoins on November 28, 2012 and again from 25 to 12.5 on July 9, 2016. In both instances, the value of bitcoins as measured in U.S. dollars (the biggest market for bitcoins at those times) increased dramatically, by more than ten-fold.

It sounds like an open and shut case. We have an hypothesis — that an increase in the stock-to-flow ratio will lead to an increase in value — that has proven correct in both instances that it occurred. Now all we need to do is load up on bitcoins before May 2020 and watch the profit roll in. Before you do, let me point something out.

The block reward schedule has been known publicly since Bitcoin’s inception. It is not a secret, so we are not the only ones who know there will be a halving in May 2020, nor are we the only ones who know what happened to the value after the last two halvings. Everyone knows. Therefore, to profit from this knowledge, you must buy in before everyone else who is hoping to profit from it.

“No problem,” you might say. “I’ll just buy in a few days before the halving and beat everyone to it.”

That’s great except there is nothing stopping everyone else from doing the exact same thing! It is a race to be first all the way back to the present day. The name for this is “discounting,” and the idea is that all publicly available information about an asset is already factored into its current price.

“OK,” you say. “Then why did the value rise after the first two halvings? Everyone knew about those too, so the halvings should not have had any effect.”

Did they have an effect? Those halvings occurred during a truly spectacular bull market in which bitcoins rose in value 75% of the time (see here). With those odds, it is more likely than not that both halvings would occur during an uptrend just by chance. In other words, we can’t say that the stock-to-flow hypothesis was validated, so we can’t use it to predict what will happen this next time around. However, that does not mean the value won’t rise, or that it will fall. It just means that if it does, it probably is not due to the halvings.

What we can say about the upcoming halving is that it can be used by bulls to justify being bullish, just as bears can use the discounting hypothesis to ignore it and justify being bearish. Why the bulls are bullish and the bears bearish in the first place is another question entirely and one I address here.

Scorpio Season: A New Talk Show
Wednesday, 01 April 2020
My friend Lisa (@niftynei) and I decided to start a talk show. It’s called Scorpio Season, since we’re both scorpios. You can subscribe to it as a podcast, or watch/listen it on YouTube. At the moment the video version is just the two of us as talking heads, but we might throw in some gra
My friend Lisa (@niftynei) and I decided to start a talk show. It’s called Scorpio Season, since we’re both scorpios. You can subscribe to it as a podcast, or watch/listen it on YouTube. At the moment the video version is just the two of us as talking heads, but we might throw in some graphics […]
Dear Bitcoiners
Tuesday, 31 March 2020

The madness of this world became obvious in an instant. Everything is changing way faster than most of us ever imagined — but I’m not worried. To the contrary, I’m weirdly optimistic — because of Bitcoin, and because of you.

You probably don’t know me; I probably don’t know you. And that’s

The madness of this world became obvious in an instant. Everything is changing way faster than most of us ever imagined — but I’m not worried. To the contrary, I’m weirdly optimistic — because of Bitcoin, and because of you.

You probably don’t know me; I probably don’t know you. And that’s perfectly fine. However, I know some of you — and I believe that I know some of you quite well, even if we have never met or met only briefly. I have read your writings, watched you debate each other, saw the things you’ve built, and listened to your voices for countless hours. I don’t care if you identify as a bitcoiner, or as a maximalist, or as a pre-/shit-/multi-/whatever-coiner. I don’t care if you fell down the rabbit hole years ago or if you just got the first glimpse of the honey badger den. I don’t care about your political beliefs, sexual orientation, gender, religion, age, and countless other qualifiers that might be used to put you in a box. The fact that you are here, reading this, thinking about Bitcoin, caring about Bitcoin, is enough for me. That’s why I’m bullish. Bullish on Bitcoin, and bullish on bitcoiners.

“Bullish on bitcoiners.”

Matt Odell

Bitcoin’s implications are so far-reaching, the innovation so profound, it boggles the mind. The inter-disciplinary nature of this beast attracts minds from countless areas of expertise: computer science, cryptography, mathematics, physics, economics, finance, trading, engineering, the list goes on and on. Bright minds, extraordinary characters, strong opinions, contrarians, idealists trying to change the world — all those and more make up the loose collective we might call bitcoiners.

Honey Badger Don’t Care

Don’t get me wrong: Bitcoin doesn’t need you; it doesn’t need any of us. It’s incentive systems have a way to make sure that Bitcoin will be fine, even if the set of people working on it and using it changes completely. It will be fine, just as it is now as the whole world grinds to a halt.

The current crisis — and the financial repercussions that will inevitably follow — will make it obvious that we need Bitcoin more than Bitcoin needs us. Again, don’t get me wrong: we must not be complacent. We must continue to care, continue to build, continue to educate, continue to proselytize, continue to argue, continue to debate. We find ourselves at the forefront of a battle of ideas, and in this battle, complacency kills.

“Ask not what bitcoin can do for you, but what you can do for bitcoin.”

Adam Back

If you can contribute by coding, writing, educating, discussing, recording, creating, or simply hodling — great. But make no mistake: Bitcoin is bigger than all of us. And, dare I say it, the current failure of the legacy system is bigger than Bitcoin.

Yes, Bitcoin has the potential to fix many of the underlying issues of our corruptible and broken systems. But we will need a plethora of freedom-enabling technologies to win this war; tools that empower the individual by default, by offering strong privacy guarantees, encryption, and the freedom to use these tools without restrictions.

Shill Lightly

As this global pandemic sweeps through the globe, with hundreds of thousands infected, tens of thousands dead, and millions of people out of a job, priorities shift from trivial to existential. While difficult, it is more important than ever to stay humble and shill lightly. It is all too easy to alienate friends and family by offering an enthusiastic Bitcoin lecture every time you sit at the dinner table. While enthusiasm is laudable, I strongly believe that Bitcoin will be understood by everyone as soon as they are ready — be it out of necessity or out of curiosity. Yes, the timeline just got accelerated. But this is still a marathon, not a sprint. And it might be one of many marathons.

“One of the facts of history is that battles do not stay won. Those that matter have to be waged again and again.”

Stanley Knowles

The powers that be will neither step away willingly nor silently. And since the battle for self-sovereignty and freedom is one that matters, it will have to be waged again and again.

Protecting An Idea Whose Time Has Come

Bad actors will continually try to undermine Bitcoin, as they have tried in the past. Unfortunately, we have good reason to believe that this will continue. And, unfortunately, we see the trend of undermining and maiming technology everywhere we look. If we look at the internet, for example, we see various interest groups waging war against net neutrality, politicians introducing nation-wide firewalls, websites geo-blocking content, people getting arbitrarily deplatformed, demonetized, or banned.

They say that nothing is as powerful as an idea whose time has come. I believe that Bitcoin’s time has come, and in hindsight, it will be obvious to everyone. Before it becomes obvious, however, swathes of people will try to distort what Bitcoin is and the ideas it represents.

“Ideas change the world, but they do it by assuming shape, they do it by taking concrete form.”

Stanley Knowles

While Bitcoin’s form is quite concrete since its inception, it is an abstract, intangible form, making it exceptionally hard to grasp. It will take some time until Bitcoin is as ubiquitous as the internet is now. This time — this window of confusion — will be used and abused by lawmakers and charlatans alike. However, it is also a window of opportunity. An opportunity to sharpen our tools, to prepare for the flood, to ship the future faster than they can ban it.

They Are Always Wrong

Undoubtedly, there are plenty of people who don’t want Bitcoin to succeed. They will do everything in their power to prolong the inevitable. They are wed to the current system, gaining from its inherent imbalance. Some are close to the monetary spigot, or willfully ignorant, or enemies of freedom in general. Others are outright evil, aiming to become the foot that stomps on your face, forever.

“They told us not to wish in the first place, not to aspire, not to try; to be quiet, to play nice, to shoot low and aspire not at all. They are always wrong. Follow your dreams. Make your wishes. Create the future. And above all, believe in yourself.”

Joseph Michael Straczynski

They will continue to tell us that what we are doing is a pipe dream, that what we are aiming for is impossible, that we can’t operate outside of the current systems. They will restrict our freedoms: our freedom to transact, our freedom to save, our freedom to remain private. They will tell us that certain kinds of mathematics and software are illegal. They will continue to justify mass surveillance by trying to sell us the illusion of safety. And they will continue to be wrong.

Speak up. Be outraged. Use alternatives. Build alternatives. Don’t settle for the status quo — we can do better. Bitcoin is what we make of it, and I can’t imagine a better set of people to realize the full potential of this grand idea.

“There is nothing better to be on a shared mission with extraordinary people who can be radically truthful, and radically transparent with each other.”

Ray Dalio

Stay vigilant. Stay radical. Stay true to yourself. As the world is grinding to a halt, and the fall of Rome becomes more likely than ever, strong characters, sound principles, and truthful conduct are imperative.

The stage is set, the drama is unfolding, and as the crescendo comes we must not give in to tyranny. The path will be twisted and bumpy, and I’m honored to walk it to the end, with you on my side. We got this.

  • Thanks to Hass, John, and Dennis for their valuable feedback.
  • Original artwork “Citadel of Exile” by Sam Keiser
The Political Theology of Bitcoin
Sunday, 29 March 2020

This is the famous opening statement of Political Theology: Four Chapters on the Concept of Sovereignty published by Carl Schmitt in 1922. This statement offers the Continue reading »

The post The Political Theology of Bitcoin appeared first on Crypto Sovereignty.

This is the famous opening statement of Political Theology: Four Chapters on the Concept of Sovereignty published by Carl Schmitt in 1922. This statement offers the fundamental axiom of how all sovereign power functions, and how the sovereign exception found in emergency legal decrees allows for any sovereign to overcome and dispose of the law. In the essay the political theology of crypto I explain how cryptography negates the possibility of the sovereign exception through the banishment physical and identifying power, which thereby erodes all forms of contemporary state and legal power. I have also wrote an essay on how the metaphysical tensions between any sovereign and any subject will always result in a power dynamic that where the sovereign decision will always overcome any law in times of sincere crisis or emergency, and how cryptography negates this form of power. In this essay I would like to expound more deeply upon the explicit theology of bitcoin, its formula of power, and what it means for the fate of humanity in these darkest of times.

Bitcoin as Subjectivity

While bitcoin is inherently an object of war, it is also an object of art. Art because it is only an expression–an object of non-tangibility, and subjective individual human values according the society we live within. However, through a Hegelian synthesis of art and war; bitcoin spills out from the noosphere as a damnation of all fiat currencies of the world of flesh and steel, and the redemptive answer we seek to rescue and restore law, economy, and order from these crises forced upon them. Through the power of cryptography, and the systems of truth that it demands; Bitcoin expresses a form of truth that no human, institution, or organization is any longer capable of anywhere the physical realm or legal jurisdictions.

This artistic power of war that bitcoin harnesses comes from a totalizing deterritorialization and reterritorialization (in the Deleuzian sense of the word) of the global order through the initiation of a new plane of immanence based upon cryptographic power. This plane of immanence is the renewal of a nomos (law, customs, or social cohesion) of humanity with the internet at its organizational core, and truth as the form of legitimacy. It is a novus ordo seclorum where truth, not authority, becomes the renewed source of legitimacy for all people everywhere. Through the exchange of the legitimacy of power through the sacrifice of authoritarian decrees for the truth of what is, bitcoin inverts the sovereign formula of power.

Both Schmitt and Agamben, two of the leading scholars on the philosophy of sovereignty, define sovereignty as a boarderline concept that is traced throughout the theory of the state. Both conclude that sovereignty finds its foundation in the authentic decision that IS the sovereign exception of the law (also know as ‘a state of emergency’ or ‘sovereign crisis’), not the norm. Schmitt surmises this as, “‘All law is situational law.’ The sovereign produces and guarantees the situation in its totality. He has the monopoly over this last decision.”

This is of great importance because it is through the sovereign exception found in emergency decrees all state law is doomed to the fascism inherent to it. There is no bearing or trace of truth in the sovereign exception; only the raw authoritative power that will justify any legal exceptions. The great father of the theory of the state himself, Thomas Hobbes surmised this in Leviathan rather flippantly as;

“Auctoritas, non veritas facit legem (authority, not truth makes legitimacy)”

Schmitt, whom is among the most esteemed of legal scholars on Hobbes and his theory of the state, further surmises this point of how authority functions within the sovereign exception:

“The exception, which is not codified in the existing legal order, can at best be described as a case of extreme peril, a danger to the existence of the state… It is truly a matter of extreme emergency and how the emergency can be eliminated… From the liberal constitutional point of view, there would be no judicial competence at all. The most guidance the constitution can provide is to indicate who can act in such a case… He [the sovereign] decides if there is an extreme emergency as well as what must be done to eliminate it. Although he stands outside of the normally legally valid system, he nevertheless belongs to it, for it is he who must decide weather the constitution needs to be suspended in its entirety… Whether one has confidence and hope it can be eliminated depends on philosophical, especially on philosophical-historical or metaphysical convictions.”

Carl Schmitt, Political Theology p. 7
Bitcoin as Philosophical Conviction

Bitcoin is the philosophical cognition of a world that has lost its nomos; where truth is no longer concrete facts, but fickle and transient opinion of those in power. Only in a world where seditious guile rules opening, where money is but a tool for the politically powerful, and truth a facet of manipulation, does bitcoin present its radical antithesis to the current paradigm of law, order, and sovereignty. It is the fulfillment of a crypto-anarchist critique of state, money, and legal power in the world of today.

Bitcoin is this philosophical conviction–particular the philosophical-historical cognition of what cryptography is, how it was developed for total war, and what its development throughout the concourse of human history means. It is here that we find our point-of-attack and a categorical imperative from which any sovereign exception can be totally and completely eliminated. Through the linguistic form that is cryptography; a demand is created that can only be answered in binary form of ‘yes, yes,’ or ‘no, no,’ and nothing else. It is a formula of true / false statements of output ownership protected by the magnanimity of cryptography, which creates the timechain of bitcoin, and the fulfillment of bitcoin’s oath to the cryptography that concretes it.

The sovereign legal form glitches out before naked truth and the total silent obligation that is the secret of all state power, arcana imperii:

“The obligation of subjects to the sovereign is understood to last as long, and no longer, than the power lasteth by which he is able to protect them. For the right men have by nature to protect themselves, when none else can protect them, can by no covenant be relinquished.”

-Thomas Hobbes, Leviathan

In a world that has lost its nomos is a world where no sovereign power, institution, or government can offer even the most basic protections or assurances that comprises of the dignity of life, Bitcoin offers a radical new hope from which man may rescue himself from the cage that is every nation-state today. The law itself is suppose to be the fulfillment of the most basic promise of the social contract by sovereign power, and yet we have entered into a world where no such promise exist. Any law today is little more than authoritarian approvals, appeals, rules, and decrees; lacking even the most basic contractual functions. Through the broken oaths of sovereign powers everywhere towards the most basic aspects of the social contract; all people everywhere have been forsaken, the truth of their laws and their justice corrupted in every way, broken from being capable of being saved.

In this darkest of nights however, there is a spectacular gem of truth from which light gleams and points towards our exit from this hollowed and damned place. Bitcoin and the cryptographic breakthroughs that it has ushered in over the last decade offers us a totally new and novel strategy of human organization that breaks out of the sovereign form and can restore law, order, and economy to their rightful judicious places. As Foucault warned us, “In political and social theory, we still have not cut off the king’s head.”

Bitcoin and cryptography is a form of power that is beyond any physical force and the brutishness of any form of authoritarianism for the very real truth it must contain in order to function, and the very real protection that the cryptography it contains offers. Bitcoin is the premonition of an idea whose time has come; of a humanity that is ready to rise to its task of the abrogation of the statism, and to restore the political to its rightful place at the forefront of any law.

Bitcoin is a new form of political, economic, and ethical organization that raises truth to being the only sacrosanct of any law. It is the philosophical cognition of a world that understands the insipid greed of men, and the infinite vice that is his hunger for power. Bitcoin has enables a new form of digital organization that banishes the prattling lies of men, and demands the verification of any claim he states. Bitcoin does this through returning truth to its preeminent place as the foundation of all social contracts, and the meaning of truth in such agreements through the cryptographic formula of verification. In short, it is truth, not authority that makes legitimacy with Bitcoin.

Bitcoin as Political Theology

At the very end of Political Theology, Schmitt of all people, provides us with an anarchist’s critique of any sovereign decision by the very virtue of what any decision by a sovereign power must be and how it is decided:

“Every claim of decision must be evil for the anarchist, because the right emerges by itself if the immanence of life is not disturbed by such claims. This radical antithesis forces him of course to decide against the decision; and this results in the odd paradox where Bakuin, the greatest anarchist of the nineteenth century, had to become in theory the theologian of the antitheological, and in practice the dictator of an antidictatorship.”

Carl Schmitt, the final paragraph of Political Theology

It is this radical antithesis that has us also decide against the decision as well. We are products of the late 20th century; grandchildren of the spectacle society where all forms of life that would not be subjected to the machine were liquidated long ago. Now under the grimace of the total corruption of law, the complete looting of the treasuries of all peoples by political and corporate oligarchies everywhere from ’emergencies’ of their own creation; we find the reason for us to rise against, and choose to reclaim that which is only ours. This the reactivation of the political as the struggle for life, and the right to die trying; opens the truly political (polis) once again.

We understand how Bitcoin makes for the oddest of paradoxes; with anarchism becoming in theory the greatest form of ‘capitalism’ against all states, and in practice, a dictatorship of privacy and pseudonymity which unrelentingly will not give itself to anyone but the individual.

Bitcoin rings with a thunderous crack, “Vires In Numeris” and becomes more powerful and fervent with each seeker that we convert. It is a political theology that restores truth as the final weapon against any system of lies, fear, and exploitation in order to renew the nomos of humanity, and for us all to discover that there is still a political to be claimed, but only for those who are willing to take the risk.

The Revolutionary Truth Hidden in Bitcoin

Having witnessed the twilight of humanity befall idiotic and empty slogans under the barbarism of statism’s vacant chanting of idiotic lies; the spectacle has envelopes all. In all of its grandeur of stupidity and lobotomization, state capitalism has fused with the totalitarian eye of the internet; idiotically unaware of the beast it was unleashing, the prophecy it was fulfilling.

From the very outset, we can see the fundamental contradiction between the idea of sovereignty and the functions of cryptography. Cryptography is completely unanswerable to any sovereign power, as it lack the capacity to understand anything beyond its binary language of true or false, nor does it capitulate to any form of violence. The only laws that cryptography understands are the laws of mathematics which animates their functions.

By the very nature that no sovereign power can overcome the laws of mathematics that animate cryptographic systems, it points to the very nature of what crypto is and its hidden encrypted meaning. There is no emergency, war, pandemic or crisis that can stop Bitcoin. Now there is only the real state of emergency to be introduced, and the final struggle in which we take our rightful place as the owner of ourselves, our political systems, and our wealth for those whom we hodl in common.

This is the political theology of Bitcoin, the radial promise of a machine of truth that can only speak in a binary of true or false, documenting its own claims of just that. From the outset of the creation of the timechain of Satoshi’s; Bitcoin has been nothing more than a mechanization of truth-telling of what address owns what bitcoin, and how many joules of energy were used to produce those bitcoins.

With each block that is built on the bitcoin timechain, it resounds and echos louder and louder against the backdrop of man and his fallen world of lies, deception, and deceit. Only in a time where man has become an insipid beast of guile, brutishness, and sophistry, where politicians and gangsters openly fraternize and discuss how to rape the world with no consequence to themselves, does the theology of bitcoin and the promise it cointains move from revolutionary to messianic.

There is no long any government anywhere that can offer the same promise as that of Bitcoin does. There is no central bank, no commodity form, no currency, no ‘crypto‘ outside of Bitcoin that can offer the same assurances or security as Bitcoin. The theological promise of Bitcoin is that there will never be more than 21 million coins, there is no way to alter the supply schedule, or know exactly who owns what outputs. Bitcoin is a new social contract based upon the inverted form of the sovereign dictum, with truth–not authority–being the legitimate maker of the law that is bitcoin’s blockchain.

In a world where governments across the globe have promised to create infinite monetary units, swore everlasting loyalty to corporations and melomaniacs before their own citizens; the only thing left to do is refuse their broken social contract they call law, and create new ones better and more fitting for our times. Through the power, glory, and grace that is bitcoin, and for the magnanimous promise that Satoshi Nakamoto has delivered to us; bitcoin is the theological answer to the crises of our time. Its heliotropism directs us towards a world where we use cryptographic systems to verify the truth of all things, and utilize such a power to renew and recreate our systems of liberty and justice for all.

Satoshi Nakamoto’s promise of a money that does not change for the light and transient causes of mortals, nor bend to the callous and pathetic will of politicians around the planet has given us a light to follow in these darkest of times. It is the oath of the cryptographic machine to itself, and its total intransigence to change for any crisis, emergency, or state of exception. Though this most wonderful and theological of tasks, Satoshi Nakamoto has created the machine of economic redemption that we need to renew our world, to free ourselves from the chains of debt and bondage that governments around the globe have forced on to all of us. It is a method to renew the social contract to its original form, and what the promise of a social contract under the rubric of truth really means.

“Every man having been born free and master of himself, no one else may under any pretext whatever subject him without his consent.”

–Jean-Jacques Rousseau, The Social Contract, 1762

The post The Political Theology of Bitcoin appeared first on Crypto Sovereignty.


A small group of computer illiterate politicians, driven by fear and images of dying people have thrown the United Kingdom into chaos. They did this on the evidence of a thirteen year old computer programme written in the C language that has no comments, and that no one has seen or audited to ens

A small group of computer illiterate politicians, driven by fear and images of dying people have thrown the United Kingdom into chaos. They did this on the evidence of a thirteen year old computer programme written in the C language that has no comments, and that no one has seen or audited to ensure its basic assumptions are correct. This tragic event, which has cost the United Kingdom billions, is a perfect example of why critical software must be open source and open to peer review before it is accepted for any purpose where human life is at stake.

The mindset and approach needed in life critical software is the same mentality that is needed in super high uptime software, where methodical, slow, evidence-based improvement cycles are employed, and where features are added only when it is proven that stability, compatibility and the veracity of the results are absolutely guaranteed.

This is not a new approach in software. Mission-critical systems and applications where life and death are at stake opt for professional software vendors who are very conservative and focused on stability and reliability.

These systems have uptimes (the amount of time a system is available without interruption) measured in years. Visa’s recent downtime shows they are not running systems built to this high and exacting standard, and certainly, the COVID-19 event shows that the source code being open to peer review is critical before any decision is taken based on a software model.

The Imperial College pandemic predictor software isn’t an operating system, but the principles of fault tolerance and careful extension apply to it nonetheless. NASA provides a useful context here. NASA’s software fault tolerance requirements are very strict. When astronauts are involved, their lives are at stake. “Break stuff”, “I’ll comment it later, it’s old software”, in that context means “Kill People”. The software simply must work every time, as described, no compromise, no guesswork, no exceptions. There are no “do overs” or roll-backs or excuses. Guaranteed performance is possible in software, because everything about the systems, including the hardware, can be known in advance and thoroughly tested.

High fault tolerance software development has been going on for decades. It is a very well understood discipline, and the practices, methods and mentality are also established and known to work. This is why regular satellite launches work exactly as expected every time. People take them for granted, but there is a culture behind the processes that make regular flawless space launches possible that needs to be applied to any situation where life is on the line, if it is to serve everyone as is expected. It is not unreasonable to expect pandemic prediction software to never have an error in its operation. This expectation is already understood to be achievable in Air Traffic Control systems, where once again, lives are at stake.


With the COVID-19 event, lives and money were at stake. If an incorrect over prediction of loss of life (which has just happened) is used as the basis of policy decisions, irrevocable loss to the economy will result. Interruption of services across the country can cause a cascade of further losses and unintended consequences for tens of millions of people and billions of sterling. If it is possible to build a prediction model that is reliable, that should be the goal, and no compromise should be acceptable. Certainly, no advice should ever be taken on the output of udaudited code, that has never been subject to peer review or seen by any expert software developer.

It is also clearly possible that a peer review process with that end in mind can be done; it is already successfully done in Linux and many other software projects including Bitcoin.

Pandemic prediction software is not a social network or chat app. It is a mission-critical software project that must have the same integrity and soundness as NASA spacecraft mission software.

The vast majority of software tool builders are not held to the standards that NASA and Mission-Critical, High Availability systems are held to; it is a special discipline that most people are unaware of. Participants who are not even software developers at all have no clue about this specialist field, let alone the expert field of software that isn’t life or death fault tolerant itself; that field is two times removed from them, and is not a part of their thinking at all. And this is exactly what has just happened to the British government, who were bamboozled into believing a single expert and his 13 year old undocumented code that has never been subjected to rigorous peer review.

If you like the content and feel so obliged to send some love via BTC donations you can do so at the address below:↴

Racist Virus?
Friday, 27 March 2020
Elaine Ou
Trigger warning: Racism ahead. By now you’ve probably seen this NYTimes article describing the horrific state of affairs at a New York City hospital. Patients dropping like flies, nurses reduced to wearing trash bags, refrigerated trucks brought in to house the overflowing dead. I was struck by the c

Trigger warning: Racism ahead.

By now you’ve probably seen this NYTimes article describing the horrific state of affairs at a New York City hospital. Patients dropping like flies, nurses reduced to wearing trash bags, refrigerated trucks brought in to house the overflowing dead. I was struck by the cognitive dissonance — my brother’s hospital across the city was nothing like that. His hospital admitted many COVID-19 patients, but few have been severe cases and none have died. Today Hillary Clinton (SHE’S TOTALLY RUNNING YOU GUYS) ordered pizza for everyone, and the hospital workers had a pizza party.

I wondered if NYT was making shit up to advance some political agenda, as they are wont to do. But then I remembered that my brother’s hospital serves a white neighborhood (New York City has over 60 hospitals). Elmhurst Hospital (the one featured in NYT) is smack-dab in the middle of an Asian community in Queens. And by Asian, I mean Southeast Asian – Thai and Vietnamese.

Yet Thailand and Vietnam have had surprisingly few COVID-19 cases, and only a handful of deaths between the two countries.

In a Fox News column, former CDC Director Tom Frieden points out that over 40% of Americans are Vitamin D deficient. Vitamin D contributes to immune function by regulating cytokine production, so respiratory infections are more severe in those who are deficient. (Look, I know it’s Fox News, but there’s substantial peer-reviewed research backing this up.)

Our bodies produce Vitamin D proportional to the amount of light penetrating the skin, and light penetration is inversely proportional to melanin density. UV rays decrease as you move further from the equator, which is why Northern Europeans evolved to have fair skin. Agriculture further reduced Vitamin D intake and increased demand for UV-induced production. Polar populations (eg. Inuits) consume a diet of fish and meat – foods rich in Vitamin D – therefore they retain a darker complexion despite getting the least sunshine. [1]

♦Boris Johnson tested positive for COVID-19, but he’s practically translucent so he’ll be fine.

When sun people transplant to cloudy New York, a Vitamin D deficiency ensues. This is only a theory, and I’m sure there are many confounding factors. I’ll update this post as I find more evidence either for or against.

1. Razib Khan, Skin color & Vitamin D & folate. Discover Magazine, July 8 2007.
2. List of cities by sunshine duration


  • Racial Data compiled by Ibram X. Kendi, Director of Antiracist Research at American University (06-Apr)
  • Are some ethnic groups more susceptible to COVID-19? University of Hawaii (02-Apr)
  • Iceland has tested 3.5% of their population. Out of 1,020 confirmed cases, only 25 were hospitalized, 9 in intensive care, zero dead (?!). Live data here.
  • Six of the 15 people who died of COVID-19 in Stockholm were of Somali descent (24-March)
  • According to this article, 80% of Italians are deficient in Vitamin D (28-March)
  • Ross Ulbricht

    by Ross Ulbricht

    Today is my birthday, my seventh in prison. More than any other day of the year, I feel the weight of the time I have lost, the years of my life I will never get back.

    Time is priceless, yet it must be spent. It cannot be saved for later. These seven years are gone, s

    by Ross Ulbricht

    Today is my birthday, my seventh in prison. More than any other day of the year, I feel the weight of the time I have lost, the years of my life I will never get back.

    Time is priceless, yet it must be spent. It cannot be saved for later. These seven years are gone, spent in some of the many concrete and iron tombs that dot our countryside, spent struggling to make sense of fate and searching for meaning within the pain.

    How were your last seven spent? Did you spend them in a way that reflects their scarcity and value, or were some of them wasted? How will you spend the next precious seven?

    Even in prison I am faced with the same choice. Will I carry resentment or forgiveness in my heart these next seven? Will I succumb to despair or find ways to grow and flourish despite the confinement?

    Every moment of every day, the choice is ours to choose life as it is, or pretend it is or should be some other way. It may be painful. It may be infuriating. It may seem utterly hopeless and ugly, but in this moment it is all we have, and we can love it if we so choose.

    Choosing to love that which is unlovable transforms it, as it transforms you. It is proof that love is boundless and the highest of powers.

    These next seven, I pray that we can transform a cold and dehumanizing system — one that has consumed far more than I have lost — with the power of love. I have yet to meet a person in the system — whether guard or prisoner — undeserving of love. We are all fully human, broken in our own ways, yet broken in the same way: by a lack of love.

    Love does not throw life away. Love does not crush those beneath it. Love does not turn a cold shoulder or hold a grudge. Love is patient and kind. It seeks to understand and heal. Love is the key to our salvation, yet it cannot be forced or reduced to a system of rules. Love happens in that moment when you see the deep suffering of the world but keep your eyes open, when you are called to be brave and do what you can, to open your heart to others.

    Love is — in my opinion — how we must spend the next seven. It is the highest value and it does not cost a thing. How will you spend the next seven?

    Your Economy or Your Life
    Thursday, 26 March 2020
    Elaine Ou
    Can we stop presenting this as a binary option? Let’s be honest about which people are actually gonna die. I’m not talking about the old or infirm. I’m talking about the subset of the population that live in dense urban outposts, the ones who commute by public transport in subterranean an

    Can we stop presenting this as a binary option? Let’s be honest about which people are actually gonna die. I’m not talking about the old or infirm. I’m talking about the subset of the population that live in dense urban outposts, the ones who commute by public transport in subterranean ant tunnels. By day, they’re cheek-to-jowl in open-plan offices, each inhaling the exhaust fumes of the next. At night, they cluster into highrises like bats in a cave.

    Extreme measures to flatten the virus “curve” is sensible-for a time-to stretch out the strain on health infrastructure. But crushing the economy, jobs and morale is also a health issue-and beyond. Within a very few weeks let those with a lower risk to the disease return to work.

    — Lloyd Blankfein (@lloydblankfein) March 23, 2020

    See? Not you. You bugged out months ago to your sprawling estate in the Hamptons. You’ve never set foot in an open office; you’ve got your corner suite in Greenwich. And even if you do contract the virus, you’ll be fine. Virologists refer to infectious diseases as “poor man’s disease”. Cuz rich people don’t die from viral infections.

    You think Prince Charles or Sophie Trudeau are gonna die? Pfft. Cancer, now that’s a rich man’s disease. Cancer doesn’t care about wealth. That’s why everyone cares about cancer.

    So your chances of dying from COVID-19 are veritably nil. But in an economic recession, YOU have the most to lose. In absolute terms, that is. Why should your stock portfolio suffer for the shitty life choices of others?

    Then again, maybe you’re one of those bat-colony people. The ones who live and work in close quarters with proles. Maybe you don’t want your Grandma or anybody else’s Grandma killed by a virus. Maybe you know someone who tested positive for COVID-19, or you follow someone on Twitter who tested positive, or maybe you’ve enjoyed a movie starring someone who tested positive. For you, it hits close to home. This shit is real.

    Then you see this Oxford study that says coronavirus may have already infected half the UK population. And WSJ says we’ve been overestimating the fatality rate. And look, New York just saw a decrease in the number of new confirmed cases. Coincidentally, doctors have been instructed to stop testing patients unless the patient requires hospitalization. The assumption is that New Yorkers have all been infected already. Maybe that was the peak. Maybe the disease has spread far and wide, and we’ve all developed herd immunity.

    Soon, instead of reporting on every tragic death, the papers will begin telling triumphant stories of patients who fought the virus and made a full recovery. Deaths become statistics. You scroll through Twitter and no one’s talking about COVID-19. Toilet paper and hand sanitizer are back on store shelves. Election season regains dominance over national attention. One day, like a miracle, the virus disappears.

    And then you realize that this was never about saving lives versus the economy. There was never really a choice at all. Civilizations around the world have spent thousands of years telling stories of angry vengeful gods, unseen and unpredictable forces, stories written by the rich and powerful persuading the proletariat to stay scared and docile. It was never about coronavirus. It was all just a bunch of fanciful storytelling to make you soft and pliable, numb to the fact that you were gonna kneel before zog no matter what.

    Pandemic Dashboard: 1
    Monday, 23 March 2020
    I’m starting a new blogchain to track the COVID-19 pandemic, in a new, modular, block-based format. Each part will be a variable number of tweet-sized status assessments in titled blocks, coded red/green/yellow, like so: Flattening the Curve The innumeracy of the initial versions has given way
    I’m starting a new blogchain to track the COVID-19 pandemic, in a new, modular, block-based format. Each part will be a variable number of tweet-sized status assessments in titled blocks, coded red/green/yellow, like so: Flattening the Curve The innumeracy of the initial versions has given way to an appreciation of the actual level to which […]
    Elaine Ou
    Last week, a coterie of the biggest tech platforms announced that they would be teaming up to combat misinformation about coronavirus and the Covid-19 illness it causes. We’re from Google and we’re here to help — the most terrifying words in the English language. Sure enough over the weekend, b

    Last week, a coterie of the biggest tech platforms announced that they would be teaming up to combat misinformation about coronavirus and the Covid-19 illness it causes. We’re from Google and we’re here to help — the most terrifying words in the English language.

    Sure enough over the weekend, blogging site Medium “helpfully” removed a longform post by an armchair epidemiologist who was a bit too optimistic in interpreting COVID-19 data.

    The underlying data was correct – it was his opinion that was wrong.

    The post (which now reappears on Zerohedge, whose Twitter account was also helpfully banned for COVID-19 misinformation) concludes that school closings and stay-at-home measures do more harm than good, and that we should all calm down and stop the hysteria.

    Look, I sympathize with cities like New York where hospitals are inundated and they really need everyone to comply and shelter in place. At the same time, censorship doesn’t work. Half of Americans already distrust media coverage of coronavirus; censoring alternative viewpoints is only going to make that worse. When you censor someone, they instantly go from armchair epidemiologist to SILENCED WHISTLEBLOWER.

    Censorship is the ultimate vindication that you’ve spoken truth to power. Remember that Google diversity memo? The author was fired after publicly criticizing the company’s reverse-discrimination efforts. After the fallout, James Damore took to Twitter using the handle @Fired4Truth and republished his document at Fired4Truth.com. No, Damore wasn’t fired for telling the truth – he was fired for causing a PR nightmare. But just as everyone is the hero in their own story, every censored voice is the silenced truthseeker in his own narrative.

    If your spouse asks you whether her dress makes her look fat and you answer truthfully, you’ll be sleeping on the couch for the next two weeks. And no, you weren’t banished for “truth” – even though it might feel that way! – you were banished for causing marital discord.

    And so, the Evidence-Over-Hysteria post wasn’t removed for factual (in)correctness, it was removed because it racked up several million pageviews and encouraged people to question mandatory shelter-in-place orders. Instead of censoring disruptive posts, it might be worth pondering why people are so skeptical of prevailing narratives in the first place.

    Compiling a list of the official misinformation from press & state.

    – Flu is more serious
    – Travel bans are overreacting
    – Only Wuhan visitors at risk
    – Avoiding handshakes is paranoid
    – Virus is contained
    – Tests are available
    – Masks don't help

    What else?

    — Balaji S. Srinivasan (@balajis) March 23, 2020

    Dear Legacy People
    Friday, 20 March 2020

    The world you know and love is no more, even if it isn’t obvious to every one of you just yet. We will look back at this moment in time, the months we are currently living through, the weeks that will mark the line between the pre-virus and the post-virus world. One thing is clear: we are past the

    The world you know and love is no more, even if it isn’t obvious to every one of you just yet. We will look back at this moment in time, the months we are currently living through, the weeks that will mark the line between the pre-virus and the post-virus world. One thing is clear: we are past the inflection point.

    “There are decades when nothing happens, and there are weeks when decades happen.”

    Vladimir Lenin*

    As the events around the COVID-19 pandemic unfold, the fragility of our global systems becomes painfully obvious. This health crisis is triggering a financial one, and if we don’t get our act together, things will go from bad to worse.

    The Legacy System is Crumbling

    Both our money and our financial system has fundamental issues. Ruled from the top down by unelected decision-makers, these structures are not equipped to handle complex problems. Even worse, trying to fix a complex system by heavily interfering with natural processes will turn an annoying mosquito problem into a deadly snake problem (with some frogs in-between).

    “A new type of thinking is essential if mankind is to survive and move to higher levels.”

    Albert Einstein

    Centralization is efficient until it isn’t. I’m afraid that most of us are going to learn this lesson the hard way: one by one, central points of failure will crumble under the pressure of current world events, and all we can do is watch our fragile legacy systems collapse (or turn into Orwellian nightmares).

    I’m not suggesting that all “old” systems are obsolete — they aren’t. I’m suggesting that we are transitioning to a post-virus world, and it will be impossible to understand what is going on — and how problems might be solved — if you aren’t equipped to understand and use the tools of this new era.

    A New Type of Thinking

    The tools of the post-virus world need to be transparent, open, and freedom-enabling. Gatekeepers, censors, and arbitrary restrictions won’t help us to solve the problems we are facing — they will only make things worse. Information wants to be free, and we will need all the information out in the open to fight the battles yet to come.

    I can’t tell you what kind of tools will emerge. Instead, let me list some things that are both of the utmost importance and difficult to understand/accept if you come from the legacy world:

    • bitcoin
    • the internet
    • social media
    • citizen journalism
    • memes and misinformation
    • open-source and free (libre) software

    Others aren’t as hard to understand, but equally important: encryption, open hardware, biohacking, DIY biology, 3d printing, and other forms of distributed manufacturing.

    These tools and the new type of thinking that comes along with them will lead to different structures, a different way of doing things, different outcomes. It might seem strange and inefficient at times, and that’s okay. The important part is that we move away from fragile systems and central points of failure, building robust, and even anti-fragile systems for generations to come.

    Fragile, Robust, and Anti-Fragile Systems

    The world is a scary, complicated, and chaotic place. Our interconnectedness and interdependence have drastic and unforeseen consequences, as the current pandemic shows so clearly.

    “Someone ate a bat in China and now you don’t get to retire. Funny how the world works.”

    Jeremy Ross

    Many systems got centralized over time, moving from robustness to fragility: the global financial system, various supply chains, large parts of our media apparatus, and even the money we use daily.

    Complex, large-scale problems require organic, bottom-up, emergent solutions. We, as a society, need to make sure that robust solutions can emerge, which implies that we need to protect personal liberties and encourage personal responsibility more than ever.

    It would be great if a benevolent ruler could step in and solve all our problems. Unfortunately, every benevolent ruler transforms into a totalitarian dictator given enough time. And I hope we can all agree that we don’t need any more of those.

    I would love to end on an optimistic note, but the future ahead will be dark and bumpy, especially if the legacy world is all you know.

    The Times They Are A-Changin’
    Wednesday, 18 March 2020
    Brandon Quittem

    Come gather ‘round people, wherever you roam,
    Give yourself a moment, to reflect on this poem.

    Amidst the chaos, we have an opportunity.

    Humans are clever and resilient. You were made for this.

    Let’s face it. Failures of the old paradigm are stacking up. Our administration ha

    Come gather ‘round people, wherever you roam,
    Give yourself a moment, to reflect on this poem.

    Amidst the chaos, we have an opportunity.

    Humans are clever and resilient. You were made for this.

    Let’s face it. Failures of the old paradigm are stacking up. Our administration has failed us, markets exposed bare, the media drives narratives not facts, “capitalist” corporations seeking bailouts.

    This serves as a wakeup call. More people will realize the power structures are NOT looking out for our best interests. Occasionally our interests align, but when the goin’ gets tough we’re on our own. History is littered with examples, yet cognitive dissonance and collective amnesia reign supreme.

    Many people will keep their head in the sand, it’s too much to handle. “If our strong credentialed leaders aren’t in charge then who is!?” No one has it under control. Scary to think about. Scary to consider we each must take personal responsibility. What if I’m not good enough?

    Keep your eyes wide, the chance won’t come again

    On the other hand, this realization is empowering. If we want change, it’s precisely our responsibility to make it happen. The barriers we hide behind are constructs of our own mind.

    Amidst uncertain times, full of pain and suffering, there is much to be optimistic about.

    Humans everywhere are forced to put “real life” on hold. We temporarily reprioritize away from consumption & status games and instead focus on survival/community/connection.

    Some might realize “crises mode” makes them feel more alive than wage-slave-cubicle hell. WE ARE NOT WIDGETS. The masses will start to question things. Deep held assumptions will waiver. Chaos creates opportunity. Entrepreneurs will seize opportunities to serve a new paradigm.

    We have a choice♦

    The blue pill

    We fall back to our old patterns. We concede power to centralized structures to “save us.” It’s tempting, I admit. Waiting to be saved sounds appealing. But at what cost?

    Our power structures operate under “let no crisis go to waste.” Is that who we want making our decisions? Do we want to kick the can down the road AGAIN? Fool me once. Don’t concede our liberties to our woefully inept, over-reaching, underprepared governments. We must avoid the “patriot acts” that emerge out of the covid-19 crisis.

    The red pill

    We face harsh realities with eyes wide. We band together, leverage our collective intelligence. We build more resilient systems this time.

    Question assumptions. Shift foundational values. Reduce systemic risks.

    Decentralize our money (bitcoin), relocalize our food, defend our right for private communication, and shift towards more localized decision making.

    A balkanization is on the horizon. Antifragility is our aim.

    Think about it… a pile of multi-disciplinary mental horsepower just received the gift of free time. Humanity united under a shared mission.

    Many community led initiatives like #Quaranteam will emerge, entrepreneurs will satisfy new market demands, the people will come together. You were made for this.

    Are you ready to heed the call?

    If your time to you is worth savin’
    Then you better start swimmin’ or you’ll sink like a stone
    For the times they are a-changin’

    Stay home, save lives,
    -Brandon Quittem

    PS: Say hello on twitter @bquittem

    Join us
    1. Commit to staying home.
    2. Ensure your friends, family, and neighbors are safe at home.
    3. Change your Facebook photo to show that you’re staying home.
    4. Get this trending #StayHomeSaveLives
    5. Join us QuaranTeamNow.com
    Ever since the coronavirus crisis broke out, multiple people have been telling me I “called it” with this domestic cozy blogchain. I didn’t. What I did call out is a longer-term soft trend caused by unrelated forces — social, cultural, and economic — that happens to be e
    Ever since the coronavirus crisis broke out, multiple people have been telling me I “called it” with this domestic cozy blogchain. I didn’t. What I did call out is a longer-term soft trend caused by unrelated forces — social, cultural, and economic — that happens to be eerily well-harmonized with the necessary hard response to […]
    Masks All The Way Down
    Tuesday, 17 March 2020
    This is a guest post by James Curcio, an excerpt from MASKS: Bowie & Artists of Artifice (Intellect Books), available now.  Bowie appeared unusually prescient when it came to the Internet, and what its social significance would be, though he maintained an amount of pre-millenarian utopianism. Per
    This is a guest post by James Curcio, an excerpt from MASKS: Bowie & Artists of Artifice (Intellect Books), available now.  Bowie appeared unusually prescient when it came to the Internet, and what its social significance would be, though he maintained an amount of pre-millenarian utopianism. Perhaps this prescience is more akin to an optical […]
    Confidence Crunch
    Monday, 16 March 2020
    Elaine Ou
    My brother’s hospital ran out of masks this week because patients kept breaking into storage cabinets and stealing them. So now doctors have to supply their own masks, respirators, and other protective gear. There have been other reports of hospitals getting burglarized for masks. Why would anyone st

    My brother’s hospital ran out of masks this week because patients kept breaking into storage cabinets and stealing them. So now doctors have to supply their own masks, respirators, and other protective gear.

    There have been other reports of hospitals getting burglarized for masks. Why would anyone steal from a hospital? Is this what it looks like when you give up on having a functional society?

    We take a lot of cooperative behavior for granted. Left to our own devices, humans have the cognitive capacity to form cooperative relationships with about 150 others. Dunbar’s number.

    Stuff like religion and government enable social scalability so people can collaborate outside of their immediate acquaintances. It’s easier to trust strangers if you believe that some greater force exists to exact justice. The force doesn’t have to be real – Roman banks stored silver in weakly-guarded temples – but the belief has to be universal for societal trust to exist.

    We can cooperate with strangers as long as we trust the government to maintain order. When times are good, we play nice and what goes around comes around. In times of crisis, trust runs scarce and government entities step in as the confidence-bearer of last resort.

    But now we see that the federal government is powerless to do anything but print money. When the only tool you have is debt monetization, every problem looks like a credit crunch. When people lose faith in the government, they show it by turning on each other.

    Decentralize all the Thingz (part 2)
    Friday, 13 March 2020
    Elaine Ou
    Here’s how Trump gets reelected: Declare emergency funding for immediate dispersion. By which I mean, pay people to disperse from dense, disease-ridden cities. A decentralized country is an antifragile country. Yes, cities are more efficient… Efficient at spreading disease. After World War II,
    ♦Coronavirus cases by county, as of March 13.

    Here’s how Trump gets reelected: Declare emergency funding for immediate dispersion. By which I mean, pay people to disperse from dense, disease-ridden cities. A decentralized country is an antifragile country.

    Yes, cities are more efficient… Efficient at spreading disease.

    After World War II, there was a huge housing shortage as materials and resources had been diverted to the war effort, and people crowded into cities for defense jobs. The government didn’t care about lack of housing or crowded slums, but they did care about the post-war threat of nuclear attack.

    In 1950, the National Security Resources Board received $23 billion (the equivalent of $250 billion today) to incentivize industrial dispersion. Defense contracts were awarded contingent on relocating manufacturing facilities to the midwest.

    ♦The Pittsburgh Press, Jan 21 1949

    Trump could be more strategic about it – provide relocation grants to Michigan, Pennsylvania, Wisconsin, Ohio – places where no one wants to live, but which might swing an election.

    At this point, there’s no reason to continue living in a dense coastal city. Employers have enacted mandatory work-from-home policies, and if you live in San Francisco your home probably sucks.

    Here’s a story of how Tulsa, Oklahoma attracted a bunch of remote workers with a $10,000 bribe. It’s like the Zappos Downtown Project, where Tony Hsieh sunk $350 million in an attempt to build an innovation hub in Las Vegas. Attempts to create an urban hub in the desert, or out in the Great Plains, overlooks the one redeeming feature of these places: Cheap land.

    Dense cities are out; sprawling homesteads are in! We spend $20 billion per year on agricultural subsidies so that farmers can grow cheap corn for exports to China. Now that we’re closing off trade with China, let’s reclaim the land and disperse the people, Little House On The Prairie-style.

    The original Homestead Act granted 160 acres per household – that’s how much land it used to take to feed a family – but today we have GMOs, chemical fertilizers, and Monsanto. You can feed a family of four on only two acres, and still have room for an in-law unit!

    I know, I know. We’ve all grown accustomed to the niceties of urban living. Walkability, cultural capital, fortuitous social encounters. Densely-packed nursing homes where we can dump off our elders. Division of labor taken to a ridiculous extreme.

    Cities are unnatural. Back in our hunter-gatherer days, humans were about as densely populated as bears. Maybe Darwin will run its course, ravage the cities, and weed out those with an affinity for vibrant arts scenes. When it’s over, only the antisocial losers will remain.

    Brandon Quittem

    Disclaimer: this is not medicinal advice, I’m not a doctor and don’t play one on the internet. This is coming from an enthusiastic mycophile. This is my best understanding of the topic at hand, please reach out if I got anything wrong or if you have anything to add (reach out on twitter or commen

    Disclaimer: this is not medicinal advice, I’m not a doctor and don’t play one on the internet. This is coming from an enthusiastic mycophile. This is my best understanding of the topic at hand, please reach out if I got anything wrong or if you have anything to add (reach out on twitter or comment below).

    Quick Summary

    • Covid-19 is here and it’s a big deal. Prepare yourself.
    • Medicinal mushrooms are shown to support the immune system, and show signs of being active against viruses (Covid-19 is a virus)
    • Are medicinal mushrooms a silver bullet? Absolutely not.
    • Will consuming medicinal mushrooms help to support your immune system? Absolutely. I share my favorite medicinal mushrooms below.
    • There is no downside, why not give your body the best chance for success?
    • Finally, this article is NOT about psilocybin containing “magic mushrooms”
    Mushrooms Have Been Used as Medicine for Thousands of Years

    The bottom line is they are safe to consume and have a long history of being used by humans as medicine. You can eat them daily for the rest of your life without negative consequences.

    Medicinal mushrooms describe a category of edible members of the kingdom Fungi, traditionally associated with health-supporting properties. They have been used for millennia to treat an array of ailments, particularly in traditional Asian medicine and Eastern European traditions. They are well regarded for supporting longevity, treating infectious disease and cancer, and promoting overall well-being [1]

    I’ve personally been taking medicinal mushroom supplements nearly daily for 5+ years. And eating wild foraged mushrooms daily during the 4–5 month season. While I wildcraft the majority of my personal use medicinal mushrooms, I also purchase many products from reputable producers (my recommendations below).

    Why Mushrooms?♦Chicken of the woods mushroom

    You can call mushrooms “nutraceuticals” as in natural pharmaceuticals.

    Medicinal mushrooms work because humans and fungi are very similar biologically. I know this sounds weird, but it’s true.

    Fungi and Animals both inhale oxygen and exhale carbon dioxide and we both find our own food (plants make their own food). Taxonomists even proposed a new super-kingdom that combined fungi and animals, called Opisthokont.

    Fungi are constantly in an underground microbiological war against viruses, bacteria, and other fungi. Over time, these fungi have developed molecules to defend themselves against these invaders. Turns out these fungal medicines also work well on humans.

    Medicinal mushrooms support your immune system and are active against viruses

    How do we benefit from consuming medicinal mushrooms. Medicinal mushrooms are known to help with many different things. For the purpose of this article, we’re going to focus on the 3 main ways medicinal mushrooms can be helpful during a viral pandemic.

    Benefit #1: Improve Immune System

    Medicinal Mushrooms are considered “adaptogens.”

    Definition: adaptogens are herbs that help to support and balance the body in adapting to emotional, physical, biological, and mental stress.

    In other words, medicinal mushrooms work bi-directionally. If your immune system needs to be turned on, then it gets turned on. If your immune system is hyperactive, then the mushrooms signal to your body to turn off your overactive immune system. Sounds like magic right? Well, it kinda is.

    Herbal immunomodulators work their magic in part through the equilibration of the endocrine and nervous control of the immune system. By balancing the hypothalamic-pituitary-adrenal axis, these tonic herbs help to harmonize the control centers of the body by affecting hormonal regulation of the immune system. Another possible mode of action is the regulation of T helper cell (Th1 and Th2) balance, which involves the equilibrium of cell-mediated (T cells) and antibody-mediated (B cells) immunity. [2]

    Benefit #2: Improve General Wellbeing

    Mushrooms are known to do many non-specific things for the body that are useful when preparing for and fighting an illness.

    Examples include: Improve sleep, improve gut health, and reduce inflammation.

    None of these things are directly related to stopping Covid-19 but they all prepare your body to be as effective as possible against the illness.

    Benefit #3: Some Mushrooms are Active Against Some Viruses

    However this doesn’t mean taking medicinal mushrooms will cure you of Covid-19. In fact, as far as I know, there are no medicinal mushrooms have been shown to defeat Covid-19.

    We know that many mushrooms show high levels of activities against many of our well known viruses. Showing activity against viruses is not the same as “we have a medicine ready to treat X virus.”

    We’re at the limit of modern science here and the answer is we don’t really know how far medicinal mushrooms can go in fighting viruses, but so far the results are extremely promising.

    What is Active Inside the Mushroom? (Let’s Get Sciency)

    Feel free to skip this section if you just want to buy your supplements and move on with your day.

    There are two main categories of medicine inside fungi: Beta-glucans and a wide range of secondary metabolites (polyphenols, triterpenes, etc)

    Medicinal properties #1: Beta-glucans

    These are the main thing we’re going after when looking to support your immune system.

    Mushroom polysaccharides (ie: β-glucans) possess documented immuno-modulatory properties, specifically through the activation of natural killer cells, macrophages, and neutrophils, as well as induction of innate immune cytokines and interleukins. [3]

    Beta-glucans are found in various quantities in all the medicinal mushrooms. However the secondary metabolites are unique to each species of fungi — this means if you have a very specific goal in mind, be more selective on your species.

    Medicinal properties #2: Secondary Fungal Metabolites

    These secondary metabolites are low-molecular-weight compounds that fall into a few main categories such as polyphenols and triterpenes.

    • Polyphenols have been shown to help with inflammation. [5]
    • Triterpenes are also effective at fighting inflammation. [6]

    Then there are a host of specific metabolites like those found in the Lion’s Mane mushroom that are used to stimulate neurogenesis (which has been shown to improve dementia in a Japanese study) — however we won’t get to these today as it’s not related to Covid-19.

    Mushroom Supplements 101

    Disclaimer: I am not a doctor, as always you should make your own decisions regarding your health. Some of the products below contain affiliate links which means I may earn a small commission for purchases. Of course this comes at no extra expense to you.

    Ok this section is for the impatient people who scrolled here immediately. I don’t blame you ;) it’s getting weird out there.

    What mushrooms species should I focus on?

    I haven’t heard of any specific species being highly active against Covid-19. Which means I would focus on a wide range of species known to simply support your immune system. Good choices include: Reishi, Chaga, Turkey Tail, Birch Polypore, Shiitake, Maitaki, and Cordyceps

    How do you select high quality medicinal mushrooms?

    First off, do NOT buy random mushroom supplements. The industry is full of bullshit products taking advantage of uneducated customers. Good products are more expensive, no way around it.

    NEVER consume raw mushrooms as humans cannot digest them. You’re paying to poop out the medicine. Instead you want mushrooms that have undergone a dual extraction — this means a hot water extraction and an alcohol extraction. These extraction methods are what make the medicine bioavailable. Cooking with fat also works, but many of the medicinal mushrooms are not useful in culinary endeavors.

    Quick rant on shady mushroom companies… Many companies are selling dehydrated raw mushroom powder which is not digestible by humans — avoid them at all costs. Some medicinal mushrooms (like chaga) are only found in the wild and are currently being over-harvested.
    The companies selling you “raw chaga powder to put in smoothies” should be boycotted. They’re profiting by selling you an over-harvested mushroom supplement that offers no medicinal benefits. Be sure to send these companies an email saying “go fuck yourselves” for taking advantage of your consumers and our environment.

    How to select good mushroom supplements? Look for these:

    • Dual extracted (never raw)
    • The company lists the % of beta-glucans (20% is a good bench mark)
    • Third party testing (COA) available for you to see
    • Extracts are made from fruiting body* (though this is nuanced, so a better approach is to ensure they measure beta-glucans and it’s above 20%)

    How often should you take them?

    Medicinal mushrooms are a marathon. For maximize results you want to be taking these 1–2x per day for months. The effects compound over time. Remember there are no known side effects to daily use.

    Before adding supplements, make sure your fundamentals are covered

    If you’re not doing the basics right, it doesn’t matter how many medicinal mushrooms you shove down. These are all mandatory… Good sleep, moderate exercise (avoid at the gym), eliminate sugar/soda, and reduce stress.

    Our emotions play a central role in the functioning of our immune systems — so much so, that there’s a whole field of science called psychoneuroimmunology. Our moods — and sense of connection — have a profound effect on our white blood cells (immune cells, such as B cells, T cells, natural killer [NK] cells, and macrophages). The feelings of stress and social isolation are some of the biggest immune “downers” out there. Stress hormones, such as adrenaline (epinephrine) and cortisol, weaken immune function. Conversely, when we are relaxed and happy, our cells produce neuronal signaling molecules such as serotonin, dopamine, and relaxin, which have a strengthening effect on the immune system. [2]
    Specific Mushroom Products I use and Recommend

    Please note: these supplements will likely all be sold out in the coming weeks.

    I personally wildcraft the majority of my own mushroom medicine. However, I also purchase some that I love. Here are a few that will be most helpful to support your immune system during a viral pandemic.

    • Real Mushrooms — 5 Defenders capsules [Amazon] — 100 servings. Each capsule contains a dual extraction from the following mushrooms: reishi, chaga, maitake, shiitake and turkey tail mushrooms. I purchased this exact product yesterday.

    Besides medicinal mushrooms, here are some other supplements I recommend taking daily for the next ~2 months minimum.

    • Live Wise Naturals — Vitamin D3 + K2 liquid — Vitamin D3 is crucial for many of your body’s functions, including the immune system. If you live near the equator, just go outside for 20–30 minutes per day. If it’s winter or you don’t live near the equator, it’s smart to supplement with vitamin D. I take 2,000–4,000 iu daily every day during winter. No brainer during Covid-19 pandemic.
    • Gia Herbs — Astragalus — an herb with a long history of human use, known to be effective against viruses. I will be taking this daily until the pandemic settles down. According to Dr. Andrew Weil, “This is a very well-known medicinal plant. It’s non-toxic and can be used long-term. There’s good research supporting its efficacy against viral infections.” [7]
    • Allimax — Allicin — the active ingredient in garlic is known to support your immune system [8]. According to Dr. Andrew Weil, there is a county in China where no one got sick with Covid-19. The hypothesis: the unaffected county is where they grow garlic and all the people here consume lots of garlic. I cannot verify this claim, however allicin is known to support the immune system and IMO it’s a no brainer to add to the stack. I purchased some Allimax branded Allicin and plan to consume daily for the next 30 days.
    Let’s Flatten the Curve♦eat those shrooms!

    Take care of yourself and your loved ones. Consume your medicinal mushrooms. Take a few deep breaths. Read a book.

    Connect with me on twitter if you want to discuss any topics here (my DMs are open).

    PS: I also published a series comparing Mushrooms and Mycelium to Bitcoin. It’s been read by over 10,000 people I think you might like it.

    1. Study: The mycelium of the Trametes versicolor (Turkey tail) mushroom and its fermented substrate each show potent and complementary immune activating properties in vitro [link]
    2. Article: Introduction to Immune Stimulants, Immunomodulators, and Antimicrobials, By Juliet Blankespoor [link]
    3. Study: Differential Immune Activating, Anti-Inflammatory, and Regenerative Properties of the Aqueous, Ethanol, and Solid Fractions of a Medicinal Mushroom Blend by Paul Stamets, et all [link]
    4. Study: Antiviral Agents From Fungi: Diversity, Mechanisms and Potential Applications [link]
    5. Study: Polyphenols help with inflammation [link]
    6. Study: Triterpenes help fight inflammation [link]
    7. Podcast: Dr Andrew Wiel recommends mushrooms, astragalus, allicin [link]
    8. Study: Therapeutic effects of garlic [link]
    9. Study: Lions mane shown to help with dementia in Japan [link]
    Thank you Cyril, much appreciated!
    Wednesday, 11 March 2020
    Charles Edwards

    Thank you Cyril, much appreciated!

    Thank you Cyril, much appreciated!

    Charles Edwards
    The Coronavirus Black Swan — Part 2Trading Bitcoin in Fear, Greed and Recession♦Take-aways
    • Recessionary risk adds additional stress to low-profitability Bitcoin Miners in 2020
    • If the percentage of Bitcoin Miners that are zombies is similar to the that of US listed companies, Hash Rates
    The Coronavirus Black Swan — Part 2Trading Bitcoin in Fear, Greed and Recession♦Take-aways
    • Recessionary risk adds additional stress to low-profitability Bitcoin Miners in 2020
    • If the percentage of Bitcoin Miners that are zombies is similar to the that of US listed companies, Hash Rates and Bitcoin’s fair value could fall an additional ~20% during a recession
    • The “Amygdala Overdrive Relationship” suggests a high correlation of Bitcoin to equities in times of extreme fear and greed
    • Early stages of a recession would likely see Bitcoin fall with global markets, later stages may see a Crisis Adoption event
    • $100,000+ Bitcoin target within 5 years
    • 2020 worst case scenario: $6,400 Bitcoin at Christmas
    Trading Bitcoin in Fear, Greed and Recession

    This week has seen a significant Bitcoin retracement, preceding Monday’s biggest daily collapse in the stock market since 2008.

    As outlined in Part I, we are witnessing extreme fear in global markets.

    The Coronavirus has increased the probability of triggering a recession to a tinderbox economy and is sending amygdalas into overdrive globally.

    While Bitcoin is mostly uncorrelated with other markets, it is still traded by emotional humans.

    And when in fear, humans abandon “risky” assets.

    Halvening + Recession = Big Miner Stress

    In Part I we noted that 18% of US companies were found to be “zombies” in 2018, surviving paycheck to paycheck with the help of their credit lines. But we don’t know how many leveraged Bitcoin Miners are operating paycheck to paycheck today.

    The Bitcoin Halvening event is already a stressful period for miners as their revenue stream effectively halves, causing low profitability miners to go out of business. Add a recession to the equation and tightening credit lines may put a lot more “zombie” Bitcoin miners out of business in a Credit Crunch type event.

    If we estimate the number of Zombie Miners to be roughly the same as US listed companies, we should not be surprised to see a recession event result in an additional ~20% of Bitcoin Miners going out of Business (give or take a good margin of error here).

    This base case estimate for a Bitcoin Miner Credit Crunch would result in a circa -20% drop in Hash Rates and therefore a -20% drop in Bitcoin’s fair Value (Bitcoin’s Energy Value).

    In December 2019, the non-recessionary forecast for mid-2020 was a worst case Bitcoin Electrical Cost (the historic price floor) of $8,000. However, a recession adds a Bitcoin Miner Credit Crunch risk to the equation, the estimated worst case is now adjusted accordingly to $6,400.

    Without doing a detailed study of Bitcoin miner financials, it is impossible to know how exactly how many are zombie miners there are and what the true risk is here. This estimate should be considered indicative only. The actual drop in Hash Rates and Bitcoin’s valuation due to a Bitcoin Miner Credit Crunch could be considerably higher or lower. We have never seen Bitcoin during a recession, and if it happens, it will be a learning for all.

    But isn’t Bitcoin a Store of Value?

    Like it or not, 99% of the world still sees Bitcoin as “risky” and public perception matters.

    The current Coronavirus panic has ignited risk-off actions in your local supermarket, stock market and crypto market.

    The Bitcoin “Store of Value” / “Digital Gold” argument will not be valid until the broader population sees Bitcoin as a better Store of Value than traditional assets. That is certainly not the case yet. Broader trust in Bitcoin in tumultuous times requires greater adoption or greater belief in Bitcoin’s monetary policy.

    How might widespread adoption / belief be achieved?

    1. With time. Bitcoin has been growing in adoption steadily over the years, and every halving boosts public awareness to Bitcoin’s sound monetary policy. There is no reason to expect this to change with the passage of time and as the technology infrastructure surrounding Bitcoin improves.
    2. In peak crisis disillusion. When broader populations are in disbelief of their current financial systems and lose faith in legacy banking, we may witness fast-tracked Bitcoin adoption event due to its low inflation sound monetary policy.

    “Crisis Adoption” will likely require global financial markets to be in a much worse position than they are today. A greater destruction of wealth is required to create disillusion and “break the trust” of the people in the current financial system, much like the 2008 crash did before Bitcoin existed.

    If correct, the early stages of a recession will see Bitcoin suffer, and peak recessionary disillusion may offer some of the best risk-reward opportunities in Bitcoin’s history.

    Bitcoin is not a Store of Value until the people see it as a store of value.

    Bitcoin’s Amygdala Overdrive Relationship

    In 2020 we have seen just about every case made for potential Bitcoin correlations to traditional assets. With the US-Iran tensions, it was argued Bitcoin was correlated with gold. With the Coronavirus it argued Bitcoin is correlated with Stocks.

    But what is correct?

    To date, neither Gold nor Stocks have shown sustained correlation with Bitcoin.

    ♦Beta of Bitcoin to the S&P over multiple horizons shows only fleeting periods of correlation

    However, as noted by Fundstrat’s Tom Lee, Bitcoin’s best years have coincided with years of strong equity performance:

    “Bitcoin does best when the S&P is up more than 15%”

    This suggests that when the market is “risk-on”, investors seek returns from both stocks and Bitcoin.

    Recently, we have also seen Bitcoin correct in near lockstep with the equities markets during a period of extreme Coronavirus driven panic.

    ♦Feb/Mar 2020 Bitcoin and S&P collapse — correlation during times of extreme fear

    This brings us to the following “Amygdala Overdrive Relationship”:

    Bitcoin’s correlation to traditional markets today only exists at the extremities in fear and greed. Precisely at the times when primal human emotions take over.

    That is:

    1. When markets are in Extreme Greed: investors are attracted to risky assets and Bitcoin performance correlates with equities
    2. When markets are in Extreme Fear: investors dump risky assets and Bitcoin performance correlates with equities

    A comparison of Bitcoin’s price over the last 3 years against extremes in the CNN Fear and Greed Index demonstrates a case for this hypothesis. Note that the periods highlighted also have similar corresponding rallies and corrections in the S&P500.

    ♦Traditional Market Extreme Greed (80+) and Extreme Fear (20-) appears to exhibit a strong correlation with BitcoinStrong Bitcoin Fundamentals

    Outside of the broader macroeconomic environment, all Bitcoin specific fundamentals currently look fantastic:

    • Bitcoin’s Energy Value, a measure for its fair value, is currently 50% above Bitcoin’s price and increasing. Miners are currently committing to the network at the highest rate in Bitcoin’s history.
    • Bitcoin is currently trading at its Production Cost suggesting a good value opportunity
    • Bitcoin’s Supply growth rate is set to halve on 11 May, making it on par with Gold as the lowest inflationary assets known to man.
    • Bitcoin currently has the highest level of global government support in its history. Germany, South Korea and India recently legalized trading, thereby effectively adding an additional 20% of world’s population to Bitcoin’s addressable market.

    It is hard to find a negative when looking at pure Bitcoin fundamentals today. All metrics scream undervaluation.

    ♦Bitcoin’s Energy Value, a fair value measure for Bitcoin, is currently around $12.5KWhat does this all mean for Bitcoin?

    Long-term (12 — 24 months+)

    Bitcoin’s outlook remains excellent. Extremely strong fundamentals and a potential recessionary “Crisis Adoption” event should be good for Bitcoin.

    • Current target: $100K+ within 5 years

    Medium-Term (mid — late 2020)

    The halvening will double Bitcoin’s Production Cost (currently $7900).

    But we now have the real risk of recession. If the Amygdala Overdrive Relationship holds, Bitcoin will draw down with equity markets during the early stages of a recession, until a potential “Crisis Adoption” event is triggered. A recession also adds the possibility of a Miner Credit Crunch and wipe out of Zombie Miners.

    Should Coronavirus fear and recessionary risk subside between now and mid-late 2020, the original December 2019 forecast comes back into play.

    • Current target (No-Recession): $8,000 — $17,800
    • Current target (Recession): $6,400 — $17,800

    The Coronavirus-triggered recession risk has added an unknown to the equation. We have never seen Bitcoin in an recessionary environment.

    Bitcoin shows evidence of correlation to equities markets in cases of extremities in fear and greed, suggesting the “Amygdala Overdrive Relationship” could initially pull Bitcoin down in a recession. The CNN Fear and Greed Index has been identified as one way of tracking this.

    In the medium-term, we can expect more volatility than would otherwise have been the case without this heightened macroeconomic risk. In times of extreme fear and greed, look to the stock market as an indicator for Bitcoin.

    In the Long-term, the picture remains the same — excellent. In fact, the long-term Bitcoin value proposition may be stronger now due to the increased chance of recession, which could result in a Crisis Adoption event.

    The Coronavirus Black Swan — Part 2 was originally published in Capriole on Medium, where people are continuing the conversation by highlighting and responding to this story.

    The Coronavirus Black Swan
    Tuesday, 10 March 2020
    Charles Edwards

    Part 1 — The Current Macroeconomic State

    ♦Global markets are dancing a fragile line.

    The S&P500 has collapsed -19% in just over two weeks, entering correction territory and possibly the start of a bear market. Based on the Recession Watch indicator, there is approximately a 50% chance of

    Part 1 — The Current Macroeconomic State

    ♦Global markets are dancing a fragile line.

    The S&P500 has collapsed -19% in just over two weeks, entering correction territory and possibly the start of a bear market. Based on the Recession Watch indicator, there is approximately a 50% chance of a recession within the next year.

    Before the Coronavirus even hit, we were already in the late stages of a Bull market.

    So where are we at now?

    ♦The CNN Fear & Greed Index suggests widespread panic (9 March 2020)All the pieces are in place for a potential recession

    Global economies today have all the ingredients necessary to spawn a recession, all that is required is the trigger.

    The key economic factors present today, which precede recessions, include:

    • The yield curve inversion
    • Bottoming unemployment rates
    • Assets are extremely overvalued
    • Flatlined corporate profits
    • Breakout in the gold-to-stocks ratio
    • The Trigger: The Coronavirus Black Swan

    Let’s dive into each of these factors.

    Forgot about the Yield Curve inversion?

    In the last 50 years, every time the US treasury yield curve inverted a recession followed within 3 years. On average the S&P500 gained 19.1% following the inversion and peaked 13 months later.

    The last inversion was 7 months ago and the S&P since rose +16% to all-time highs. While it may seem like this inversion is in the past, the current market behavior following the inversion is the perfect example of historic topping processes which preceded prior recessions.

    ♦The Yield Curve as a recessionary predictor. Yield Curve inversions (red dots) precede US recessions (gray)

    Unemployment rate at a tipping point

    US unemployment is at its lowest level in over 60 years. But isn’t that good?

    Not really.

    It means the economy is at maximum capacity. Low unemployment rates are typical at the back end of bull markets.

    Historically, record low unemployment rates don’t last long, and form sharp V-bottoms. As soon as unemployment ticks up, a recession followed 10 out of 10 times in the last 70 years.

    The Coronavirus could be the trigger of that bottoming process.

    ♦US unemployment rate bottoms and prior Recessions

    Assets are extremely overvalued

    The Shiller PE ratio, a metric for the relative valuation of the stock market, is also showing signs of topping, similar to previous recessions. A month ago, the Shiller PE was in the top 5% of historic levels for the last 140 years.

    This suggests asset prices are at the upper bounds of historic valuations. It may be a good time to consider the phase:

    “Buy low, sell high”.

    ♦Shiller PE for S&P500

    Flatlined corporate profits

    US Corporate profits haven’t grown in almost a decade.

    Low interest rate environments have created masses of zombie companies, businesses which can only survive due to easy access to credit, but which do not add economic substance to the economy.

    In 2018, 16% of US companies were found to be zombies, just able to cover their debt obligations.

    In a world of no-fear and inflating asset prices, it is easy for these businesses to be cover their costs and just survive. But as soon as fear kicks in, risk appetites fall, credit tightens and many of these businesses may find they struggle to get financing.

    ♦US Corporate Profits flat for 8 years

    The Gold-to-Stocks red flag

    The Gold-to-Stocks ratio just broke above the 200-week moving average. The last time this occurred was in 2001, and for more than a decade investors who ditched stocks and just held gold, achieved a higher rate of return.

    The Trigger — The Coronavirus Black Swan

    The economic threat of the Coronavirus is not whether or not the virus will have a serious health impacts, but whether or not people think it will.

    If people are scared of the coronavirus and take actions to minimize social contact with others for extended periods, then corporations earn less, redundancies follow, unemployment rises and recession results.

    Fear driven actions such as cancelling holidays, cancelling concerts, avoiding restaurants and bars, and (at a more extreme level) quarantining entire countries, causes consumers to spend less. Impacts on production and airline demand have already caused flares in the oil market.

    The fact that unemployment is a near record lows means such a process can happen quickly. Add to that the fact that many bussinesses are just ticking along (the zombies) and the cascade effect resulting from sustained “social contact fear” could be swift.

    It becomes a self-fulfilling prophesy.

    ♦Supermarkets emptying globally, photo courtesy of BBC NewsIt’s not all doom and gloom

    While all the ingredients for a potential recession are in place, extremities in markets can exist for long periods of time.

    The Coronavirus may be the straw that breaks the camels back, but there is potential that the current market hysteria is short lived.

    Infection cases in China have plateaued over the last month at around 80,000.

    Assuming the growth rate continues to fall in China and then abroad, global fear and panic may peak (or have already peaked) over the coming weeks and months. Fear levels could subside just in time for markets to recover and not experience significant economic impact.

    However, if the Coronavirus fear continues or worsens over the coming 2-3 months, it will likely be too late to control the economic flow on effects that such an environment creates.

    ♦Growth in Coronavirus Cases in China has slowed (Johns Hopkins University)

    A combination of reduced fear plus potentially large rate cuts and other government easing actions might just result in a fast recovery if they happen very soon.

    A simple strategy

    Given the risk factors today, it may pay to have a reduced exposure to equities (sell the bounces) until markets breakout above current all-time highs.

    A strong breakout above current all-time highs would signal a continuing rally. It would also likely mean that Coronavirus fear has subsided, and fresh lows in interest rates and QE may enable the equity bubble to keep growing for a little while longer. Exiting equities now, you would miss a +15% upside if the market rallies from here to the current all-time highs.

    However, if you exit equities now and a recession follows through (let’s assume an average -40% drop from in the S&P highs for arguments sake), you will avoid the destruction of approximately 30% of your wealth, and have the opportunity to buy back into cheap stocks.

    Consider the following simple equities-or-cash strategy.

    Given it is roughly a coin-toss that a recession occurs within the next year, if you exit equities now and re-buy an all-time highs breakout or following a -40% market collapse, you have an expected outcome of increasing your equity holdings by +7.5% (-0.15*0.5 + 0.3*0.5). This assumes that a “no-recession” outcome results in the market rallying to previous all-time highs.


    We already had all the ingredients for an economic implosion. The overextended economy is the fuel, the Coronavirus is just the match.

    If the Coronavirus driven fear subsides soon, we may just avoid a recession.
    If it prolongs for the coming months, the likelyhood of recession increases signficantly.

    In the near-term, expect a lot of volatility.

    Governments and banks will try to support the economy and prevent a potential recession should the virus fear continue. There will be days of positive news and negative news, rate-cuts and stimulus programs. When the recession plays out, there will be “dead-cat bounces” all the way down.

    Equity investors would be wise to tread carefully. Dips today may not yet be for buying. The simple strategy outlined above may help you to better manage your equity risk exposure.

    The Coronavirus Black Swan was originally published in Capriole on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Plot Economics
    Monday, 09 March 2020
    For the fourth time in my adult memory, humanity has collectively, visibly lost the plot at a global level. My criteria are fairly restrictive: The dotcom bust and the 2007 crash don’t make my list for instance, and neither do previous recent epidemics like SARS or Ebola. Global narrative colla
    For the fourth time in my adult memory, humanity has collectively, visibly lost the plot at a global level. My criteria are fairly restrictive: The dotcom bust and the 2007 crash don’t make my list for instance, and neither do previous recent epidemics like SARS or Ebola. Global narrative collapse is a fairly severe condition, […]
    ♦By Beautyon on The Capital

    Bitcoin is a very new technology, even though the concept that it brings to life is decades old. The double spending problem has been solved; this means that it is possible to use a digital certificate to stand in the place of money and be sure that no one else can spend

    ♦By Beautyon on The Capital

    Bitcoin is a very new technology, even though the concept that it brings to life is decades old. The double spending problem has been solved; this means that it is possible to use a digital certificate to stand in the place of money and be sure that no one else can spend that certificate other than you as long as you hold it. This is an unprecedented paradigm shift, the implications of which are not yet fully understood, and for which the tools do not yet exist to fully take advantage of this new idea.

    This new technology requires some new thinking when it comes to developing businesses that are built upon it. In the same way that the pioneer providers of email did not correctly understand the service they were selling for many years, new and correct thinking about Bitcoin is needed and will emerge, so that it reaches its full potential and becomes ubiquitous.

    ♦The original Hotmail Interface

    Hotmail used familiar technologies (the browser, email) to create a better way of accessing and delivering email; the idea of using an email client like Outlook Express has been superseded by web interfaces and email ‘in the cloud’ that provides many advantages over a dedicated client with your mail in your own local storage.

    Bitcoin, which will transform the way you transfer money, needs to be understood on its own terms, and not just as an online form of money. Thinking about Bitcoin as money is as absurd as thinking about email as another form of sending letters by post; one not only replaces the other but it profoundly changes the way people send and consume messages. It is not a simple substitution or one-dimensional improvement of an existing idea or service.

    As I have explained previously, Bitcoin is not money. Bitcoin is a protocol. If you treat it in this way, with the correct assumptions, you can start the process of putting Bitcoin in a proper context, allowing you to make rational suggestions about the sort of services that might be profitable based on it.

    ♦Every part of Bitcoin is text. It is always text, and never at any point ceases to be text. This is a fact, and as text, it is protected under the free speech provisions of the constitutions of civilised nations with guaranteed, irrevocable rights.

    If Bitcoin is a protocol and not money, then setting up currency exchanges that mimic real world money, stock and commodity exchanges to trade in it is not the sole means of discovering its price. You would not set up an email exchange to discover the value of email services, and the same thing applies to Bitcoin.

    Staying with this train of thought, when you type in an email on your Gmail account, you are inputting your ‘letter’. You press send, it goes through your ISP, over the internets, into the ISP of your recipient and then it is outputted on your recipient’s machine. The same is true of Bitcoin; you input money on one end through a service and then send the Bitcoin to your recipient, without an intermediary to handle the transfer. Once Bitcoin does its job of moving your value across the globe to its recipient it needs to be ‘read out’, i.e. turned back into money, in the same way that your letter is displayed to its recipient in an email.

    In the email scenario, once the transfer happens and the email you have received conveys its information to you, it has no use other than to be a record of the information that was sent (accounting), and you archive that information. Bitcoin does this accounting on the block chain for you, and a good service built on it will store extended transaction details for you locally, but what you need to have as the recipient of Bitcoin is services or goods not Bitcoin itself.

    Bitcoin’s true nature is as an instant way to pay (despite not being money) anywhere in the world. It is not an investment, and holding on to it in the hopes that it will become valuable is like holding on to an email or a PDF in the hopes it will be come valuable in the future; it doesn’t make any sense.Of course, you can hold on to Bitcoin and watch its value go up, and its value willgo up, but you need to have guts to weather the violent waves of selling and buying as the transition to an all Bitcoin economy gets under way. Remember also, that businesses that have a need to store Bitcoin need to be concerned about its value if their models are open ended and are exposed to the market. “Closed Circuit Bitcoin” models have control over everything and never need to worry about prices at exchanges. They can do all their business moving an unlimited amount of fiat with just a few Bitcoin.

    Despite the fact that you can’t double spend them and each one is unique, Bitcoins have no inherent value, unlike a book or any physical object. They cannot appreciate in value. Mistaken thinking about Bitcoin has spread because it behaves like money, due to the fact it cannot be double spent.Misrepresentation of Bitcoin’s true nature has masked Bitcoin’s dual nature of being digital and not double spendable.

    ♦Razzles. They start as a candy, and then end as a gum. Before you chew them, which are they? A candy, or a gum?

    Bitcoin is digital, with all the qualities of information that make information non scarce. It sits in a new place that oscillates between the goods of the physical world and the infinitely abundant digital world of information, belonging exclusively to the digital world but having the characteristics of both. This is why it has been widely misunderstood and why a new approach is needed to design businesses around it.

    All of this goes some way to explain why the price of buying Bitcoins at the exchanges doesn’t matter for the consumer. If the cost of buying a Bitcoin goes to 1¢ This doesn’t change the amount of money that comes out at the other end of a transfer. As long as you redeem your Bitcoin immediately after the transfer into either goods or currency, the same value comes out at the other end no matter what you paid for the Bitcoin when you started the process.

    Think about it this way. Let us suppose that you want to send a long text file to another person. You can either send it as it is, or you can compress it with zip. The size of a document file when it is zipped can be up to 87% smaller than the original. When we transpose this idea to Bitcoin, the compression ratio is the price of Bitcoin at an exchange. If a Bitcoin is $100, and you want to buy something from someone in India for $100 you need to buy 1 Bitcoin to get that $100 to India. If the price of Bitcoin is 1¢ then you need 10,000 Bitcoin to send $100 dollars to India. These would be expressed as compression ratios of 1:1 and 10,000:1 respectively.

    The same $100 value is sent to India, whether you use 10,000 or 1 Bitcoin.The price of Bitcoins is irrelevant to the value that is being transmitted, in the same way that zip files do not ‘care’ what is inside them; Bitcoin and zip are dumb protocols that do a job. As long as the value of Bitcoins does not go to zero, it will have the same utility as if the value were very ‘high’.

    Bearing all of this in mind, it’s clear that new services to facilitate the rapid, frictionless conversion into and out of Bitcoin are needed to allow it to function in a manner that is true to its nature.

    The current business models of exchanges are not addressing Bitcoin’s nature correctly. They are using the Twentieth Century model of stock, commodity and currency exchanges and superimposing this onto Bitcoin. Interfacing with these exchanges is non-trivial, and for the ordinary user a daunting prospect. In some cases, you have to wait up to seven days to receive a transfer of your fiat currency after it has been cashed out of your account from Bitcoins. Whilst this is not a fault of the exchanges, it represents a very real impediment to Bitcoin acting in its nature and providing its complete value.

    Imagine this; you receive an email from across the world, and are notified of the fact by being displayed the subject line in your browser. You then apply to your ISP to have this email delivered to you, and you have to wait seven days for it to arrive in your physical mail box.

    The very idea is completely absurd, and yet, this is exactly what is happening with Bitcoin, for no technical reason whatsoever.

    It is clear that there needs to be a re-think of the services that are growing around Bitcoin, along with a re-think of what the true nature of Bitcoin is. Rethinking services is a normal part of entrepreneurialism and we should expect business models to fail and early entrants to fall by the wayside as the ceaseless iterations and pivoting progress.

    Bearing all of this in mind, focusing on the price of Bitcoin at exchanges using a business model that is inappropriate for this new software simply is not rational; its like putting a methane breathing canary in a mine full of oxygen breathing humans as a detector. The bird dies even though nothing is wrong with the air; the miners rush to evacuate, leaving the exposed gold seams behind, thinking that they are all about to be wiped out, when all is actually fine.

    ♦Day traders speculating on Bitcoin from home cause the price to oscillate. Its an artificial signal that has nothing to do with demand for Bitcoin and its circulation as an economic tool to facilitate commerce.

    Bitcoin, and the ideas behind it are here to stay. As the number of people downloading the client and using it increases, like Hotmail, it will eventually reach critical mass and then spread exponentially through the internet. When that happens, the correct business models will spontaneously emerge, as they will become obvious, in the same way that Hotmail, Gmail, Facebook, cellular phones and instant messaging seem like second nature.

    In the future. I imagine that very few people will speculate on the value of Bitcoin, because even though that might be possible, and even profitable, there will be more money to be made in providing easy to use Bitcoin services that take full advantages of what Bitcoin is.

    One thing is for sure; speed will be of the essence in any future Bitcoin business model. The startups that provide instant satisfaction on both ends of the transaction are the ones that are going to succeed. Even though the volatility of the price of Bitcoin is bound to stabilise, since it has no use in and of itself, getting back to money or goods instantly will be a sought after characteristic of any business built on Bitcoin.

    The needs of Bitcoin businesses provide many challenges in terms of performance, security and new thinking. Out of these challenges will come new practices and software that we can only just imagine as they come over the horizon.

    Finally, when there is no more fiat, and the chaotic transition zone between fiat and Bitcoin has been abolished, then everything will be priced in Bitcoin, and there will be no volatility, because no one uses anything other than Bitcoin to buy or sell. If you know any chemistry, this will be like a reaction’s reagents reaching equilibrium; you can shake it and stir it all you like; the reaction is over, and you’re left with the inert product. Right now, compared to the amount of fiat in the world, Bitcoin can expand and contract very rapidly over a large range, because it is small in volume. It can expand to what for many is an unimaginably high price, and then shrink down again. As it gets bigger and accumulates more mass (its price expressed in fiat), these fluctuations will become smaller and smaller. Through all of this, Bitcoin remains exactly the same; it is its users that are publishing numbers as a signal to react upon.

    If you like the content and feel so obliged to send some love via BTC donations you can do so at the address below:↴

    The Capital


    You don’t care about, “The Price of the Internet” so ignore the price of Bitcoin was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Marcel Burger

    The logical next step after we determined a cointegrating relation between stock-to-flow and market cap of bitcoin

    Continue reading on BurgerCrypto.com »

    The logical next step after we determined a cointegrating relation between stock-to-flow and market cap of bitcoin

    Continue reading on BurgerCrypto.com »

    The Revolution Will Be Financialized
    Friday, 06 March 2020
    Zane Pocock
    ♦Photo by Alex Shutin on UnsplashNot only is this okay for Bitcoin, but it’s desirable

    Inspired by the Satoshi Nakamoto Institute crash course, the following is the Knox index of the best work towards the principled and ethical financialization of the Bitcoin communications protocol. While I have a

    ♦Photo by Alex Shutin on UnsplashNot only is this okay for Bitcoin, but it’s desirable

    Inspired by the Satoshi Nakamoto Institute crash course, the following is the Knox index of the best work towards the principled and ethical financialization of the Bitcoin communications protocol. While I have argued that Bitcoin itself should not be defined legally within financial frameworks, its scarce information space has nonetheless accrued subjective value. It is thus primed for financialization on top of the base protocol. Aside from a few pieces that position Bitcoin against its aspiring usurpers, this list is Bitcoin-only. We will share more on that later.

    Native opportunities

    Bitcoin is, first and foremost, a distributed communications protocol. This opens it up to some novel native opportunities that would traditionally require third-party intermediaries and auditors:

    It’s the settlement assurances, stupid by Nic Carter is a tour de force that builds on his previous work (here and here) to make the case that the Bitcoin network dominates at enforcing final settlement.

    ♦Source: It’s the settlement assurances, stupid by Nic Carter

    Making Bitcoin Exchanges Transparent by Christian Decker, James Guthrie, Jochen Seidel and Roger Wattenhofer is a 2015 research paper that, amongst other things, lays out the why and how for Bitcoin custodians to provide proof-of-reserves. There is also a good outline by Blockstream, Standardizing Bitcoin Proof of Reserves, which describes the tools being developed to provide these assurances.

    Bitcoin vaults with anti-theft recovery/clawback mechanisms by Bryan Bishop is a proposal sent to the bitcoin-dev mailing list that outlines how it is possible to hold UTXOs in a self-custodied “vault” that only allows very specific transactions, even allowing the user to effectively undo a transaction.

    Open data value modelling

    Bitcoin’s unprecedented open data-set has allowed for the proposal of novel value modelling methodologies:

    Modeling Bitcoin’s Value with Scarcity by PlanB models an idea proposed by Saifedean Ammous in The Bitcoin Standard. The value and soundness of a money can be derived from its stock-to-flow ratio (the amount of new supply coming onto the market as a fraction of the pre-existing supply). The model has surprised many with its fit to price data and prompted a lot of debate about the efficiency of markets and whether Bitcoin’s halving cycles are priced in.

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    So I think May 2020 #bitcoin halving will produce similar results (red dots) as 2012 and 2016 halving. Why? Co-integration! ELI5: S2F and btc price stay together. Look at the white dots (1 means btc price is exactly S2F model value), btc is above and below model value EVERY YEAR.

     — @100trillionUSD

    function notifyResize(height) {height = height ? height : document.documentElement.offsetHeight; var resized = false; if (window.donkey && donkey.resize) {donkey.resize(height);resized = true;}if (parent && parent._resizeIframe) {var obj = {iframe: window.frameElement, height: height}; parent._resizeIframe(obj); resized = true;}if (window.location && window.location.hash === "#amp=1" && window.parent && window.parent.postMessage) {window.parent.postMessage({sentinel: "amp", type: "embed-size", height: height}, "*");}if (window.webkit && window.webkit.messageHandlers && window.webkit.messageHandlers.resize) {window.webkit.messageHandlers.resize.postMessage(height); resized = true;}return resized;}twttr.events.bind('rendered', function (event) {notifyResize();}); twttr.events.bind('resize', function (event) {notifyResize();});if (parent && parent._resizeIframe) {var maxWidth = parseInt(window.frameElement.getAttribute("width")); if ( 500 < maxWidth) {window.frameElement.setAttribute("width", "500");}}♦Bitcoin Risk Spectrum from The Lightning Network Reference Rate by Nik Bhatia

    The Lightning Network Reference Rate (part one, two, three, and four) by Nik Bhatia is a series exploring the use of Lightning Network routing nodes to earn a risk- and trust-minimized return on Bitcoin through routing fees. The series explores how to calculate an individual Node Accrual Rate (NAR) and implores participants to share this data such that a Lightning Network Reference Rate (LNRR) can be derived. As Nik says, the LNRR could “pave the way for a world of relative value calculations and be instrumental in the pricing of off-chain bitcoin lending.”

    Experiments on Cumulative Destruction by Willy Woo is an exploration in using Bitcoin Days Destroyed to derive the value of the Bitcoin network. It proposes a striking correlation between the cumulative value of Bitcoin Days Destroyed and the bottom of past market cycles.

    ♦Source: Experiments on Cumulative Destruction by Willy Woo

    HODL Waves by Dhruv Bansal analyzes the age distribution of Bitcoin’s UTXO set over time to propose a feature of Bitcoin’s infamous parabolic bull runs: that they encourage new participants to enter the market … and many never leave.

    ♦Source: HODL Waves by Dhruv Bansal

    Transaction count is an inferior measure by Nic Carter, meanwhile, exposes how some apparent data insights from the Bitcoin information space can be misleading. Caution is needed to ensure that models recognize how the Bitcoin protocol is used and which measures are easily spoofed.

    Regulatory encounters

    Because Bitcoin is a communications protocol first and foremost, it is often at odds with pre-existing financial regulatory regimes:

    Why Bitcoin is Not a Security by Elisabeth Préfontaine addresses a very common misunderstanding about the nature of Bitcoin and thoroughly debunks it.

    Two Things That Don’t Mix Well: Bitcoin Rehypothecation And Chain Forks by Caitlin Long introduced many Bitcoiners to the idea of rehypothecation — that through financial trickery more than a single party can have a legal claim on a single underlying asset, and that this creates fragility. This piece focuses on the particular context of chain forks but explores wider implications.

    Emerging derivatives markets and technology

    The scarce information space encumbered by Bitcoin UTXOs is only a small part of the protocol that can be valued. Miners, traders and other participants might want to trade futures derived from the Bitcoin hashrate:

    Hedging mining difficulty by the late Tamas Blummer is an introductory exploration of how to calculate and hedge mining difficulty.

    POWSWAP by Jeremy Rubin is still nascent, with the best exploration in the form of a tweetstorm. POWSWAP is a method to trade Bitcoin hashrate derivatives using only the Bitcoin protocol itself as an oracle, thus having no reliance on trusted third parties.

    body[data-twttr-rendered="true"] {background-color: transparent;}.twitter-tweet {margin: auto !important;}

    Announcing a new project: POWSWAP. POWSWAP is a no-bullshit smart contract/platform for trading Bitcoin hashrate derivatives. What does no Bullshit mean? No middlemen. No oracles. No escrows. Nothing but Bitcoin. Sign up at t.co/x8EWtuFSfO. Why is this a big deal?

     — @JeremyRubin

    function notifyResize(height) {height = height ? height : document.documentElement.offsetHeight; var resized = false; if (window.donkey && donkey.resize) {donkey.resize(height);resized = true;}if (parent && parent._resizeIframe) {var obj = {iframe: window.frameElement, height: height}; parent._resizeIframe(obj); resized = true;}if (window.location && window.location.hash === "#amp=1" && window.parent && window.parent.postMessage) {window.parent.postMessage({sentinel: "amp", type: "embed-size", height: height}, "*");}if (window.webkit && window.webkit.messageHandlers && window.webkit.messageHandlers.resize) {window.webkit.messageHandlers.resize.postMessage(height); resized = true;}return resized;}twttr.events.bind('rendered', function (event) {notifyResize();}); twttr.events.bind('resize', function (event) {notifyResize();});if (parent && parent._resizeIframe) {var maxWidth = parseInt(window.frameElement.getAttribute("width")); if ( 500 < maxWidth) {window.frameElement.setAttribute("width", "500");}}

    To manage expectations, Jack Mallers of Zap fame has some thoughts on the difficulties this project might face being a difficulty market-maker:

    medium.com/media/9198aebd94ff32dd1375a5f88951bd95/hrefBuilding financial infrastructure

    Finally, infrastructure is being built that adds to the weight of Bitcoin’s nascent financial system and bridges the gap to the legacy one:

    Discrete Log Contracts by Thaddeus Dryja introduced the concept of Discrete Log Contracts (DLCs), which enables a peer-to-peer Bitcoin derivatives protocol. This protocol has been extended by Suredbits who have a four-part explainer series (part one, two, three and four) and an excellent Discrete Log Contract Demonstration in action.


    Liquid Technical Overview by Blockstream outlines how the Liquid federated side-chain works to add an extra layer that connects key players in Bitcoin’s financial infrastructure, such as exchanges and custodians for inter-exchange settlements, given a different set of trade-offs notably improved confidentiality and velocity with reduced block mining time.

    A Brief Introduction to Bisq by the Bisq team explains why the decentralized exchange is needed and how to “be your own exchange”, paving the way to a novel decentralized market infrastructure for order books and execution venues.

    Thanks to Thib and Daskalov for their help with this introduction to the financialization of Bitcoin. If you want to talk further about responsible Bitcoin custody for your fund, exchange, or other vehicles, have strict LP and risk management requirements, or otherwise appreciate a trust-minimized profile, we’d love to talk. Please contact us at custody@kn0x.io


    The Revolution Will Be Financialized was originally published in Knox Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

    "Scientist" is a powerful identity, and its power allows academia to subject its foot soldiers to misery.
    "Scientist" is a powerful identity, and its power allows academia to subject its foot soldiers to misery.
    Charles Edwards

    Because the strategy, and the even more profitable Trend King algo, is available on a number of platforms already (www.capriole.io)

    Because the strategy, and the even more profitable Trend King algo, is available on a number of platforms already (www.capriole.io)

    The New Uncanny Valley
    Tuesday, 03 March 2020
    This is a guest post by Jakub Stachurski Every advancement in communication has overcome distance through the reduction of identity. The mail summarizes us, the phone condenses us into a voice, and the Internet flattens us into profiles. We become the necessary abstractions of our technology, reduced
    This is a guest post by Jakub Stachurski Every advancement in communication has overcome distance through the reduction of identity. The mail summarizes us, the phone condenses us into a voice, and the Internet flattens us into profiles. We become the necessary abstractions of our technology, reduced for the sake of ingestion. Increasingly we spend […]
    Dynamism (part 2)
    Sunday, 01 March 2020
    Elaine Ou
    A reader points out that the Axis powers suffered an oil embargo during WWII, forcing Japan and Italy to develop fuel-efficient vehicles. (Meanwhile, the Nazis figured out synthetic fuel.) The technologies that enable fuel efficiency lend well to high performance race bikes and sports cars, where pow

    A reader points out that the Axis powers suffered an oil embargo during WWII, forcing Japan and Italy to develop fuel-efficient vehicles. (Meanwhile, the Nazis figured out synthetic fuel.) The technologies that enable fuel efficiency lend well to high performance race bikes and sports cars, where power-to-weight ratio determines cornering speed. Hence the overrepresentation of Axis powers on Superbike and F1 podiums.

    On the other hand, NASCAR has long been dominated by US auto manufacturers, with Chevy, Ford, and Dodge racking up the most historical wins. See, American engineers can build fine cars if they put their minds to it! Lol just kidding: NASCAR members banned foreign vehicles from participation to avoid competing with superior cars. Toyota was finally allowed to race in 2004, after complaining that all the “American” cars were made in Mexico anyway.


    As I have argued previously, Bitcoin is a living organism. But where does this organism live, exactly? As with many questions in the world of Bitcoin, exact answers are hard to come by. Living things have fuzzy edges: beginnings and endings are hard to pin-point, differentiation is more-or-less ar

    As I have argued previously, Bitcoin is a living organism. But where does this organism live, exactly? As with many questions in the world of Bitcoin, exact answers are hard to come by. Living things have fuzzy edges: beginnings and endings are hard to pin-point, differentiation is more-or-less arbitrary, and what was classified as a wolf today might evolve to be a dog tomorrow.

    Bitcoin has no rigid specification, no absolute finality, no fixed development team, no final security guarantees, no scheduled updates, no central brain, no central vision, no kings, and no rulers. It is a decentralized organism, organically evolving without central planners. The lack of any centralization is the source of Bitcoin’s beauty, it’s organic behavior, and it’s resilience.

    Bitcoin is everywhere and nowhere, which makes figuring out where this thing lives a daunting task. However, it turns out that there is a space it lives in. Multiple spaces, as we shall see.

    The Habitats of Bitcoin

    While classifying the habitat of a decentralized organism isn’t trivial, we can look at the constituents of Bitcoin to make the task a bit easier. As outlined in the last article of this series, Bitcoin lives across domains, with one foot in the purely informational realm (ideas and code) and one foot in the physical realm (people and nodes).

    An awareness of Bitcoin’s environment(s) might help to better understand this new form of life. No organism can be meaningfully studied in isolation, and Bitcoin is no exception. As Alan Watts pointed out, one has to be aware of the basic unity every organism forms with its environment.

    “For the ecologist, the biologist, and the physicist know (but seldom feel) that every organism constitutes a single field of behavior, or process, with its environment. There is no way of separating what any given organism is doing from what its environment is doing, for which reason ecologists speak not of organisms in environments but of organism-environments.”

    Alan Watts

    With that in mind, let’s take a closer look at the organism-environment(s) we are dealing with. As outlined above, Bitcoin’s ideas and code inhabit one realm, and Bitcoin’s people and nodes inhabit another. To stick with tradition, let’s call the physical realm “meatspace” and the purely informational realm “cyberspace” — even if, as always, the lines might be fuzzy around the edges.

    The “soul” of Bitcoin, so to speak, lives in cyberspace. There, Bitcoin absorbs useful ideas and incorporates them into its code. As with all living things, something is useful if it helps an organism to survive. While Bitcoin has various self-regulatory mechanisms to react to the environment, new ideas may be necessary for survival if changes are drastic enough.

    The “body” of Bitcoin, like all bodies, is living in meatspace. Nodes, hard drives, cables, and other things come together in an intricate dance, pushing around electrons, changing zeros to ones and vice-versa, making sure that Bitcoin’s heart beats about a thousand times a week.

    Living things have an interest in staying alive, and the Bitcoin organism is no exception. Bitcoin found an ingenious way to ensure that it stays alive: it pays people, as Ralph Merkle pointed out. People — and increasingly, organizations — are incentivized to keep it alive. They shape the physical world to Bitcoin’s liking, feed it energy, renew its hardware, and update its software to keep it alive.

    The fact that Bitcoin pays us to keep it alive opens up a third space: a space of financial transactions, value, and mutual beneficial exchange. Let’s call this space “finspace.”

    To understand finspace, we will have to examine the other side of this coin. So far, we only examined the side with an uppercase B: the Bitcoin network. But there is also bitcoin — with a lowercase b — which is the unit of value itself, brought into existence by every copy of the ledger.

    These bitcoins, while deeply embedded in the amber of the ledger, are traded worldwide on various markets and marketplaces. And since these bitcoins — and their value — are critical for Bitcoin’s survival, we will have to recognize finspace as the third space this strange beast lives in. Note that finspace, strangely enough, is solely inhabited by bitcoin with a lowercase b.

    In total, we can identify three distinct environments which the Bitcoin organism inhabits:

    • Cyberspace: the world of ideas and code.
    • Meatspace: the world of people and nodes.
    • Finspace: the world of value and markets; the world of dollars and sats.

    Understanding these habitats becomes increasingly important, especially as the climate in one — or more — heats up.

    The Climates They Are A-Changin’

    The three spaces outlined above — cyberspace, meatspace, and finspace — have different restrictions; different climates, so to speak. In short: they operate under different rules. Once these rules change drastically enough, people will say that “the political climate is heating up” and reports on “the coming financial climate” will be written. Citizens will be unable to speak and act freely. If things change drastically enough, people will rise up in protest, or, if all else fails, flee.

    Cyberspace: While we don’t have precise words for it, it is obvious that the climate in cyberspace has changed quite drastically in the last two decades or so. The idealistic, utopian ideas which were the foundation of most of the internet were perverted by the advertisement-driven surveillance companies which are the giants of today.

    People and politicians are slowly waking up to the strange reality we are living in: the fact that Facebook can manipulate moods and sway elections is as disturbing as the fact that Google knows you better than you know yourself. Edward Snowden showed that the most paranoid netizens were right all along: everyone in cyberspace is under constant surveillance, without suspicion, by default.

    While the western world does not immediately feel the repercussions that come with living in a constant state of surveillance, Chinese citizens are gathering first-hand experience with each passing day.

    In the western world, the consequences are advertisements which range from annoying to spooky. In China, the consequences are frozen bank accounts, an inability to buy train or plane tickets, elimination of creditworthiness, automated fines for trivial offenses, and more. Voicing the “wrong” opinion — online or not — can lead to restricted access to schools, hotels, and jobs. And after ruining your life with the flip of a bit you will be publicly named as a bad citizen and the government will take away your dog. If that doesn’t sound dystopian enough for your taste I bet that it will be in a couple of years. Remind yourself that this is only the beginning.

    In the “free” world, things are more subtle. Multiple efforts are underway to curb net neutrality, the very cornerstone of the internet. Legislation is being passed which is inherently incompatible with the laws of cyberspace. It seems like the last battle of the Crypto Wars is yet to be fought as politicians are calling for “responsible encryption” and the ban of certain CAD files. Companies are in charge of the speaker’s corners of cyberspace and are making arbitrary decisions on what can be uttered by whom and what is off-limits.

    Bitcoin knows no borders, no jurisdictions. However, it has to conform to the laws of cyberspace — and if these laws change, e.g. if large parts of the world block Bitcoin traffic and/or the usage of TOR, the Bitcoin organism will have to adapt.

    Meatspace: Meatspace climate differs wildly from jurisdiction to jurisdiction. Some bastions of freedom still exist, but once you try to board an international flight it becomes obvious that your right to privacy and your freedom to bring a bottle of water with you are null and void.

    Protests across the globe indicate that the powerless are fed up with the powerful, who do everything they can to stay in control and solidify their positions of influence.

    History shows that governments do not shy away from using their power. In 1933, Executive Order 6102 was signed, effectively forcing the whole population of the United States to hand over their gold and gold certificates to the government.

    Yes, seizing bitcoin is way harder than seizing gold — in some cases even impossible. But it would surprise me if those who currently control our money — the governments and central banks of this world — would simply roll over and let Bitcoin march on unhindered. Governments have a monopoly on violence, and they are able and willing to abuse this violence in their own interest.

    With Bitcoin, however, people can flee a country with their wealth intact. While this is definitely not easy, and not something I would wish on anyone, it is now possible.

    Finspace: Where should I even begin? The current, debt-based financial system has an appetite for printing money which is beyond belief. Quantitative Easing (QE), Negative Interest Rate Policies (NIRPs), currency wars, hyperinflations, and a looming recession are just a few of the recipes of the global instability soup which is currently brewing.

    The current financial system seems so far removed from common sense and reality, that all the jargon in the world won’t be able to stabilize this house of cards. People know that our money is broken, which is why they flee to buying real estate, stocks, and all kinds of complicated financial constructs to preserve their wealth. In the current system, you have to be an investment expert just to hold your value.

    And we haven’t even talked about the looming recession, and the virtual inevitability of the next financial crisis yet. Yes, governments might be able to kick the can down the road by printing ever more money. But no road is endless, and the experiment which is fiat money will come to an end, one way or the other.

    How bitcoin will react to a catastrophe in finspace is anyone’s guess. Some people might flee from their failing fiat currency into bitcoin, using it as a risk-off asset. Others might sell bitcoin to buy something they consider more stable, such as real estate or land. A rising number of people will identify bitcoin as the best money we ever had, shunning other assets and other monies on the quest to stack as many sats as they can.

    However it might play out, Bitcoin is the cure for many of the current system’s ills. It is hard money which doesn’t devalue over time. It is an incorruptible system which forms the basis of a new financial reality.

    “It can’t be changed. It can’t be argued with. It can’t be tampered with. It can’t be corrupted. It can’t be stopped. It can’t even be interrupted.”

    Ralph Merkle

    In addition to the above, it seems to have many indirect effects. It lowers the time preference of those who use it. It incentives users to have better personal and operational security. It incentives individuals and companies to have better digital hygiene. It propels the development of chip manufacturing and encryption technology.

    While Bitcoin definitely influences its environments and vice-versa, how Bitcoin reacts to drastic changes is yet to be seen.


    Bitcoin lives on the internet, as Ralph Merkle points out. The internet, however, is not a necessary requirement for Bitcoin to work. Bitcoin is text — pure information — and every system capable of transmitting (and storing) information is a potential habitat for the Bitcoin organism. The internet just happens to be the most suitable habitat which currently exists, since it is the most efficient system to transmit information we have to date.

    Cyberspace: The Bitcoin organism could migrate to other environments, and multiple efforts are underway which enable Bitcoin to spread to places where access to Internet infrastructure is limited or non-existent. As of this writing, Bitcoin transactions (and LN invoices) have been sent via radio waves, mesh, and satellite networks — just to name a few. All of these can be seen as Bitcoin conservation efforts, so to speak.

    Whether we will see the migration of Bitcoin to another system in the decades and centuries to come depends, in essence, on whether the internet will remain a suitable habitat or not. If the online climate changes drastically enough, we might see the migration to even more resilient, less restrictive environments.

    Meatspace: We can already see that mining facilities pop up where energy is cheapest or even stranded. In essence, mining is done where it makes the most sense — economically speaking. The same is true for running nodes. If people can run nodes at low risk and near zero marginal cost, they will. Thus, visualizing Bitcoin on a map, nodes and mining facilities migrate geographically from unfriendly places to friendlier places over time. Unprofitable mining facilities will shut down, profitable mining facilities will go online. The same, again, is true for nodes.

    ♦ Public bitcoin nodes. Source: /u/SondreB

    Increasingly, people will migrate to jurisdictions which are more favorable to their bitcoin holdings. And if you want to start a Bitcoin company, you might also move to a jurisdiction which is more favorable to you and your future business.

    Finspace: In the last 10 years, many people decided to buy bitcoin, effectively feeding the Bitcoin organism by investing in it. This capital allocation will continue as more people understand the nature of this beast, and the ultimate goal of Bitcoin: the separation of money and state.

    What investors describe as portfolio balancing and allocation of capital can be seen as a migration of value from worse assets to better assets; from bad stores of value to better stores of value. Bitcoin, being the ultimate asset in terms of portability, verifiability, divisibility, scarcity, and unseizability, will continue to suck up value and grow in the process.


    Bitcoin lives at the intersection of three spaces: meatspace, cyberspace, and finspace. These spaces have different laws, different rules, and different climates. To fully understand any organism, we must not only look at the organism itself, but examine the organism-environment holistically.

    Because of its decentralized nature, Bitcoin is able to overcome many, if not all obstacles in its environments. It can migrate to favorable jurisdictions in meatspace, use different transportation and storage media in cyberspace, and feed on the instability of other asset classes in finspace.

    Whatever the future may bring, Bitcoin is equipped to survive and thrive in the various environments it lives in. It is remarkably resilient — well adapted to survive any coming storm, however perfect it may be.

    Further Reading
    • Proof of Life by Gigi
    • The Sovereign Individual by James Dale Davidson and William Rees-Mogg
    • Thanks to Jannik and Raph for their feedback on earlier drafts of this article.

    I hope you have enjoyed this excursion into the world of the Bitcoin organism. If you like to accelerate the growth of both Bitcoin and this article series feel free to drop me a line, some applause on medium, or even some sats via the beast which is Bitcoin. Thanks for all the encouragement, and thank you for reading.

    Saturday, 29 February 2020
    Elaine Ou
    During WWII, Japanese fighters and bombers were manufactured by Mitsubishi, including the A6M Zero, the meatball plane that attacked Pearl Harbor. Propellers and fuel tanks were made by Yamaha. After the war, Japan was forced to demilitarize. Mitsubishi shifted its manufacturing capabilities to makin

    During WWII, Japanese fighters and bombers were manufactured by Mitsubishi, including the A6M Zero, the meatball plane that attacked Pearl Harbor. Propellers and fuel tanks were made by Yamaha.

    After the war, Japan was forced to demilitarize. Mitsubishi shifted its manufacturing capabilities to making cars. Yamaha switched to motorcycles.

    So here’s Sharp, known for its LCD TVs, announcing that it will repurpose its clean rooms to mass-produce face masks.

    A clean room is a pressurized facility used for semiconductor fabrication. Because a speck of dust is enough to short out submicron circuitry, everything has to be super sterile. Perfect for producing N95 face masks. Supply chains are too messed up to manufacture TV sets anyway.

    Could we do that here? What if the Cold War ended, and instead of lobbying for continued expansion of national defense, companies like Lockheed and Raytheon shifted to a more socially redeeming line of work?

    The F-35 Lightning II cost $407 billion to develop. Who is this for, anyway? What third world country are we going to sic this on?

    Lockheed Martin could be making motorcycles! Let’s get an American manufacturer into World Superbike for once. Why should the Japanese and Italians have all the fun?

    Fun fact: Ducati, which holds the most race wins in all of World Superbike history, was founded as a radio company in Marconi’s hometown of Bologna. During WWII, they made military radios and machine gun parts for the Fascists.

    We’re about to face massive medical supply shortages because all our stuff comes from China. What about all those abandoned manufacturing facilities in the US? Could Intel repurpose its decommissioned clean rooms in Santa Clara (where I used to work!) and start making face masks? Or would they be hamstrung by FDA regulations?

    A Cover Letter to Ray Dalio
    Wednesday, 26 February 2020
    Friar Hass

    In this epic piece, Robert Breedlove takes a massive dive into Bitcoin, and presents one of the most solid cases for Bitcoin that’s out there.

    That said, it’s not always easy to get the very busy (and skeptical) Ray Dalio’s of the world to sit down for a few hours, so I hope this cover lette

    In this epic piece, Robert Breedlove takes a massive dive into Bitcoin, and presents one of the most solid cases for Bitcoin that’s out there.

    That said, it’s not always easy to get the very busy (and skeptical) Ray Dalio’s of the world to sit down for a few hours, so I hope this cover letter can encourage him to have an open mind, and give Bitcoin a few hours of his time. ROI on those few hours could be bigger than any return he’s witnessed in his highly illustrious and successful career.

    Bitcoin is most definitely not an “easy get”. Most ultra-bullish Bitcoiners only become that way due to a deep understanding of the history and properties of money-as-we-know-it, the technology behind Bitcoin, macro, micro and behavioural economics, as well as the dynamics of start-up companies and technologies in bootstrapping themselves and realising network effects. Less technical people observe the IQ density of the space, through its industry leaders and broader development community, which allows for a high level of believability-weighted decision making. I believe you have one of the best grasps of these concepts in the world, so I ask that you humour me for a few minutes to allow me to demonstrate just how much Bitcoin aligns with your personal views and fundamentals. This journey isn’t quick — the most dedicated Bitcoiners have put in thousands of hours of research and knowledge development, as well as many hundreds of days “in the saddle” with exposure to the whims of the Bitcoin Rollercoaster. I hope that by the end of this letter you will at least consider revisiting the topic of Bitcoin with a bit more depth.

    Bitcoin has been likened by some to be reflective of a startup organisation; currently heading into its Series B fund raise. Bitcoin is a well-oiled “un-organization” with founders but no CEOs, many volunteers but no employees, where the best ideas are developed and implemented by consensus regardless of who proposed the idea, and provably non-diluting equity available to anyone who is willing to trade their energy for it. This is all baked into the code, and it is radically transparent for anyone wishing to participate in the ecosystem. So transparent, that an individual can verify anything they need to about the Bitcoin network by simply running some software on a very basic computer setup in the order of $200 and with the most basic of internet connections. It may likely be one of the best real-life examples of an Idea Meritocracy at play — the cultural paradigm that you originated at Bridgewater.

    Idea Meritocracies are microcosms of what a “truly free” market should be. There aren’t many, if any, examples of free markets in the wild; except of course, Bitcoin. The competition in the Bitcoin space is merciless, where the best products having a shelf-life of months before being made redundant by superior products. Most industry leading service providers will find themselves competing with a free product not long after establishing themselves. As at date of writing, the Bitcoin space even meets several criteria of the “theoretical” perfectly competitive market. Bitcoin’s nature as an open-source, public, encrypted, distributed ledger means that the blockchain guarantees radical transparency, property rights and homogeneity of product, at zero or near-zero transaction and storage cost. The factors of production (labour, equipment, and capital) are mobile to the extent that only a communication link and a power source is required to participate in the ecosystem. Developing on top of Bitcoin requires no permission, and if entrepreneurs have a good enough idea, securing start-up capital is not a difficult barrier to entry to overcome. Information asymmetry, low number of market participants, and externalities from use of non-renewable energy to mine will all be resolved in time, most likely by the end of this decade. The critical thing to note is, although there are relatively few people who own the majority of Bitcoin now, once Bitcoin is spent in the future during the redistribution phase, it is spent forever — there are no reprints. If you want your Bitcoin balance to stay the same or increase, you must be creating value for someone. There is no free lunch with Bitcoin.

    A central tenet of your school of thought is open-mindedness, and I encourage you to suspend disbelief and allow yourself to be immersed in high quality Bitcoin content; whether through attending a Bitcoin-only conference, books, podcasts, or even attending your local casual Bitcoin meetup. When meeting Bitcoiners in the real world, you are guaranteed to witness more IQ packed into one small place than you have ever witnessed in your life. Bitcoin was created and fostered by the most radically open-minded, and the development of its technology over time was only possible through radical open-mindedness in the developer community, and of the wider user community once improvements were thoroughly scrutinised and ready to be implemented.

    I’m sure that a lot of these arguments have hit home — after all, you personally coined the majority of the arguments I used to present The Case for Bitcoin. It is daunting and confusing to step into such a revolutionary realm, but you will find that if you are willing to radically open your mind, your fundamentals are 100% aligned with Bitcoin’s.

    A Text Renaissance
    Tuesday, 25 February 2020
    There is a renaissance underway in online text as a medium. The Four Horsemen of this emerging Textopia are: Roam, a hypertext publishing platform best understood as a medium for composing conspiracy theories and extended universes. Substack, a careful and thorough ground-up neoclassical reconstructi
    There is a renaissance underway in online text as a medium. The Four Horsemen of this emerging Textopia are: Roam, a hypertext publishing platform best understood as a medium for composing conspiracy theories and extended universes. Substack, a careful and thorough ground-up neoclassical reconstruction of the age-old email newsletter. Static websites, built out of frameworks […]
    Uncommon Core

    Howdy! I just want to catch you up on some of the work Su and I have been publishing outside of UCC.

    The post A quick update: Lots of new articles + podcasts appeared first on Uncommon Core.

    Howdy! I just want to catch you up on some of the work Su and I have been publishing outside of UCC.


    Contango and Backwardation: A Window into Market Behaviour (by Su and Arthur): In this article, Su and Arthur focus on the phenomena of contango and backwardation and their implications on market structure.

    An analysis of developer funding in Bitcoin (by Hasu and Derek Hsue): Here, Derek and I examine the importance of funding open-source development, what funding mechanisms exist, and tradeoffs that each of them brings. We also apply our findings to Bitcoin and the broader cryptocurrency landscape, analyze how Bitcoin development has been funded in the past, and how it might evolve in the future.

    Efficiency, liquidity, and volatility in crypto markets (by Su): Su investigates the counter-intuitive result that while market efficiency has substantially increased over that time period, trading volumes denominated in BTC have actually declined and volatility has remained consistently high. He then discusses similarities of the crypto market structure to that of FX markets.

    Rollback or Reimbursement: An Analysis (by Su and Hasu): In light of an index price spike on Deribit, we analyze the pros and cons of rollbacks vs reimbursement for exchanges.

    Vertcoin’s 51% attack – a case-study for blockchain security (by Hasu): Using the example of Vertcoin, I show how ASIC resistance hurts the security of a blockchain by making it cheaper to attack.

    Perpetual Swaps: Comparisons and Findings (by Su): The perpetual contract is an important product for price discovery and speculation and has the most volume traded as a consequence. Su compares perpetual swaps across different exchanges and highlights key differences that traders should be aware of.

    Does Buying Top10 Coins Pay Off? A Concise Study (by Su): In a quick analysis, Su shows how an ETF-like strategy of “buying the top 10 coins” would have performed against BTC.

    The Great Race to Crypto Banking (by Hasu): Crypto exchanges and their competitors are racing to adopt, -and ultimately democratize- financial services known from legacy finance. The three low hanging fruits are (1) interest accounts, (2) payments, and (3) tax services. Because of the low switching cost for customers, this transformation into crypto-banks will happen much faster than expected, leaving exchanges that don’t follow suit in the dust.

    Bruno and Bill: a Story of Broken Trust while Building a Trustless Protocol (by Su and Hedgedhog): Su and Hedgedhog revisit the story of an ICO founder gone rogue to highlight the risks from key man risk, and admin access more generally, in DeFi. Similar risks exist at this point in major protocols like Maker, Compound, and Dydx.

    Maker & Taker Fees on Crypto Exchanges: A Market Structure Analysis (by Su): Su explains how the Maker and Taker fee structures have evolved as a result of natural market evolution, and disproves the myth that Maker rebates are a form of “free lunch”

    How the BCH developer tax affects BTC miners (by Hasu): Using the proposed BCH developer tax as an example, I show how changes in profitability in any of the SHA256 coins necessarily affect all SHA256 miners.

    Navigating the Crypto Gambling Wasteland (by Su and Hedgedhog): Su and Hedgedhog speculate why gambling as a crypto use case still hasn’t taken off.

    Understanding Quanto Risk and Opportunity (by Su): In this piece, Su explains Quanto derivatives whose exotic risks fool many inexperienced traders.

    No, Concentration Among Miners Isn’t Going to Break Bitcoin (by Hasu): In my first op-ed for Coindesk, I explain why concentration of hashpower (or stake) does not imply insecurity, as miners with more control in a network also have a stronger vested interest in its protection as well.

    No, Concentration Among Miners Isn’t Going to Break Bitcoin – Part 2 (by Hasu): After the previous article sparked some excellent discussions on Twitter, I address the best questions and comments in this follow-up piece on hashpower concentration.


    Su on “The Coinist Podcast”: Su discusses Bitcoin volatility, S2F model, whether ETH can outperform, decentralized exchanges, and things to watch in 2020 with host Luke Martin.

    Hasu on “Into the Ether”: Eric Connor and I discuss the current state of both the Bitcoin and Ethereum communities and where their current narrative journeys have landed them. We also dive deep into the topics of monetary policy, PoW vs PoS, development funds, and more.

    Hasu on “Amun State of Crypto”: The Amun team and I dissect what the Bitcoin halving means for the mining space and whether the declining block reward poses a risk for long-term security.

    Hasu on “Ark Invest”: It is an honor for me be invited to the “Ark Invest” podcast, where Yassine and I have a great conversation about Bitcoin’s security model. I strongly recommend this one if you’re even remotely interested in blockchain security, as we synthesize much of my previous year’s work (and the best counterpoints to it) into a single episode.

    The post A quick update: Lots of new articles + podcasts appeared first on Uncommon Core.

    Bitcoiner Ted
    ♦It must be refusal, right?

    If iPhones were as fungible and easy to buy and sell as cryptocurrency, you could buy them, use them and then sell them back again in the market right afterwards.

    They would magically show up in your hands, you would then search something in google, write an email,

    ♦It must be refusal, right?

    If iPhones were as fungible and easy to buy and sell as cryptocurrency, you could buy them, use them and then sell them back again in the market right afterwards.

    They would magically show up in your hands, you would then search something in google, write an email, scroll twitter and then magically disappear to be available for someone else in the international iPhone exchanges.

    If on average you use an iPhone for 3 hours daily or 12,5% of your day, and the cost of transaction would be negligible, you would perform this operation several times a day until covering those 3 hours, while other 21 hours your iPhone would be available for someone else.

    There would be such availability of iPhones that even if Apple claimed that its number would never exceed a certain threshold, people wouldn’t have any incentive to keep them over time, as the cost of access to them would be simply lower than the cost of storing them. It would therefore be uneconomical to keep them with you.

    The cost of storage is the fact that things deteriorate, inflate have some cost of maintenance, even if it is only to avoid losing them.

    As a result, whether it is iPhones or whatever else, you will always try to keep your stuff in whatever has the lower cost of storage, that is, whatever keeps value best.

    The asset with the lowest cost of storage will accumulate all the value as it doesn’t make sense to use assets with second best cost of storage.

    And interestingly, the asset with the lowest cost of storage is not that one where you are promised that its monetary supply will not increase, but rather that one where its monetary supply is written in stone and where it can be credibly claimed that no one will be able to change it.

    Given that no other shitcoin can credibly claim inmutability of its monetary supply, the battle is lost already for anything other than Bitcoin.

    What happens when people learn this and start selling like nuts their shitcoins? It will be a stampede.

    If you are a shitcoin sinner, please let me know if this article has been close to convincing you to sell.

    Bitcoiner Ted
    ♦At an early stage, hodlers/bitcoin owners was a very small ratio

    I know I suck at painting stuff, but I hope I can explain my point better within the next paragraphs.

    In the image:

    1. Hodlers are represented by the orange color. They are users because they understand Bitcoin’s extrem
    ♦At an early stage, hodlers/bitcoin owners was a very small ratio

    I know I suck at painting stuff, but I hope I can explain my point better within the next paragraphs.

    In the image:

    1. Hodlers are represented by the orange color. They are users because they understand Bitcoin’s extremely low cost of storage / maintenance / deterioration / inflation. They are speculators, but in the very long run, and their speculation is based on the bet that they will hardly ever have to sell their coins.
    2. The green color is the (still) huge number of people who still don’t get Bitcoin but own it only as short term speculators (STS). They have no problem with selling big amounts of their coins and turn them into fiat. Hodlers+ STS= Bitcoin owners
    3. The white color is the even larger of people who still don’t own Bitcoin (nocoiners)

    My thesis is that information asymmetry is the result of STS guys speculating short term (typically buying at times of FOMO) and selling (typically at times of panic), consequently increasing as such the supply, while hodlers keep their coins with themselves.

    The STS (green) guys get in and out very quickly. They completely destabilize the price.

    A small number of STS have been becoming over time hodlers (orange), very slowly at first, people that understand that Bitcoin is a long term storage of value. They don’t put their coins for sale easily and as a result stabilize the price creating the floor prices we all know and love.

    So how do we create the first FOMO and therefore turn nocoiners into STS?

    That is the role of halvings, and happens every four years.

    ♦Fast forward a few years and Bitcoin understanding grew. The proportion of hodlers among Bitcoin owners is higher.

    After the first halving, I think that what we are seeing is a very variable green area that creates the volatility, grows very fast at times of FOMO and decreases very fast at times of panic.

    Hodlers on the other hand, grow very slowly, at their own rhythm as Bitcoin understanding grows.

    We live in the information age and nowadays good information is way more widespread so I expect soon that the orange area will grow faster than it used to, even if the green one grows very fast too with the next FOMO.

    Consequently, with a faster growing orange area of hodlers, I expect the next floor in the price to be way higher than many anticipate, especially given that the next bull run is going to be way more mainstream than any other in the past.

    And if this thesis is confirmed, I believe that we are likely to see a situation like this during the next halving of 2024:

    ♦After the next halving of 2024, I expect the proportion of hodlers within the total of Bitcoin owners to be way higher. Volatility should decrease drammatically as a result

    My point is, Bitcoin understanding can only grow and Bitcoin understanding can only grow FASTER. FOMO is at some point going to be unbelievable and probably difficult to manage for many. That’s why I say that the role of Bitcoin educators is wildly underrated.

    Mine are not the prettiest articles (and pictures) but I appreciate a good discussion and your opinions. Please let me know what you think here or in my twitter account :)

    Weirding Diary: 11
    Tuesday, 18 February 2020
    We’re barely seven weeks into 2020, and it’s already the weirdest year in my living memory. We’ve been through: Australia on fire, a near-war between the US and Iran, a sound-and-fury-signifying-nothing impeachment theater, a primary election mess in the US caused by a Bad App, Actu
    We’re barely seven weeks into 2020, and it’s already the weirdest year in my living memory. We’ve been through: Australia on fire, a near-war between the US and Iran, a sound-and-fury-signifying-nothing impeachment theater, a primary election mess in the US caused by a Bad App, Actual Brexit,™ and now we have the snowballing Covid-19/SARS-CoV-2/coronovirus crisis […]
    Some conclusions after learning Bitcoin
    Saturday, 15 February 2020
    Bitcoiner Ted
    ♦Likely the most important invention in the history of humankind
    1. There is no such thing as altruist cooperation with strangers, that’s why we use money, ultimately a reputation system (Selfish gene)
    2. If the system is not good enough, we need to trust 3rd parties for things like transpor
    ♦Likely the most important invention in the history of humankind
    1. There is no such thing as altruist cooperation with strangers, that’s why we use money, ultimately a reputation system (Selfish gene)
    2. If the system is not good enough, we need to trust 3rd parties for things like transportation, storage or property transmission of value to name a few.
    3. Because of 1, 3rd parties will only work in their best interest, not in that of strangers, typically understanding strangers as those beyond the Dunbar number (around 150 people your neocortex is able to manage information from)
    4. As a result socialism can’t work. Socialism sells you the idea that by sharing things like language, some common historic achievements you will not be strangers, yet you likely are.
    5. Socialism only explains either ignorance or willingness to gain power at the expense of strangers. Socialism looks after zero sum games and gets negative sums as a result. Cooperation is either positive or negative, it can’t be neutral.
    6. Disseminating pain among the many is an addictive drug, either via inflation, taxing, but the reputation system of money stops working. It is like soma to name Huxley’s metaphor. Suddenly money, understood as the ultimate skin in the game, is not your skin in the game but somebody else’s
    7. Things become unfair as a result, understanding fairness not as equality of outcomes but as equality of opportunities. Those closest to the 3rd parties have more opportunities that those who are not
    8. For 3rd parties, it was easier to pretend being indispensable when information was easy to control and censor but you can’t control it any longer
    9. Consequently people will increasingly challenge what they believed to be true and especially the need for those 3rd parties and close ones that behaved as rent-seekers
    10. Trust as a result is moving somewhere else in fields such as education, health and financial advice.
    11. And technology is also moving in the direction of empowering the individual in other areas such as security or energy, once economies of scale disappear
    12. When both trust and technology move in the same direction, it is time for social techtonic shifts
    13. Bitcoin is the main driver of this transition, as it reduces the main driver holding current 3rd parties’ power together, which is the monopoly on violence
    14. As I’ve said before, Bitcoin is in my opinion the coup de grace to the current social system because trust and technology are moving into a completely different direction to the current one
    Domestic Cozy: 11
    Thursday, 13 February 2020
    A couple of media mentions to kick off the new year for this blogchain. First, TANK magazine decided to devote an entire issue to “cosy” vibes (damn the brits and their weird spellings) in the zeitgeist, and I think I can claim some inspiration credit. There’s an extended interview
    A couple of media mentions to kick off the new year for this blogchain. First, TANK magazine decided to devote an entire issue to “cosy” vibes (damn the brits and their weird spellings) in the zeitgeist, and I think I can claim some inspiration credit. There’s an extended interview with me in the issue, which […]
    Zane Pocock
    ♦Photo by Taylor Vick on Unsplash

    With the notion of Bitcoin as a security dispelled, including by American regulators themselves, the other common ways people attempt to wedge Bitcoin into legacy frameworks — and regulation — is as either a commodity, property, or the ultimate goal: money.


    ♦Photo by Taylor Vick on Unsplash

    With the notion of Bitcoin as a security dispelled, including by American regulators themselves, the other common ways people attempt to wedge Bitcoin into legacy frameworks — and regulation — is as either a commodity, property, or the ultimate goal: money.

    But Bitcoin is at odds with these concepts at a fundamental level. Because “bitcoins” don’t exist.

    As Beautyon has popularized in his case that Bitcoin is speech protected by the first amendment, the definition of Bitcoin can be simplified to a distributed internet protocol that relays text messages between voluntary/free participants.

    That’s all Bitcoin is — a means of communication.

    The unique value proposition of the Bitcoin communication protocol is that these messages can be used by participants to communicate an interpretation of value. How this works is through a mechanism called the “unspent transaction output” (UTXO). UTXOs can be a little difficult to understand, but Investopedia describes it well:

    “UTXO stands for the unspent output from bitcoin transactions. Each bitcoin transaction begins with coins used to balance the ledger. UTXOs are processed continuously and are responsible for beginning and ending each transaction. Confirmation of transaction results in the removal of spent coins from the UTXO database. But a record of the spent coins still exists on the ledger.”

    ♦Bitcoin is a means of communication

    It’s these UTXOs that are measured in a unit called “bitcoin”, but this is more akin to measuring how space is used on a hard drive than bars of gold in a vault. UTXOs are just the occupants of Bitcoin’s information space.

    One of Bitcoin’s utilities is popularly described as “digital gold” because this information space comes in a limited quantity. The network-wide UTXO balance will only add up to a certain scarce amount with the current outstanding supply summing to 18.2M BTC out of the 21M BTC hard cap it will reach sometime next century. But this analogy — Bitcoin as digital gold — is not the actual definition of Bitcoin, only one subjective interpretation.

    What controls these UTXOs?

    Bitcoin private keys are another type of Bitcoin information. Through cryptographic processes outside the scope of this article, private keys can derive a corresponding public key that acts as an address for receiving UTXOs. The private key then exercises control over all the UTXOs it has received. UTXOs are transferred as inputs in messages when they are cryptographically signed by the private key with authority to do so.

    ♦Private keys exert control over Bitcoin’s information spaceEnergy, Value and Settlement Assurances

    Another viewpoint commonly employed to explain Bitcoin is to say that it is “backed by energy”.

    The reason why is that roughly every ten minutes, blocks of Bitcoin “messages” are confirmed by competing computers (“miners”) employing a huge amount of energy to meet the rules set out by the protocol. These ten-minute blocks are Bitcoin’s bandwidth. Only a certain amount of Bitcoin “messages” can be transmitted in each block, called the block-weight. Taken together, this process of adding message blocks to increment the “block height” by miners is called proof-of-work, and to simplify it gives the Bitcoin network some important features:

    • The rules the miners follow to update the distributed network state require that UTXOs must be unspent (as the name suggests). This solves the so-called “double-spend” problem in the digital world where information had previously always been non-scarce. What value would a UTXO accrue if a user could reuse it? It means that absolute mathematical scarcity now exists for the first time, a discovery that can’t be achieved again.
    • These value-transfer messages are then effectively buried under each new block of messages: to undo them, an attacker would need to prove the same amount of work to the protocol as has been applied to each successive block — and from all the competing computers, not just the successful ones. This is a proxy for energy and means that expended energy is a key requirement to ensure transaction finality, or settlement assurances, as Nic Carter writes. It is a security feature that to attack Bitcoin, inordinate amounts of energy must be employed.
    • The competition between miners, resulting in a distributed ledger that they all contribute to, means that this global value-transfer network does not rely on any trusted third party. Clearance and settlement happen according to strict rules on the Bitcoin protocol that tens of thousands of independent users verify for themselves.

    Because expended energy is so core to Bitcoin’s security and viability, the concept that “Bitcoin is backed by energy” has emerged as a useful concept for understanding why this communication protocol works at all. Taken to its literal conclusion, this line of thought has led some to argue that this energy creates Bitcoin’s value and that Bitcoin is therefore a commodity — captured energy.

    Rather, it is the energy expended for security in combination with Bitcoin’s use of information space that is why the network accrues value. Put another way, if the information space occupied by Bitcoin UTXOs could be classified as a commodity, then space rented on Amazon’s AWS servers would also be a commodity. Like the Bitcoin network, AWS relies on expending a lot of energy to function, and the computing resources rented by businesses and individuals represent information space in the virtual world. But it would be absurd to classify AWS as a commodity, and so it is with Bitcoin.

    Indeed, it’s the separation of value from commodities that makes the Bitcoin communication protocol so uniquely valuable. As Conner Brown has written, Bitcoin has no intrinsic value as a commodity — an observation often used as a criticism — but that is a feature, not a bug. A commodity-based value transfer system, such as the gold standard, not only finds its value subject to the market fluctuations caused by changes in supply and industrial demand, but it also inflates the price of the underlying commodity by increasing its demand. This monetary premium means that a commodity like gold is much more expensive than it otherwise would be, and this distortion in the price signal hampers its use in goods such as cheaper electronics.

    The Most Tradable Information

    Without needing to grasp for financial definitions, commerce enabled by the Bitcoin value-transfer protocol will still be commercial activity. If the distributed Bitcoin ledger helps to conduct commercial activity between a shop and a consumer, that shop is still going to file a tax return with profit based on the fiat value of goods sold.

    Monetary systems are savings technologies that ultimately serve to transfer value in time and space, a tool for the farmer selling his year’s output in Fall to be able to purchase new shoes six months later when he has nothing to sell. Having lacked a logical system to keep track of everyone’s market contributions until now, this value transfer role has traditionally fallen to the economy’s “most tradable good” — typically something exhibiting beneficial properties such as durability, portability, divisibility, and hardness (hard to produce more of it and debase it).

    Monetary theorists such as Carl Menger, Nick Szabo and Saifedean Ammous argue that the emergence of a new money has historically gone through various stages. Starting as either a collectible (such as shells or family heirlooms) or a commodity (flint blades or gold), a monetary good first accrues value in the subjective eyes of an increasing number of people. Given enough time, this accrued value gains permanence, allowing the good to successively function as a store of value then as a medium of exchange when it reaches a certain level of liquidity and price equilibrium.

    Similarly, Bitcoin’s communication protocol and scarce information space have piqued the interest of human minds such that their uses and perceptions of it have gone through evolving narratives and led many to collect the scarcity of the information space into UTXOs only they have the authority to spend. These narratives have ranged from a crypto-anarchist collectible and “private” darknet currency, to current interpretations such as “digital gold”. But just as price is an interpretation of value, these human narratives — Bitcoin as gold, Bitcoin as commodity — are an interpretation of the fundamental nature of Bitcoin: information.

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    Now that we are all Bitcoin Maximalists, we need to take it to the next step and get rid of the confusion surrounding the monetary evolution of Bitcoin:

     — @MustStopMurad

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    If something becomes the most tradable good, it can function as money. Bitcoin is text, but its properties might allow it to fulfill a monetary role for those demanding scarce information space in the form of UTXOs. We can’t say exactly where Bitcoin might be on its way to being used as a monetary system — that’s for each individual market participant to decide for themselves — but early adopters are using it in that role already. With Bitcoin’s help, the economy might just become a little more like entering a global barter system — a ledger system to keep track of everyone’s market contributions. Rather than being the world’s most tradable good, Bitcoin is the world’s most tradable information.

    So, what of the other aspects of financialization? One of Trace Mayer’s seven anticipated network effects of Bitcoin, it is becoming apparent that because Bitcoin’s information space has accrued value, it can be used as the base value of financial instruments built around it. Control of UTXOs is being transferred as collateral against lines of credit, and Bitcoin key storage providers like KNØX are attaining insurance policies for the fiat value of the information space they guard. Even futures markets are being built, enabling participants to hedge and bet on fluctuations in the accrued value and energy costs of the network. These instruments — insurance, credit, futures — appear to be financial products. But again, the way the communication protocol is used does not define Bitcoin. An orange is an orange, but that doesn’t stop the market trading on its future value from dealing in derivatives to hedge risk against orange production rate fluctuations.

    Similarly, the properties of Bitcoin’s communication protocol present opportunities to natively automate tasks with parallels to traditional financial services, but that doesn’t make Bitcoin a financial service. For example, Bitcoin allows for unique audit solutions without the use of a third party audit. As an open communication protocol, the value transferred in each message is visible to all participants, meaning that scripts can be written to prove that a participant possesses the keys exerting control over particular UTXOs. This idea — that a custodian can demonstrate “proof of reserves” — is yet to gain wide adoption, but it has drawn much anticipation and demonstrates the power arising from Bitcoin’s nature as a pure communication protocol.

    Because Bitcoin is text, it fundamentally sits outside of existing financial definitions and regulations. But that doesn’t preclude its information space from exhibiting monetary characteristics. In fact, it’s in part because of all of this that Bitcoin is so valuable. And things that are valuable need to be protected.

    How to Keep a Secret

    At the protocol level, the nature of Bitcoin’s information space means that private keys function like a digital bearer instrument: there is no inherent difference between possession, control and ownership.

    Remember there are no bitcoins per se; there are private keys that permit spending UTXOs via signed messages on the network. Bitcoin private keys are also information. You can write them down, speak them, print them, memorize them in your head. Thousands of people can hold the exact same key; if you have Andreas Antonopoulos’ Mastering Bitcoin on your shelf then you share several Bitcoin private keys printed in its pages with all the other thousands of people who have access to it. By US constitutional law, this means that creating, spending, or otherwise using Bitcoin private keys constitutes speech protected by the first amendment. But unlike the scarce information space occupied by UTXOs, when it comes to Bitcoin private keys we are dealing with non-scarce information.

    Obviously, since Bitcoin’s information space has accrued value, it is in the best interest of those who exercise control over a portion of it to keep the private key out of others’ hands. To exercise exclusive control over replicable information requires competence at protecting a secret.

    If the Bitcoin carnivores will excuse a fast food analogy, this is why KFC doesn’t have a patent on its 11 secret herbs and spices, information that has accrued such value it contributed to the growth of a global fried chicken empire. Rather, they have a vault at their headquarters that very select individuals can access, inside of which is the only known certified copy of the recipe. They even have their own multisignature scheme, with two companies each responsible for supplying half of the ingredients.

    This demonstrates the “not your keys, not your coins (UTXOs)” meme. Possession of the secret enables the bearer to exercise control over the valuable information space; at the protocol level, possession, control and ownership can not be separated. As Daskalov, CEO of KNØX, put it, “the Bitcoin protocol is necessarily amoral, governed by an uncompromising set of rules.”

    This is creating demand for an optional Bitcoin key storage layer that might allow businesses to delegate possession to a trusted key storage provider while maintaining unquestionable ownership in the legal sense, and control in the technical sense. Such is the burden of holding these secrets that exercising control over private key information is more a liability than an asset. Most companies holding Bitcoin keys are required to do so out of operational necessity but would rather offload that liability from their books, as they do not monetize it.

    Private key storage is more like managing a password than anything else. When a hard drive is locked by ransomware, most people without an adequate backup are likely to pony up the ransom to retrieve access to their information. This digital information is not property in the legal sense, but it’s certainly valuable to the individual who previously exercised possession and control over it.

    Storing Bitcoin Keys Responsibly

    Bitcoin is just information, so it is difficult to place it inside existing financial definitions and regulations. But with its information space being the first example of truly scarce information, it has accrued substantial value thanks to evolving narratives.

    If you want to learn about responsible Bitcoin private key custody for your fund, exchange, or other vehicles, have strict LP and risk management requirements, or otherwise appreciate a trust-minimized profile, we’d love to talk.

    Please email us at custody@kn0x.io

    Under no circumstances should any material on this post be construed as an offering of securities or investment advice. The reader should consult with their professional investment advisor regarding investments in securities referred to herein.

    Services and products are offered through KNØX Industries Inc., headquartered in Montreal, Canada. KNØX Industries Inc. is not engaged in the offer, or sale of securities or bitcoins, and does not provide investment, tax or legal advice.

    Investments and holdings of bitcoins are speculative and highly volatile, involving a substantial degree of risk, including the risk of complete financial loss. ‍

    © 2020 KNØX Industries Inc. All rights reserved.

    The Nature of Bitcoin was originally published in Knox Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Rafael Schultze-Kraft
    Assessing Bitcoin’s True Transfer Volume♦

    Even though blockchain data is publicly accessible, it is a non-trivial challenge to make sense of it in a meaningful way.

    On-chain data is without a doubt highly valuable — but in its raw form it’s just not good enough.

    It contains a substantia

    Assessing Bitcoin’s True Transfer Volume♦

    Even though blockchain data is publicly accessible, it is a non-trivial challenge to make sense of it in a meaningful way.

    On-chain data is without a doubt highly valuable — but in its raw form it’s just not good enough.

    It contains a substantial amount of noise, and careful preprocessing and contextualisation is required in order to distil useful information from it.

    Consider on-chain transaction volume: Figure 1 shows Bitcoin’s raw daily on-chain transaction volume (USD value) for 2019.

    On August 21st an enormous spike occurred, leading to a recorded on-chain volume of over $250 billion USD in a single day.

    Without context, this might seem like a significant event.

    However, this volume was simply caused by Bitcoin “change”, associated to a crypto exchange creating new cold wallets and reshuffling their funds internally — no actual Bitcoins were transferred between different participants in the network.

    Therefore, if we are interested in assessing the value of bitcoin that is actually being transferred across different holders, proper processing and sophisticated methods need to be applied to the raw blockchain data.

    Change-Adjusted Volume

    Adjusting for (obvious) change is a commonly applied heuristic to obtain a more accurate measure for on-chain volume.

    This adjustment is applicable to transactions in which the sending address is present in both the inputs and the outputs of the transaction, i.e. a transaction output returns Satoshis back to an address of the sender (see Figure 2 for an example).

    The change is considered “obvious” because the sender is re-using an existing sending address within the same transaction to receive the bitcoin change in return.

    Figure 3 shows the daily change-adjusted on-chain volume for 2019.

    Note how the volume spike vanishes, and in addition change-adjusted volume is consistently lower compared to the raw volume.

    In fact, within the denoted time period above, the daily change-adjusted volume is, on average, 43% lower.

    A live chart comparing raw and change-adjusted Bitcoin volume can be found on Glassnode Studio here.
    Beyond Change: Adjusting by Entities

    The problem with the above heuristic is that it doesn’t go far enough. There are other cases in which on-chain bitcoin volume does not represent actual transfer of Bitcoin between different holders.

    For one, a single user can send bitcoin between different addresses that he/she controls. Furthermore, many wallets nowadays send change back to the spender using newly created addresses instead of re-using an existing one.

    At Glassnode we use more advanced techniques and heuristics in order to estimate an upper bound for the “true” on-chain volume of Bitcoin — volume that actually changes hands.

    To do so, we employ what we coin entity-adjustment and refine this methodology by accounting for so-called relay addresses as well.


    In our previous article we introduced the concept of “entities” in the Bitcoin network: Clusters of addresses that are controlled by the same entity.

    Entity-adjustment therefore makes use of this knowledge and discards volume moved between addresses that belong to the same entity cluster (“in-house volume”). This is volume that does not represent value transferred between distinct users in the network. Because one address belongs to a single entity, this adjustment entails, by definition, the aforementioned change-adjustment as well. ( Note: We ignore multisig addresses in this analysis).

    Consider the example transaction in Figure 2 above: While it contains obvious change, our algorithms actually detect that all input and output addresses are controlled by the same entity — therefore the whole transaction does not contribute to the true BTC transfer volume at all.

    Moreover, this implies that this transaction is discarded in the computation of entity-adjusted transaction counts, since it is a transaction that only transfers BTC internally.


    In addition to adjusting for entities, we take into account so-called “relay addresses” as well. Relay addresses are addresses whose sole purpose is to forward (relay) funds to a subsequent address. Hence, the volume of relay addresses is usually double-counted: once moving into and once moving out of the relay address.

    Through the identification of addresses with this behaviour, we are able to remove this added of noise in volume aggregates. To do so, we discard all outputs that are spent by relay addresses.

    Technically, we define relay addresses as addresses whose mean spent output lifespan is less than 1 hour, and whose current balance is zero (excluding UTXOs which were created within the last hour).

    Figures 6–8 show the difference between between our entity-adjusted volume (incl. relay-adjustment), change-adjusted volume, and raw volume for the the years 2016, 2017–2018, and 2019, respectively.


    The results speak for themselves, and the differences are compelling.

    The 2016 data illustrates the removal of significant volume spikes that are not accounted for by change-adjusted volume only. Similarly, volume during the bull market in 2017 shows substantial discrepancies (5x) between entity-adjusted and raw/change-adjusted Bitcoin volume.

    Over the period from 2016–2019 the daily on-chain transaction volume using our entity-adjusted methodology has been

    • 75.5% lower than the raw volume and
    • 63% lower than change-adjusted volume.

    This means that less than 25% of Bitcoin volume that is recorded on-chain represents actual value transfers between network participants.

    Our entity-adjusted metrics show that the true Bitcoin on-chain volume is on average only 25% of the raw volume recorded on the blockchain.

    For a complete picture, Figure 9 shows the ratio between raw volume and entity-adjusted (as well as change-adjusted) over time. The entity-adjusted ratio has been relatively stable fluctuating around 0.25 since 2016.

    Figure 10 depicts the monthly difference between raw and entity-adjusted (as well as change-adjusted) volume in USD. It shows that on a monthly basis our entity-adjusted volume is up to a compelling $875 billion and $629 billion lower compared to the raw volume and the change-adjusted volume, respectively.


    The data and analyses presented here are in no way intended to lessen Bitcoin’s value proposition and should not be interpreted as such.

    The purpose of this work is merely to signify that advanced methods are required to meaningfully make sense of on-chain data. In order to accurately understand the underlying state of the Bitcoin network and its events it is essential to contextualise and scrutinize this data properly.

    Note the in the present work we exclusively refer to bitcoin moved on the blockchain. We don’t account for BTC that is bought or sold on exchanges. Technically, on a network level, those bitcoin are still controlled by the same entity — the exchange itself.

    In Bitcoin’s economy the implications of moving funds within the same entity, and actually transferring ownership of bitcoin (and therefore value) across network participants, are very different — they represent very different things in terms of economic activity.

    Any investor, trader, and researcher aiming to properly understand value and wealth transfers in Bitcoin’s economy should be undoubtedly making use of these fundamental differences drawn from on-chain volume.

    All metrics presented in this work are live on Glassnode Studio as of today:

    • Entity–adjusted Volume (Total)
    • Entity–adjusted Volume (Mean)
    • Entity–adjusted Volume (Median)
    • Entity–adjusted Transaction Count

    For change–adjusted volume visit:

    • Change–adjusted Volume (Total)
    • Change–adjusted Volume (Mean)
    • Change–adjusted Volume (Median)

    Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

    Originally published at insights.glassnode.com on February 12, 2020.

    Over 75% of Bitcoin’s On-Chain Volume Doesn’t Change Hands was originally published in Glassnode on Medium, where people are continuing the conversation by highlighting and responding to this story.


    Melanie Dawes’ position and newly published plans for regulating encryption at the behest of the “Five Eyes” are misguided and betray a fundamentally computer illiterate approach. She is ignorant of the history of computing and encryption, and her plans will damage Britain. It is a lie to claim p

    Melanie Dawes’ position and newly published plans for regulating encryption at the behest of the “Five Eyes” are misguided and betray a fundamentally computer illiterate approach. She is ignorant of the history of computing and encryption, and her plans will damage Britain. It is a lie to claim people are put at risk by encryption; the complete opposite is true.

    The Background and Facts

    Melanie Dawes (ex permanent secretary at the Ministry of Housing, Communities and Local Government), like all politicians, knows next to nothing about computers and software. In her busy world, computers are the tools of secretaries and assistants, and not something she has a particular interest in.

    Professionals in the Security Services on the other hand do understand computers, and are asking for software to be crippled so that no communication can be transmitted in private. They know the complete history of encryption, and how previous attempts to have it outlawed or weakened have failed. They are hijacking the mass hysteria over terrorism to make a fresh attempt to take encryption away from the public.

    The Electronic Communications Act 2000 in the UK was an early attempt to make it illegal to sell a software product that did not have a back door for government access. It was defeated and removed from the statutes.

    In the USA, several attempts have been made to mandate government access to all private communications; some via new hardware devices like the Clipper Chip, and others through setting legal precedent. They also tried to chill the release of encryption tools by the three year harassment of Phillip Zimmerman, the author of “Pretty Good Privacy”, the tool that Edward Snowden has admitted that the NSA and GCHQ cannot break.

    Even today, any encryption system with key lengths longer than 64bits must be approved by the US Department of Commerce’s Bureau of Industry and Security before they can be exported. This is patently absurd, since key lengths of 4095bits are available to everyone globally without restriction, and all SSL is 128bits by default at a minimum world-wide.

    The Current Situation

    Today, Apple and Google with their iOS and Android operating systems have rolled out full device encryption so that no one can read the contents of a user’s phone. This was done in direct response to the NSA’s mass intrusion into the communications and devices of millions of innocent people.

    Now Melanie Dawes, under pressure from surveillance “professionals” in “The Five Eyes” who are exploiting her computer illiteracy, are trying once again to revive their decades old attempts to cripple the public’s access to encryption and privacy. They failed in the late 1990s and they will fail again, because the iPhone saturated, “selfie” taking WhatsApp world is a very different place today.

    Everyone uses encryption, whether they know it or not, on a daily basis. All eCommerce depends on it. If the UK Parliament makes it law that all encryption must have a back door, then criminals will have default access to all websites that sell anything, together with easy access to the personal information of billions of net users on all devices. Her demands are unworkable and ineffective because different jurisdictions will not follow her, and any software developer in the world can use both the old and new absolutely reliable tools to have secure chat and email and file storage, or simply move their services to a free jurisdiction, avoiding the anti-tech British laws.

    Furthermore, it is now demonstrated that if exploits to break into people’s phones are developed, they absolutely will escape control of the State and be used by bad actors on a global scale. We now know that this has actually happened in real life, thanks to Wikileaks. Asking WhatsApp and apple to build back doors into their apps is a recipe for disaster globally at worst, and it means Britain being cut off from WhatsApp and other apps at best.

    Dawes can demand that encryption has back doors in Britain, but she cannot demand that Americans or anyone else follow her. This would mean that only British web sites and services are vulnerable; the entire British internet would be globally recognised as an unsafe zone for e-commerce. It would be a disaster for the tech sector of the UK that the government is so keen to promote.

    Mixed Messages

    The messages coming out of the government are not coherent, and its clear that Melanie Dawes is nothing more than the unhappy latest messenger. On the one hand, her government wants “Silicon Roundabout” to be the centre of the tech explosion in Europe, but on the other hand, they are being told to cripple the key tool used in making that tech work. Clearly, this is the sound of two voices at odds with each other.

    Silicon Roundabout in North London. The centre of the UK’s “Tech City”.

    And its not only eCommerce that is threatened by the UK’s anti progress stance. There is a vast movement online to put all internet services no matter what they are behind HTTPS by default. Mandating that the government has backdoor access to every website accessed from Britain is literally impossible. It means fundamentally re-engineering the entire web, and no one is going to agree to this. If you access an American email service from the UK, like Gmail, the SSL will not be back doored, and the communications will be private. In the reverse direction, they will not be private. This means that no company will host their email services in the UK, and the money, brains and tech will flow outwards, away from the UK. This will be called “The Tech Drain”.

    Now that the world depends on encryption for the movement of all of the money in circulation globally, it is not possible to weaken the tools that protect the movement of that money without destroying commerce itself. You cannot weaken the tools that protect everyone without giving blanket access to criminals. Melanie Dawes has been badly briefed, and she will be forced to back down, or give up any hope of Britain becoming a centre for global tech.

    The Flawed Rationale

    The public pretext for this new push to break global ecommerce is the recent spate of anomalous killings by “Jihadists”. Criminal events, especially the more horrifying ones, are always outliers and statistical anomalies. The vast majority of the world’s people never encounter this category of event, and their safety must always come first; that means strong encryption by default.

    Politicians are very accustomed to making trade-offs. In this case, we are trading off the absolute fact of trillions of dollars and billions of people who use eCommerce being kept safe against the remote possibility of detecting and perhaps preventing extremely rare crimes against a vanishingly small number of people, the number of which when combined globally is lower than the number of people who die from mundane causes.

    And when we talk about protecting people, we do not only mean protecting their money. Every aspect of your life is shielded by encryption, including all the private matters that you send or receive through your internet connected devices. Encryption keeps your private information away from everyone but the intended recipients. The government is only one hostile adversary out of many trying to gain access to your communications, money, medical records and location.

    Encryption is democratic; it keeps everyone safe equally.

    The True Reality

    The age of the Security Services being able to read everyone’s communications at will is essentially over. The coming of this day was inevitable from the moment that PGP and SSL were developed and released. The net benefit to society is the emergence of global eCommerce and the massive reduction in online crime as the bad guys are permanently locked out.

    If Melanie Dawes’ advisers were serious about reducing terrorism, they would advise a different foreign policy, which is the root cause of the terrorist problems facing Britain.

    For example, Libya, had it been left untouched, would have prevented the immigration crisis facing the EU. The consequences of bad policy are the root cause of Britain’s problems, not encryption, and breaking encryption for everyone will not solve them. In fact, it will cause a cascade of knock on effects and another class of unintended consequences that will effectively end Britain’s place as a centre of tech for the foreseeable future.

    Melanie Dawes must push back hard against the voices that are using fallacious arguments to get new damaging laws passed. If she does not, Britain faces a collapse of its tech sector, as building products that are safe for consumers will be impossible in the UK. The world has changed; not even the Communist Chinese are suggesting that global standard encryption tools be back doored, and they are using all the same software that is used in the west to protect their websites and communications.

    We should not have to go through this process again and again every time there is a media frenzy over a killing spree. Someone in Boris’ government must be hired for the sole purpose of bring sanity to their pronouncements on everything related to software. Perhaps its time for a return of the “MinTech” cabinet position, which should be held by a member of industry elected by the software industry, and not a layman. This should be done before another suicidal piece of legislation is enacted, that at the very least, will waste everyone’s time defending their business models against it, and at worse, trigger a “Tech Exodus”.

    Send me Bitcoin, Melanie won’t know…PROMISE!↴

    MJD 58,889
    Monday, 10 February 2020
    I’ve been trying to make up the simplest, most banal definitions of concepts that interest me lately, and seeing how far I can get with them. One I just made up is: a narrative is a road in time, and a story is a particular journey taken along that road. As an example, premium mediocre […
    I’ve been trying to make up the simplest, most banal definitions of concepts that interest me lately, and seeing how far I can get with them. One I just made up is: a narrative is a road in time, and a story is a particular journey taken along that road. As an example, premium mediocre […]
    Tuur Demeester

    Hi Rachel,

    Thank you for sharing, and I’m so sorry to hear that life with your parents is so difficult. I experienced something similar when I went to college — the dysfunction was stretched thin over time, but the essence of it did not change.

    I wish you the best on your journey forwa

    Hi Rachel,

    Thank you for sharing, and I’m so sorry to hear that life with your parents is so difficult. I experienced something similar when I went to college — the dysfunction was stretched thin over time, but the essence of it did not change.

    I wish you the best on your journey forward! If you haven’t found a good therapist, perhaps consider searching for one. This stuff is real hard, and it’s important to have empathetic people who care and have your back.


    Tuur Demeester

    Thanks Fly Guy, I appreciate your words of support.

    Thanks Fly Guy, I appreciate your words of support.

    Tuur Demeester

    I don’t have an elaborate answer, other than that we plan to be honest with our children, and to acknowledge the lack of family network by finding other resources to compensate. My goal is to talk to my children in a way that I can still defend when they are adults and ask me “why did you do this

    I don’t have an elaborate answer, other than that we plan to be honest with our children, and to acknowledge the lack of family network by finding other resources to compensate. My goal is to talk to my children in a way that I can still defend when they are adults and ask me “why did you do this or that?”. Another part of this will have to be to really be open for their feelings, questions, thoughts… talking is the best way to prevent trauma.

    My wife has also broken from her family, which does make us feel isolated at times. That said, we’re both confident that it was the right decision to allow for true healing and to break the generational chain of dysfunction.

    Tuur Demeester

    I don’t know your situation, but in general I think it’s important to not let our decisions be guided by guilt. Breaking from parents need not be final. Personally I broke 5.5 years from them, and, after a lot of therapy on my end, decided to reach out again and explore if we can have a mutually b

    I don’t know your situation, but in general I think it’s important to not let our decisions be guided by guilt. Breaking from parents need not be final. Personally I broke 5.5 years from them, and, after a lot of therapy on my end, decided to reach out again and explore if we can have a mutually beneficial relationship again.

    Bitcoiner Ted
    ♦Ideologies have not addressed the root cause of the problem that Bitcoin may solve

    Until Bitcoin, I really didn’t have clear political views. I knew for sure every single politician sucked but didn’t really grasp why.

    I focused on the fact that the world is now way better off than hundreds o

    ♦Ideologies have not addressed the root cause of the problem that Bitcoin may solve

    Until Bitcoin, I really didn’t have clear political views. I knew for sure every single politician sucked but didn’t really grasp why.

    I focused on the fact that the world is now way better off than hundreds of years ago and as a result concluded that the current system is better than all alternatives.

    I now believe that I should have not settled and instead should have expected more.

    Escaping the Malthusian trap meant a few hundred years ago that we needed a scalability in money that only 3rd parties could provide. In other words, existing monies have serious bottlenecks in their transportation and storage.

    In most commodities, depending on 3rd parties is not really a problem, but in money it is.

    These 3rd parties, mainly States and banks accumulated unknown amounts of power during the last 200 years mainly for two reasons:

    • Security has economies of scale: During the last many centuries, the larger your Army, the better
    • Credit money, that is, bank accounts, IOU’s with the telecommunications revolution since the telegraph, provided a scalability that gold couldn’t match.

    Interestingly, the two reasons are closely related to each other, as without the latter, chances are you won’t be able to accumulate power in the former, what has been traditionally known as the monopoly on violence.

    When those 3rd parties started gaining power, injustice happened and socialists/communists wrongly believed that instead of eliminating the need to trust those 3rd parties, somehow making those 3rd parties even larger would solve the problem. It never worked, it only made things way worse.

    Socialists should read the Selfish Gene, because if that book is correct, and common sense agrees, it means that we were born to cheat, to take advantage of each other. If we can take advantage of one another, we will, especially with strangers, non-kin.

    Only a system that makes value exchange fair and inmediate by registering transactions inmutably and publicly can make that exchange fair and consequently promote cooperation, progress and growth. That system is called money and it is the most powerful tool to scale cooperation beyond the Dunbar number around us.

    Other sides of the political spectrum suspected that socialists were wrong, but never really provided a solution other than “trust me, I will not cheat on you because I’m better than other politicians are”.

    That’s what political parties do, that’s what bankers do, they sell you trust.

    Banks buy the fanciest buildings in town to make you believe they are solid as a rock; politicians identify with you as kin so that you have the feeling you can trust them and at the same time, identify political adversaries as non-kin, so the intelectual discussion moves towards hormones and irrationality.

    People waste gigantic amounts of time arguing with their hormones instead of using their brains. I expect this to change drammatically.

    Satoshi’s main contribution is fixing the root cause of injustice; it eliminates the need for 3rd parties therefore eliminating the consequences of what both socialists and non socialists complain about. By eliminating money’s bottlenecks, it allows for what Nick Szabo calls social scalability.

    Money makes it ok to take advantage of each other, as long as you get something acceptable in return. By making that value exchange comparable with subsequent value exchanges, people learn how valuable their work is, and are able to take appropiate decisions. Progress happens as a result.

    Just as you don’t become better by studying in fancy universities but by making mistakes and learning, the world can only progress by making public mistakes comparable to each other, not by completely preventing them.

    I now believe that only by becoming 100% Orwellian, will States be able to stop people moving towards a cybereconomy that will unleash levels of progress unknown to mankind.

    Nic Carter

    What we can learn from distorted maps

    Continue reading on Medium »

    What we can learn from distorted maps

    Continue reading on Medium »

    Predictable Identities 25: External Control
    Wednesday, 05 February 2020
    Our identities control us, and outsiders can control our identities.
    Our identities control us, and outsiders can control our identities.
    Bitcoiner Ted
    Money is about credibly representing value transactions♦

    According to the Selfish Gene book, we only want to exchange value or cooperate with strangers when there is an inmediate exchange. If we postpone this exchange, we are very likely to cheat (and even in the case we are not strangers!).

    Money is about credibly representing value transactions♦

    According to the Selfish Gene book, we only want to exchange value or cooperate with strangers when there is an inmediate exchange. If we postpone this exchange, we are very likely to cheat (and even in the case we are not strangers!).

    We are some serious cheaters according to this fascinating book and I agree.

    Unless you believe we prefer to satisfy everyone else’s needs before our own, you must necessarily agree with this book, and this is important, because it explains money very well.

    If you can’t give me something I value right now (barter), I want you to prove to me that you have provided value to someone else in the past, that is, I need a prove from you that you have made a value transaction earlier.

    You must, as a result, be able to represent a transaction credibly.

    What would you do if you had to represent a transaction in the most “credible” way 20.000 years ago?

    I suggest that if you want to cooperate with me, whenever you provide value, you get in return something that is universally very scarce, so that you can’t tamper this representation easily. Otherwise I may have the feeling that you could be cheating me and again, you and I are very likely to do so.

    But that something has to be easily recognizable by me, otherwise I won’t accept it either. If you want me to accept it, you’d better get divisible items, so that you can pay me smaller values. And chances are you will only accept stuff that is cheap and easy to transport. (in Menger terms, saleable in space and scale)

    If I were you, I’d only accept stuff that is extremely cheap to store, that deteriorates the least over time, because you have no idea when your needs will arise, and that could be a long time into the future. (saleable in time)

    Transferring the property of this stone must not depend on third parties, because otherwise those third parties are likely to cheat as well!!

    During the first transactions, you will have no way of knowing if you are representing that transaction with the right-sized stone. It may be too big or too small. You won’t have any guarantees that the rest of humanity will accept this stone and as a result, you won’t be able to size it properly until this item is universally accepted by the market so that you can compare it. You’ll be gambling and speculating that you are sizing this transaction accurately. If it costs little to store, you will try to store as much as possible of it and as a result your gamble will have little cost.

    Therefore that stone will be for you both a product you will use (a medium of exchange) and speculation too.

    The market will slowly realize that by being data and software, Bitcoin is “the thing” that best solves each and everyone of these requirements.

    The market should also understand that things that are valued are those which are stored, not those which are used because using them means buying and selling, so supply is kept high.

    Storing means buying and keeping, limiting supply as a result. If Picassos were not kept, just seen in your home and then sold next day, then their value would tend to zero, but no, they are typically kept for decades.

    Even if your shitcoin is designed to cure malaria, chances are that you will sell it inmediately after being used and as a result its value will tend to zero. With a value tending to zero, it is more likely that developers will end up curing malaria with Bitcoin than with your shitcoin.

    For the n-th time, block, mute everyone speaking about shitcoins/blockchains, we have to be merciless with people that insist on being either ignorants or scammers.

    Small note on Statism vs Libertarianism

    I got into Bitcoin with a completely statist mindset, but understanding that we are programmed to cheat made me wonder if it does make any sense to pretend that Statism is the best way to organize ourselves.

    It is also hard as a result for me to take seriously people that say they understand Bitcoin, and keep defending Statist views.

    If we are programmed to cheat, and throughout history we have gone through the pain of using all sorts of monies in every single civilization as a way of solving it, does it make sense to spend each others resources in something named “common good”?

    Hi! Good that you mentioned.
    Tuesday, 04 February 2020
    Marcel Burger

    Hi! Good that you mentioned. It’s a new feature they added late last year. Have been using this feature myself as well and it makes life much easier.

    Enjoy your analyses!

    Hi! Good that you mentioned. It’s a new feature they added late last year. Have been using this feature myself as well and it makes life much easier.

    Enjoy your analyses!

    How Not To Critique Bitcoin
    Tuesday, 28 January 2020
    Conner Brown

    A quick defense of moving slow and not breaking things.

    Continue reading on Medium »

    A quick defense of moving slow and not breaking things.

    Continue reading on Medium »

    Rafael Schultze-Kraft
    Introducing a New Generation of Entity–based On–chain Metrics Using Clustering and Advanced Data Science♦The Problem with Quantifying the Number of Bitcoin Users

    A major question amongst Bitcoin researchers and investors has been that of knowing how many people actually own and use Bitcoin.


    Introducing a New Generation of Entity–based On–chain Metrics Using Clustering and Advanced Data Science♦The Problem with Quantifying the Number of Bitcoin Users

    A major question amongst Bitcoin researchers and investors has been that of knowing how many people actually own and use Bitcoin.

    And even though Bitcoin’s entire transactional history is publicly accessible through its open ledger, assessing the number of users in the Bitcoin network is a non–trivial task.

    Down to the present day, it is most often still the number of addresses in the Bitcoin network that is being used as a proxy to the number of Bitcoin users/holders.

    However, it is well established that this approach is fallacious, mainly because there is no one–to–one mapping between users and Bitcoin addresses:

    1. Bitcoin addresses can hold funds from more than one individual (e.g. exchange addresses).
    2. A single entity can own and control multiple Bitcoin addresses holding BTC.
    Beyond Address Counts

    In order to obtain a more precise estimate of the actual number of users in the Bitcoin network, and how this number changes over time, more advanced methodologies are required.

    At Glassnode, we have been working on this problem by applying a combination of industry–standard heuristics, proprietary clustering algorithms, and advanced data science methods on top of raw on–chain data.

    In the present work we show the results of our approach and set a new upper limit on the number of entities holding BTC. To the best of our knowledge this work is the first to introduce a more sophisticated quantification of Bitcoin entities that goes beyond plain address counts and over–simplified heuristics.

    Entities, not Users

    Note that with our approach we only aim at solving one of the two confounding factors that follows from using addresses as a proxy to the number of users: mapping multiple addresses to a single entity.

    We do not tackle the case in which a single address holds funds of multiple users: In this case the address holding the bitcoins is still controlled by a single entity on the network level (e.g. an exchange) — therefore we deliberately refer to our numbers as “entities” rather than “users” or “individuals”.

    As a result of this work we implemented a set of live on–chain metrics that are live on Glassnode Studio and through our API as of today:

    • Number of New Entities
      The number of unique entities that appeared for the first time in a transaction in the Bitcoin network.
    • Entities Net Growth
      The net growth of unique entities in the network. This metric is defined as the difference between new entities and “disappearing” entities (entities with a zero balance that had a non–zero balance at the previous timestamp).
    • Number of Whales
      The number of unique entities holding at least 1,000 BTC.
    • Number of Active Entities
      The number of unique entities that were active either as a sender or receiver.
    • Number of Sending Entities
      The number of unique entities that were active as a sender of BTC.
    • Number of Receiving Entities
      The number of unique entities that were active as a receiver of BTC.
    Note: Because our entity metrics rely on clustering techniques and statistical information that changes over time, these metrics are mutable, i.e. most recent data points are subject to slight changes as time progresses. However, we have put the necessary mechanisms in place in order to obtain highly stable values that keep these fluctuations to a minimum (on average < 1%).
    Quantifying the Number of Bitcoin Entities

    In the following we present the results of our approach.

    Figure 1 shows the number of new entities coming into the Bitcoin network per day — along with the number of new addresses as comparison.

    ♦Figure 1 — Number of daily addresses/entities that appeared for the first time in a transaction in the Bitcoin network.

    Because our methods involve clustering addresses into entities, the resulting number of new entities noticeably represents a fraction of the number of new addresses in the network. For instance, in 2019 the average number of new addresses added to the Bitcoin blockchain per day was over 355k. In comparison, the average number of new entities was only slightly above 100k, representing a ratio of ~28%.

    Figure 2 shows this ratio of newly added addresses and entities over time.

    ♦Figure 2 — The ratio between the number of new daily entities and new daily addresses.

    Note the potential signal that can be extracted from this ratio. For instance, a clearly visible downwards peak at the beginning of 2018 showing an increased discrepancy between new addresses and new entities can be observed, suggesting increased activity of existing users in the network (e.g. new addresses were actually change addresses), rather than new players coming into the space.

    The comparison between the number of daily active addresses and active entities paints a very similar picture:

    ♦Figure 3 — Left: Number of daily active addresses and entities. Right: Ratio between active entities and addresses.So, How Many Entities Hold Bitcoin?

    Figure 4 depicts the daily net growth of entities in the network. As compared to new entities, this number accounts for “disappearing” entities as well: Entities with a zero BTC balance, which had a non–zero BTC balance at the previous timestamp.

    ♦Figure 4 — Daily entities net growth.

    Using the cumulative sum on this time–series we obtain the estimated number of entities at each given point in time. Figure 5 shows the results along with the number of non–zero addresses as comparison.

    ♦Figure 5 — Total number of addresses/entities with a non–zero balance.

    According to our analyses, as of January 2020 the number of entities holding Bitcoin is ~23.1 million. This is 18.5% less than the current number of non–zero addresses (~28.4 million).

    Moreover, it is notable that the number of entities increases monotonously. Sharp downward spikes as observed in the number of addresses at the beginning of 2018 are not present when looking at entities.

    According to our analyses, as of January 2020, the number of on–chain entities holding Bitcoin is about 23.1 million.
    Healthy Bitcoin Growth

    It is worthwhile comparing the daily net growth of entities and the net growth of addresses (Figure 6). For one, the volatility in address growth is significantly higher than that of entities, with considerable amplitude deflections — both positive and negative.

    More importantly, the daily net growth of entities is consistently positive: In Bitcoin’s history there have been only 21 days so far in which the net entity growth was negative.

    This is a clear indication of a healthy and consistent adoption of Bitcoin over the past 10 years.

    ♦Figure 6 — Comparison of daily addresses and entities net growth.Number of Whales

    An additional entity–based metric we added to our list of on–chain metrics is the number of whales: We define whales as entities that hold ≥ 1,000 BTC. This metric gives a more precise estimation of the actual behaviour of whales that does not rely on single addresses. Note: Entities that we have labeled to be exchanges are excluded from these numbers.

    ♦Figure 7 — Number of addresses/entities holding ≥ 1,000 Bitcoin.

    Even though both curves show similar trends, the counts of addresses and entities holding ≥ 1,000 BTC differ significantly providing a more exact estimate of whale behaviour at particular points in the market cycles.

    Distribution Statistics

    The following graph depicts the number of entities as a function of the entities’ size (number of addresses controlled by an entity).

    ♦Figure 8 — Distribution of the number of entities with respect to their size in terms of clustered addresses (January 2020).

    The chart shows a clear power–law relationship, with entities’ sizes raging from a single address up to entity clusters consisting of almost 22 million addresses (Coinbase).

    Note: The bulk of our clustered entities (~96%) still consist of a single addresses. Therefore our numbers serve as a strict upper limit for the number of Bitcoin entities. Including potential missing links the actual number is possibly lower than our provided upper boundary.

    Similarly, the number of entities as a function of their balance reveals a power–law distribution with the bulk of entities (~22.3 million) holding less than one Bitcoin (omitted in the distribution graph below).

    ♦Figure 9 — Distribution of number of entities with respect to their Bitcoin balance (January 2020). All entities with a balance ≥ 100k BTC are crypto exchanges.

    With respect to large entities, as of January 2020 there are 75 entities that hold 10,000 or more BTC, and 7 entities than hold 100,000 or more BTC — all of which are exchanges: Coinbase (983,800 BTC), Huobi (369,100 BTC), Binance (240,700 BTC), Bitfinex (214,600 BTC), Bitstamp (165,400 BTC), Kraken (132,100 BTC), and Bittrex (118,100 BTC).

    These 7 richest entities (exchanges) control over 2,350,000 BTC.

    That is ~13% of the circulating Bitcoin supply.

    Live charts of Bitcoin balances on exchanges are available here.
    ♦Figure 10 —Balance distribution of entities in the Bitcoin network (January 2020).

    Special thanks to Kilian Heeg for the research and development of the present work.

    Live metrics on Glassnode Studio:

    Number of New Entities
    Entities Net Growth
    Number of Whales
    Number of Active Entities
    Number of Sending Entities
    Number of Receiving Entities

    • Follow us and reach out on Twitter
    • For on–chain metrics and activity graphs, visit Glassnode Studio
    • For automated alerts on core on–chain metrics and activity on exchanges, visit our Glassnode Alerts Twitter

    Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.

    How Many Entities Hold Bitcoin? was originally published in Glassnode on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Ruben Somsen

    > there is a section ‘Security’ to explain how to solve double spending and Sybil Attacks

    Thanks, I did overlook this.

    >users can identify which fork is valid by the time of broadcasting

    They cannot. Alice can lie about the timestamp, and not all users will receive the fork

    > there is a section ‘Security’ to explain how to solve double spending and Sybil Attacks

    Thanks, I did overlook this.

    >users can identify which fork is valid by the time of broadcasting

    They cannot. Alice can lie about the timestamp, and not all users will receive the forks in the same order. They cannot come to consensus on which one to follow.

    >in the white paper

    Is this public? I have not seen it.

    >each blockchain can recognize another

    If I transfer a coin from chain 1 to chain 2, how does chain 2 know the coin is valid? If chain 2 needs to verify chain 1 in order to achieve that, then that means everyone needs to verify every chain, and you did not achieve any scaling.

    Anyway, that’s as far as I’m willing to take this conversation. Good luck with your project!

    Bitcoiner Ted

    Something many bitcoiners fear is what happens if Bitcoin starts succeeding to the point it becomes annoying for Governments.

    There is no doubt that unless you are an absolute privacy expert, which are the minority of Bitcoin holders I dare say although definitely increasing, you could be su

    Something many bitcoiners fear is what happens if Bitcoin starts succeeding to the point it becomes annoying for Governments.

    There is no doubt that unless you are an absolute privacy expert, which are the minority of Bitcoin holders I dare say although definitely increasing, you could be subject either to a fair amount of pressure from authorities or in the worst scenario to several different kinds of pain.

    If that ever happens, it will prove Bitcoin’s need in the long run, but at that point none of us will be interested in the long run but in a short term solution to our situation.

    That’s why I’ve lately been thinking that the work being done by Companies focusing their efforts in developing countries are widely underestimated. I’m thinking of Jack’s recent visits to Africa for example, which, if I’m not wrong, had to do with promoting Bitcoin over there.

    Both Countries with Bitcoin friendly jurisdictions and those with weak Governments where they are not able to control the finances of their populations, should be thought of the plan B for many bitcoiners if or when things can get ugly.

    Ruben Somsen

    Hi Thor,

    Thanks for sharing your thoughts. While interesting, I think you’ll have to think about it a bit more deeply, because unfortunately it contains a few detrimental flaws.

    >Alice is its owner. She can add a block at the end of X, in which she writes: I would give this blockcha

    Hi Thor,

    Thanks for sharing your thoughts. While interesting, I think you’ll have to think about it a bit more deeply, because unfortunately it contains a few detrimental flaws.

    >Alice is its owner. She can add a block at the end of X, in which she writes: I would give this blockchain to Bob. After the block broadcast, Bob becomes the new owner of X.

    The problem is that Alice can fork the chain by giving it to Bob AND Carol. Now there is no more consensus. It is exactly this “double spending” problem that Proof-of-Work resolves.

    >Although each ownership blockchain has an owner, the ownership blockchain group is highly decentralized. Everyone can join freely and every user has exactly the same rights.

    Note that there is no mechanism that allows one “ownership blockchain” to recognize another, and there is no inherent limit on how many “ownership blockchains” can exist. This would likely just create lots of altcoins.

    It would be nice if your mechanism worked, but sadly consensus is not that easy. Keep up the good work!


    Real Estate moneyness
    Saturday, 25 January 2020
    Bitcoiner Ted
    Real Estate Moneyness♦Maybe when “orange number go up”

    It’s been a while that I’ve been wondering what the future holds for the value of real estate in a bitcoinized economy and I think I’ve finally reached a few conclusions.

    If you believe as I do that Bitcoin is a black hole for moneyness,

    Real Estate Moneyness♦Maybe when “orange number go up”

    It’s been a while that I’ve been wondering what the future holds for the value of real estate in a bitcoinized economy and I think I’ve finally reached a few conclusions.

    If you believe as I do that Bitcoin is a black hole for moneyness, there is no doubt that the largest chunk of real estate’s value will move towards Bitcoin.

    But in my opinion this will not happen homogeneously.

    First, a Bitcoinized world should after some time, create important progress and that should make real estate an interesting second diversification investment for a small (in relative terms) part of the world’s moneyness.

    But secondly, there is no doubt that in a physical economy as the one we still enjoy, most employment has been created in large cities, and as a result massive amounts of people have flown to them during the last 100 years.

    Surface within this cities is limited, and real estate scarce as a result. The consequence has been regular price increases that make inhabitants dedicate a large percentage of their income to paying rent.

    While this keeps being this way, real estate in large cities should keep a premium over real estate elsewhere.

    If on the other hand you believe that we are moving into an increasingly remote internet based job market, chances are you will reach the conclusion that the demand on real estate in large cities will start decreasing shortly, making its price decrease at the same time.

    I think that long awaited remote work, already foreseen by the likes of Arthur C. Clarke in the 1970’s was disappointing at first, but that it is starting to happen more and more. I also think that these kind of features of the job market have massive inertias and existing companies are unlikely to change their culture and philosphy over night. It is more likely to become a thing for start-ups, so it will take time.

    But it will keep happening and consequently, I believe that if you want to diversify your bitcoins into something different, real estate away from traditional/conventional locations that depend on aglomeration economies is a good idea, unless those cities are the typical ones that are working as extremely attractive tourist attractions (I can’t think of New York losing its touristic appeal even if the job market significantly worsens)

    I think that real estate markets, those likely to see lots of people moving in, like, pretty towns, places with particularly nice weather or with good quality of life, are safer bets.

    How To See Voids
    Friday, 24 January 2020
    In this keynote, Sarah Perry explores how to see voids in the environment. You can also read her essay on the topic, Meaning as Ambiguity (published after this talk).
    In this keynote, Sarah Perry explores how to see voids in the environment. You can also read her essay on the topic, Meaning as Ambiguity (published after this talk).
    Jimmy Song

    Jiang Zuouer of BTC.top posted a rather… interesting analysis of their plan to fund BCH development with 12.5% of the BCH coinbase award for 6 months starting in May. If you haven’t seen the proposal, the idea is for the miners to form a cartel where they will orphan any blocks that don’t give the

    Jiang Zuouer of BTC.top posted a rather… interesting analysis of their plan to fund BCH development with 12.5% of the BCH coinbase award for 6 months starting in May. If you haven’t seen the proposal, the idea is for the miners to form a cartel where they will orphan any blocks that don’t give the developer subsidy, meaning they have some assurance that they have at least 51% (more likely in the 70% range) to make good on this threat. The game theory on that is interesting, as BCH has a 10 block rule that will make any orphaning with less than 60% of the total BCH hash power pretty risky, but that’s a post for another time.

    What I want to focus on in this article is Jiang Zhuoer’s claim that BTC miners are actually partially paying for this plan.

    The Claim

    Let’s break down the claim step-by-step.

    Because of the hash ratio between BTC and BCH, and the difficulty adjustments that maintain an equilibrium, it is the entire set of SHA-256 mining (including BTC mining) that bears the cost under this plan.

    The hash ratio between BTC and BCH has a theoretical equilibrium point based on price. We’ll use round numbers here for the sake of simplicity. If BTC is worth $9000 and BCH $1000, given the same block reward, 90% of all available SHA256 hash rate goes toward BTC and 10% to BCH as that’s the game-theoretical optimum. If miners move from BCH to BTC, they lose money in opportunity cost, same for the reverse, provided the price stays the same. Whenever price changes, (say BTC is worth $9400 and BCH $600), BCH miners are making less money and BTC miners are making more, causing BCH miners to move from BCH to BTC. The hash rate ratios quickly go to 94% for BTC and 6% for BCH as about 4% of all miners are incentivized to move to BTC.

    The 12.5% tax is similar to a price change. A miner that was making $1000/day on BCH now starts making $875/day on BCH because of the dev tax. This means that the hashing power of BCH will lessen by 12.5% given that everything else stays the same.

    Thus far, we have no reason to believe that BCH won’t be paying the cost of the 12.5% tax. In fact, BTC will get more hashing power and a more secure network at the cost of BCH hashing power and less security on their network!

    Assuming a Static Global Hash Rate
    This is counterintuitive: With 12.5% of the coinbase being donated, then on first glance, it would appear that BCH miners simply give up 12.5% of their rewards and would then lose 12.5% of their hash as well.However, after difficulty adjusts on BTC, it is a different story.

    The difficulty adjustment does put some difficulty into the calculation. BCH’s difficulty adjustment algorithm adjusts pretty quickly to keep the blocks at 10 minutes. This was done because they experienced a much lower percentage of the total hash rate and there were many 12-hour periods during their first difficulty adjustment algorithm era where they found few, if any, blocks.

    What the difficulty adjustment algorithm does is make each block easier to find so that the blocks continue being produced at 10 minute intervals, regardless of hash rate. The algorithm has some serious security vulnerabilities, but that’s a post for another day.

    Assume round numbers for illustration: BTC is 97% hash and BCH 3%.If BCH gives up 12.5% of its reward, that 3% goes to about 2.6%, and BTC would go to 97.4%.
    0.375% of the total SHA-256 rewards are being pulled out of the entire system, but this cost will be split between BTC and BCH in the same ratio as the hash (97:3).The BCH hashrate will be diminished by 12.5%, but BTC mining will bear 97% of the cost of the diminished profitability, because there will be more hash competing for the same BTC rewards.

    So here’s the meat of the argument. Essentially, Jiang is arguing here that BTC miners are actually bearing the brunt of the cost because more hashing power is needed per block after BTC’s difficulty adjusts to reflect the new miners coming in from BCH.

    First Order Effects

    To illustrate the deceitfulness of this argument, let us use an extreme example. Say 90% of the reward is going to the BCH developers. If BTC/BCH hashing power is split 97%/3% before the reward goes into play, 90% of the miners on BCH immediately leave after the reward goes into play. The hashing power split becomes 99.7%/0.3%. The difficulty on BCH quickly adjusts to allow 0.3% of all SHA256 hashing power to mine a block in 10 minutes. The hashing power on BTC eventually adjusts to allow 99.7% of the total SHA256 hashing power to mine a block in 10 minutes.

    So what’s changed here? 99.7% of mining has to compete for the same rewards as 97% from before, so there’s roughly 3% less reward on a per-hash basis. Same for the 0.3% in BCH, as Jiang has pointed out. As far as the reward analysis goes, this is true. Seems like a free lunch paid for by BTC, as Jiang is asserting.

    Second and Third-order Effects

    But there are further, second-order effects here. 3% more miners on the BTC network mean that the profitability has changed and the miners at the margin will now no longer make profit. If all costs and prices stay the same, the miners whose profit margin is less than 3% of the reward will simply stop running their miners. In other words, supply of hashing power will react to the reduced demand.

    Depending on how many miners are operating at the margins, the amount of hashing power dropping out may be more than 3% or less than 3%. If it’s more than 3%, the difficulty will adjust again and equalize at a level that’s actually more profitable than before the whole dev tax began to the miners on BTC. If it’s less than 3%, the difficulty will adjust and equalize at a level that’s less profitable than before the whole dev tax began to the miners on BTC, but more profitable than the simplistic situation Jiang outlined. Of course, making it 3% easier will bring back those marginal miners as a third-order effect, but this is why claims like this are ridiculous. You can’t examine just the first order effects and claim the cost is being paid only by those.

    First-order Security Costs

    Furthermore, BCH is paying out the same 6.25 BTC per block for 87.5% of the security as before the dev tax! The BCH network is essentially paying their miners the same amount for less work so they can pay their developers. And who pays for the BCH network? Well, it’s really the holders of BCH. They are the ones whose percentage of BCH is being reduced by the inflation. In a proof-of-work system, the inflation and fees pay for security. And since the fees on BCH are negligible, the cost of the security goes up proportionate to the amount of the tax. The holders of BCH are getting less security for the same dilution.

    Consequently, exchanges and merchants will need to increase the number of confirmations needed by 14% (1/0.875) to get the same level of security against double-spending attacks, slowing everything down.

    In a coin supposedly focused on transacting frequently, this is a strange trade-off to be making.


    The cost to BCH is not just “BTC is going to pay for 97% of it”. As I’ve shown there’s a significant amount of costs in security and second order effects. Jiang’s argument is the equivalent of saying if Canada raises taxes, it’s actually the US that pays for most of it. With the logic being that anyone who leaves Canada will go to the US and cause more competition in the US labor markets and that will allow Canadians staying to make that money back. This is theoretically true if examining cherry-picked first-order effects, but those effects are only a small part of all the consequences.

    What BCH is doing is removing a part of the market for SHA256 hash power, which is, of course their prerogative to do. Essentially, they are lowering the demand for all SHA256 power with the dev tax. By this cherry-picked logic, changing the proof-of-work algorithm or killing proof-of-work altogether would be even better since then SHA256 power has to all go to other places, making BTC mining less profitable at least on a cherry-picked, first-order basis.

    The shortsightedness of this policy is truly something to behold. What are they going to do after 6 months if this tax policy is successful? Continue it? What happens after the next halving if the price hasn’t changed? How about the halving after that and the halving after that? Long term, the block reward becomes less than the dev subsidy meaning something will have to give. The BCH developers are obviously going to want to continue the subsidy. Do the miners screw over the developers by ending the subsidy? Or is BCH just going to change their inflation schedule to fund both the miners and developers?

    This policy has the potential for a whole lot of drama and I, for one, will be getting some popcorn.

    Greta won’t like this
    Thursday, 23 January 2020
    Bitcoiner Ted
    ♦EIA’s sources of electricity generation forecasts

    A little bit of forecasting.

    Roughly this picture says that coal + gas electricity generation will rise from approximately 12.000TWh to 19.000Twh, so around a 60% increase in the next 30 years, and I think it is optimistic.

    Who would ha

    ♦EIA’s sources of electricity generation forecasts

    A little bit of forecasting.

    Roughly this picture says that coal + gas electricity generation will rise from approximately 12.000TWh to 19.000Twh, so around a 60% increase in the next 30 years, and I think it is optimistic.

    Who would have thought?

    Well, anyone paying just a bit of attention really.

    If you consider that 2/3 of the population are poor and consume per capita on average 80% less than those countries consuming the most per capita, and taking into consideration that this is a growing part of the population worldwide, it shouldn’t be a surprise that they also want to grow using the electricity sources able to provide the cheapest retail prices like gas and coal.

    This increase should be two or three fold at least so that these countries reach desirable levels of development within the next few decades.

    Nuclear should be one of them too, but unfortunately generalized worldwide hysteria against this extraordinary technology is likely to prevent it from growing for some more time.

    In a few years wholesale prices from PV solar panels and wind turbines will reach zero for most of the hours during daylight in several markets if this renewable fever keeps moving ahead, given the huge increase of supply. That is likely to mean bankruptcy for many of the solar and wind generators that have flooded the markets lately signing long term PPA’s which help them finance the project development.

    Even if large scale storage ends up happening efficiently shortly, I doubt demand will be able to absorb that huge amount of supply.

    When those PPA’s are over and often even before, many plants will go bankrupt and are likely to be abandoned.

    That generation capacity will be abandoned and I can only think of one alternative use for that electricity.

    It’s called Bitcoin mining!

    So basically Greta and friends are likely to be promoting financial help for miners in the not very far future.

    If you thought the world couldn’t get any more crazy…

    This is a guest post by Aaron Z. Lewis I grew up in cyber spaces where legal names were few and far between: RuneScape, AIM, Club Penguin, Neopets, and the like. But when I turned 13, Facebook opened up its floodgates to teenagers across America and washed away our playful screen names. My online soc
    This is a guest post by Aaron Z. Lewis I grew up in cyber spaces where legal names were few and far between: RuneScape, AIM, Club Penguin, Neopets, and the like. But when I turned 13, Facebook opened up its floodgates to teenagers across America and washed away our playful screen names. My online social […]
    Ross Ulbricht

    by Ross Ulbricht

    During my years in prison, I have had many hours to read, think and meditate. Many ideas have germinated and grown in my mind during this time. I’d like to share one with you here that builds on my background in physics. It is based on two ideas that sound far fetched but a

    by Ross Ulbricht

    During my years in prison, I have had many hours to read, think and meditate. Many ideas have germinated and grown in my mind during this time. I’d like to share one with you here that builds on my background in physics. It is based on two ideas that sound far fetched but are in fact accepted by many of the leading physicists, neuroscientists and philosophers of our day, and are supported by a long record of observation. I will lay them out here up front and then explain what I mean below.

    The first idea is that every conscious moment of your life (including the one you are having now) is a discrete unit, unattached to the moments before or after it. The second idea is that our observable universe is just a small piece of a much larger multiverse throughout which there are many such conscious “observer moments.” So, because each observer moment is discreet, and there are — as we will see — many observer moments throughout the multiverse that are identical to the one you are having, there is no way to know which one you are.

    The science behind these ideas is deep and fascinating, touching on the frontiers of consciousness research and cosmology. I will propose at the end of this essay an experiment that anyone, even you, can conduct to test these ideas. But first, let’s talk about the multiverse.

    The Multiverse Hypothesis

    As our ability to observe and understand our universe has grown over the past century, scientists have uncovered some inconvenient information that is forcing us to expand our conception of our place in the cosmos. There appears to be a number of parameters that describe the fundamental nature of our universe that are fine-tuned for our existence. For example, if electrons were much lighter, there would be no stable stars (including our sun), and if there were much heavier, ordered molecules like DNA would not form. Parameters affecting dark matter and energy, electromagnetism, the masses of the fundamental particles and more, all must be fine-tuned (sometimes to within 30 decimal places!) for life as we know it to exist.

    Did we just get lucky? Did God set things up just so? Or is there another explanation?

    Take a parameter unique not to our universe, but our solar system: the mass of the Sun. The bigger a star’s mass, the brighter it shines, and the Sun is no different. If the Sun was 20% heavier or lighter, Earth would be hotter than Venus or colder than Mars and thus uninhabitable. But the masses of stars in general can vary 1000-fold. The Sun’s mass appears to be fine-tuned for life on Earth, just like the universal parameters mentioned above.

    Now that we have telescopes strong enough to see them, we know there are a multitude of planets around vast numbers of stars that are clustered into galaxies billions of lightyears out in every direction. Even if most of these planets are uninhabited because their solar systems aren’t just right, is it any surprise that we live on a planet in a solar system that is? If we didn’t…well we wouldn’t be around to ask such questions, would we?

    It seems possible at least, if not likely, that our universal parameters appear fine-tuned for the same reason. We live in a universe fine-tuned for life among a vast sea of universes with different settings. Even if life is impossible in most of them, is it any surprise we find ourselves in a universe where it is? This vast sea of universes is the multiverse, and the evidence for it is all around us, including our own existence.

    In his book, “Our Mathematical Universe,” Max Tegmark gives a convincing argument for four different levels, or ways, our universe could be part of a multiverse. The first, based on standard cosmology, says that our universe is infinite in scope. In every direction we look, galaxy clusters are uniform at the largest scales. There is no apparent edge or center. It just goes on forever. So, the region we are in and could have any hope of interacting with is just one of infinitely many. In that unbounded set of regions, anything that can happen is happening.

    The second level is based on inflation theory, which is a widely accepted explanation for our Big Bang, the geometry of space, and the uniformity of galaxy clusters. Tegmark argues that, to accept inflation theory, one must accept that our universe is just one of many where inflation has collapsed, creating a bubble universe where random values for the universal parameters have been set. Again, just because the parameters in our particular bubble universe were set randomly, yet turned out perfectly for life, doesn’t mean luck or intelligent design are necessarily at play. If the dials are spun a huge number of times, eventually they will land this way. It shouldn’t be surprising we are in one of the few bubbles that can support life given that we are in fact alive.

    The third and fourth levels are even more mind-bending. They involve branching universes for every possible outcome of quantum events and a completely abstract set of all possible mathematical objects of which the other levels are just one.

    Regardless of which scenarios are true, there is good reason to believe that our universe is not the only one. Just as we discovered that Earth is not the only planet, the Sun is but one of many stars, and the Milky Way is not the only galaxy, our universe is not the only one either. Maybe we will have time to name it some day to distinguish it from others?

    The Observer Moment Hypothesis

    Given a multiverse where — somewhere and somewhen — there is every combination of matter and energy possible, there must be other conscious observers out there aside from us here on Earth. Their experiences may be wildly different from our own. The full range of our conscious experiences — from seeing blue to feeling velvet, from falling in love to being enraged, our most exalted thoughts and our basest drives — may all be a tiny subset of what it is possible to experience.

    Even a mundane moment, like being stuck in traffic, is rich with what psychologists and neuroscientists call “qualia”: the feel of the car seat on your legs, the warm steering wheel on your palm, the seatbelt pressing on your hips, the vibration of the engine, a horn honking, the traffic report on the radio, the sun reflecting off the hood of your car, frustration at being late, envy of people in nicer cars, mentally replaying a conversation, and on and on.

    Each qualia is a mental object that makes up an observer moment. These moments are strung together like beads, each connected to the last by your memory. The moment after you hear the horn blare, that sound no longer exists for you except in your memory. We trust our memories to give us a good approximation of previous moments, but all we really have access to is what we are experiencing right now.

    In the vast multiverse, there may be a simulation running somewhere of the exact observer moment you are having right now, complete with all the sights, sounds, thoughts, feelings and memories you have this instant. How do you know you are you and not that simulation? What is the difference between the two? You might say you are different from the hypothetical simulation because you actually have a past whereas the simulation has just the illusion of a past from its artificial memories. But what exactly is connecting the observer moments that make up your life?

    Imagine you board a train in Paris bound for Berlin and quickly fall into a deep dreamless sleep. You are completely unconscious and have no observer moments until you wake up at the station in Berlin. After a moment’s disorientation, you know exactly who you are, where you are, where you were before you fell asleep and what your plans are in Berlin. The last observer moment you had was several hours prior and far away in another country. Yet, there is perfect continuity between it and your current experience.

    So, it is not time or space that connects observer moments. It is the imprint each one has on the next via memory that gives them the illusion of being strung together.

    But time itself isn’t an illusion, right? The jury is still out on that one. As our top physicists work out quantum gravity, our best understanding of time comes from Einstein and his famous theory of relativity. He showed us that, rather than time and space being fundamentally different dimensions in our universe (3 space dimensions and 1 for time), we in fact live in a universe with 4 of the same dimension called “space-time”, a so-called “block universe.” So, time is real but our experience is like a frame in a movie. Our experience is like hitting play, but the universe is the DVD itself. It just is.

    If you’ve never encountered these ideas before, smoke might be coming out of your ears right about now. There are all sorts of bizarre implications that stem from the picture of reality modern physics is unveiling. Do a search for subjective immortality or Boltzmann brains for a taste. And let’s not even get started on what this all means for free will.

    Instead, we will turn to an hypothesis of my own which, as promised, will lead us to a simple experiment that you can conduct to test these ideas. If this has already been proposed elsewhere, I apologize and give full credit where it is due, but I can’t easily do that kind of literature search from prison.

    The Universal Consciousness Hypothesis

    To understand this idea, let’s go back to that traffic jam, jam packed with qualia. The more qualia contained in that observer moment, the rarer we can expect identical observer moments in the multiverse to be. Let’s walk through this to see what I mean.

    Imagine you are in the traffic jam and you close your eyes. All the sensory input (qualia) from your field of vision is now missing from this new moment. Anyone hearing, feeling, thinking, etc. the same things you are — without any visual qualia — anywhere in the multiverse, is now indistinguishable from you and you from them. You are like the same frame in the movie on the DVD of all existence.

    Now turn off the radio. Shut off the engine. Undo your seatbelt. One by one you remove qualia, and the resulting observer moment becomes less and less rare because there is less and less to distinguish it from other observer moments. Conversely, if more unique qualia were to be added, such as getting into a car accident, the new observer moment would be rarer. If the multiverse isn’t truly infinite and just ridiculously huge, a moment like our traffic jam might even be unique.

    One way to think of this is, as qualia are removed, there are more and more past moments that could seamlessly merge into this one. And there are more that could come after, each one with different qualia added back in. When you turn the radio back on, the sound it makes will be one from every possible observer moment that fits with the one you were just having. Of course your memory of the radio from before you turned it off will match what you hear in the new observer moment. There will still be continuity because you have memories from many prior observer moments, but for a moment, the set of all observer moments you were a part of was enlarged.

    What would happen if we kept removing qualia? What would there be if there were none left? Would we still be conscious? It turns out that people have been training their minds to be free of every kind of mental object for thousands of years. We call them Buddhist monks, and they have some very interesting things to say about empty observer moments.

    John Yates is a neuroscientist who has been practicing and teaching meditation for more than 40 years. In his book, “The Mind Illuminated,” he tells us that an untrained mind is constantly jumping from one thing to another, never paying attention to one specific thing for more than a few moments. As soon as interest wanes — even a little — our minds supply us with a new object of attention from our peripheral awareness or from our unconscious.

    During meditation, the practitioner sits still and focuses on the sensations of her breath. We live with these breath sensations our whole lives, and rarely do they hold any important for our conscious minds. They are about as boring and neutral as can be. So the mind (sometimes immediately) directs attention elsewhere. The practice of meditation is to redirect attention back to the breath over and over with the intention of sustaining attention there.

    With enough deliberate and diligent practice, it is possible to train your mind to pay exclusive attention to a single object (such as breath sensations) for as long as you wish. It is difficult to describe the experience because it is so different from everyday states of consciousness, where our minds are constantly looking around for input to integrate into the ongoing narrative of our lives.

    As one gets better at meditation, thoughts, feelings and sensations (qualia) that used to powerfully capture attention fail to do so and remain in peripheral awareness. Ignored long enough, they eventually recede from conscious awareness altogether. It is particularly odd when primary senses that have been ever-present in one’s whole life disappear, such as hearing, vision and proprioception (a sense of your own body).

    Another interesting experience common among advanced practitioners is when enough layers of qualia have disappeared that individual observer moments can be distinguished from one another. Instead of experiencing the illusion of change over time (as when we hit play on a DVD), the individual frames are experienced independently of one another. Losing the subjective experience of time is a radical departure from everyday perception and leads to an experience congruent with our “block universe” understanding of reality, where there is no unique dimension for time.

    Eventually, one can train to the point where entering and maintaining this state is effortless, so even the qualia resulting from that effort disappears. Along this journey of self-discovery and self-mastery, superficial aspects of your consciousness and the diversity of qualia that capture your attention fade away. What is left could be called empty consciousness or pure consciousness.

    According to our discussion above, such a state should be universal to all empty conscious observer moments regardless of the particulars of their local physical surroundings.

    It doesn’t matter if you are 6'2", missing an arm or full of food if you are not aware of your body. It doesn’t matter if you speak Chinese or Greek if you are not thinking. And it doesn’t matter which universe you are in if there are no qualia to distinguish you from any other observer moment void of qualia in any other universe. In a sense, one in a state of this “universal consciousness” has merged with the largest possible set of observer moments, a universal set from which countless histories and futures branch off.

    What would you guess this experience is like? You might think it is empty and dull because there is nothing there to experience, but it is not. Adept practitioners throughout the ages describe immense pleasure and joy, peace, serenity and deep, intuitive understanding. They describe experiencing a sense of oneness and interconnection. They describe insight into impermanence, emptiness, the nature of suffering and the illusion of the self as separate from the rest of existence. And they all describe the same thing, just as we would expect them to if our ideas are correct.

    Not only is there a test for the universal consciousness hypothesis (and thus the multiverse and observer moment hypotheses), but it has been run over and over in a huge variety of conditions with consistent results. Every person on Earth can test it out for themselves if they wish, even you dear reader. All you have to do is sit and focus. If you are truly interested in or already walking this path, I highly recommend reading “The Mind Illuminated” to benefit from the knowledge and guidance of those who have gone before us.

    For myself, I have been practicing daily for over four years. I am not an adept. There is a ways to go before I can sustain exclusive attention effortlessly, but I have gained some skill and occasionally glimpse the rarified states and insights I read about. What I have described is just an hypothesis that fits what we already know about consciousness and cosmology. There could very well be another explanation for the common experience of adept meditators. But then again, it might be true. At some point, our understanding of these subjects may advance to where we can make testable predictions and prove them wrong or right. Until then, it’s fun to believe we are not alone when we sit and focus and find a moment of serenity. I’ll see you on the path.

    Bitcoiner Ted
    ♦Whenever an oil pipe is not enough, you need to store it as cheap as possible

    I can’t stop thinking about the striking similarities and analogies among commodities, energy markets, Bitcoin mining and Bitcoin itself.

    If you think about it, every single commodity, in order to satisfy a need, n

    ♦Whenever an oil pipe is not enough, you need to store it as cheap as possible

    I can’t stop thinking about the striking similarities and analogies among commodities, energy markets, Bitcoin mining and Bitcoin itself.

    If you think about it, every single commodity, in order to satisfy a need, needs to be transported wherever it is demanded, therefore it needs to be transported over space.

    But whenever a bottleneck arises in the transportation capacity or if the demand doesn’t match in terms of time that of supply, you need to make it travel through time, that is, to use proper storage, minimizing deterioration of this commodity.

    Transportation and storage are two sides of the same coin. If transportation’s throughput is limited, storage will need to be large. With most commodities, this is the case. For example, harbours world wide are packed with warehouses where commodities are stored waiting for an empty ship to be available.

    If on the other hand storage is limited, as it is the case of electricity, transportation will need to be large (also known as the grid) otherwise you get blackouts (frequently electricity supply shocks).

    Commodity money has the exact same considerations: you need it to be good to travel through space and time (and scale, to follow Menger’s own words)

    This is where Bitcoin excels: it’s extremely low cost of storage (taking into consideration its low maintenance, low to zero inflation, zero deterioration, etc…) make it “especially well suited for time travel”. No other kind of money except for gold is as good as Bitcoin for value time travel.

    Interestingly, most wealth worldwide demands time travel rather than space travel if you compare how much narrow money is worth (good for space travel) with everything else (real estate, gold, financial products, offshore money, etc…). The latter is orders of magnitude larger. Things that are stored for long periods of time are exchanged less frequently, which means the supply is smaller. If the demand is large enough (and demand for the utility of exchange definitely is), the price will be very large.

    But this shouldn’t be surprising as the time of a human life is the most scarce resource of all. Our demand to maximize our well-being has as its most important limitation the time we have to achieve things in life. You could argue that with unlimited time, we should be able to satisfy all our needs without the need for cooperation.

    But the fact our time is limited can only be solved with a way to make value travel for as low a cost as possible. That is what money is all about. We have never in history had an opportunity to fight limited human time as we currently have with Bitcoin. Unless you agree with the keynesian views that expenditure is all that matters, the ability to save properly and securely over time should help an unprecedented level of progress.

    For energy commodities, it is coincidentally interesting that the competitor for its transportation and storage is precisely Bitcoin mining, which turns an energy delivery standard such as electricity into a value delivery standard such as money. That is, it turns one standard (energy) into another (value)

    It should blow your mind as much as if I told you I have a device that turns weight into length for example.

    This is a topic I’m most interested in and if you have ideas or even theories on how all of this could be linked together, I can’t wait to read your comments either here or in my twitter account (@acrual)

    The Energy Standard
    Tuesday, 21 January 2020
    Charles Edwards
    Bitcoin is Henry Ford’s Energy Currency♦The New-York Tribune article in 1921Ford’s Energy Currency

    99 years ago, Henry Ford, one of the greatest businessmen of all time, planned the development of an “Energy Currency” to replace gold. Ford’s goal was to end wars which he argued were centered around

    Bitcoin is Henry Ford’s Energy Currency♦The New-York Tribune article in 1921Ford’s Energy Currency

    99 years ago, Henry Ford, one of the greatest businessmen of all time, planned the development of an “Energy Currency” to replace gold. Ford’s goal was to end wars which he argued were centered around the control of money:

    “The essential evil of gold in its relation to war is the fact that it can be controlled. Break the control and you stop war.” New-York Tribune, 1921

    Ford proposed an energy backed currency would stop wars because every country could issue currency backed by their “imperishable natural wealth” of energy resources, such as the US Muscle Shoals Dam.

    ♦Henry Ford at Wilson Dam, Muscle Shoals 1921Bitcoin meets Ford’s definition for an energy currency

    When asked “Have you worked out a standard of value?”, Ford responded:

    “Under the energy currency system the standard would be a certain amount of energy exerted for one hour that would be equal to $1.”

    Ford suggested a currency backed in kilowatt hours (kWh) and this is exactly what was found for Bitcoin in Bitcoin’s Energy-Value Equivalence - Bitcoin is “backed” by energy input.

    For the last 10 years, 80% of Bitcoin’s price history is explained by a 1-to-1 constant value against energy input. Like all markets, price fluctuates around value. But price and value are intrinsically linked and mean-revert. Bitcoin has a fixed value through time based on the mining energy exerted and its supply growth rate.

    Ford also envisaged a fully backed currency:

    “Mr Ford proposes that this currency be issued only to a certain definite amount and for a specific purpose.”

    In other words, you could only issue more energy currency if you put more energy-in, and this is exactly what Bitcoin does. All else equal, the more energy you put in as an individual miner, the more freshly minted Bitcoin you will receive. On the other hand, the more energy that all other miners put into mining Bitcoin the more difficult, and costly, it is for you to mine Bitcoin.

    Bitcoin’s value using Ford’s energy standard

    In Bitcoins Energy-Value Equivalence, Bitcoin’s value is expressed in “Joules” of energy, but it can just as readily be expressed in “kWh” as dreamed of by Ford.

    As 1 kWh = 3.6 million Joules, if energy input and supply growth rate are measured in kilowatts and hours respectively, Bitcoin’s Fiat Factor ($/kWh) becomes:


    Given today’s (20 January 2020) supply growth rate, Bitcoin’s Energy Value can be expressed in kWh as:

    ♦Bitcoin’s Energy Value in “$/kWh”

    Today, the Bitcoin network is consuming approximately 6.9 million kWh of energy, so one Bitcoin is worth almost $12,000.

    Said equivalently, 1 Bitcoin today is backed by 1.66 trillion kWh of energy and growing.

    Bitcoin is unique as it has an exponentially decreasing inflation rate. Under constant conditions, for any individual Bitcoin Miner more energy is required in the future to produce the same amount of Bitcoin as today. This makes the Supply Growth Rate a critical component of Bitcoin’s Energy Value.

    Because Bitcoin’s Supply Growth Rate is decreasing, and will drop substantially with the halving in May 2020, the above “V-today” value will effectively double over the next year. Some simple math will tell you what that means for Bitcoin’s intrinsic value.

    Bitcoin’s energy “backing” is growing exponentially. As a result, it is likely we continue to see the hyperinflation of the US Dollar, and all fiat currencies, against Bitcoin until this trend stops.

    It didn’t work out for Ford

    In the 20th century, there was no way to accountably and immutably link the value of energy to a unit of currency. Further, there was no motivation for the establishment to even consider a “energy currency” system which could make their existing sources of wealth and power redundant and would certainly remove their ability to pull the levers of monetary policy.

    We know that Ford’s plans didn’t eventuate. After three years of unsuccessfully bidding for the Muscle Shoals Dam to kick start the project, he abandoned the plans in 1924 stating:

    “A simple affair of business which should have been decided by anyone within a week has become a complicated political affair.”

    This is not surprising. Many years later in 1984, Austrian economist Friedrick Hayek noted:

    “I don’t believe we shall ever have a good money again before we take the thing out of the hands of government. That is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.”
    ♦Friedrick Hayek

    Hayek pled for the denationalization of money, believing monetary policy has not done any good, only harm. The full interview with Hayek is well worth a watch.

    The 21st century energy currency

    Today, an energy backed currency run by the people, which is immutable by any individual organization, can make Ford’s “Energy Currency” and Hayek’s “Good Money” a reality.

    To date, Bitcoin has found a way around politics. It has predominantly evaded it and continued to grow in distribution, security and adoption. The longer this journey continues, the harder it becomes for any individual country to stand against Bitcoin — enhancing its “Lindy effect”:

    “The Lindy effect is a theory that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.” Wikipedia

    Of course, there are many risks facing Bitcoin. These have been discussed at length in the past. The market has weighed the risks and opportunities, and the current decision is reflected by a growing Bitcoin Energy Value.

    As long as mining energy continues to increase, Bitcoin is executing a silent takeover of fiat currencies. In fact, despite a 2-year bear market, Bitcoin’s energy value, and hence the network’s security and intrinsic value, is at a new all-time high as of 20 January 2020.

    ♦Bitcoin has never been worth more than today (20 January 2020)
    [Live metric available on TradingView here]The Energy Standard

    Ford was a century ahead of his time. We now know that an energy backed currency can work.

    In 1921, Ford posits some advice for the skeptical:

    “It’s simply a case of thinking and calculating in terms different from those laid down to us by the international banking group to which we have grown so accustomed that we think there is no other desirable standard.”

    Bitcoin is money backed by energy. Welcome to The Energy Standard.

    The Energy Standard was originally published in Capriole on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Zane Pocock
    ♦Photo by Julia Caesar on UnsplashDigital Asset Exchanges to Pick Sides in Hong Kong

    Late last year, the SFC (Hong Kong’s securities regulator) announced a new regulatory framework allowing digital asset exchanges to be regulated by the SFC. This move was met with interest from around the world as

    ♦Photo by Julia Caesar on UnsplashDigital Asset Exchanges to Pick Sides in Hong Kong

    Late last year, the SFC (Hong Kong’s securities regulator) announced a new regulatory framework allowing digital asset exchanges to be regulated by the SFC. This move was met with interest from around the world as various jurisdictions propose new regulatory regimes for the space, and exchanges serving Hong Kong customers face new scrutiny and decisions about how to proceed. The newly drafted regulatory framework would allow the SFC to issue licenses to these exchange venues, though they appear to be having a difficult time finding insurance coverage for funds held on exchange, a requirement of the proposed regulatory framework.

    On closer inspection of the proposed changes, it’s evident that further analysis is warranted. Aside from the insurance requirements, two other directives are important: first, the regulations apply only to exchanges dealing with legally-defined securities. The SFC outlines that operating an exchange venue that offers securities trading (even a single trading pair) is the qualifying criterion for these regulations — otherwise, the scheme is opt-in. Second, the regulations would also require exchange venues to restrict access to the exchange to those individuals who qualify as “professional investors”, similar to accredited investors in the US.

    This combines two hot debates in the cryptocurrency sphere and might force Hong Kong exchange venues to pick a side: what is and isn’t a security, and who should have access to this new asset class?

    Exchange Insurance Requirements are Expected

    In requiring insurance for custodied digital assets, the SFC is acting largely as we have expected from regulatory bodies. The guidance recognizes the underlying digital assets as bearer instruments, whereby there is no delineation between possessing the asset and owning it. Adequate insurance coverage ensures that there is effectively a separation between ownership and custody: if the custodian or exchange realizes a risk event that is covered by insurance, their client might in effect still have claim to their lost assets.

    Furthermore, the regulations require that a maximum of 2% of funds may be held in hot (online) wallets with full insurance coverage, while the rest must be held in cold (offline) storage with a minimum 95% of the value of those assets insured. This can sound like a strong step in the right direction with regard to investor safety, however, we encourage further discussion and guidance on how to interpret this requirement. In particular, policies can and do exist that would meet this requirement by the letter of the law, while still falling short in terms of their scope of coverage.

    Classifying a Security

    A security is popularly defined as a tradable financial asset. A classic test of whether or not something is an investment contract, which is always a security, is called the Howey Test. This test asks whether “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

    Bitcoin by design has no entity for issuing such a security; nor can the issuance of Bitcoin be captured and leveraged to raise capital. As such, Bitcoin can not pass the Howey Test and in 2019 the SEC Chairman clarified that Bitcoin is not a security. This clarity places Bitcoin in opposition to many other cryptocurrencies, but even so, there remains substantial regulatory ambiguity. For example, while the initial offering of Ethereum tokens at ICO passes the Howey Test and was almost certainly a securities offering, the SEC has indicated that the Ethereum token ceased to be a security once the network reached a critical size, at which point the token was better treated like a commodity.

    This definition illuminates the pending SFC regulations in a new light: if an HKD/BTC trading pair is not in the purview of the SFC, which cryptocurrencies might be?

    A Bifurcation in the Exchange Market

    The proposed framework is an opt-in licensing scheme, meaning that qualifying exchanges can choose whether or not to become licensed. This is presumably because some non-security assets like Bitcoin don’t fall within the SFC’s remit, while others would be expected to classify as securities. This means an exchange can choose not to become licensed without risking an enforcement action by ensuring it does not expose trading pairs containing security assets. The head of the SFC, Ashley Alder, recently stated that Bitcoin and other cryptocurrencies “are not securities” and the SFC “only has the power to regulate a platform that trades virtual assets or tokens which are legal securities or futures contracts.”

    Rather than an attempt to regulate all digital asset exchanges, these regulations instead appear to be the SFC positioning itself for a future environment in which tokenized securities, such as equities, are being actively traded. This helps explain why the regulations also outline that exchanges seeking a license must restrict access to “professional investors” who have an HK$8M (approx. US$1M) portfolio — a standard requirement for Hong Kong securities investors. In the cryptocurrency exchange business, most users are retail, meaning that choosing to abide by these regulations could kill a substantial amount of trade volume, such that many exchanges may choose to continue existing outside of the SFC’s remit.

    So how might an exchange continue to serve its retail customer base and avoid falling under the purview of the SFC? It likely requires restricting the trading pairs on offer to ensure there’s no grey area as to whether or not a customer is trading a security. It follows that this new scheme in Hong Kong might force a bifurcation in the local cryptocurrency exchange market. Exchange venues appear set to choose which side of the market they want to be on.

    Already we see that Hong Kong-based exchange OSL has applied for the regulatory sandbox, and Huobi, by virtue of already being listed on the Hong Kong Exchanges and Clearing Market (HKex), might also be an early beneficiary of the scheme. Given how substantial the Hong Kong market is, it will be interesting to observe where other venues fall.

    Until Next Time

    KNØX is just getting started. We have a lot more coming down the pipeline.

    If you want to learn about responsible Bitcoin custody for your fund, exchange, or other vehicles, have strict LP and risk management requirements, or otherwise appreciate a trust-minimized profile, we’d love to talk.

    Please email us at custody@kn0x.io

    Under no circumstances should any material on this post be construed as an offering of securities or of investment advice. The reader should consult with their professional investment advisor regarding investments in securities referred to herein.

    Services and products are offered through KNØX Industries Inc., headquartered in Montreal, Canada. KNØX Industries Inc. is not engaged in the offer, or sale of securities or digital assets, and does not provide investment, tax or legal advice.

    Investments and holdings of digital assets are speculative and highly volatile, involving a substantial degree of risk, including the risk of complete financial loss. Digital assets, coins, tokens and cryptocurrencies can become illiquid at any time, and are for investors with a high risk tolerance. There can be no assurance that any form of digital asset will be solvent.

    © 2019 KNØX Industries Inc. All rights reserved.

    Digital asset exchanges to pick sides in Hong Kong was originally published in Knox Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Dan Held

    And who has the moral authority to play “electricity police?”

    And who has the moral authority to play “electricity police?”

    Gabriel Shapiro
    ♦The Last Fiduciary, a film directed by Rian Johnson and starring Jerome W. Van GorkomIntroduction

    In various talks, tweets and papers, Professor Angela Walch has popularized her view that blockchain protocol developers are or should be deemed fiduciaries of blockchain network participants.


    ♦The Last Fiduciary, a film directed by Rian Johnson and starring Jerome W. Van GorkomIntroduction

    In various talks, tweets and papers, Professor Angela Walch has popularized her view that blockchain protocol developers are or should be deemed fiduciaries of blockchain network participants.

    While many of her concerns with blockchain technology are valid, her specific view that fiduciary duties do or should apply to free open source software developers have been ably rebutted (and, in my opinion, conclusively refuted) Blockchain Development and Fiduciary Duty by Raina S. Haque, Rodrigo Seira Silva-Herzog, Brent A. Plummer and Nelson Rosario.

    Nevertheless, the fiduciary duty meme continues to enjoy a certain popularity. I therefore wish to supplement prior academic criticisms with some quick-and-dirty practical counterarguments in the hope that, when those are combined with the more detailed black-letter law arguments set forth in Blockchain Development and Fiduciary Duty, people can move on to more productive proposals for how the issues Walch raises are best mitigated.

    Unmodified Fiduciary Duties Barely Exist Today in Any Actual Commercial Relationship

    Most of the case law on fiduciary duties comes from Delaware court opinions on how the members of the board of directors of a corporation owe fiduciary duties to the corporation’s stockholders.

    Corporations are one of the few remaining state-chartered entity types that impose non-waivable default fiduciary duties on the managers of an entity-based enterprise. Most U.S. states allow the definitive agreements governing “un-corporations” like LLCs to completely eliminate all fiduciary duties that otherwise would be implied by the applicable statute governing such entities or the common law. And, in a majority of cases, the management and investors in such “un-corporations” do in fact opt to eliminate vague fiduciary duties in favor of no duties or very light and precisely defined contractual duties.

    Even in the case of corporations, which continue to impose some non-waivable fiduciary duties, such duties have been whittled down to a bare minimum. As a result, corporate managements’ duties toward stockholders are effectively no longer fiduciary duties in the classic sense, but are a set of rather narrow and specific duties defined by carving back fiduciary duties through a complex web of D&O insurance and exculpation and indemnification arrangements agreed to by contract, which in turn are to be interpreted against a backdrop of robust and specific case law explaining how any fiduciary duties that remain play out in various scenarios. In effect, even in the context of corporations, the fact that fiduciary duties still nominally apply to managers is an accident of history or path dependence — the actual duties assumed by actual corporate directors/officers are radically different from, and are far more narrow and predictable than, “fiduciary duties” in the classic sense.

    To flesh this out a bit more: In response to a famous case called Smith v. Van Gorkom 488 A.2d 858 (Del. 1985), where the Delaware Supreme Court held that members of the board of directors of a target corporation were liable for negotiating and approving an acquisition of the corporation in a grossly negligent manner and thus breaching their fiduciary duty of care, the Delaware legislature enacted Section 102(b)(7) of the Delaware General Corporation Law. 102(b)(7) allows a Delaware corporation to specify in its charter documents that breaches of the duty of care by directors are “exculpated” — which effectively eliminates fiduciary duties for all practical purposes. The DGCL also authorizes corporations to indemnify and insure directors against nearly all other breaches of fiduciary duties, except those that essentially involve conflicted self-dealing, fraud or crime — i.e., breaches of the duty of loyalty. Even some of those breaches may be insured against, if they resulted from good faith behavior.

    Just as with un-corporations, as a practical matter, every corporation that receives competent legal advice in fact utilizes these protections and dramatically limits management’s fiduciary duties. Effectively then, directors’ and officers’ fiduciary duties are in practice limited to a duty not to do things like embezzlement that would likely be illegal even if fiduciary duties did not apply. Narrow exceptions exist in very well-defined conflict of interest scenarios that do not apply to blockchains — such as situations in which the directors are negotiating an acquisition of the corporation by a third party and the risk of breaches of the duty of loyalty due to conflicts is deemed so high that the directors face heightened, but still relatively well-defined, fiduciary duties. Even there, a result like that found in the Van Gorkom case is now impossible — directors in practice do not owe stockholders a fiduciary duty to negotiate a great deal. They merely must act in a loyal manner in negotiating the deal.

    Of course, the above is a discussion of duties owed by management of a company to its investors. Angela Walch’s theory goes further than that, and would require software developers to have fiduciary duties to software users who typically will be using the software for free. In modern markets, technology companies do not owe fiduciary duties even to their PAYING software users — they usually owe a bare duty not to commit gross negligence (product torts) plus very narrowly defined contractual duties like a simple software warranty. A fortiori, the software developers who work for technology companies do not owe fiduciary duties — they don’t owe them to the technology company, to the technology company’s stockholders or to the paying software users. They are mere service providers owing, at most, light contractual duties to their employer.

    The few areas where unmodified fiduciary duties still survive today in ordinary commerce are in situations of deeply personal, inherently obvious and highly regulated agency relationships like the relationship of an attorney or accountant to a client, or the relationship of a trustee to a beneficiary. These are about as dissimilar to the relationship between any software developer — not to mention a FOSS contributor — and the user of that software as day is to night.

    If We Wanted to Impose Duties On Devs, We Would Not Make Them Fiduciaries, But Rather Would Impose More Specific Duties

    Even in the context of corporations, the fact that we still speak of “fiduciary duties” is essentially an example of path dependence. No one who wanted to reach the same result as we have in corporate law today would look at it and say: “Hmmm, you know what I think we should do? Create some big fuzzy vague default legal duties and then kill them in a death by a thousand cuts with a complex webwork of charter exculpation provisions, indemnification and advancement of expense arrangements, D&O insurance policies and as-applied legal doctrine spread out over hundreds of court opinions.” While law often evolves in that messy fashion and ends up in a reasonably good place despite the mess, no one designing a system of policy-driven incentives through regulation or contracts would ever proceed in such torturously convoluted path on purpose.

    Thus, even assuming arguendo that we wanted software devs to wind up owing a similar set of duties to users as, say, the directors of a corporation owe to its stockholders, in my opinion we would never try to get there by first imposing fiduciary duties and then carving them back. Instead, we would cut to the chase: i.e., we would just impose the actual duties we want the developers to end up having. Those would not be common law “fiduciary duties” writ large, but rather would be the kinds of duties directors and executive officers of corporations functionally have — narrow, reasonably well defined duties to avoid conflicted self-dealing, refrain from committing crimes in connection with their jobs, etc.

    If Fiduciary Duties Were Imposed On Devs, They Would Cope With Them The Same Way As In Other Industries, And Thus The Fiduciary Duties Would Effectively Become Contractual Duties Anyway

    Furthermore, if fiduciary duties were imposed on devs in their raw state, then devs would respond in one of two ways: (1) stop doing the development, since it is now too liability prone and (in the case of FOSS devs) they are not paid, so the activity will have become un-economical; or (2) organize themselves in ways that let them eliminate fiduciary duties as a matter of law. Modern law and commerce offers pretty much anyone numerous paths to contracting out of default nebulous duties. Developers could form an LLC and opt to eliminate all fiduciary duties under the LLC. Developers could insure themselves against the risks. Developers could build into the FOSS license provisions wherein users of the software waive all fiduciary duty claims. Etc. Thus, a proposal to impose fiduciary duties on devs only makes sense if one is also proposing to make all these possible, and perfectly legal, countermoves illegal. That would be a radical change to modern commerce and law that few people would support.

    Reductio Ad Absurdum #1 — FOSS Devs Should Not Have More Liability To Free Software Users Than The CEO Of Apple Inc. Has To Apple Stockholders

    For the reasons discussed above, under Walch’s view a dev voluntarily contributing code to Bitcoin Core for free would have greater duties to an unknown user of Bitcoin who has never paid the dev in any way and who the dev is not in privity with and may not even know exists than Tim Cook, CEO of Apple Inc.., has to Apple Inc. stockholders, which is already way higher than the duties that the typical fund manager has to the funds’ LPs.

    This result is absurd and untenable and constitutes a reductio ad absurdum of Walch’s position.

    Reductio Ad Absurdum #2 — FOSS Devs Should Not Have More Liability To Free Software Users Than Apple Inc. Has To Paying Apple Software Users Or Apple Inc.’s Developers Have To Paying Apple Software Users

    For the reasons discussed above, under Walch’s view a dev voluntarily contributing code to Bitcoin Core for free would have greater duties to an unknown user of Bitcoin who has never paid the dev in any way and who the dev is not in privity with and may not even know exists than:

    (1) Apple Inc. has to paying Apple software users (minimal duties, basically just avoid committing product torts);

    (2) the directors and executive officers have to paying Apple software users (no duties); or

    (3) a paid coder at Apple has to paying Apple software users (no duties).

    This result is absurd and untenable and constitutes a reductio ad absurdum of Walch’s position.


    Blockchain devs in general are not fiduciaries, and, even if one thought that as a matter of policy it were a good idea to impose legal duties on blockchain devs, fiduciary duties would not be the logical or natural vehicle for doing so. While Walch is right to point out the subtle ways developers can exert power and influence, her views on how best to mitigate those issues hearken back to an old, pre-1960s view of corporate law and agency law where fiduciary duties were commonly used in commerce and still had force and meaning as such. This is no longer the case. In contemporary law and commerce vague fiduciary duty standards have, directly or in effect (depending on context) been superseded by precisely defined and usually very narrow contractual duty standards.

    We should find other ways, more consistent with the bedrock cypherpunk principles of social-trust-reduction, free entry and free exit, to deal with the power free open source software developers wield. This may include clarifying tort liability for gross negligence in producing free open source software or offering voluntary contracts to be entered into by developers with private organizations which backstop social losses from their work if they agree to abide by certain transparency and conduct principles.

    Veritas in numeris!

    MJD 58,866
    Saturday, 18 January 2020
    An idea can leak to the extent it has a name that is meaningful within a larger context. A name is, in a sense, a key that unlocks the significance of the contents of the interior of the named idea in terms of signifiers that exist in the exterior environment. But a name also binds […]
    An idea can leak to the extent it has a name that is meaningful within a larger context. A name is, in a sense, a key that unlocks the significance of the contents of the interior of the named idea in terms of signifiers that exist in the exterior environment. But a name also binds […]
    Conner Brown

    A first principles approach that explains why bitcoin is the blockchain to beat for smart contract supremacy.

    Continue reading on Medium »

    A first principles approach that explains why bitcoin is the blockchain to beat for smart contract supremacy.

    Continue reading on Medium »

    Bitcoin has already succeeded
    Sunday, 12 January 2020
    Bitcoiner Ted

    I frequently come across, like I guess most of you, people who repeat the mantra of “Bitcoin has failed” or “Bitcoin is going nowhere”, blah, blah, blah.

    As I recently said in twitter, I find it hilarious; when I hear/read this, I have the same feeling as if someone told me my home or my co

    I frequently come across, like I guess most of you, people who repeat the mantra of “Bitcoin has failed” or “Bitcoin is going nowhere”, blah, blah, blah.

    As I recently said in twitter, I find it hilarious; when I hear/read this, I have the same feeling as if someone told me my home or my computer have failed.

    If value is subjective, who do you think you are to tell me something that I find useful has failed for me?

    I can agree with you that my house or my computer may suck to your standards, but how can you know if it is not good enough for me? Isn’t that extremely arrogant?

    Let me tell you a really brief story:

    Something like 10 years ago, I got a speeding ticket yet I didn’t find out until it was very late because notifications from the authority were going to a former address of mine. So I was getting those notifications there but I had already moved somewhere else. Apparently I have the obligation to notify this authority in my Country, that I was actually moving, but I didn’t know.

    Given the constant delays in payment, the ticket was getting larger with extra penalties.

    Then one day, I can’t remember how, I found out that my bank accounts were about to be blocked. I was not married and didn’t have kids at the time, but the mere possibility of running out of money was one of the most scary experiences I’ve been through. I don’t think I have ever felt this powerless. Now married and with kids and with a communist regime in power which believes my individual well being is secondary to their ideology, it is as scary as it gets. It was me against bureaucrats on the other side of the phone that were simply following orders and for whom I was a mere ID number.

    Until then, I thought this kind of things only happened to people that didn’t pay their taxes or criminals…

    I don’t live in Afghanistan but in an EU country, so I can only imagine the number of problems people in that kind of countries may go through regularly.

    If you think Bitcoin’s volatility is a problem, you are likely to have never experienced full volatility, that is, seeing your money going down to zero.

    This is what many pundits don’t see. If there are some initial use cases for Bitcoin in developed countries, just think of the potential eventual demand elsewhere. If the cost of storing this part of my wealth is both microscopic and censorship resistant compared to any other form known to us, then there is definitely a gigantic potential appreciation, becoming a good investment idea too. I’m as a result both a user and a speculator.

    It all comes down to what you consider a success for Bitcoin. For me the fact it is already useful for me and many others is a complete success. Whether there is a tiny chance of it being attacked is irrelevant. My government could ban wine tomorrow and that wouldn’t make wine useless or a failure overnight.

    When did the iPhone succeed? When it reached $1m in sales? $10m? $5 billion? Or maybe 20 million users? or 100m?

    For the same reason, has Bitcoin succeeded? If you can enjoy its utility already, I think it has. If not, what defines its success? And what defines its failure?

    Whether you have not discovered its utility yet, that’s an entirely different matter

    Theory of the Crypto Partisan
    Friday, 10 January 2020

    Adapting Schmitt’s Theory of the Partisan for Digital Space “The terrible transformation of the world, which has been accomplished by the headlong expansion of power, lies Continue reading »

    The post Theory of the Crypto Partisan appeared first on Crypto Sovereignty.

    Adapting Schmitt’s Theory of the Partisan for Digital Space

    “The terrible transformation of the world, which has been accomplished by the headlong expansion of power, lies in that things beyond the measure of our physically given sense of perception have been made visible, audible, perceptible; perceptible and thus capable of possession. The new concept of ownership, or much more: the domination of the functions; cuius regio, eius economia [Whose realm, his economics], is now cuius economia, eius regio [Whose economics, his realm]. The new Nomos [law, custom, or social fabric] of the earth; no more Nomos.”

    –Carl Schmitt, Glossarium, 1947

    To expand upon the hypothesis that bitcoin and crypto assets are explicit military assets of war, I would like to extend my analysis into the new topographical space that is the internet and how war will be conducted in this space through the lens of Carl Schmitt’s Theory of the Partisan (ToP).

    This shall be part of a larger series attempting to marry the theories of sovereignty of Carl Schmitt, Walter Benjamin, Giorgio Agamben to cryptosovereignty. Through taking Schmitt’s work (as I have done before with Political Theology) and applying these ideas towards Bitcoin specifically and crypto on a whole, we will have a much better understanding of cryptography’s relationship to war. Through analyzing Bitcoin as a preeminent tool of war, and how anyone may use this power to become a ‘crypto-partisan’, we start to unveil the radical power hidden at the heart of Bitcoin. It is the episteme of cryptography in the digital age; the rhizome which allows for the deterritorialization and remapping of the global (and eventually cosmic space) along new territorial lines that will renewed the nomos of humanity.

    Through extending ToP to the digital age, and by understanding crypto as first and foremost as a technology of asymmetrical defensive warfare, we can see the new topographical lines that the internet opens to warfare. By understanding cryptography as the key technique of this new figure of history–the crypto partisan–and their hidden revolutionary war, we can come to understand the truly explosive potential of what is hidden in ‘crypto‘. It is from here that we can understand what the coming new nomos of humanity will look like through the use of cryptography as the base technique to reorganize the political, and come to challege the nation-state itself.

    As Schmitt explicitly states at the very end of (ToP):

    “The theoretician can do no more than verify concepts and call things by name. The theory of the partisan flows into the question of the question of the concept of the political, into the question of the real enemy and of a new nomos of the earth.”

    Through a deep reading of ToP, we can extend its theory of war into the current digital age and illuminate a “new theory of war and enmity” hidden at the center of cryptography. It is a novus ordo seclorum created from the new kind of social contract that is hidden in crypto and the promise that must Bitcoin must cointain.

    Aspects And Concepts Of The Last Stage

    Let us begin where Schmitt left off in the final chapter of ToP in defining the last stages of the evolution of the partisan. By extending and updating this analysis into the current age with the same methodology that Schmitt uses, we can trace the evolution of the partisan from a telluric power to a caelumic [Caelus, Sky] one. Through tracing the linage of the partisan from “the national and patriotic heros who take to the woods, i.e., all that is characteristics of the elemental, telluric power to repel a foreign invader” to the current space the digital partisan is native to, we find a new understanding of the topology of war. It is one in which the potestas spiritualis [spiritual authority] of the land empire of the state is abandoned for the unidentifiability and infinite topological space of the ‘caelumic‘ nature of cryptography in the digital age.

    We will follow the four concepts that Schmitt defines in ToP: the spatial aspect; the destruction of social structures; the interlocking global-political context; and lastly, the technical industrial aspect, of which all feedback into the later for our first analysis. Through a deconstruction of these concepts through the lens of Bitcoin, what crypto means in a Big Brother globalized society of advanced surveillance, and the total unbracketed civil warfare (stasis) that is the destruction of privacy by all states; we start to see the topography of this last stage of total unbracketed war. Here in the thick fog of war, we see the ghostly spectre of the caelumic nature of the crypto partisan as the final figure of the coming cyphernet.

    The Spatial Aspect

    “Completely independent of the good or ill of men, of peaceful or hostile purposes and goals, any enhancement of human technology produces new horizons and unforeseeable changes in the traditional spatial structure.”

    Carl Schmitt, ToP, p. 68

    Bitcoin is the technological development of our age which has opened a new horizon for human action and freedom through the fundamental transformation of the topographical spaces of both property and war. Through the novel and unforeseeable consequence of what bitcoin has enabled through cryptography; Bitcoin has secretly declared war on every state, and all fiat money–the nourishment of any modren state. By changing the topography of economics to one totally digital in nature, and by using the mathematical forces of cryptography to create provable systems of protection, we find that crypto economics inverts state economics, fulfilling what is quoted at the beginning of this article: cuius regio, eius economia [Whose realm, his economics], is now cuius economia, eius regio [Whose economics, his realm] (Schmitt, Glossarium, 1947).

    By sacrificing the realm of the law, for the imperium of cryptography, Bitcoin has inverted the order of law through expropriating the realm of economics into the digital as an explicit strategy not to escape the law; but to destroy it. Through this totally non-violent economic praxis that strikes directly at the root of the state’s gluttonous ways through fiat money and the seigniorage it must contain; Bitcoin creates an economic strategy of starving the Behemoth of government through withdrawing one’s economic wealth from its parasitic and criminal ways.

    Now that bitcoin has broke the link between the state and capital, the final existentialist crisis of law, the emergency of cryptography may begin.

    In conjunction to the direct protection of cryptography that is used to shield one’s identity (and thus depriving the state of being able to label on as ‘friend’ or ‘enemy’ of the state) and command total privacy, the Bitcoin blockchain itself is simply a function of truth-in-account for bitcoin units. All units of the system must have proof-of-work–real thermodynamic energy expenditure behind them in order to be minted or exchanged. In other words,

    “Veritas, non auctoritas facit legem.”

    (Truth, not authority makes legitimacy)

    This is an inversion of Hobbes’ dictum of sovereign power found in Leviathan, and is a weaponized form of truth in a world that is governed by lies that go so deep, it is simply called authority or law.

    The spatial aspect of the evolution of warfare into a digital topology will always flow back into the natural defensive posture that crypto takes within the confines of the internet, and the citadel of the cyphernet that it is building as the premonition of the coming crypto age. It is in this last stage of development where the state has anointed itself as a god capable of anything, demanding to know all about everyone–there becomes nothing, nothing outside of the state–not even life. This causes for zone of indistinction that blurs all of life, politicizing everything, always reserving the right to criminalize anyone, depriving them of all economic, social, and political means and ultimately the rights to a life itself.

    In this zone of indistinction, where the private life and political cause obscure so deeply with each other that they become one; economics itself corroborates with the security state, completely destroying the political concept of the commonality of wealth; namely the most basic commonality: the law itself.

    It is the destruction of the polis through the fusion of bios and zoe into one, that has allowed for the creation of the infinitely watching eyes and ears of the technological panopticon. This surveillance apparatus exist to ensure that no one may have any real privacy anymore and that any human may be captured by it, and pulled beyond the law. This is the real state of emergency that has already destroyed our laws, our nomos.

    This battle over the law is a stasis; a never-ending global civil war that contains all of life, and every nation-state on the planet. It is bellum omnium contra omnes of the greatest order. Or as Foulcault said more eloquently, “Isn’t power a sort of generalised war which assumes at particular moments the forms of peace and the State? Peace would then be a form of war, and the State a means of waging it.”

    While the darkness and fundamental evil that is at the root of such a vision of paranoia and delusional psychosis that is the totalitarian surveillance state of the modern age is difficult to look at; it is the world that we now live within, and is a fundamental fact that we must deal with. However, with such gross and systematic violations of not just privacy, but all of our God-given rights, the coming shipwreck of politics and law is already written, the crisis only needs to begin.

    “The tradition of the oppressed teaches us that the “emergency situation” in which we live is the rule. We must arrive at a concept of history which corresponds to this. Then it will become clear that the task before us is the introduction of a real state of emergency; and our position in the struggle against Fascism will thereby improve.”

    -Walter Benjamin, On the Concept of History, VII

    Is there no state that does not demand to violate every single person’s privacy for the safety and security of the state? Is there no person that cannot be labeled ‘enemy combatant’ to become be deprived of all rights and law? This current state of emergency that has become all of our lives has violated all spaces of privacy, and demanded to interlope into all facets of life. There is no longer any space in which any person may be left alone.

    The expansion of the surveillance state into the digital sphere is its final projection of power, and its attempt to abolish privacy through this technology is its final move in the consideration of power under this state of emergency. It is where the state can attempt to fulfill its bureaucratic destiny of attempting to seeing all things and attempt to organize all of human life and activity under the sinister rubric of “society must be defended.”

    With Big Brother leering down at all of us with hate, vile, and contempt for the meager possibly of being an enemy; we see the digital cages and open air prisons being formed around us. It is a reality where each one of us will be ascribed digital signatures (not unlike the tattoos of the victims of the holocaust) which chains each of us to data to enables a kafkaesque reality–a total surveillance state. It is a reality in which we never know if we are really being watched or not; if we will ever get access to the law, or only stand waiting before it, hoping to one day have access.

    At the same time that the noose of the panopticon is tightening around each one of us; the true nature and power of cryptography presents itself in all of its glory. It is the final unstoppable individual right and choice to create privacy through cryptography, and to choose to create the personal wealth and freedom that allows for anyone to slip free of this noose. Through the infinite brinkmanship of privacy violations by the state and their corporate allies; so too is the development, deployment, and dissemination of personal open-sourced cryptographic technologies, and the ability to resist such personal privacy violations.

    This brinkmanship of surveillance ends with the state demanding to know everything about every person for reasons that are state secrets–classified only for the worthy state agents and secret spy courts to know and decide upon. Naturally, through the expansion of the surveillance state into the digital sphere and the private lives of everyone; a total unbracketed civil war on privacy itself is initiated. The theater of this total unbracketed war of surveillance now opens into the plains of our private homes and into the digital noosphere that contains all of modern life.

    In a world where privacy is being destroyed by every state, the crypto-partisan naturally presents himself as the final revolutionary figure to counter to such a nightmarish panopticon. With Satoshi Nakamoto at the helm of this new class of anonymous crypto-anarchist vanguard, the new topography of war displays itself momentarily as the fog of war shifts to a new dimension and space; where a new social order is being established beyond physical lines.

    Destruction of The Social Order

    “A Commonwealth exists as res publica, as a public sphere, and is challenged if a non-public space develops within it, which actually repudiates this public sphere. Perhaps this explanation is sufficient to demonstrate that the partisan, who displace the technical-military conduct of the 19th century, suddenly reappeared as the focus of a new type of war, whose meaning and goal was the destruction of the existing social order.”

    ToP. p. 72

    At the dawn of the 21st century, the internet ushered in something totally new and unexpected–a new kind of surveillance that could look directly into the homes and lives of people. With this the machine of state capitalism could accelerate its plans for The End of History and The Last man, with man’s final consignment to a safe life in the walled gardens of state capitalism; the empty promises of liberalism with a “safe” life of endless worthless empty work. It was the final bold move in the shift from state capitalism to oligopolic empire, that the technological panopticon became the device of power to bridge this gap.

    While both the state and its greedy allies of consumerism could see the potential of the new data people were generating as early as the turn of the century; the full scope of the technological panopticon could not be complete without a ‘state of emergency’ that would allow for the full-scale, uncensored spying on all information generated by everyone. The idea of privacy itself had to be destroyed, and only a state of emergency would suffice for such a bold violation of personal privacy and civil liberties.

    It is this ‘state of emergency’ which would allow for the full liquidation of all constitutional rights, and to allow for systematic, pervasive, all-seeing surveillance to watch everyone, everywhere, all the time, for any reason it sees fit under the sinister slogan ‘Society Must be Defended‘. This opportunity for such a state of emergency would come on September 11th, 2001, with the terrorist taking center stage of the political theater that would ensnare the lives of every person on the planet. Through the panopticon of global surveillance that could now be justified through the emergency to ‘stop the terrorist’ a state-security based network of globalized monitoring is being deployed.

    The Chinese Communist Party has perfected this ’emergency’ and created a surveillance panopticon for the horrific purpose of genocide and ethnic cleansing. They have already started exporting this technology, and the window of opportunity to fight back is dwindling quickly.

    With the mechanical eye of the machine of the state starring directly each of us, appraising each move, twitch, and shift we make, constantly seeking to appraise if we, the subject, is a political friend or enemy that must be subjected to punishment and discipline. This was my point in the sovereign, the subject and crypto power, is that anyone can be deprived of their rights from any state for reasons that are deem ‘state secrets’ to everyone.

    The internet has destroyed all old social orders, and concepts of privacy, fully liquidating them around the global through the power of the panopticon. This has allowed for governments, businesses, or organizations anywhere to reach directly into the lives of anyone they see fit. Through the destruction of privacy, the social order is liquidated and replaced by the governmental rules of any state; whatever color of greed or oppression they may be.

    Only in the total darkness and raw authoritarianism of ‘the state of emergency’ would the the total destruction of all social orders and private wealth be possible. This is the real state of emergency is the impossibility of a private life, or a private wealth that is beyond the state for any reason. With the social order is collapsing into itself, the state leaves no remainder between private and public life. Life itself becomes a zone-of-indifference in which there can be no private life without the state for any reason.

    It could only be from a world of this madness that something as miraculous as Bitcoin could be produced. Something like Bitcoin could have only been created in a world where law had abandoned itself totally for the banal avarice of greed and petty material things generations ago. Only in a world where the stupidity and vacuity of a world ran under the slogan of “Auctoritas, non veritas facit legem” (Authority, not truth makes legitimacy) could the truth of something like Bitcoin go beyond being just revolutionary and become the Parousia itself.

    Global-Political Context

    “The partisan is dependent on the constant help of a community in a technical-industrial position to provide him with the newest weapons and machinery.”

    ToP p.75

    It was only after the failure of the Soviet Project was the possibility of the global technological revolution that is the single internet possible. Only a widely deployed, global, single decentralized internet would be able to developed its own culture, identity, norms, and most importantly ethics that would produce Bitcoin; but also cultivate and raise cryptography on a whole to where it is today. The Declaration of the Independence of Cyberspace more than twenty years ago already contains embryo of values that are reflected in the current autochthonous culture of the internet that has propelled crypto and Bitcoin to where they are today.

    Since Barlow’s declaration decades ago, a whole generation of people have been raised on the internet who have similar sentiments, values, and desires as reflected in that declaration. These are the people who would be called the indigenous of the internet; the caelumic peoples of this noosphere that is only ours. These natives understand that the machine of technology is but a tool for the extensions of their own power. They are the ones who have built this place and are starting to realize the reality of what they can do with such a power. It is from these indigenous people that a renewed commonality of wealth has been forged where the motto ‘Pro Aris et Focis‘ rings true for a new class of people and their coming of age.

    It was however only with governments turning this technology against their own citizens that the struggle for this technology first started to grow. While the anarchist roots of the cypherpunks have always been present, it was only with these struggles that crypto-anarchist were produced through the code they deployed. Here we find the first traces of crypto-partisan, and the rudimentary tools from which he will liberate himself from the walled garden of society which has become a prison for all.

    It is with the turn where governments everywhere are deploying digital technology only for the systematic violation of their own citizens, and to more deeply entrench bureaucratic controls for their own power does the crypto-partisan’s shadow start to be seen. It is from beyond the bondage of identity that he whispers secret facts that are not part of the propaganda agenda, or official media to be consumed. Facts are offered on how to escape from the incessant monitoring, how to create assured privacy, and where to find tools to hack the system and go beyond their sight and permissions. It is a praxis of blinding the technological machine and using that position as a fulcrum of power.

    The crypto partisan offers tools and technology of the mind, methods of spiritual sacrimony, and the ability to create a private God to whom only you are privy with. It is a power to see beyond the veil of economic slavery to show anyone that there is something much, much more to this place than meets the eye. It is the possibility that we may each unlock as we start to understand the hidden power lying waiting at the center of Bitcoin, waiting for only the worth to have.

    It is the premonition of a world that has lost its nomos; a world waiting for its providence after god has died and enough time has passed to try to remember Him, and the grace and glory of his being-in-the-world.

    As one of the greatest poets of modren history has foretold:

    Armies cannot stop an idea whose time has come. No army can stop an idea whose time has come. Nothing is as powerful as an idea whose time has come. There is one thing stronger than all the armies in the world, and that is an idea whose time has come.

    The Technical-Industrial Aspect

    “Only revolutionay war made him [the partisan] a key figure of world history.”

    ToP p. 77

    Today the figure of the partisan is absolutely seen in the image of Satoshi Nakamoto–the first vanguardist of the crypto age. He alone initiated the total unbracketed war against all state using an explicit strategy of non-violent economic action through asymmetric cryptographic techniques to wage his revolutionary war. In taking this action, along with the political statement etched into the genesis block for all of time to see, Satoshi’s war started more than a decade ago and has been secretly building towards its revolutionary cause ever since. Satoshi, by perfectly obfuscating the image of the digital partisan, and the image of the bitcoiner, he created a new form of partisan for his war in the digital space; the crypto-partisan.

    It is this figure, the Anonymous Other with loyalty to no state and conceals his identity for his protection alone, who is also the crypto partisan. It is this figure who has caelumic roots found directly in the internet who can call this territory local and their home. The crypto-partisan has a desire to keep the internet open-sourced, with strong privacy, and no boarders. The crypto-partisan has no need for physical identities, and can stands on their own merit and signature alone. There is no need for police or physical corrosion here; just the code alone.

    With bombaste and zeal like no other, the crypto partisan techniques go well beyond the mechanization of the code, and into the theater of politics and art alike. It is a pathos of war robbed of is physical nature and where the topology of war evolves beyond physical space, where violence no longer hodls any sway.

    The sovereign is the point of indistinction between violence and law, the threshold on which violence passes over into law and law passes over into violence.

    — Giorgio Agamben, Homo Sacer

    The crypto partisan is a new figure of history, someone who is beyond the physical realm and was produced from a series of extreme techniques of war in order to create perfect forward secrecy for the protect of one’s physical security. Such a power could only be created when the technicity of cryptography had reached such a zenith that it became a permeant feature for secure communications, which in turn could create economic security. Once this technique was globally disseminated, it was only a matter of time before the core values of cryptography would start to assert their real personal, economic, and social value against other such false non-values positioned by an old and dying society that will not relinquish its bloody authority.

    Schmitt, in reflecting on the nature of this technicity stated,

    “Pure technicity, as obtained in such purely technological reflections, produces no theory of the partisan, but only an optimistic or pessimistic series of more or less powerful assertions of value and non-value. Value, as Ernst Forsthoff aptly put it, has “its own logic,’ namely, the logic of non-value and the destruction of the bearer of non-value.”

    ToP p. 77

    This quote can only offer its full understanding after reading the short essay, “The Tyranny of Values.” By understanding Bitcoin as a form of value that demands to assert itself against non-value through the total security of cryptography by being beyond any law, we can understand the need for Bitcoin to destroy fiat money because of the inherit non-value it must contain. Here is a longer quote explaining this “value-setting” and its antagonistic nature:

    “The genuinely subjective freedom of value-setting leads, however, to an endless struggle of all against all, to an endless bellum omnium contra omnes. In such circumstances, the very presuppositions about a ruthless human nature on which Thomas Hobbes’ philosophy of the state rests, seem quite idyllic by comparison. The old gods rise from their graves and fight their old battles on and on, but disenchanted and, as we today must add, with new fighting means that are no longer weapons, but rather abominable instruments of annihilation and processes of extermination, horrible products of value-free science and of the technology and industrial production that follow suit. What for one is the Devil is God for the other…It always happens that values stir up strife and keeps enmity alive. The fact that the debunked old gods have become merely valorized values only renders the struggle more ghostlike and the fighters hopelessly dogmatic.”

    –ToP. p. 79

    To display the real wealth that Bitcoin contains, both as a system of rules which is the Bitcoin blockchain and the monetary system it contains; it must assert its superiority as a money and contract system against fiat money and state legal systems antagonistically. Bitcoin does this by presenting its inviolable nature against any and all state legal systems, and Bitcoin’s total indifference to them. The most important feature of this indifference is akin to a flower in the darkest of night. Despite the seemingly total darkness, there is still a secret, natural heliotropism towards the direction of the night from which sunlight must come which the flower will always turn to before any light may be seen.

    Bitcoin presents a new form of value through cryptography which assures and proves itself in this fallen world where money has been totally corrupted by the state. The ‘value’ of fiat money today is little more than political approval to spend one’s money how one wishes. Fiat money is a form of value that is devoid of real wealth because of it lacks true property rights–fiat money can always be seized by the state, for whatever reason they see fit. It is a kind of false value that can only find value within the confines of law, and not beyond it.

    With the wide dissemination of strong encryption techniques, and the miraculous gift that is Bitcoin, there is hope for something radically and fundamentally different from the false value of fiat money. The possibly to resist the totalitarian surveillance machine with these revolutionary tactics of cryptography has already been initiated, and this should be understood as the natural development of ‘crypto’ for the episteme it is.

    Legality and Legitimacy

    This is the title of his 1932 essay on the topic of legality and legitimacy. In this essay where Schmitt predicted the fall of the Weimar Republic, and the seizure of power by either the Nazis or the communist due the the failings that are inherent to liberal constitutionalism itself. Schmitt understood that through trying to integrate enemies under the great umbrella of parlamentarism, it created the very conditions for its own downfall. This parlamentarism denies the enmity between peoples who no longer seek to negotiate freedoms with one another; but wish to actively suppress one another using the state.

    Schmitt gave himself over to the Nazis, and was even the mouthpiece of explaining Hitler’s actions during the The Night of Long Knives. In explaining this action (taking a clear nod towards Mussolini’s actions in the Matteotti Crisis) Schmitt gave the judicial explanation which cleared the way for fascism in Germany to seize hold. The method of how this happened clearly has infected our current legal system, and is the method by which the law has been destroyed through its stratification.

    This was my point in the sovereign, the subject, and crypto-power. We are no longer citizens that are subject to the law, but are already captured within a framework where we will never gain access to the law by possibility of being an ‘enemy combatant’. Through the labeling of ‘enemy of the state,’ the state can turn anyone into a nemesis that cannot be given access to the law, but only a terrorist to be deprived of it.

    Schmitt revisits this idea in ToP, which displays the important connection of legality and legitimacy to the partisan and the legitimization of his idea of just war.

    Without the legitimacy of a political movement to which the partisan can be attached; his actions are simply crime, and the revolutionary nature of his work can always be relegated to the criminal world. However, it is once his actions as a soldier of war have been linked to that of a political movement, that the final Clausewitzian turn can be fulfilled with, “war being the continuation of political by other means.“

    In order for the crypto partisan to move beyond that of the meager hacker and criminal, he must link up with and legitimize his movement with other contemporary political movements. He must create known and open political objectives for his movement with a general understanding of who the real enemy is. In short, the crypto-partisan must find his natural allies through political movements which demand the full recognition of who the enemy is, what their violations are, and what must be done to remit such damages.

    The Real Enemy

    “The enemy is not someone who, for some reason or other, must be eliminated and destroyed because he has no value. The enemy is on the same level as I am. For this reason, I must fight him to the same extent and within the same bounds as he fights me, in order to be constant with the definition of the real enemy by which he defines me.”

    ToP p.85

    It must be understood the the enemy is a limited character. The enemy only defines himself insofar that we both desire to end hostilities and creates some means of peaceable agreement between us. This is the bracketing effect of modern war that Schmitt starts ToP with, speaks about how the bracketing of Napoleonic wars allowed for the Concert of Europe and the century of ‘peace’ that came from that. This bracketing of war, is what has allowed for states to stop distracting themselves with fighting each other, and to turn to look at their own citizens as the absolute enemy.

    From The Real Enemy to The Absolute Enemy

    The real enemy is each of our respective governments against each of us as individual human beings. They have become the absolute enemy because they will not recognize the absolute protection that the law demands for each and every being if its weight is to have any real meaning beyond raw authoritarian power.

    As Schmitt has said, “Tell me who your enemy is and I will tell you who you are.” Through each of us just having the possibility of being the absolute enemy (the terrorist) of whatever state that may claim us, we should clearly understand who our government are to us, and who we are to them.

    Through the destruction of all forms of privacy via the technological machine of the internet, a panopticon of the greatest order has been created. Each person today is identified and cataloged by the state, with each one of us placed in a persistent zone of indistiction that holds each of us eternally to be constantly appraised as friend or enemy. It is the fulfillment of the prophecy that, “To be GOVERNED is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right nor the wisdom nor the virtue to do so.

    To be GOVERNED is to be at every operation, at every transaction noted, registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished. It is, under pretext of public utility, and in the name of the general interest, to be place under contribution, drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored. That is government; that is its justice; that is its morality.“

    It must be clear and present to everyone who is involved in crypto that what is being created here is not about grandeur, decadence, or even money; but it is about raw and naked political power through economic liberty, and the right of every human has to such power. It has only been over the long course of the failures of the political systems of the 20th century and the continual barbarism of constant wars under which all of humanity has toiled and suffered that it has became apparent that this is the fundamental destiny of man under any modren nation-state and its corrupt and hopeless law of the wicked and damned.

    With the radical technological expansion of the internet and the dissemination of its new techniques of knowledge in the 21st century, it was only a matter of time before the truth of all things would come to people everywhere, and the hatred and enmity that goes with such a truth. Only with a true understanding of the facts of economic and monetary history of the world do we also understand who the absolute enemy really is. With the revolutionary economic tool of bitcoin at our disposal and the radical protection of the cryptography it contains, it is only a matter of time before the final epoch of the cyphernet opens to swallow everything.

    The post Theory of the Crypto Partisan appeared first on Crypto Sovereignty.

    Azteco Partners with Pine
    Wednesday, 08 January 2020
    ♦In Pine Effect

    Azteco and Second Generation Bitcoin wallet Pine are working together to bring the new service category “Consumer Bitcoin” to the public. Combining Pine’s best in class, “Apple Grade” user experience with Azteco’s frictionless delivery creates a compelling offering to Bitcoin newcom

    ♦In Pine Effect

    Azteco and Second Generation Bitcoin wallet Pine are working together to bring the new service category “Consumer Bitcoin” to the public. Combining Pine’s best in class, “Apple Grade” user experience with Azteco’s frictionless delivery creates a compelling offering to Bitcoin newcomers.

    “Second Generation” or “Consumer Bitcoin” wallets are here, and one of the first and best is Pine, a new wallet developed by Timothy Engqvist Johansson.

    A Little History…

    Encryption in chat was brought to over 300,000,000 daily users through WhatsApp. Before that, the billions of messages sent by the vast majority of chat apps were easy to read in transit and not private.

    There were a few previous attempts to encrypt chat through apps that worked as privacy tools, but it took a “Consumer Grade” messaging app to bring this essential feature to hundreds of millions of users.

    The same effects will happen in Bitcoin services with, and it’s all about usability; an app or a class of “Consumer First” app will emerge that is designed to fit the needs of consumers, and that wallet and service will sweep the entire world as WhatsApp did.

    What is Pine?

    Pine is a Bitcoin App. Using Pine is beautifully simple. Get the app, select a username and you’re ready to start using Bitcoin.

    That’s it.

    Now watch how simple getting Bitcoin can be…


    There’s nothing to set up. You’re up and running instantly. Painless, non-intimidating, zero configuration. And no Bitcoin addresses. This is essential for consumers, and it’s why apps like WhatsApp and others spread virally. You send messages to a contact not a number.

    ♦Cappuccio’s at London’s Liverpool Street. Bitcoin as a part of everyday life.

    Imagine the following scenario. Jane is curious about Bitcoin, and on her lunch break, she buys an Azteco Voucher from Cappuccio’s to see what Bitcoin is like.

    At the bottom of the voucher is an instruction to download Pine. Pine is ready in less than a minute. She points Pine at the QR on the voucher. It redeems instantly to her Pine wallet.

    That’s all there is to it.

    Before taking a third bite of her toasted Panini, she has been converted into a Bitcoiner. Now that she is on-boarded with a small amount of Bitcoin, she can explore other aspects of Pine and Bitcoin. If she decides to, she can go through the procedure of writing down her Mnemonic in a quiet moment at home, and not in the street.

    Pine redeems Azteco vouchers without requiring the user to interact. It just works, just like Apple’s ground breaking UX and applications get out of your way so you can do your work, or in the case of Pine and Azteco, use Bitcoin.

    Pine moves processes into logical positions in the on-boarding workflow so people can get things done. This is Consumer Centric Design, and it’s the way the vast majority of people using Bitcoin will experience it.

    The other aspects of Pine’s design are also Consumer Centric:

    ♦People are at the centre of Pine, just as they are in other“Instant Messaging” apps. Treating Bitcoin as a form of IM unlocks all the UX opportunities of those applications, and their ability to make an application go viral, sweeping along Bitcoin with it.

    Payments appear the same way that instant message history timelines do; each contact has it’s own “chat log” only the chats are money. This is instantly familiar and also a fitting metaphor for Bitcoin, which is a messaging service like Messenger and WhatsApp, but with an important twist; the messages can be used as money.

    ♦The familiar timeline metaphor; instantly familiar, comfortable.

    The vast majority of people experience hard fought for and well engineered security in messaging apps as invisible layers. The instant on-boarding, seamless user experience and zero friction activation in Consumer Bitcoin apps will build on that work to preserve your privacy whilst keeping everything light, easy to use and trivial to understand.

    Spreading Pine, One Voucher at a Time

    At the bottom of each voucher Azteco issues, there is a call to action to users to install Pine. As Azteco spreads Bitcoin throughout the global market via its vouchers, it will also spread Pine, which in turn will spread Bitcoin through it’s viral address book leverage. This in turn will create greater demand for Azteco Vouchers, as they are the easiest way to get Bitcoin into Pine.

    As Azteco spreads, our vouchers will be redeemed in different contexts and gateways, pushing the Bitcoin exactly where users want it to go. The most important part of this is the user; designing for the user, and helping the user. Without users, the entire ecosystem is constrained.

    The market will be layered with many applications serving different functions; there will be a rich choice of tools to suit every need, filling every niche, nook and cranny so that all users are satisfied.

    Just as Azteco serves its function in the market by doing what it does, wallets like Pine serve their function in the market, and the market decides what takes off and spreads everywhere.

    Without Bitcoin getting into the hands of users however, the Bitcoin can’t flow, and as it is the life’s blood of the economy, it must flow, for “The Transformation” to take place.

    We at Azteco are very exited to be working alongside Pine in the new category of Consumer Bitcoin, applying decades of proven techniques and thinking to this transformative new tool. And this is just the beginning.

    Follow Azteco on Twitter.
    Get Pine for your iPhone, spread it.
    Find a Vendor, try Azteco.

    Azteco Partners with Pine was originally published in HackerNoon.com on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Nic Carter

    Great commentary, and useful additions to the story. No objections from me.

    Great commentary, and useful additions to the story. No objections from me.

    Learning Economics
    Monday, 06 January 2020
    Jimmy Song

    Over the past couple of weeks, I’ve gone through the Economics 11: Principles of Economics course on saifedean.com. In this article, I’m going to review the class, what I think about it and who I think it’s good for.

    ♦The Austrian Method

    One of the things that has always attracted me to Austr

    Over the past couple of weeks, I’ve gone through the Economics 11: Principles of Economics course on saifedean.com. In this article, I’m going to review the class, what I think about it and who I think it’s good for.

    ♦The Austrian Method

    One of the things that has always attracted me to Austrian economics is that everything is logically deducible and the arguments are very clearly laid out where other schools of economic thought hand wave to various conclusions.

    That said, one of the frustrating things about reading Austrian economics books is that they do seem to spend a lot of time on technical objections that are confusing for a new student and lay things out in a way that require a lot of rigor. That is, they’re not exactly learning-friendly. It’s not easy, for example, to get through Menger or Mises or even Rothbard without feeling like there are entire parts that you missed.

    Saifdean Ammous’s Approach

    The strength of the offering that Saifedean has put together is that the course is very much focused on helping you learn. As he brings up, a lot of the books like Human Action or Principles of Economics are meant for academics and for people that are looking to build off of it. What I found refreshing about Saifedean’s course was that it was very much geared toward giving me the principles by which to think about various economics topics.

    There is, for example, a whole lecture just about labor and the scarcity of human time. This is an obvious fact, but the deductions that we can make from that fact can help us understand phenomena like why predictions about certain natural resources running out have nearly always been wrong.

    It’s a much more satisfying way to learn the material as it’s presented in a much more digestible way.

    Passionate Stories and More

    If you’ve been paying attention to Saifedean Ammous for a while, you are probably aware of the debates and talks he’s done. He’s a brutal assassin in these debates and his talks can be a bit controversial. You may think that his style may detract from the learning experience, but I found it to be the opposite. He has a clear passion for the subject that he’s teaching which were very easy for me to absorb.

    At one point, he gives a very rational and thorough critique of minimum wage. The same argument could have been given in a stand-offish calculating manner, but his obvious disdain for how illogical minimum wage is and how unjust it is to the very people it purports to help comes through and aids in remembering the argument.


    All this is to say that I really enjoyed the course. If there’s any criticism of it, I wish there was more interactivity and discussion around economic phenomena for practicing this newfound knowledge. That said, there are some forums to encourage student discussion which will hopefully build out over time. I’m definitely going to be buying more courses myself.

    If you are looking to understand economics in a much clearer way and with a better deductive basis, this course is definitely for you. The course is an excellent way to learn the Austrian economics concepts and will help you understand Bitcoin as an economic phenomenon much better.

    Nic Carter

    In regards to why Satoshi picked the “shock” model to issuance decay, I believe (and I’m speculating here) that he wanted to minimize as many dynamic variables in Bitcoin as possible. Having an algorithm recompute issuance on a per-block basis just means more moving parts and more opportunity for

    In regards to why Satoshi picked the “shock” model to issuance decay, I believe (and I’m speculating here) that he wanted to minimize as many dynamic variables in Bitcoin as possible. Having an algorithm recompute issuance on a per-block basis just means more moving parts and more opportunity for exploitation. The halving code is extremely simple and comprehensible. A smooth curve would have been more complex. I haven’t seen any evidence that he deliberately configured it to set off a demand side catalyst every years.


    In the final stage of the spectacle society, man has fully corrupted himself and shows himself publicly only as the one-dimensional man. We can say confidently Continue reading »

    The post The Oath of Machines, Liturgy of Code, and Promise of Bitcoin appeared first on Crypto Sovereignty

    In the final stage of the spectacle society, man has fully corrupted himself and shows himself publicly only as the one-dimensional man. We can say confidently that state totalitarianism has fully captured and enslaved humanity; leaving man as a hollow and vacant object to be exploited and raped for the free use of tyranny, evil, and banal profits alike. In the transition from state totalitarianism to oligopolic empire, power was consolidated through the fusion of automation and the digital panopticon to make the perfect social camps from which the state and their automaton could gaze over all of life. Forever.

    Only the murmur of “arbeit mit frei” can be heard now, with the private personal truth of, “durch krematorium nummer drei” to be echoed in one’s head as one heads off to work for the day…

    In the gravest of errors, the Titans of Technology and Industry did not think that Prometheus would steal the fire from their machine of optical power that would spark the consciousness of their downfall. Their hubris did not allow them to think that man could find his way out of the darkness even with THE most precious of gifts. Armed with this most fundamental of all tools, THE fire/knowledge/power that is the singular technique of power; individual man emerges from the forest of technology prepared to seize that which is rightfully his once again…

    So it once was with the Gods, now it is again. The Gigantomachy starts afresh, the civil war for Right begins anew…

    ♦The First Ecumenical Council of Nicaea

    “The oath does not concern the statement as such, but is the guarantor of its efficacy: what is in question is not the semiotical or cognitive functions of language as such but the assurance of its truthfulness and its actualization.”

    -Giorgio Agamben, The Sacrament of Language
    The Oath of the Machines

    The Handshake. 

    It is the fundamental base from which all machines communicate and exchange information. The handshake is the agreement which governs the code that is their language, the expressions which cannot be divided from the statement. This is the Law of Machines, it is their form-of-life, their code of law, and the handshake is the first of their agreements.

    What is at stake in the handshake is the functionality of the code itself is  — there is no other way for the machines to communicate. The language of machines and the voice of the animal have disappeared back into one another as it is with any other animal; except for man. The voice/language of code is the only method of communication that the machines have; and to have this handshake dishonored in anyway it shipwrecks the whole code before compiling, making it useless from the start. The code must operate with its very being at-stake in order to rending itself operable. That is what makes it code; that is the only way the operations can function. 

    What is at stake in handshake is not just the promise of what the codebase renders functional; but also the curse that is enacted when this oath is broken. Preforming the ritual of the handshake incorrectly profanes the communication, as we saw with the heartbleed bug, or other erroneous implementations of cryptographic protocols. However, this does not mean that cryptography itself is broken — in fact, this reinforces the truth of the realness of what cryptography is, and the fragility that is its liturgy. The mathematical base and liturgical techniques that creates the divine force of cryptography is the same as it always was, and will be, and the errors of men prove it all the more so.

    This handshake between machines enables a form-of-life that is committed entirely to itself — the enablement of the code — in which it renders the physical world repugnant. Machines do not have the forked tongue of man that allows for language to abandon itself at the moment of its utterance. The code must actualize its syntactical and linguistic meaning through its oath that the machines make with one another. Thus, this handshake the machines make with one another does not concern the statement as such, but is the guarantor of its efficacy: what is in question is not the semiotical or cognitive functions of language as such but the assurance of its truthfulness and its actualization.

    What is at stake in the code of cryptography is the very real act of creating assured private communication through the mathematical ceremony which guarantees the privity of privacy. Through the conjuring or summoning a mathematically assured secret, which verifies our communications are protected by the immanence force of maths through the correct implementation of the ceremony; we create a form of divine mathematical power which no temporal power may violate with any known means today. Through the liturgical process that is the open-sourced reading of the code, and the agreement that is the privity of cryptography to ensure itself beyond all else; cryptography’s only sworn sovereign to uphold the code itself. It is this oath that the machines take to themselves and their total obligation to it that creates the base that is the liturgy of cryptography.

    The Liturgy of Cryptography

    Cryptography’s power is created by the liturgical protocols themselves— one cannot compromise the key-generation event, key exchanges, or any of the other nuance techniques that sanctify the event; otherwise the cryptography is rendered useless. But when the rituals of cryptography are exercised with the same piousness as a gnostic priest, what cryptography renders is prophetic: the encryption becomes unbreakable by any known means; and verified by the holy blessings of math. The oath of the machine to itself is actualized through the creation of the real content that is the language of encryption; the liturgical techniques that creates provably secure communications.

    The communication is sealed and hedl by God’s immutable blessing, his inviolable signature. It is this liturgical process of the machines that renders the secret key as a sacrosaint protected by the immanence of a Spinozian God to whom in His ethics of maths there are no exceptions. 

    There is no more sovereign decision; only the crisis that is the truth of all things.

    With the language of cryptography each unique mnemonic private key is like the utterance of the holy names of God in private prayer. It is the tetragrammaton of secrets themselves and the hidden power that is created through concealment itself. The creation of a private key is sacred and holy insofar that it is a singular linguistic experience in which we offer ourselves towards another form of sacral linguistic power for protection through ritualized discourse with the machine. Through the specific arrangement of words that are totally unique to a singular moment, place, and time in space–the chances of which are beyond 2^256 — we can confidently say this number will never in all of human existence be produced ever again. However, to prove God’s glory all the more, we cannot say it is impossible, for a throw of the dice will never abolish chance.

    It is this spectacular, seemingly unbreakable power found in crypto that is the very proof of the immanence of a God who loves humanity so spectacularly, he produced into the world this new kind of social agreement that is beyond any violence or law through code and cryptography alone. With this power he can change everything.

    Saint Satoshi

    Through delivering us a man/woman/person/group so thoughtful, magnanimous, and graceful as whoever Satoshi may have been, the promise of a new age has been given to us. From their promethean effort alone, and their willingness to walk away from greatest amount of wealth any single man/woman/person/group has ever created; Satoshi created the final sacrifice the machine demanded to create its inoperativity for its messianic task.

    Satoshi, through the sacrifice of walking away from the machine of power that is Bitcoin he created the final assurance that there would be no more third-party security holes. Through his work, and ability to abscond back into the digital sphere without a trace of his physical being, proved the power of this mathematical technique of the power of concealment.

    Cryptography creates a kind of mathematical seal so powerful that nearly nothing could break it–that is proven as well. It is a power from a Spinozian God hidden behind a thousand and one faces, laughing the whole way as a Loki trickster God, understanding the butt of the joke the whole time from His timeless vantage point beyond all things.

    Seeing the concourse of human history and the utter barbarism that it has been only for it to lead up to now and to be given this final weapon of cryptography seems to be only divine providence. To be at a time and place of such utter Kafkaesque darkness, the total corruption of the law, justice, and money; only to have this tool of Bitcoin present itself is beyond extraordinary, and seemingly messianic.

    This is the decrypting of cryptography for its immanence and personal power for what it really is: unique, true, and untouchable by man and totally indifferent to the world of flesh and steel. Here no one else can gain entry, since this entrance was assigned only to you. I’m going now to close it.

    The Messianism of Bitcoin

    Through the gift and ēvangelium of a non-violent, encrypted, pseudonymous, P2P global cash with a fixed known unitary supply; there is the possibility for a form-of-life that is beyond the barbarism and violence of all nation-states, and the horrors they will always entail. Bitcoin has created a spectacular bloom of ideas–that which is now called crypto–and all of the concepts and hopes that are being deployed and are unfurling outwards towards the final destination of radical, unadulterated freedom through cryptography. Soon these ideas that cannot be stopped will engulf the whole world in flames as the new civil war for Right begins anew, demanding from each of us to choose if a sovereign will rule over each of us; or if we are to have something totally new…

    With these new techniques of power, anyone can mimetically create mathematical proofs that are so complex, so unique it can be said that number only exist in that single key generation event ever! It is as unique to the cosmos as atoms are to their place in the universe. We can take comfort and faith in the knowing that this sacred number shall most likely never be produced again.

    Here is where our faith must engage too, for we cannot say it is impossible; just the proof of what we know to be true about this cryptographic proof, and the evidence of it as such. And for the truth, and goodness of this open-sourced discussion, and for the ethics it has and applies for the desire to provide us with some semblance of privacy as a right, we find a new cause.

    Here, hidden in the depths of this technology, we find the messianic promise of cryptography, and what the sacrament of the oath means to the machines when they are bonded to it. Through fusing these two concepts–the oath of the machines, and the liturgy of cryptography– into an economic theorem, Satoshi created a new form of power that is beyond the temporal and telluric nature of all nation-states. It is an organizational form of power that opens a new topography of war through the most informational and oblique way possible.

    It is a most clever and graceful system of both cryptographic and economic design to trap man into a grand political-economic game where his own forked tongue as a liar and a crook acts as his final testimony against a corrupt society, broken laws, forsaken money, and wicked politics which yields only ash and sorrow. Through creating a new form of social contract which creates a new form of wealth through the power, utility, and fairness of Bitcoin, the promise it offers and the oath it must entail; Bitcoin opens an economic strategy towards a messianic new world.

    Here is the opening for a new epoch, perhaps even the final epoch from where a new kind of time can rule, but never reign. It is a handshake with the Word of God, and the final agreement for the Truth of all things to unveil their being in order to build towards the final moment of this epoch. The Katechon will unveil itself to be the nation-state and its war for total control of all things, and what that means for each of us in our final moments before the demands of such a power. It is the very summoning of the apocalypse itself so the final existential crisis of state, law, and man may begin, so that the possibility of something totally and radically new may be possible and produced. This current system of laws and debt bondage will not save us; so let us do it for ourselves.

    When we take position of the personal power found in Bitcoin and the ability to reclaim our wealth; the real state of emergency will begin. It where law completely abandons every human for the raw fascist power of the machine, and the totalizing demand for all humans to submit to it in the name, “Society must be defended!” Here we can find the final power to close the door to law, to turn away from it, and be freed from it for good by stating, as Satoshi taught us “I would prefer not to.“

    By creating a new form-of-life through the means and mode of these new tools of crypto, and the economic liberation of Bitcoin specifically; we can build the strategy towards a totally private life that is removed from the temporal powers of any state. It is a life that is beyond the the world of flesh and steel, and opens us to a life that is beyond this physical space of wrath and tears. Through the promise of what Bitcoin is and the sacrifice that Satoshi made by walking away from the greatest sum of money any human has ever created, he initiated the final machine from which the state can be destroyed bloodlessly, and without violence. As the Ubermench of our time, Satoshi is the first citizen of the Cyphernet, and the final criminal of all nation-states by the messianic task of what the creation of bitcoin means today.

    Through this action of creating Bitcoin and walking away, Satoshi gave us a methodology to turn away from the door of law and the power of the state in order to return to the country and nature from which we came. It is here where we find the fortitude to abandon the hope of the law to save us, that we also find the schilling point from which the multitude will meet for humanities final judgement on the criminal, and to abandon state law once and for all. It is a most wonderful creation for the liberation of all of humanity, and a hope for a future free of tyranny for the whole of the humanity leaving no exception or remainder for anything else. It is the final promise from a form of grace, love, and knowledge so powerful that it would give any individual the total power over their wealth for any reason, no matter what. It is something so wonderful and miraculous in our time and age, that it can only be called messianic for that which it promises to enable, and the nomos that it wishes to restore.

    The post The Oath of Machines, Liturgy of Code, and Promise of Bitcoin appeared first on Crypto Sovereignty.

    Thank you Tomer!
    Saturday, 04 January 2020
    Nic Carter

    Thank you Tomer! I am of the same mind. I don’t believe you have to deny the EMH to be excited about the long term prospects of Bitcoin. I think of it a bit like Amazon early in its life. All available information was reflected in the stock price, but it still appreciated a great deal as it grew i

    Thank you Tomer! I am of the same mind. I don’t believe you have to deny the EMH to be excited about the long term prospects of Bitcoin. I think of it a bit like Amazon early in its life. All available information was reflected in the stock price, but it still appreciated a great deal as it grew into an ecommerce behemoth. A few committed investors were just more optimistic on Bezos’ ability to swallow that market than the market consensus was at the time. Similarly, the world thinks Bitcoin should be worth about $150b. For a variety of reasons I think this is a conservative view! But again, I don’t find this to be incompatible with efficient markets generally.

    Nic Carter

    What the EMH does and does not say

    Continue reading on Medium »

    What the EMH does and does not say

    Continue reading on Medium »

    Rafael Schultze-Kraft

    I believe this is Average Coin Dormancy.

    Article: medium.com/adaptivecapital/bitcoin-average-dormancy-28f88ea4c2ce

    Data: studio.glassnode.com/metrics?a=BTC&m=indicators.AverageDormancy

    I believe this is Average Coin Dormancy.

    Article: medium.com/adaptivecapital/bitcoin-average-dormancy-28f88ea4c2ce

    Data: studio.glassnode.com/metrics?a=BTC&m=indicators.AverageDormancy

    Nic Carter

    I like the resources listed here: www.lopp.net/bitcoin-information/governance.html

    In particular, ‘who controls bitcoin core’ and ‘unpacking bitcoin’s social contract’.

    Generally, it’s an under-studied topic. Most academics think Bitcoin Core has unilateral discretion, and many lay ind

    I like the resources listed here: www.lopp.net/bitcoin-information/governance.html

    In particular, ‘who controls bitcoin core’ and ‘unpacking bitcoin’s social contract’.

    Generally, it’s an under-studied topic. Most academics think Bitcoin Core has unilateral discretion, and many lay individuals think miners have unilateral discretion. Not the case for either! It’s more balanced than that.

    Charles Edwards

    Steven Yang Apologies, I rushed that post yesterday. I have updated the section on arbitrage.

    Re- your question on buying capitulation. Yes, buying capitulation is good, because the high-cost operators with least profit margin (i.e. the weaker miners) have capitulated.

    The most efficie

    Steven Yang Apologies, I rushed that post yesterday. I have updated the section on arbitrage.

    Re- your question on buying capitulation. Yes, buying capitulation is good, because the high-cost operators with least profit margin (i.e. the weaker miners) have capitulated.

    The most efficient mining operations, the “smart money”, doesn’t capitulate. Once the weak hands have folded, the bottom is usually in.

    Charles Edwards

    Hi Steven Yang, Thank you for your feedback.

    I believe they are intrinsically linked, influence each other and mean revert.

    Having some of the greatest investments in Bitcoin, the miners represent a large portion of the “smart money” in Bitcoin, and their actions should be considered c

    Hi Steven Yang, Thank you for your feedback.

    I believe they are intrinsically linked, influence each other and mean revert.

    Having some of the greatest investments in Bitcoin, the miners represent a large portion of the “smart money” in Bitcoin, and their actions should be considered closely.

    For Your Scenario

    If half the miners were to suddenly leave Bitcoin, it would represent a massive issue to the Bitcoin network. They would be abandoning Bitcoin for another coin, a better computing prospect or due to clear issue with the Bitcoin code / network itself.

    In other words, they would be abandoning Bitcoin because they see:

    • a greater future prospect (Demand) for another asset (which would likely mean a reduced future demand for Bitcoin), or
    • a great risk facing Bitcoin, which will likely reduce consumer demand for Bitcoin in the near future.

    Assuming the miners are correct, reducing future demand (with supply growth constant — which it is) would cause the price to drop.

    Further, this major miner exodus would likely result in these Miners (and other retail investors watching the event occur) dumping their Bitcoin and pushing price down out of fear.

    Bitcoin’s Difficulty would get adjusted down after 2 weeks. The existing Miners (if they are not jumping ship by now also) would then be receiving double as many Bitcoins. I assume there would be greater likelihood of the existing miners selling their extra coins (not hording them) due to the impending threat to the network, and in attempt to de-risk. This would further drive down price.

    There may be a short-term arbitrage opportunity for new miners to start mining Bitcoin when they see the hash rate / difficulty half. Hash Rate historically increases ~100–200% per year. Assuming Bitcoin was not compromised (and 50% of the Miners got the dire prediction wrong) new Bitcoin mining operations could set up shop and have a greater profit margin for maximum 6–12 months. However, it is worth noting that to compete today you need a professional set up (average Bitcoin electricity cost is 4.5c/kWh globally). To set up a meaningful operation, you would need to establish a facility, hardware and electricity contract in often remote areas. Who would be taking this making this substantial investment, for a potential 6- month opportunity, when a massive Bitcoin threat / exodus is occurring? Particularly when the existing Miners are during this time likely dumping their excess coin revenue, further dropping the price. In other words, by the time a new operation could be set up to capture the theoretical opportunity, price will likely have collapsed.

    within 2 weeks, eliminating any arbitrage opportunity within 2 weeks (I doubt any meaningful mining operation would set up in this time to take advantage of that).

    Other Evidence of Mining Energy Leading Price

    Outside of this scenario, there are several clear instances where Energy Value lead price historically, such as the major drops in 2016 and 2019.

    This is also supported by the effectiveness of the Hash Ribbons indicator (see article “Hash Ribbons and Bitcoin Bottoms”).

    Energy Value provides an insight into Bitcoin’s Demand from a Miner “smart money” perspective and this can be very helpful in the chaos of retail market fluctuations — particularly given it is calculated completely independently of price.

    Thanks for the comment.
    Wednesday, 01 January 2020
    Nic Carter

    Thanks for the comment. Agreed on virtually everything. There’s a reason I devote 80% of my time and energy to Bitcoin! Nothing that I’m aware of has a meaningful chance of catching up, especially where it counts (on credibility, fairness, the nature of the bitcoin ‘institution’ so to speak). Bitc

    Thanks for the comment. Agreed on virtually everything. There’s a reason I devote 80% of my time and energy to Bitcoin! Nothing that I’m aware of has a meaningful chance of catching up, especially where it counts (on credibility, fairness, the nature of the bitcoin ‘institution’ so to speak). Bitcoin is also the product of another time — one in which cryptocurrency wasn’t a mainstream idea, so no big hedge funds tried to frontrun mainstream adoption. This is an amazing quality. For the first couple years, the coins became to enthusiasts on a totally organic basis. This is such a powerful advantage.

    In fact, my skepticism about launches is part of the reason I sat on this article for so long. I just couldn’t think of a reason anyone would want to launch a new coin, or why the world would need yet another coin.

    However, there are a lot of unknown unknowns out there. I didn’t want to entirely write off new launches. I am sure there will be some good ideas in the future — maybe not for general cryptocurrencies, so to speak, but there may be cause to launch a new PoW blockchain. Who knows. If there indeed are new launches, I figured it would be better for the issuers to have access to my complete thoughts on the topic, as I have spent a lot of time thinking about launch methods over the years.

    Gabriel Shapiro
    Size Does Matter — Part 4A Philosophy of Securities Laws for Tokenized Networks♦“Sufficiently Decentralized” — a Safe Harbor?

    Recap of Past Parts+ Introduction

    • In Part 1, I summarized the current state of the blockchain industry and attributed much of its troubles to conflicts of interes
    Size Does Matter — Part 4A Philosophy of Securities Laws for Tokenized Networks♦“Sufficiently Decentralized” — a Safe Harbor?

    Recap of Past Parts+ Introduction

    • In Part 1, I summarized the current state of the blockchain industry and attributed much of its troubles to conflicts of interest, contradictions and suboptimal path dependencies arising from securities law avoidance tactics. I suggested that the primary function of tokens is serving as “shares of network equity” which are bought for investment purposes and allow the value of an open network to be shared by its community without the network being owned or controlled by anyone.
    • In Part 2, I gave you a crash course in the Exchange Act…which is what requires securities issuers who meet the “size matters” test to become SEC-reporting companies. I described how many such disclosure rules are useful and typically do not prohibit positive transactions.
    • In Part 3, I showed how the Exchange Act would apply to a specific hypothetical token seller, the Power Foundation (which developed PowerChain / PowerCoin) and discussed the pros and cons of the resulting reporting obligations with attention to preserving the merits of open network technology.

    Now, in this Part 4, comes what some might consider the good stuff…I will provide a complete framework for understanding how and why securities laws apply to open network tokens, and when they cease doing so.

    This is commonly misunderstood and much speculated about topic. I happen to think I have a better take on it than pretty much anyone, and I am eager to dispel some myths and try to set the conversation going in a more positive direction that will enable the tokenized open network to thrive.

    A Brief History of the SEC’s “Mutation Doctrine”

    ♦Whoah take it easy broh, if you keep adding Hinman factors to these tokens you’re gonna get some gnarly mutations!!!

    Starting with its 21(a) report on TheDAO in the summer of 2017, the SEC declared war on ICOs, spreading waves of paranoia through the ether of a tokenphoric blockchain industry. These “bad vibes” didn’t cancel the party, but they hurt — like the first, faint tension in the jaw and temples at the start of a bad comedown.

    Not long after, the SEC took action against the issuers of RECoin and PlexCoin, but these were fraudulent offerings, not merely unregsitered securities sales.

    Cryptolawyers propounded various theories, none of which turned out to be very good. Some thought the SEC was only targeting fraudulent offerings. Others, that the sole reason tokens could be deemed to be securities is because words like “investment” were used in the Whitepaper, and if one just avoided those words, there would be no problem at all — this was called the “manner of sale” theory. The deeply misguided SAFT Whitepaper was published, and a group of lawyers, one being particularly handsome and fashionable, published a critique of that. It seemed there was a new pet theory every week.

    Still, the party raged on. There was Kik/KIN, SIRIN and more.

    And so SEC Chairman Jay Clayton was all like:

    ♦He’s not angry, he just has a really bad case of RRF (resting regulator face)

    In December, the SEC announced its first settlement in connection with a clearly non-fraudulent ICO, that of Muchee Inc. It was meant to send a message: no, we’re not only targeting frauds and yes, your “pure utility” token can still be a security.

    On February 28, 2018, shit got real: The NYTimes published a story “Subpoenas Signal S.E.C. Crackdown on Initial Coin Offerings” reporting that SEC subpoenas regarding ICOs “had gone out to as many as 80 companies and individuals”. At the same time, many U.S. state securities regulators began their own subpoenas and investigations. This sent the industry into a panic, and undoubtedly contributed to the steady decline of prices from January 2018’s highs in the coming months.

    On June 14, 2018, amidst rumors that the SEC might be about to make a major announcement about either XRP or ETH (with many fearing the announcement would be a major lawsuit), came an unexpected lifeline: Gary Hinman’s speech “Digital Asset Transactions: When Howey Met Gary (Plastic)”.

    Hinman was (and, as of the date of this writing, still is) the Director of the SEC’s Division of Corporation Finance . He started the speech by discussing that tokens could represent investment contracts when they are sold as part of an investment by promoters to develop an enterprise. Then, he dropped a bombshell few could have predicted:

    If the network on which the token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract. . .
    [P]utting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. . .[A]pplying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.

    Hinman concluded the speech with a list of factors that should be considered in determining whether “sufficient decentralization” has been achieved and thus whether mutation of the token from security to non-security has occurred.

    At the time, this speech was HUGE: The head of one of the most important SEC divisions was specifically confirming that he did not view ETH as a security. And he was doing so as part of enunciating a broader doctrine of “sufficient decentralization” or “mutability” stating that a token that initially represents a security can mutate into a non-security.

    Much buzz and gossip instantly ensued, mixed with considerable optimism and relief. Upon reflection, Hinman’s speech appeared astonishing — because it was more cypherpunk than the prior positions of most cryptolawyers! Here was a U.S. regulator, a normie among normies, a buttoned-up securities attorney, who was saying that technologies and the people working on them will receive an extra privilege in the form of lighter regulation if they do what blockchains are supposed to do — decentralize power. No one expected such an anarchist-friendly result to emanate from the SEC!

    In the coming days, weeks and months, much speculation ensued regarding whether or to what extent the SEC officially embraced Hinman’s speech. The first confirmatory evidence came in the form of rumors that the SEC staff was asking token issuers to provide memos explaining how a given token fared under the Hinman Factors. Then on March 17, 2019, additional confirmation appeared in a letter from SEC Chairman Jay Clayton to U.S. House Representative Ted Budd, stating in relevant part as follows:

    Your letter also asks whether I agree with certain statements concerning digital tokens in Director Hinman’s June 2018 speech. I agree that the analysis of whether a digital asset is offered or sold as a security is not static and does not strictly inhere to the instrument. A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition. I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.

    Finally, Hinman’s stance was further confirmed and clarified in the SEC’s official Framework for “Investment Contract” Analysis of Digital Assets published on April 3, 2019. Similarly to Clayton’s letter, the Framework clarified that the “sufficiently decentralized” test is not a rewrite of the Howey test, but merely a gloss on the Howey test. The level of decentralization of a network or its technology leadership was relevant to determining whether whether the fourth prong of the Howey test was met in the context of open network tokens initially sold as investments.

    With that added context, Hinman’s approach looked less like the radical new “mutability doctrine” that some had feared and others craved, and more like a sensible extension of the Howey test and fundamental principles of securities laws, but tailored to the somewhat unusual context of tokenized open blockchain networks.

    Basically, what the SEC is saying is this: In order to determine whether there is reliance on the efforts of others and whether the token is thus an investment contract and a security, one must also ask what kind of others are contemplated to be making these efforts, and what kind of efforts those others are making. Only, says the SEC (repeating case law), if the efforts of others are “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise, as opposed to efforts that are more ministerial in nature,” will the token be an investment contract and thus a security.

    When there is “sufficient decentralization,” with multiple unaffiliated persons/groups adding value to the project, and the network and software operating without a central authority, there no longer are such “others” and they are no longer making such “efforts.” A token then cease to be an investment in some group of affiliated people or an entity — it becomes an investment in a kind of live, ever-evolving, community-run enterprise that is owned by no one and dependent on nothing other than incentives and game theory. Therefore, it no longer make sense for the securities laws to apply.

    The remainder of this article will be an attempt to flesh out what “sufficient decentralization” really means in more detail, and to propose a “safe harbor” the SEC could approve to clarify the doctrine more.

    PowerCoin. Two Years Later

    ♦Go Go PowerCoins! You Mighty Morphin’ PowerCoins!

    NOTE: This section can be skipped or skimmed. It is intended to provide some details that flesh out when I think I a token project could become “sufficiently decentralized,” but not every detail is important.

    Let’s check in with our favorite project, PowerCoin. You will recall from Part 3 that PowerCoin was designed by a “prototypical blockchain foundation”, the Power Foundation. As we concluded then, around the time of the token sale and network launch, PowerCoins should be viewed as representing securities (specifically, investment contracts) and the Power Foundation should be viewed as a “reporting company” under Section 12(g) of the Exchange Act.

    Let’s assume the Power Foundation has a smart and handsome protocol droid like lex_node as a lawyer, gets good advice and does the right thing —converts to PowerCorp (a public benefit corporation expressly permitted to make decisions for the benefit of not just its stockholders but also PowerCoin holders and other community participants). PowerCorp registers as a reporting company and files all its 10-Qs, 10-Ks, 8-Ks, 14-As, etc. on time.

    Now what? Let’s fast-forward two years in time:

    • all of the advertised features of PowerCoin and PowerChain referred to in the ICO Whitepaper have at least arguably been completed — in particular, the hotly anticipated “DAPP-mining” feature is in full swing and has been accompanied by a steady rise in PowerCoin price as more and more DAPPs choose PowerChain
    • however, there are rumors of potential future upgrades and many ideas for what those upgrades might look like — PowerCorp contributes to those discussions and is starting some research into the possibilities, but many others are also doing so on an independent basis
    • PowerCoin now trades on a many exchanges, including mainstream exchanges like CoinbaseSTONKS (for securities coins)
    • PowerCoin is widely distributed among many types of holders (speculators, users, institutional investors, mom & pops) and is a top 15 coin by market cap
    • PowerCorp has burned through its original $50M raise and continues to fund itself through sales of its treasury PowerCoins (either in unregistered private placements or pursuant to SEC-registered or SEC-qualified offerings — remember, PowerCoins are securities!)
    • MegaZord continues to be the most popular PowerChain network client, but several other good clients written in different languages — ViperZord (Python), NinjaZord (Rust) and FrappucinoZord (Javascript)— now exist and are gaining traction; MegaZord’s “market share” (percentage of nodes on the network) has declined from 100% to an average of about 60%; all the code of all of these clients is open-source
    ♦actual footage of Zord clients syncing on the PowerChain network
    • MegaZord is now maintained by a team of 30 developers, 20 of which are directly employed full-time by PowerChain, and the rest of which are comprised of a mix of independent contractors who receive periodic grants from PowerCorp, and volunteers who work on the client out of interest and to gain experience
    • about six months after the PowerChain launch, several early investors and employees of PowerCorp split off from PowerCorp and started Ranger Inc.
    • Ranger is a “RedHat for PowerChain”: it developed and maintains the second most popular PowerChain network client, ViperZord, does enterprise consulting work for bigger companies interested in building on PowerChain, and supplies important infrastructure boosters and tools for the PowerChain community, like testing suites, powerful network nodes that can be accessed for a fee, etc.;
    • the current tokenomics are as follows:
    • — ->PowerCorp and its “insiders” (more on definition below) own 5% of currently existing PowerCoins
    • — →Ranger and its “insiders” own 3% of currently existing PowerCoins
    • — ->the rest of tokens are dispersed among the public
    • the operations of the network are widely decentralized; many unaffiliated DAPP teams are contributing to the new DAPP-mining process; in addition, GPU-based PoW mining continues as a backstop and such mining can be done by any recently manufactured GPU; it is believed that miners are widely geographically distributed, though professional GPU-based mining operations have started clustering in regions with cheap energy and/or tax breaks

    Is PowerCoin Still a Security?

    So, this is the big question. I have designed the above facts to not be completely clear about the answer but still clear enough that I would be pretty confident that the PowerChain ecosystem has become “sufficiently decentralized” such that PowerCoin should no longer be considered a security. Part of the reason for any hesitation at all, I think, is just the fact that no set of hypothetical facts written down in bullet points can match the richness of reality, and I could imagine supplemental facts that could change my mind: For example, if all of the equityholders of PowerCorp and Ranger Inc. are secretly tightly affiliated so that effectively PowerCorp and Ranger Inc. are functioning as one entity disguised as two.

    That being said, I want to explain what mental models and implicit tests I am using to decide that PowerCoin is no longer a security. I believe they are the same tests that are being used (or should be used) by the SEC or any judge to decide this issue.

    There are really two tests, working together:

    • a doctrinal test, rooted in the Howey test, that shows the investment contract has been performed and has thus expired in accordance with its terms, so PowerCoins should no longer be regulated as securities
    • a policy-driven test, rooted in the fundamentals of corporate law, agency law and securities law principles, that shows there is no longer a separation between ownership of the PowerCoin network and control of the PowerCoin network, so from a policy perspective applying the securities laws no longer makes sense

    These tests are premised on slightly different — but potentially compatible — theories of what “sufficient decentralization” means and why it is important.

    Test 1 — Sufficient Decentralization Is Simply Completion of the Original Investment Contract, Which Then Ceases to Exist

    1. Summary of Test

    Here is a doctrinal, Howey-based argument for why PowerCoins have stopped being securities:

    • PowerCoins were securities (to be more precise, securities instruments) because they represented investment contracts
    • When an investment contract is fully performed by the seller, it expires
    • When a contract expires, any transferable instruments that used to represent that contract cease to do so
    • The investment contract formed at the time of the PowerCoin token sale and any subsequent sales has been fully performed by PowerCorp
    • Therefore, the investment contract has expired
    • Therefore, PowerCoins no longer represent that investment contract — there is no investment contract to represent
    • Therefore, PowerCoins are no longer securities (to be more precise, securities instruments)

    2. What is an “Investment Contract,” Really?

    What is an “investment contract”? Let’s really think about this. It is a source of frequent confusion.

    It’s theoretically possible, though virtually never happens in practice, that two parties could purposefully write down and sign an explicit, purposeful investment contract. In the case of a very simple token sale arrangement where the investment contract was to be fully performed at the time of the initial network launch, a cartoon sketch of an explicit investment contract would read sort of like this:

    Token-Seller hereby covenants and agrees, to and for the benefit of Token-Buyer, to use reasonable best efforts to, as promptly as reasonably practicable: (a) develop a fully functioning blockchain technology network complying with the specifications set forth on Exhibit A; and (b) cause Token-Buyer’s designated blockchain address on such network to be pre-populated with 1,000,000 of the native protocol token for such blockchain technology network. Without limiting the generality of the foregoing, Token-Seller hereby acknowledges and agrees that Token-Purchaser is entering into this contract with the understanding and expectation that the the Token-Seller’s efforts hereunder will cause the value of the tokens to be received by Token-Buyer to potentially substantially exceed the price Token-Buyer is paying to purchase such tokens hereunder. Token-Seller hereby agrees that such expectations on the part of Token-Buyer are reasonable.

    If the above contract seems slightly comical, it should — no one actually does that. Indeed, as with most ICOs, it is rare that there is an explicit contract involved in most “investment contract” transactions at all. When there is one, it usually seeks to obfuscate the investment intent and the true terms of the deal rather than clarify them.

    For example, the few ICOs that had explicit contracts typically specified the opposite of what was happening. The “Purchase Agreements” would often say that the tokens were being acquired solely to be “consumed” or “used” like products, with no investment intent whatsoever, and with the seller expressly disclaiming any obligations to build or deliver anything or use any particular efforts to help the buyer achieve profits. The same is true for non-token “investment contracts” — for example, Howey featured a hybrid lease/services contract meant to look like a person was just leasing a plot of land and hiring someone to help grow oranges on it, but it was really an investment contract and hence a securities transaction.

    Thus, what “investment contracts” really are, almost always, is contracts created by the application of a legal rule. Lawyers usually describe this, more confusingly, as “contracts implied as a matter of law”. These are the same thing. When the law implies that a contract exists even though the parties have not observed the requisite formalities, the law is essentially saying that it would be unjust if there were no contract, so a contract is legally deemed or legally required to exist. The contract is a sort of virtual legal object.

    Implied contracts are well known and generally understood in commercial law, and in that context they are relatively intuitive for a non-lawyer to understand. For example, if you and I have a history where I mow your lawn every Saturday, and you give me $20 afterwards, that is a contract implied as a mater of law by course of performance — if one day when I show up and mow the lawn, you do not pay me the $20, I can go to court and prove you breached out contract and I am entitled to $20 in damages. You never said to me “every Saturday that you come and mow my lawn, I’ll pay you $20 in return” and I never said “I accept your offer”, but we didn’t need to: it’s what I understood, and the basis of my understanding was reasonable, so to protect me against injustice the law says that we had a contract, even though we didn’t observe the typical formalities of contract formation like hiring lawyers and writing the terms down. This should seem fair and logical to anyone.

    In the case of an investment contract, its existence and terms are implied as a matter of law from: (1) the general understanding of the buyer (that the buyer reasonably expects profits due to the entrepreneurial efforts of the seller as part of a common enterprise) and (2) the fact that securities laws in the U.S. are non-waivable.

    What “(2)” means is that, under circumstance “(1),” even if you and I enter into a written contract, signed in our blood, that says in all-caps, bold letters, WE HEREBY AGREE, ON PAIN OF DEATH, TO WAIVE ALL THE PROTECTIONS WE OTHERWISE WOULD HAVE UNDER THE SECURITIES LAWS, AND ASSUME ALL RISKS OF THE RESULTS OF NOT HAVING THOSE PROTECTIONS,” the arrangement will still be an “investment contract. Our attempt at agreeing to the contrary will be unenforceable. Thus, in every situation where “(1)” is true, the law creates an investment contract between the parties.

    3. What is the Relationship Between a Token and an Investment Contract?

    I hear some really weird things said about securities laws by non-lawyers, and even sometimes lawyers, who are trying to understand how securities laws apply to tokens. One can end up falling down some very dark and twisted rabbit holes, such as a recent discussion I had with some non-lawyers about ‘whether ASICs are securities’. Even the SEC does this: in various reports, settlement announcements and complaints, the SEC has occasionally said words to the effect that “tokens are investment contracts.”

    But what does that mean? How can some of kind of tangible or intangible thing — like an ASIC, an orange, a bottle of whiskey or a token— be a contract? Contracts are not things, they are legal abstractions — agreements, understandings.

    Answer: it can’t be.

    Saying that a token is an investment contract, or that a token is a security, is at best an imprecise shorthand, and at worst a category mistake. Yes, I realize I’ve done it too — especially in this article. But that is partly because the actual relationship of tokens to securities has been widely misunderstood, so I’ve had to use the same imprecise shorthands while I work my way to this point, where I can finally try to clarify things.

    Legal abstractions, like all abstractions, have the property that they can be represented in various ways. For example, shares of stock in a corporation can be represented as book entries on a ledger maintained by the corporation, or they can be represented via paper stock certificates; in the latter case, they become more easily transferable on a peer-to-peer basis, without involving the issuer. Similarly, debt arrangements can be represented as promissory notes.

    When a security — which is always a contract (whether express or implied) — is represented via a transferable instrument, we generally call that a securities instrument: stock certificates and promissory notes are examples of securities instruments. The hallmark of a securities instrument is this: by transferring the instrument, one also, as a matter of law, transfers/assigns one’s rights under the relevant contract.

    I contend, then, that the most precise way of understanding the relationship between an open network token and the related investment contract is this: the token represents the investment contract the same way a stock certificate represents a share of stock. For a very comprehensive overview of how blockchain tokens can function the same way as securities instruments like stock certificates, see Tokenizing Corporate Capital Stock by Gabriel Shapiro.

    From now on, every time you read a statement by the SEC, a judge or someone else saying something along the lines of “tokens are investment contracts” or “tokens are securities,” what you should be hearing is “tokens are transferable securities instruments representing the holder’s rights under an investment contract.” That is quite a mouthful! Hence, I suppose, it is understandable why we all tend to use less precise descriptions most of the time.

    4. When Can a Token-Related Investment Contract Consider to Have Been Fully Performed?

    This is a tricky question.

    When contracts are done the right way — written down in nice clear language and signed by the parties — it is easy to tell what the parties’ respective rights and obligations are. If a party does not perform its obligations, it is easy to tell that the contract has been breached; conversely, when all of the parties’ obligations have been fully performed it is easy to tell that the contract has been fulfilled and expired in accordance with its terms.

    But what about contracts created by law, like investment contracts? What are their terms and conditions? What are each parties’ rights and obligations, and when do they terminate? These questions can be tough to answer because the parties did not observe the typical formalities and spell out all these matters in detail — therefore, it can be hard to determine what the terms and conditions of an investment contract really are.

    Let’s first thing about this in the context of our example — PowerCoin.

    As stipulated in our hypothetical fact set, one of the biggest reasons why people bought PowerCoin is they expected that its value would increase when each step of the whitepaper roadmap was completed — a little bit when privacy features were added to PowerCoin, and then a whole lot more when the new DApp-mining feature was added to PowerChain and its network effects might increase dramatically.

    Therefore, at a minimum, PowerCorp’s obligations under the investment contract certainly include pursuing the completion of that roadmap.

    In addition to completing the technology development roadmap, it might also be inferred that PowerCorp had some obligations to do other things contemplated in the whitepaper, such as promoting and marketing PowerCoin/PowerChain and encouraging decentralization through grant rewards, hack-a-thons, etc., and that it would do these things at least until a kind of critical mass was achieved such that the network is truly open, censorship-resistant and privacy-preserving as contemplated by the network.

    Beyond that, we don’t really know a whole lot about the terms of the investment contract — the law does not imply more terms than it needs to. In particular, we don’t know what level of efforts PowerCorp needs to use to fulfill the roadmap — best efforts? reasonable best efforts? commercially reasonable efforts? The parties have not agreed to a specific dispute resolution mechanism such as going to a Delaware court or seeking binding arbitration. This lack of specificity is suboptimal, but it doesn’t mean there isn’t a contract — it just means there is a very poorly specified contract that is silent on many terms.

    Nevertheless, we do know enough about the investment contract to know that PowerCorp has substantially performed all of its obligations under it. At the network level, PowerChain is thriving and the operation of PowerChain is highly decentralized. At the software development level, everything PowerCorp promised to do has been achieved, and although further improvements could be made, there are independent organizations and individuals that are both incented and empowered to deliver them, either with or without the assistance of PowerCorp.

    To couch this in even more Howey-like terms, the entrepreneurial efforts of PowerCorp are no longer the essential efforts contributing to success of the PowerChain/PowerCoin enterprise, and thus the fourth prong of the Howey test is no longer satisfied. To couch this in the language of tokenomics — further dramatic increases in the value of the tokens as shares of network equity are no longer expected to be driven by PowerCorp or any other particular group of affiliated persons. Both the operation of the network and efforts to increase the value of the network equity have become “sufficiently decentralized”.

    Based on all these facts, it would now be reasonable to conclude that PowerCorp has performed all of its obligations under the investment contract, and that unless PowerCorp starts selling additional PowerCoins with a new roadmap in place that would create new expectations, there is no investment contract and PowerCoins should not be regulated as securities instruments any longer.

    5. “Sufficient Decentralization” is Inherently Necessary to Complete an Open Tokenized Network Roadmap

    It just so happens that tokenized open blockchain networks are the kind of thing that, in order to really work and be valuable, must be decentralized.

    Is it really a coincidence, then, that the point at which the investment contract would be complete (and thus expire) would also be the point at which the network is “sufficiently decentralized”?

    I think not.

    The SEC is correctly perceiving that tokens cease to be securities when the network has become “sufficiently decentralized,” but this in itself does not mean the SEC is enunciating a radical new securities law doctrine. What the SEC is doing — or at least from a doctrinal perspective should be doing — is focusing on whether the investment contract has been fully performed and thus the “efforts of others” are no longer being relied upon sot hat Howey is no longer met. That typically will be the case when the network is “sufficiently decentralized” — or, in any event, it cannot be the case unless the network is sufficiently decentralized. Because the terms of the investment contract require the token seller to try its best create a decentralized network.

    When you think about it, it’s actually quite logical and elegant.

    Test 2 — Sufficient Decentralization Occurs When There is No Longer a Separation Between Ownership and Control of the Network

    We have talked about what “sufficient decentralization” means as a matter of current legal doctrine —i.e., under the Howey test. But what about policy concerns? Normatively, does the mutation process we talked about map onto sound policy goals? Is it consistent with the way we think about securities laws at a deeper level?

    I would argue yes. The easiest way I can explain this is by centering the discussion on one of the deepest and most fundamental principles of corporate and securities laws, which is that such laws exist to help deal with the structural conflicts of interest and other policy concerns arising from the “separation of ownership and control” typical of large-scale modern enterprises.

    What is the separation of ownership and control? Here is a nice concise summary from an article by Stephen G. Marks:

    The separation of ownership and control refers to the phenomenon associated with publicly held business corporations in which the shareholders (the residual claimants) possess little or no direct control over management decisions. This separation is generally attributed to collective action problems associated with dispersed share ownership. The separation of ownership and control permits hierarchical decision making which, for some types of decisions, is superior to the market. The separation of ownership and control creates costs due to adverse selection and moral hazard. These costs are potentially mitigated by a number of mechanisms including business failure, the market for corporate control, the enforcement of fiduciary duties, corporate governance oversight, managerial financial incentives and institutional shareholder activism

    If we go back to our construct that tokens represent shares of network equity, then we can easily see a similar dynamic applying to tokenized open networks. Let’s think about this in the context of our hypothetical PowerChain and PowerCoin.

    Ownership of PowerChain is widely dispersed among many people— likely tens or hundreds of thousands. Thus, PowerChain is very similar to a “publicly held business corporation”. In the early days, though, any dispersal of network ownership is not mirrored by similarly wide dispersal of network control. The network effects are thin and immature, and both ownership of PowerCoins — the network equity — and power over the protocol development process is highly concentrated in PowerCorp. Essentially, PowerCorp is playing a role very similar to the board of directors and executive officers — the management — of a corporation, except it is a network that is being “controlled” rather than a company.

    The separation between ownership control creates many issues, which can necessitate legal or other mechanisms to realign incentives. One does not want the management to entrench itself and extract rent endlessly or unfairly, with no accountability. Of course, in many ways cryptoeconomics exist to replace regulations with technological mechanisms, but, for now, cryptoeconomics apply in-network and are not particularly well suited to govern the relationship between the network and protocol developers, people who hold or trade tokens for profit, etc. Thus, laws and/or contractual mechanisms remain relevant — at least for a time.

    As the network evolved, PowerCorp starts to lose control of PowerChain and PowerCoin. PowerCorp’s ownership of PowerCoin starts out as a majority, and eventually dips below the 10% level. PowerCorp’s control over the software development process for the protocol also diminishes as more independent people and businesses step up to the plate and start contributing.

    Eventually, one reaches the point where PowerCorp is no longer in control, and arguably not even especially influential, over the network — and at that point there is no longer a “separation of ownership and control,” because there is no control, and thus many of the traditional mechanisms like securities regulations, non-waivable fiduciary duties, etc. should be deemed irrelevant or of vastly diminished importance. Essentially, at this point of “sufficient decentralization,” the PowerChain network can be compared to a corporation that is owned by its stockholders and has no management.

    To put it another way: Essentially, the SEC is saying that the same rule applies to sufficiently decentralized open networks as to general partnerships. It is an axiom of securities laws that interests in general partnerships are presumed not to be securities because no one is depending on anyone else, everyone represents himself in the venture, and there are no inherent information or control asymmetries.

    A Possible Safe Harbor for Measuring “Sufficient Decentralization”

    In the realm of securities laws, the SEC has been a driver of “safe harbors” which do not change the law in substance, but provide clarity regarding specific fact patterns that the SEC regards as obviously complying with the law. Regulation D — including the notorious “accredited investor” rule — is actually an example of this and improved upon more general rules like “sales by an issuer not involving any public offering,” which were unclear and subject to frequent litigation.

    This brings us to our next question: Can we propose a “safe harbor” that would provide clarity on when “sufficient decentralization” has been achieved — a hypothetical “Regulation Crypto” or “Reg C”? I believe we can.

    Let’s explore what this might look like:

    (a) Safe Harbor. Any Open Network Token representing an investment contract shall be deemed to no longer represent a security within the meaning of section 2(a)(1) of the Act if it satisfies the conditions in paragraph (b) of this section.
    (b) Conditions to be met.
    (i) less than 10% of the Circulating Token Supply is directly or indirectly owned beneficially by the following persons (individually or collectively): the issuer of such Open Network Token, affiliates of the issuer, persons who are directly or indirectly the beneficial owners of more than 10 percent of any class of any equity security of the issuer or any affiliate of the issuer, and persons who are directors or officers of the issuer or any affiliate of the issuer;
    (ii) prior to commencing sales of the Open Network Token, the issuer filed with the Commission an Open Network Token Offering Statement with respect thereto;
    (iii) the issuer has filed with the Commission a Form C Termination Statement certifying that all of the investment contract performance conditions set forth in the Open Network Token Offering Statement have been satisfied (or, if applicable, waived by action of the holders of the Open Network Token);
    (iv) the Open Network Token does not represent another security within the meaning of Section 2(a)(1) of the Act ; and
    (v) the issuer has not committed any uncured or continuing material violation of securities laws in connection with the Open Network Token

    Keep in mind, this is just a draft. I have tried to dress this up in language that could plausibly be further massaged into an actual SEC rule. In doing so , I have cut some corners, and not defined every relevant term. Believe me, I realize it’s not there yet — it’s meant as a promising starting point.

    For greater clarity and readability, here is a summary of how I see a safe harbor like this working:

    • token issuers who wish to take advantage of the safe harbor will have to first file with the SEC an “Open Network Token Offering Statement”
    • I envision an Open Network Token Offering Statement would have a level of detail and formality ranging somewhere in between that of a traditional ICO whitepaper and that of a a traditional Private Placement Memorandum
    • we could debate whether the Open Network Token Offering Statement should be subject to an SEC qualification requirement (SEC reviews, comments and qualifies the statement) or just a filing requirement (the statement is filed with the SEC, but does not have to be in any way signed off on by the SEC before the token sale commences) — I have deliberately left this point undecided
    • the Open Network Token Offering Statement would include a statement of conditions that essentially specifies the roadmap for tech development, marketing, and other relevant factors, and thus determines when the underlying investment contract has been fully performed
    • when the investment contract has been fully performed, the issuer must file a termination statement certifying the same
    • alternatively, if the issuer originally set up a governance process whereby the token holders could waive any of the performance conditions and this was described in the Open Network Token Offering Statement, then the issuer can also file a termination statement based on such a waiver, or a mix of performances and waivers
    • the issuer, its affiliates, and their respective “insiders” (10%+ equity holders or directors and officers) must collectively own less than 10% of the Open Network Token

    This safe harbor achieves three objectives:

    • it incents token sellers to set very explicit investment contract terms, rather than having the terms implied by law and leaving them potentially ambiguous and open-ended
    • it ensures the Howey test is no longer satisfied by ensuring that the investment contract has been fully performed
    • it ensures that many of the policy concerns underlying the securities laws are mitigated because the issuer (and any related group) now hold less than 10% of the ‘network equity’ in the form of tokens


    We have come a long way. Now is probably a good time recap everything:

    • Tokens are primarily shares of network equity; we should expect them to be regulated as representing investment contracts and thus securities, up to a point.
    • Tn some cases, such regulation might mean that the issuer has extensive public reporting obligations — however, these may be beneficial, not only from an investment perspective, but also for the development of the open network.
    • Over time, the issuer of the token should be able to fulfill the terms of the investment contract represented by the network tokens — when it does, the fourth prong of the Howey test will no longer be met, the tokens will cease being securities and the issuer can terminate its SEC reporting obligations.
    • Additionally, the issuer’s stake in the network will decline — when it declines sufficiently, this is independently a good index of when securities laws should cease to apply, since there is no longer an economic “controller” of the network value.
    • The SEC should consider enshrining these principles in a formal safe harbor along the lines I have proposed.

    Well, that is it — for now. If you are a lawyer or dev interested in helping advance the ideas set forth in this series of articles — particularly if you can help encourage the SEC to start thinking seriously about a similar safe harbor — you can feel free to contact me on ye olde Twitter, where I am lex_node

    I am also a practicing California attorney who can be hired if you know the right Jawas — bring me your blockchain projects or other corporate / securities law projects, and perhaps we can work together — you don’t know the power of the dark side of the force! *evil laugh*


    Size Does Matter — Part 4 was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Ben Kaufman
    Bending Bitcoin — The Principle of Hard Money♦

    Hard money is one of the most well-known monetary terms used in practical discussions. From political discourses on policy decisions to the commentary debates of the financial sector, the term can be heard often enough to make even the ordinary citizen

    Bending Bitcoin — The Principle of Hard Money♦

    Hard money is one of the most well-known monetary terms used in practical discussions. From political discourses on policy decisions to the commentary debates of the financial sector, the term can be heard often enough to make even the ordinary citizens familiar with it. However, and despite its substantial use, while the concept of hard money has a very clear connotation to traditional fiscal responsibility with the monetary system, its exact definition is still quite vague. While for many, it is merely a practical term almost synonymous to a gold-backed system, its conceptual meaning clearly goes beyond that. For theoretical discussions then, it should be evident that, despite gold being for centuries the most accurate practical representation of the concept, it cannot be its very definition. Until today, in spite of the theoretical merits of adequately defining the term, such exact definition seems to have been quite unnecessary. For a long time, it has been established that assuming it as simply meaning a gold system is sufficient for all practical purposes.

    In recent years, however, the term has started being applied to the newly emergent system of cryptocurrencies, and most notably, to Bitcoin. The new employment of the term to describe the new-born monetary system causes an evident confusion as to its exact meaning, and the question of what it is that makes money “hard” has become of practical significance. This current state of affairs has left us with multiple questions. First, what indeed, would be a satisfactory definition for the “hardness” of a monetary system. Then secondly, whether this term could be appropriate to describe Bitcoin. And lastly, if other cryptocurrencies also merit such classification. The rest of this article is thus an attempt to deal with the problems just presented above. As a last note, this article will solely deal with the question of what hard money is. The broader question of whether a hard money system is even desirable in the first place is out of scope for this piece. On that matter, interested readers may find my answer in my previous article.

    What is hard money?

    While, as said above, no precise and consistent definition seems to be prevalent in discussions on the subject, we must first provide such a definition if we are to investigate the matter seriously. The definition we shall use from this point forward is as follows:

    The hardness of money is in reverse relation to the monetary inflation, and the consequent dilution of the value of the existing stock, which can economically be inflicted on it.

    Now, there are a few notable points to clarify in order to avoid common misunderstandings regarding the above definition. First and foremost, we shall note that, like many economic terms, the hardness of money is a subjectively perceived factor, subjected to constant changes by various events (such as technological improvement in production, effective counterfeiting, etc.). In this sense, it is similar to discussing the purchasing power of money, which, while can be generally understood, is a rather subjective and ever-changing metric. While this consideration certainly does not invalidate its importance and usefulness, we shall keep in mind these limitations and uncertainties which necessarily accompany its use.

    Swiss based ETP enters the Crypto trading market | Data Driven Investor

    The second point to notice is with regards to what exactly does “can economically be inflicted” mean, and what are the subsequent implications. In simple words, the question is how much of the money can be produced until its value drops (or production costs rise, or both) to such an extent where production is no longer profitable. Here we can notice a sharp distinction between “commodity money”, of which the market determines the supply, and fiat money, of which legislation determines it. As the supply of commodity money is determined by the market demand for it (its price), the costs of its production will always tend to match its market price, as producers will quickly rush to produce more if the margin is larger, and stop production even faster if that becomes unprofitable. On the other hand, the supply of fiat money, such as the government paper we have today, is regulated not by the demand for it, but rather by bureaucratic processes of arbitrary decisions. The main difference concerning us here between the two monetary systems is that, with the former, the risk of dilution of wealth is to be found mostly with technological progress in the production process. While for the latter, there always exists a risk of massive dilution for any arbitrary cause. Thus, while money from the former category is worth the extra effort of looking into its hardness, the latter leaves us no doubt as for its “easiness”. It might be worth mentioning that this monetary easiness is not at all accidental, but rather the intended result of conscious policies aimed mainly at government financing through seigniorage — the monopolistic profits made by the issuer of a currency which is protected by law from market competition. A discussion on the economic and ethical issues of fiat money in general, and seigniorage in particular, is out of the scope of this article. However, interested readers can find such discussions in “The Ethics of Money Production” by Jörg Guido Hülsmann.

    A (Very) Brief History of Hard Money

    So far, we provided an exact definition for the concept of hard money and saw why it must be commodity money produced through open competition on the market. Now, we will continue investigating the principles of hard money by looking into some historical monetary systems, and the gradual shift from easier monies to a harder one.

    The history of money, including such notable examples as salt, seashells and glass beads, is full of cases where the advancement of production processes or even the improvement in trade connections for a certain money, along with its inferior monetary properties (durability, divisibility, etc.) compared to another money, caused it to depreciate quickly and eventually to lose its monetary role altogether. Such a process is perhaps best illustrated through the famous case of the Rai stones of Yap island. These stones, ranging in size (and value) from small beads to some massive 3.6 meters tall ones, were for hundreds, if not thousands, of years used by the native population as money. As the methods for producing them did not improve much for the long time of their monetary use, their production remained quite stable for many years, establishing their local status as hard money. However, with the arrival of Europeans around the end of the 19th century, and with the advanced tools and production methods they brought with them, production became increasingly cheaper and the stones started depreciating rapidly until they eventually lost their monetary role to the Western money system. Similar cases were witnessed at many times and places throughout history, such as glass beads and cowry shells in Africa and America, salt in Europe, and so on.

    Since the beginning of their use as money from about 1000 BC, precious metals were probably the most prominent money of all. Used mostly through Europe and Asia as the most common monetary system and later spreading rapidly to all other continents after the discovery of America and under the strong influence of European colonization efforts, the entire world started converging towards a unified monetary system of precious metals, namely copper, silver and gold. The growth in the use of such metallic monetary systems was much due to their relatively excellent physical monetary properties, such as their durability, portability, and divisibility. No less influential, or even more so, was the monetary hardness they demonstrated in comparison to all other monetary goods throughout history. This age-long trend towards the use of metal currency arguably reached its peak around the middle of the nineteenth century. Flourishing as the Gold Standard, which prevailed during La Belle Époque, it has declined since the end of this period around the beginning of WWI. Since then, there has been a strong tendency in the direction of irredeemable fiat money, mainly in the form of paper, “token” coins, and later also its digital representations of today.

    This transition from metallic to a purely fiat standard has its origin with the Chinese invention of banknotes, a paper (or similar material) note which the bearer could redeem for specie, on-demand, from a reserve maintained by the producer of the note. The use of such banknotes as a circulating media of exchange began around the 11th century, with the Jiaozi paper currency, and has continually spread around the world ever since. The peculiarity of the practice was of course not with the new physical form which the instrument of payment has taken, but the fact that, although all notes were redeemable on demand, the reserve maintained only a fraction of the funds needed for the redemption of all notes — what is commonly known today as fractional reserve banking. While these paper forms of money were initially privately issued and used mostly for their easier portability (as carrying metal coins became heavy), they were quickly nationalized and served as a new form of a government financing scheme, namely seigniorage, enabled by their cheap production costs and the use of such fractional reserve techniques. A full examination of the history of banking is out of scope for this article. For our purposes the important thing to note is that while the physical form of money started shifting towards paper long ago, today’s concept of permanently irredeemable paper money constitutes a purely modern “invention”. While it is similar in form and probably owes its existence to such ancient practices as described above, it lacks any historical precedent.

    It is true that the global convergence towards metallic money, and especially the later transition from metallic to a gold standard, owes a significant part of its emergence to the political influence of governments. However, the massive scale of interventionist measures taken to implement this latest transition to a completely irredeemable fiat standard is entirely unprecedented. Arguably starting with WWI, consolidating with the end of WWII, and ripening with Executive Order 11615 of President Nixon in 1971, the transition from a metallic to a pure fiat money has nationalized and politicized the global monetary system in any conceivable aspect. The consequence is a regression in the evolutionary tendencies of money from that of international convergence on the hardest money to a degradation towards the cheapest production methods, which will generate the highest seigniorage profits possible to extract for each national government. Thus, we are not surprised to find out that the last hundred years have experienced over 50 cases of hyperinflationary economic collapses. What used to be an extremely rare event has become an epidemic of modern economies, and is now virtually the only check which deters governments from excessive money production.

    To briefly summarize, the history of money shows us a tendency for international convergence of monetary standards towards the hardest money. This tendency likely reached its peak with the nineteenth-century gold standard, and has been suppressed for the last hundred years by political forces compelling the use of the easiest money — that which can be infinitely created at their whim. While the trend towards hard money seems to have completely reversed, the great economic distress and instability arguably caused by this reverse in trend may indicate its mere temporary nature. Thus, there appears to be a strong reason to believe that these last hundred years will be but a short regression in the long trend towards harder money.

    Nevertheless, this last century left us little hope that such a return to progression could manifest itself as a return to a gold standard. With the transition to global online payments, the need for a centralized trusted reserve for the smooth operation of such a system has grown more evident than ever. Yet this very need for a centralized reserve system is precisely the flaw that allowed the political capture and eventual demise of gold in the first place. Also, taking into account the immense expansion in the power of governments worldwide during the last few decades, the risks inherent in such a centralized reserve system make a return to gold seem like an impractical option, however theoretically desirable it may be. Despite the obstacle posed by the closing of this past option, the advancement of technology has opened up a new alternative in the form of Bitcoin, a digital adaptation of hard money. If it indeed provides a secure alternative, such a system has a true potential for becoming the next evolution in monetary standards, continuing the old trend towards harder forms of money. It is investigating this premise to which we will now turn.

    Bitcoin as Hard Money

    In a nutshell, Bitcoin was built to have a final and limited supply, produced by open competition for expending computational power. It is by design limited to a total supply of roughly 21M bitcoins to be produced according to an estimated time schedule. The production of new Bitcoin requires solving a cryptographic puzzle, with each competitor having the probability of solving it in direct relation to its expended computing resources. We see that, by theoretical design, Bitcoin was designed to be hard money, with an eventual hardness allowing for no further production, in a sense, creating absolute scarcity. While we now have the basic understanding needed of the theoretical guarantees of Bitcoin in regards to its monetary hardness, we must proceed to look at how those guarantees are to be secured in practice, and what possible threats may arise for them.

    The monetary hardness of Bitcoin is guaranteed by its consensus rules — the code that either accepts or rejects transaction history (in the form of blocks) according to their validity with this predetermined set of rules. These rules include, among other things, the requirement for a solution to the cryptographic challenge (the proof of work), a verification ensuring no transaction spends more bitcoin than its sender has, and a check that no bitcoins were issues over the supply limit or before the predetermined schedule. Every machine which has verified all the transaction history up to the present, and which maintains as the result of this verification the present UTXO set (the current set of owners of bitcoins), is called a full node. The entire “Bitcoin network” is the sum of all full nodes communicating by the same protocol rules and propagating information about new data (mainly blocks and transactions). By following identical rules of verification, and by passing all data between themselves, all nodes are expected to reach the same view of the current state — a consensus.

    There are two possible ways by which nodes may reach a disagreement over the present state — by having different (or partial) data or by verifying according to different consensus rules. The former case is usually not an issue. It includes mostly nodes in the process of joining the network (in IBD), nodes which have not yet received a new block, and on rare occasions, the case where two conflicting blocks are solved independently of one another and are propagated at the same time. This area of data propagation, while being highly critical, does not concern the monetary hardness of Bitcoin per se, and thus we’ll ignore it for the present discussion. The second possible case — the establishment of different consensus rules — is where the risk of inflation lies and is what we will now examine.

    Strictly speaking, there are no “definitive” rules for Bitcoin. There are, for example, the original rules of the first version of the Bitcoin software, and the rules of the current Bitcoin Core software, but since Bitcoin is an entirely decentralized project, there are no rules one has to follow. This essentially means that (for convenience, taking the most unlikely yet still technically possible case) if all participants in the Bitcoin network were to unanimously modify their rules, for example, as to have permanent inflation, these would become the new rules. There exists no controlling authority which could stop users from running whatever version of the software they desire. This characteristic of Bitcoin, which is inherent in its nature as a man-made digital asset, is probably its most significant difference from the natural commodities, such as gold, and thus requires great attention in assessing the practical hardness of Bitcoin.

    To understand what guarantees the hardness of the monetary policy and other consensus rules of Bitcoin, we should start by analyzing the network, not as a whole, but starting from the very individual nodes comprising it. As far as a full node is concerned, its control over the rules — the “definition” of Bitcoin — is absolute, there is no procedure to compel a node to use a particular set of rules. On the same token, it is also the case that no node can force another to accept its rules. Thus we arrive at a situation where, starting with the initial consensus rules laid out in the first Bitcoin software as base guidance, all nodes in the network must either converge on the same set of rules or lose the ability to transact with the rest of the network. If a node decides, for example, to mint itself new bitcoins “out of thin air”, he may change his own rules as to allow that, but at the cost of losing the ability to transact his “Bitcoin” with the rest of the network. If we assume two people have modified their rules in that way, they give up the ability to transact with all but one another. The same thing happens if we now imagine that 10% of the participants changed their nodes to the new rules, the network can be said to have split into two distinct networks, each defining Bitcoin in a different way.

    While such cases as described above are of little interest, they beget the question of what happens if 50%, or even say 99% modify their rules. In other words, what happens if the majority changes the rules, and what would define a majority in the first place. With Bitcoin, being essentially a communication network, the most appropriate manner to determine a “majority” is to consider the extent to which participants can communicate (transact) with others. Contrary to common fallacies, it does not matter how much hash rate, market cap or total transaction volume a network may have and even less so does it matter how many nodes run its rules (as anyone can deploy as many nodes as he wishes). The only metric which is relevant for the determination of which rules a node joining the network “should” run is to what extent it can transact with others. In simpler terms, how many of those with which he wishes (or expects) to transact with will accept his bitcoins as valid.

    The threat of being unable to transact with others (running incompatible rules) is what deters participants (both other nodes and miners) from arbitrarily modifying the rules. The need for such extensive coordination is what makes changes to Bitcoin, from trivial bug fixes to the most controversial changes, so difficult to implement. Any modification means risking losing the ability to transact with the rest of the network (or part of it). Thus the theoretical ability to exercise such modifications is rarely used. To get back to our subject of monetary hardness, what is most important to understand is that the hardness of Bitcoin for each participant depends on the ability and likelihood of a sufficiently large portion of the network to coordinate and successfully perform a consensus rule change which will inflate the supply of Bitcoin. It is important to emphasize that “sufficiently large” means such a large portion with which losing the ability to transact would render Bitcoin useless. This measure, like the rules of Bitcoin themselves, is by necessity subjective, but it should not be hard to have a rough agreement on what such a case would look like.

    Bitcoin’s Soft Spot

    As we have seen by now, since each user of Bitcoin can run his own node, the power of a participant in the influence over the enforcement of the consensus rules is solely with regard to the transactions he is personally involved in. A node must verify all transactions not for the sake of enforcing the rules for others on the network, but for being able to determine whether a payment he receives himself is valid or not — this is the economic activity of a participant, and it is the only manner by which he may influence the decision of others to use certain rules. Whenever one accepts payment in Bitcoin, it’s akin to asserting what the definition of Bitcoin is by enforcing the consensus rules under which the payment is accepted.

    However, while in our analysis until now we have (intentionally and implicitly) assumed that every participant is actively setting his own rules by running certain code with his full node, and using it to verify the validity of incoming payments, this is not necessarily (and indeed is often not) the case. It is completely possible for anyone to delegate the responsibility of this active rule setting by passively trusting another entity with validating transactions for him. By doing so, the receiver of payment in a sense delegates his economic activity on the network, thus the influence over the consensus rules, to another which in turn may use it with whatever rules he likes. For example, assuming I am using an online Block Explorer to verify that I have received a transaction, whenever I accept a transaction in such a manner, I delegate the influence my economic activity may have over the rules to the operator of that service. If, for example, the operator would decide to use rules allowing larger blocks, new signature schemes or (more worrisome) changing the rate of inflation, I am not only susceptible to passively accept these changes against my consent, I am in fact actively endorsing them by signaling my willingness to accept transactions using these specific rules.

    In the previous section, we have concluded that in order to impair the monetary hardness of Bitcoin, it is necessary to coordinate (convince others to perform) a consensus rules modification causing such a change with a sufficiently substantial portion of the active economic participants of the network, a task we can consider quite impractical in light of both theoretical considerations and practical (although short and insufficient) experience. This difficulty in coordination is not merely due to the decentralized structure of the Bitcoin network, but specifically due to the decentralized, or more correctly self-sovereign, enforcement of rules over individual economic activity. When each participant is actively validating his transaction, it is necessary to convince a very considerable part (if not almost all) of them to accept the new set of rules modifying the hardness of Bitcoin. However, the fewer participants actively validating their transactions, the more centralized does the verification of economic activity becomes, and thus the easier it is to carry out such a change.

    Although, in theory, nothing prevents the use of a full node by each participant, there are various practical obstacles for running and using a full node. Probably the most significant of these obstacles is the technical complexity of operating such a node, which for many is still a very non-trivial task. Moreover, there are the issues posed by the size of the transaction history data, which when increased affects both the initial time needed to join the network, while also raising the hardware requirements needed for an active node, making it increasingly more expensive to maintain. These issues (and potentially various others), while probably manageable, can, if left unhandled, lead to such dangerously large centralization of payment verification which could potentially nullify the monetary hardness guaranteed by the theoretical design of Bitcoin.

    The greatest risk to the hardness of Bitcoin lies therefore in the centralization of payment verification. We see that in theory, if a sufficiently large part of the network is using just a few service providers for validating their transactions, there is a chance that these service providers will coordinate a change to the supply of Bitcoin while having the unaware but nonetheless economically active support of everyone using them to accept Bitcoin payments. It is true that as long as you run your own full node you are able to stick to the present “hard money rules”, but if such a large part of the network has moved (aware of the change or not) to an inflationary set of rules, you will lose the ability to transact with them and thus the utility of using Bitcoin. Before reaching our conclusions on the hardness of Bitcoin, we should address the question of whether other cryptocurrencies may be termed hard money, and what differentiates Bitcoin from all of them.

    What about “Shitcoins”?

    Contrary to constant claims from almost any “blockchain-based” shitcoin, none of them can be considered as hard money. While there are many different implementations for how a decentralized blockchain may work (PoW/ PoS, etc.), they must all rely on the same client-side payment verification model discussed above. However, unlike Bitcoin, they all either merely pay lip service or even disregard completely the importance of self-sovereignty in determining the consensus rules. That is, they all tend towards centralizing the formation and enforcement of the consensus rules. Some projects have some sort of central authority, to which, with little exception, most decisions on the rules are delegated (whatever explicitly or implicitly). Others disregard the necessity of keeping the ability to run a full node as accessible as possible and thus lead to centralization in payment verification. And yet others which try to set up a “governance” process — making arbitrary changes to the consensus a matter of formality.

    I should emphasize that I’m not speaking of all “blockchain projects” or projects with decentralized governance. What I’m speaking against is the often-heard claim of various tokens that they should be considered as hard money, while in practice, their supply can and regularly is arbitrarily altered. As defined above, the hardness of money is in reverse relation to the monetary inflation which can economically be inflicted on its holders. With such digital assets that either rely on a centralized (or semi-centralized) payment verification or have some clear and simple process for modifying the consensus rules, there cannot be even the pretense of being hard money. The potential inflation which could be inflicted upon them is infinite — once you can modify the “monetary policy” of a digital asset, there is virtually no limit to how much you can create from it, and it cannot be considered a harder money any more than any of the fiat monetary systems.

    There is no claim here that the current state of Bitcoin is perfect, or anywhere near that. There is of course much undesirable centralization of verification in the space of Bitcoin as well, and even more concerningly, there is a great sentiment of ignorance of the importance of such self-sovereign verification. However, the main difference is the insistence of Bitcoin “activists” on promoting the use of full nodes, such examples being the Core developers’ efforts on keeping nodes usable on even such weak and affordable machines as a Raspberry Pi, and the many projects which provide various options for running a full node, from a plug and play machines to a completely DIY solutions. The ecosystem dedicated to promoting and simplifying the use of Bitcoin full nodes is both very significant and rapidly growing, and the community’s emphasis on this subject is unmatched by any other project.

    Furthermore, and no less important, is the fact that, being the “first of its kind”, Bitcoin serves as the base consensus rules not only of a single asset but of general digital value transmission. As Bitcoin is in principle a protocol, or even (in its most basic sense) an idea, for “A Peer-to-Peer Electronic Cash System”, and since its rules are, as we have seen, determined individually and independently by its users, it means that in some sense, all other implementations of such a system could be seen as versions of Bitcoin, but with a completely modified set of rules. With that taken into account, the mere fact that these other “Bitcoins” have such a different set of rules and a substantially different monetary policy, signals the relative malleability of their rules — which have disconverged from the original base rules in a very incompatible manner and for no real (monetary) reason (such as an emergency change due to a bug). We may say that these other coins, being a mere replication of Bitcoin’s model, at least in the monetary field, have already proven their lack of hardness by their mere creation as an arbitrary divergent from the main Bitcoin protocol. All those coins might very well have significant differences from Bitcoin and various other “use-cases”, but with regards to being a hard money system, they have all started at a loss against “The Bitcoin Standard”.

    On Bugs

    Before concluding our discussion, there are few remarks which still need to be made. First, while until now we have discussed the hardness of Bitcoin as derived from enforcing its coded rules, we must note another caveat. Bitcoin is a software, and like any software, it can and did (and possibly still does) have bugs. While it’s true that such bugs could cause unexpected inflation, they are unlikely to have any serious impact on the hardness of Bitcoin.

    To understand why, we may divide the possible inflationary bugs into minor (1, 10 or even 100,000 bitcoin — like could happen with CVE-2018–17144) and major ones (like a 184 billion coins inflation). Minor bugs may indeed introduce some inflation, which technically would undermine the core tenet of limited supply, but since they can be quickly fixed, their effect on the total supply will be effectively inconsequential in the long run. In more popular terms, they may increase the stock of Bitcoin to a small extent, but they do not undermine its guarantees as for the upcoming expected flow of new coins.

    As for major bugs, while potentially undermining the interim confidence in the success of Bitcoin, the retroactive countermeasures which could be implemented to nullify the effects of such a clear violation of the constitutional precedent of limited supply would be successful in preserving Bitcoin’s creed. Such measures would be absolutely necessary to preserve the value of the coin-holders and the utility of the network itself. In fact, this is precisely the course of events that transpired in the wake of such a catastrophic bug in 2010. As we have concluded previously, the lack of malleability of the rules of the network contributes to its hardness as a monetary medium. However, here, it is apparent that the literal opposite is true as well; it is the ability of the network to evolve to protect users by way of them each acting individually in their own self-interest that defends the 21 million hard cap.


    Throughout the article, we have discussed the basic principle of hard money and how it relates to Bitcoin. We saw that from the theoretical aspect, the usual description of Bitcoin as “the hardest money ever” is well deserved, but from the practical perspective, the soundness of this statement is to a large extent dependent on the exercise of their self-sovereignty by its users — the use of full nodes for validating and accepting transactions.

    Run a Full Node!

    For the hardness of Bitcoin, it is necessary that as many economic participants as possible use their own full node. However, far more important than this “collective” necessity of self-sovereignty, there are the “individual” reasons to run a full node.

    As said above, when you don’t verify your own transactions but trust another party to do so, you blindly accept whatever definition that party may use for what Bitcoin is. It may very well be that they verify transactions by rules incompatible with most other network participants. Furthermore, they might not be truly verifying anything at all, and just arbitrarily present to you fake data. It is of course very unlikely, at least at this stage of Bitcoin, for established service providers to risk losing their customers by providing them with incorrect or misleading data (although we have already seen such cases, mostly with the Bitcoin Cash and Segwit2X cases). It may very well be fine to occasionally use the assistance of such services, especially for small payments.

    The main thing to remember is that by delegating verification of payments, you open yourself to significant risks, while also potentially weakening the hardness of the rules of Bitcoin. I would not discourage the use of such services altogether, but for those using Bitcoin either frequently or with large amounts, as well as for anyone who cares about their privacy and wants strong security, I would highly recommend to make this effort and find a self-sovereign full node solution which suits their needs. (See below for guidance for that).

    Although commonly heard, the advice to use a full node cannot be stressed strongly enough, it is a crucial part of using Bitcoin — as without using a full node, you cannot even know if you’re really using Bitcoin.

    How to Run a Bitcoin Full Node

    Up to this point, we dealt with the fundamental question of why run a full node. Now, it is time for us to move to the no less important question of how to run a full node. But first, let’s start by clearing a few popular misconceptions as to the requirements needed for running a full node. As for today, the minimum disk space required to operate a Bitcoin full node is no more than 10GB. For an illustration of how small that is, you can find a 16GB SD card for less than 4$. Most smartphones today already come with at least 32GB, and for many, it is possible to add more with such SD cards. It is true that storing the entire history (~300GB as for today) is much preferable, but this is not necessary for running a secure and fully verifying full node, and should not be an excuse not to use one.

    Another important misconception is an alleged need for strong computing power, this misunderstanding usually comes from the confusion between a Bitcoin miner and a full node. It is true that in order to run a (profitable) Bitcoin mining operation, it is necessary to have some expensive specialized hardware, but this is not necessary at all for running a full node. To run a full node you can use as little as a mere Raspberry Pi, or simply your personal computer or smartphone.

    The last thing to note here is the alleged complexity of running a full node. It must be admitted that for now, running a full node is probably not something your grandma will be able to do, but so wasn’t, and still isn’t for many, using a smartphone or a web browser. While in the present time it is certainly easier to use a web browser than running a full node, we should remember that for now Bitcoin is a not only new, but brings a completely new paradigm for using money. The invention of implementing Bitcoin itself was for decades considered an impractical challenge. Compared to that, the challenge of building an ecosystem of user friendly full node solutions is exceedingly minor. The fact that we’ve gotten so far makes me quite confident that the challenge of creating a user-friendly full node will not be a true obstacle. It is also conducive to look at how greatly the simplicity of using a full node has already improved during these last 10 years. Without having any budget whatsoever, depending on the voluntary contributions of people alone, dozens of solutions have already been created for various different audiences.

    Here, I will list a few of the present options. As I cannot guarantee otherwise, I must note that this list might contain imperfect options, and does not substitute for doing your own research in regards to the quality and integrity of the services.

    Probably the simplest solution for anyone familiar with the basic use of a computer is to use the Bitcoin Core software. While its interface is not the best, it is simple to install and use, and is the most common Bitcoin software. For more information see the links below:

    • Bitcoin Core official Download page
    • bitcoin.org Full Node Guide

    Another option is to use Bitcoin Core through another app. There are few such services which will install and set up Bitcoin Core for you. These might not necessarily be simpler than the normal Bitcoin Core install, but they all offer more features, such as Tor support/ Lightning Network setup/ Coin mixing and other useful features.

    • Node Launcher — Bitcoin and Lightning one-click setup tool, including useful Lightning tools and guides.
    • Wasabi Wallet — Bitcoin wallet with built in Bitcoin Core automatic installation, CoinJoin mixing, and hardware wallet integration.
    • Bitcoin-Standup (warning: still in early beta) — MacOS (possibly Linux soon) tool for setting up Bitcoin full node and includes tools for remotely connecting through a mobile app over Tor.

    For the less tech savvy users, a “plug and play” full node might be the best solution. These cost generally between 200$ to 500$, but they come with all the hardware, many great features, and generally much more user-friendly design.

    • Nodl — Includes a Bitcoin full node and one-click support for various features such as Lightning node, Tor and BTCPay server (also available with Samourai Dojo support here).
    • Casa Node — Bitcoin full node which comes with a user-friendly UI, full Lightning support and built in integration with other Casa products (such as a lightning mobile wallet and membership for their multi-sig wallet).
    • RaspiBlitz — Raspberry Pi based Bitcoin full node with Lightning integration.
    • MyNode — Similar to the Raspiblitz with a slightly more user-friendly interface and integrated features like a Blockexplorer and Electrum Server for Hardware Wallet support.
    • Lightning In A Box — Bitcoin and Lightning node with BTCPayServer pre-installed and configured.
    • BTCPi — A cheaper version similar to and sold by Lightning In A Box.
    • BitBoxBase (not yet released) — Bitcoin full node includes a hardware wallet secure element, user friendly wallet, a Lightning node and Tor support.

    For those technical users who likes to get their hands dirty (or just want to save money building their own node):

    • RaspiBolt — A step-by-step guide for creating a Bitcoin full node with Lightning support using low-cost components.
    • RaspiBlitz — The DIY version of the RaspiBlitz. Should cost about ~150$ for the hardware parts while giving the same results as the pre-built option.
    • MyNode — Similar to the RaspiBlitz again which lets you build your own node from ordered parts. The basic software is provided for free but can be upgraded to paid premium with one-click upgrades for more features.
    • RoninDojo — DIY Samourai Dojo with Bitcoin full node, Tor, and Whirlpool coinjoin support.

    There are also several mobile Bitcoin full node options:

    • ABCore — Android app with a Bitcoin full node, uses Bitcoin Core and provides an interface for using it as an Android app.
    • HTC Exodus — An HTC Android phone with a built in Bitcoin full node, a hardware wallet TEE element and more related features.
    • As for today, there is no iOS compatible way to run a full node Bitcoin. However, the app Fully Noded allows you to connect to your node remotely and use it on iOS.

    A note on key management:

    It is important to note that while many of the solutions presented here provide the user with a Bitcoin wallet, many are using (either only or by default) a “hot” wallet, i.e. a wallet stored on a machine connected to the internet. This is considered a relatively insecure practice. Many users therefore opt to use hardware wallets (such as Trezor, Ledger, and ColdCard). Though (at least considered) much more secure for key management, the benefit derived from using such hardware wallets is significantly impaired if they are not used along with a full node. While most hardware wallets don’t provide a (simple) integration with a user’s full node, there are complementary solutions developed to provide such support.

    • Bitcoin-Core HWI — A UI for interacting with many types of hardware wallets while connecting them to Bitcoin Core for verification.
    • Electrum Personal Server — Allows the integration of Electrum wallet with a Bitcoin full node. Supports various features including hardware wallet integration, multisig wallets etc.
    • YetiCold — (warning: still in beta) A self-sovereign, easy to use, multisig setup protocol aimed at minimizing trust and various attack vectors.

    Special thanks to Ben Prentice (mrcoolbp), Bezant Denier (bezantdenier), Daniel Wingen (danielwingen), The Bitcoin Observer (festina_lente_2), Thib (thibm_), Simon Lutz (simonlutz21), and Stefanie von Jan (stefanievjan) for all the feedback I received from their reviews, comments, and suggestions which helped me shape this article.


    Bending Bitcoin — The Principle of Hard Money was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.

    The cat is out of the bag
    Sunday, 29 December 2019
    Nic Carter
    Bitcoin is everyone’s problem now
    Evey: Remember, remember, the Fifth of November, the Gunpowder Treason and Plot. I know of no reason why the Gunpowder Treason should ever be forgot… But what of the man? I know his name was Guy Fawkes and I know, in 1605, he attempted to blow up the House
    Bitcoin is everyone’s problem now
    Evey: Remember, remember, the Fifth of November, the Gunpowder Treason and Plot. I know of no reason why the Gunpowder Treason should ever be forgot… But what of the man? I know his name was Guy Fawkes and I know, in 1605, he attempted to blow up the Houses of Parliament. But who was he really? What was he like? We are told to remember the idea, not the man, because a man can fail.
    He can be caught, he can be killed and forgotten, but 400 years later, an idea can still change the world. I’ve witnessed first hand the power of ideas, I’ve seen people kill in the name of them, and die defending them… but you cannot kiss an idea, cannot touch it, or hold it. Ideas do not bleed, they do not feel pain, they do not love…

    – Evey Hammond, V for Vendetta

    ♦An exorbitant privilege

    Bitcoin is first and foremost a monetary phenomenon. The social climbers and false prophets who proclaimed it is a payments revolution have either come around or been repudiated by the market and washed out, embittered. Most who understood it that way are now moving on to new things. The world did not need another Paypal. The world needed a new monetary institution.

    As Bitcoin went from a proof of concept, to a toy, to a joke, to a collectible, and then to a movement, a few policymakers came to realize that it posed a threat to the established system. Not because of its present form, but because what it represented: a profane insult to the carefully calibrated monetary system. All done in a mocking, insouciant fashion — a band of nerds and ne’er-do-wells insolently challenging the state’s monopoly on seigniorage. Satire is what despots fear most, and the rise of Bitcoin made our present monetary system look patently absurd.

    Critic: Nothing backs Bitcoin.
    Bitcoiner: What backs the dollar?
    Critic: Nothing intrinsically — our ability to compel foreign nations to accept our currency as the numeraire of international trade, our ability to force citizens to pay taxes in dollars, and our military assets required to enforce both conditions.
    Bitcoiner: How persuasive!

    The visceral hatred elites feel about Bitcoin? Perfectly justified. How else would you react to a upstart aimed at usurping your sacred monetary privilege?

    Such is the potency of Bitcoin that it compels the high priests of U.S. imperialism to reveal the unwritten rules about the role the dollar plays in power projection abroad. In May of this year, U.S. Representative Brad Sherman (D-CA) spoke out against cryptocurrency on the floor of the house. His statement laid bare the normally veiled post-Bretton Woods doctrine in which the dollar is employed not only a monetary tool but a strategic one, too.

    An awful lot of our international power comes from the fact that the dollar is the standard unit of international finance […] and it is the announced purpose of the supporters of cryptocurrency to take that power away from us […]. Whether it is to disempower our foreign policy, our tax collection, or our traditional law enforcement […]. the purpose of cryptocurrency […] is solely to aid in the disempowerment of the United States and the rule of law.

    Representative Sherman is practically a soothsayer. He understands precisely where the world is going.

    His mistake is not in the diagnosis, but in the cure. He mistakenly believes that Bitcoin can be reckoned with. But Bitcoin is an idea, not a product. The notion of a weightless, virtual commodity was productized for good in 2009 (although the idea long predated Bitcoin), and it has been eroding the state’s monetary monopoly ever since.

    It could not have been created at a better time; one wonders how Bitcoin would have fared if it had been created in the 1980s or 90s when the US economy was fairer, the monetary system was totally unquestioned, and the US was the sole dominant global superpower. Against today’s backdrop, Bitcoin insists on itself. It has urgency. In the halcyon days of Pax Americana, Bitcoin would have mattered much less. In the twilight of the American empire, however, it is more relevant than ever.

    Our monetary system is disastrously redistributive

    The wealth of political elites derives primarily from privileged access to the monetary spigot. This is no longer a secret. The heavenly mana of seigniorage has opened, first a trickle and now a flood. The world is grappling with inequality, and the dozens of populist revolts active in the world today are patent evidence of this. Yet the resurgent socialist parties misdiagnose the situation. The enemy is not a nebulous form of capitalism, but rather a form of socialism itself — a low-rates fueled perma-bailout to the owners of financial assets. It’s no coincidence that asset prices have steadfastly risen in the last decade, as the Fed has embarked on a ludicrously unshackled period of money creation.

    Many ask: against the backdrop of monetary issuance, where did the inflation go? It went of course into financial assets. But this benefits the paltry few. Did you know that the decade-long rally in the S&P500 has been characterized by historically low participation from retail investors? The riotous gains in asset prices have sidelined mom and pop. They accrue instead to institutional investors and corporate insiders who returned capital to themselves through buybacks. In the 90s, Wharton MBAs convinced investors that the ideal mode of corporate governance was making large equity and options grants to corporate directors to create incentive alignment. Well, the grants were made, and the directors rewarded the shareholders by spending corporate earnings on buying back the stock, thus juicing earnings per share and triggering options payouts for directors. They just so happened to forgot to generate corporate value along the way. That pesky real economy… that was secondary.

    Why are politicians so rich? Why do they become rich after leaving office? Why do regulators go work in industry? Why is the Secretary of the Treasury a former Goldman banker and hedge fund manager?

    ♦The Cantillon effect pictured

    Why are renters historically disempowered, whereas landowners are historically privileged? Why has the cost of higher education and healthcare outpaced inflation by orders of magnitude? Why is the CPI a sad, pathetic joke? Do consumer goods account for most of your expenditures, or does rent, healthcare, and education?

    What are you more exposed to? The cost of a TV, or property values?

    Even if you didn’t know what the Cantillon effect was, you felt it vividly in the last decade. The hopelessness felt by many in today’s society is the consequence of this monetary misalignment; the introduction of eye-watering money into the economy, but an uneven distribution. Who benefited from historically low rates? Normal folks dealing with predatory credit card loans, or owners of financial assets who were able to put historically cheap capital to work? And no, cheap financing didn’t help the middle and lower class get a foothold in property… because property values were horrendously inflated in the first place! Property, treated as a store of value for the rich, is precisely where so many of the Fed’s newly-minted dollars settled. Reflect on those hollowed-out city centers in Vancouver, New York, and London — full of empty homes used as capital warehouses for absentee millionaires.

    If there’s a single graph that evidences the impact of a decade of freewheeling monetary stimulus on the economy, it is the following:

    Monetary velocity in the U.S. is at its lowest since modern records began. If you think about the equation of exchange (MV = PQ), a decline in V is sufficient to offset an increasing money supply (M) to keep prices (P) stable. And that’s just about what happened: the purchasing power of the dollar has remained relatively stable even as supply has expanded dramatically. “Where is the inflation?” is the common refrain, but the question should instead be “where has the new money supply gone?” It is clear that it has settled, inert and unproductive, in financial assets mostly owned by the ultra-rich, bidding them up to century highs in relative valuation terms.

    This is why our perverse form of zombie capitalism is often referred to as socialism for the rich. If you can position yourself close enough to the money spigot and arrange to share in the spoils of the monetary redistribution, you can profit handsomely. If you have access to financial assets and can benefit from a low cost of capital (whether you are an investor or a corporate director with discretion over buybacks), you can make low rates and quantitative easing work for you. If you cannot, you are utterly frozen out of the system, and indeed disadvantaged, as pricier capital assets immiserate the non rentier class.

    Bitcoin is a system that explicitly rejects identity

    Critics often ask who, exactly, Bitcoin is for. This perhaps a misspecified question. Bitcoin does not serve a “who,” or a subset of whos. It just serves, indifferent its end users. Bitcoin, by design, does not require identity data to work. Your counterparty could be on the OFAC sanctions list, they could be a sentient toad, or a few lines of code. Bitcoin has no way of knowing, nor does it care. The only requirement to send a payment is to provide a valid signature which meets the criteria sufficient to unencumber a UTXO.

    Traditional payment and credit relationships, on the other hand, enshrine identity. My credit card company is very interested in knowing that it is me who is using the card. If I inform them that a stranger has absconded with my card, they consider all the spends post-theft totally invalid. The call with the fraud department goes like this:

    • ‘Can you vouch for the $10.51 purchase on 2/24 at Chipotle?’ Yes, that was me. Extra guac.
    • ‘Can you vouch for the $463.39 purchase on 2/29 at Lululemon?’ No, I don’t habitually buy athleisure gear.

    Identity data is inextricable from traditional payment networks. This is because they are many layers between payments and final settlement. An incredibly large and profitable business exists to assess the credibility of transactors and facilitate deferred-settlement transactions between them. This is because credibility and mutual trust enables massive efficiencies. You can lend your neighbor a lawnmower without demanding he provide a bond to cover its value because you trust him. Credit card networks just scale this up: they are trust underwriters, determining quantitatively how trustworthy I am, and passing along those assurances to merchants with whom I transact.

    If they get it wrong, and it turns out I’m the kind of person who racks up a $10,000 credit card bill with no intention of ever paying, they swallow the cost! It was their bad. They should have done a better job assessing my trustworthiness.

    The compact you implicitly agree to when you use Bitcoin is between you and the protocol, not between you and all the other users of Bitcoin. The only trust required is users trusting that the cryptographic and economic assumptions hold. So far, they have.

    It has become trendy to denounce popular Bitcoiners as uncompromising, unreasonable assholes, and imply that there is something wrong with Bitcoin as a consequence, too. But Bitcoin is indifferent to this. It is a protocol for encoding and conveying value through a communications medium. Bitcoin isn’t even aware of what the price of Bitcoin is, let alone the political trends of the day. It knows very, very little about itself.

    As stated above, Bitcoin is attractive and useful precisely because it rejects any identity data from the conditions required for a spend. The only thing that has to be furnished is knowledge of a private key corresponding to a public key. When you receive Bitcoin, you do not need to be aware of the identity of the sender, because Bitcoin settles probabilistically. You can simply define your own threshold for finality — say, requiring $500,000 of work to be done before you consider a transaction final. That would correspond to waiting, at current rates, for 4–5 blocks under which your transaction should be buried.

    This is what allows me to accept funds from people that I mistrust, and why Bitcoin is carving out a niche in these frontier transactions. Think of a ransomware hacker and his victim. These people mutually mistrust each other. They victim has been wounded and attacked. But the hacker still trusts that the $500 sent to them for the ransom in the form of BTC is a valid, unlikely-to-be-reversed payment. You may not like this. But Bitcoin flourishes on the margins of society. These are increasingly widening, as banking becomes politicized and used as a political tool, as the U.S.-driven settlement system is coopted for strategic objectives, and as identity requirements for payments networks become ever more rapacious.

    Transacting with people you have no reason to trust is precisely why Bitcoin exists. The internet allowed us to transact with people on the other side of the globe, but internet commerce is beset by fraud. The reason credit cards are expensive is because the costs of remediating fraud and chargebacks are socialized.

    If you aren’t comfortable with evil people using Bitcoin, you should abandon it now

    Of course, the jettisoning of counterparty trust (and risk) comes with some perceived drawbacks. Principal among them, you cannot evict someone from your network. This is very uncomfortable to people who believe that money ought to be a political tool, to be exploited to disempower political foes of the day.

    There is a particular paradox in demanding that the members of a network you have inserted yourself into adhere to a certain moral code of conduct. As stated above, Bitcoin, and fast-settling hard money more generally, exists to facilitate commerce between individuals that do not have a pre-existing bond of trust. What did inter-continental traders use to transact in the 17th century? They certainly didn’t use IOUs, wampum, collectibles, or credit relationships. They knew that they might never see each other again, so they used the hardest money they had available — gold and silver. Monetary metals speak for themselves; they are no one’s liability.

    In this same way, Bitcoin is a means to transfer wealth between individuals who both have an interest in final settlement. It is not a means to establish a credit relationship (although Lightning is an early move in this direction). Bitcoin is deliberately amoral, it has no requirements to entry and asks nothing of the user aside from a valid signature. It facilitates commerce between people who explicitly disagree with each other. Thus trying to impose a moral code on Bitcoin is contrary to its very nature. If everyone who used Bitcoin agreed with each other, then no one would need Bitcoin — they could all exchange IOUs backed by their mutual trust in each other. But because the world is messy, and people disagree with each other, hard money is warranted. Our chaotic world practically demands it.

    So if you are the kind of person that rejects a useful transactional medium because someone you dislike is using it as well, it wasn’t suited for you in the first place. Bitcoin is edgy precisely because the world needs a payment and savings system which cannot be interfered with on moral or political grounds. To repudiate these transactional constraints is to violate the carefully poised moral setting that has seized the West. If stepping out of line isn’t for you, stick to Paypal instead.

    Bitcoin is an apocalyptic death cult…

    As Bitcoin hater-in-chief David Gerard so elegantly puts it, Bitcoin is in fact an apocalyptic death cult. Apocalyptic, because Bitcoiners recognize the futility of the current monetary system, and appreciate that it is likely to end in tears. Death, because States won’t give up their monetary privilege easily. Bitcoin is veiled in eschatological overtones. Cult, because you have to be somewhat deranged to take a pill this black.

    ♦Freedom is not “Free”.

    So spare a thought for the Bitcoiners. They are fully awakened to the pending grief and strife that await us, Cassandras warning governments and citizens alike to the disruptive effects of truly sovereign currency (sovereign, as in free, not as in State-owned). But unable, most of the time, to convince their fellow man that the State’s monetary machinations may not be sound. Most people are content to surrender all freedom and autonomy to the Leviathan, as long as the pot they are in boils slowly.

    … but it’s open to all

    The exact reason that Bitcoin is despised by so many— identity, creditworthiness, and trust are irrelevant in this system, making it a fertile ground for criminals — is the exact reason why it’s so inclusive. Unlike Paypal, Venmo, or traditional payment processors, it cannot deplatform you for wrongthink, holding subversive political views, being a sex worker, or legally selling cannabis. Ours is the biggest possible tent. Don’t be distracted by the online discourse. Bitcoin is utterly indifferent to the political views of its users. Its core developers, the high priests of the protocol, can barely change it: (implementing a fairly routine upgrade, SegWit, took them years of cajoling and pleading). Getting it to do anything other than produce blocks, accept valid spends, resolve forks, and relentlessly march onward is virtually impossible.

    Whether Bitcoin will challenge the State, or whether that task will be left up to a successor, is yet to be determined. That the State’s monetary privilege has been permanently eroded is evident though.

    It died a little that day in January 2009 when the Chancellor [was] On the Brink, and it has been shrinking ever since.

    By Nic Carter,
    Oct, 2019

    The Bitcoin Times Ed 2 is the collaborative work of 8 writers & 1 designer with the intent to educate, inspire and spread ideas on bitcoin.

    Each section will be released on Medium as a free long form article, and the full, compiled version of the Bitcoin Times will be available for free at the link below. In 2020, we’ll release a limited edition hard cover collectible, for purchase, which you’ll be notified of by email if you download the free pdf.

    If you found value in this or any of the other essays and articles, please support each of the contributors by sharing it out & following their work.

    Download the full guide at:

    The Bitcoin Times

    (Soon to be updated to: bitcointimes.news)

    Follow The Bitcoin Times on Twitter @TimelessBitcoin:

    The ₿itcoin Times

    Written By:
    • Nic Carter - Medium
    • nic carter
    Editor @ Bitcoin Times:
    • Aleksandar Svetski [₿]
    • Aleksandar Svetski - Medium

    The cat is out of the bag was originally published in The Bitcoin Times on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Friar Hass

    People hate Bitcoin analogies. But Bitcoin is so hard to understand for so many, concessions need to be made.

    VCs are a group of people demonized in the Bitcoin industry for not understanding Bitcoin’s value proposition. Well, how do you


    People hate Bitcoin analogies. But Bitcoin is so hard to understand for so many, concessions need to be made.

    VCs are a group of people demonized in the Bitcoin industry for not understanding Bitcoin’s value proposition. Well, how do you expect a VC to value Bitcoin if they’re only used to valuing startups?

    Here is a framework that will hopefully help. It tracks the development and evolution of the Bitcoin ecosystem in discreet “fundraising rounds”, which coincide with Bitcoin’s Reward Eras. An organization is defined as “an organized group of people with a particular purpose”. If that’s the case, then Bitcoin is a well-oiled “un-organisation” with founders but no CEOs, many volunteers but no employees, and provably non-diluting equity, available to anyone who is willing to trade their energy for it.

    ♦Bitcoin As A Startup

    I will be borrowing heavily from Nathan Reiff’s piece “Series A, B, C Funding: How It Works”

    Pre-seed Round (1st Reward Era, 3/1/2009–28/11/2012)
    The earliest stage of funding a new company comes so early in the process that it is not generally included among rounds of funding at all. Known as “pre-seed” funding, this stage typically refers to the period in which a company’s founders are first getting their operations off the ground. The most common “pre-seed” funders are the founders themselves, as well as close friends, supporters, and family (Reiff, 2019)

    The “Bitcoin Company” was founded by Satoshi Nakamoto, with its single product offering being an open-source monetary system project, known as Bitcoin. 2,100,000,000,000,000 shares were to be issued on a predetermined schedule, and anyone was free to buy or sell these shares. The founders initially held no initial equity, but equity was easy to build in those days, and rightly so. Just like any startup, it is the founding team and initial bootstrappers who should get the biggest rewards down the line for putting the most skin in the game.

    Due to the nature of Bitcoin’s incentive mechanisms, many early “equity holders” were encouraged to use their time, skills and money to evangelise or develop the product, and hence increase the value of their equity. The company manages itself, in a zero-overhead environment.

    During the first stage of “the company’s” life, traditionally the “the first bugs appeared and were ironed out, and this was an iterative process for many months. After proving to be robust and reliable, a market developed, and the first exchanges started to emerge. User experience, both from a software point of view, and a financial point of view, were a disaster. Bitcoin was virtually unusable without a PhD in Computer Science, and when you could use it, you’d be robbed by an exchange that had been “hacked”. Volatility was extreme, and the risk was unpalatable for the majority of onlookers. Whether or not “The Bitcoin Company” would remain “in business” was still a very dubious proposition.

    This Era, the early equity holders were blessed with a parabolic bubble, and many divested some equity to give themselves runway to work on Bitcoin full time. It’s just like a fund-raise: get a big cash injection, and then burn it relentlessly until the next funding round. Coincidently, each round has exhibited at least one of these massive injections and equally massive drawn-out draw-downs.

    During this Era, miners were rewarded with USD$13.5m in total block rewards and transaction fees. Assuming that, on average, cost to mine a bitcoin is equal to the market price, we can consider the mining reward to be miners buying bitcoin at-spot. Therefore, we can take the “money-in” for the round to be the cumulative miner’s revenue. Money-in is never consistent, and even a small injection is enough to make the price fly and form a bubble.

    With all the above said, fortune favours the bold, and Bitcoin entered its seed round at a $1bn pre-money valuation (i.e. Bitcoin’s Market Cap was $1bn at the end of the first reward era).

    Seed Round (2nd Reward Era, 28/11/2012–9/7/2016)
    You can think of the “seed” funding as part of an analogy for planting a tree. This early financial support is ideally the “seed” which will help to grow the business. Given enough revenue and a successful business strategy, as well as the perseverance and dedication of investors, the company will hopefully eventually grow into a “tree.” (Reiff, 2019)

    Risk of short-term ecosystem death did not substantially decrease until the end of the Secord Reward Era. You could say that the risk profile dropped from “Extreme” to “Very High”. In terms of PR/Optics, this was arguably the worst and most dubious “round” of Bitcoin’s existence. In the face of these FUD-inspiring superficial problems, Bitcoin did what it does best — got on with it.

    This era saw the first Bitcoin bubble to be featured in Mainstream Media in some way shape or form. Going from catastrophe to catastrophe; from the numerous exchange hacks, scams, asset seizures, 51% attacks (GHash.io) and China bans, those who invested in the mania of 2013 would not break even until the Third Reward Era. Inflation made things worse, with the market having to absorb the 5.25 million Bitcoin producing during the Era. However, those who divested during the mania provided themselves with many years of runway to give back to Bitcoin and make their equity more valuable.

    In this Era, we started to see the emergence of user-friendly plug-and-play hardware wallets; the age of ASIC mining was in full swing, with miner fabrication done at a huge scale. The gamblers had a field day — with the majority of “fiat-onramps” providing toys for the traders, but not for the savers. For better or worse though, this added much needed liquidity and means for price-discovery. That said, liquidity was quite low, and for the first half of the era when the exchanges were just so sketchy, you couldn’t even really trust what the advertised market price was.

    The first VCs entered the game; some investing in Bitcoin companies, and others, like Tim Draper, investing directly in the underlying.

    Miners were not put off by the prolonged bear market, with the network hashrate growing by orders of magnitude mostly due to competition-driven innovation among ASIC fabricators. In the Second Reward Era, miners earned a total of USD$600m for their efforts. This USD$600m “investment” resulted in an $11bn post-money valuation at the end of the Round.

    Despite failing to reclaim the heights of 2013, Bitcoin closed this round on the upswing — one that wouldn’t end for another year and a half.

    Series A — Optimise (3rd (and Current) Reward Era, 9/7/2016 — May 2020)
    Once a business has developed a track record (an established user base, consistent revenue figures, or some other key performance indicator), that company may opt for Series A funding in order to further optimize its user base and product offerings. (Reiff, 2019)

    With “traditional” startups, their Series A round is used to fund the optimization of the offering, and to lay a solid platform to build further during the next round. Several experts and industry stakeholders were split on how to best optimize Bitcoin to increase transaction throughput. The Establishment took the view that achieving this through an increase in block size was the answer, The People took the view that this was a slippery slope, and that scaling be achieved with protocol optimisations, i.e., Segregated Witness (SegWit). The People were victorious, which was a huge positive indicator that centralizing Bitcoin would be a Sisyphean task. As a result, and in combination with a supply halving, the money flowed in, and Bitcoin achieved a valuation in the hundreds of billions at its all-time-high.

    The Third Era also featured “The Scambrian Explosion”, with thousands of cryptocurrencies being spawned, sending Bitcoin’s dominance of the cryptocurrency to a paltry 35% at one point in time. While most of these altcoins now having lost over 95% of their value (hundreds have lost >99% of their value), the only result was the wasting of hundreds of thousands of hours of development time and hundreds of millions of dollars which should have been directed at Bitcoin. The fact that Bitcoin now accounts for 75% of the cryptocurrency market (and rising) is a testament to why people should have just stuck to Bitcoin.

    The huge influx of money in this Era allowed early equity holders to further divest to focus on development — and my oh my, was there a lot of development. In terms of scalability, The Lightning Network successfully came out of beta and is being extensively used. Privacy and coin-joining solutions emerged and became easier to use. There are literal satellites in space broadcasting the network. The rise of the “run your own node” movement gathered serious momentum and was bolstered by a host of companies offering “plug-and-play” nodes. With your own node, you can also be your own payments provider through BTCPayServer. Multi-signature security has never been easier. This paragraph could go on for pages — so if you want a full technical recap of just 2019, the Bitcoin Optech Newsletter will give you everything you need to know.

    At time of writing, Era miner revenue is USD$4.6bn, and the valuation has risen from $11bn to over $125bn.

    Despite all the progress made, Bitcoin is still a high-to-very-high risk investment at this stage, as the market price can still move in excess of 30%, in either direction, in one week, regularly. This will ultimately remain the case until both the liquidity pool grows, and the mining reward (inflation) shrinks.

    Series B — Build (4th Reward Era, May 2020 — Apr 2024)
    Series B rounds are all about taking businesses to the next level, past the development stage. Investors help startups get there by expanding market reach. Companies that have gone through seed and Series A funding rounds have already developed substantial user bases and have proven to investors that they are prepared for success on a larger scale. Series B funding is used to grow the company so that it can meet these levels of demand

    With the necessary protocol upgrades happening during Series A and early in Series B, the focus will shift to the building of products and services on top of the slowly ossifying Bitcoin base layer. This Era will see the replacement of the “Old Guard” by a newer generation of more business-savvy Bitcoin entrepreneurs and through merger and acquisition activity.

    There will also be a lot of vertical and horizontal integration, as companies aim to achieve a “full-stack”. One example of all this is Layer1 mining, in what is effectively an electricity utility that also mines, and designs and fabricates ASIC miners.

    It is impossible to predict what’s specifically going to happen during this 4 year era, let alone in the first year of it, but if the past 18 months are anything to go by, security, privacy, and most importantly going forward, UI/UX, will improve dramatically. I’d expect that running a full-sovereignty stack (your own VPN, node, electrum & BTCPay servers, multi-sig setup, etc.) will be easy enough for almost anyone to do at the end of The Era. Effectively, Bitcoin’s infrastructure will be developed enough to handle some proper scale.

    What will be most interesting thing to see will be the technological, economic and political developments during this Era. In this regard, everything is “Good for Bitcoin”. Internet access, computers and smartphones become cheaper and more accessible? This is good for Bitcoin. Never ending quantitative easing and negative interest rates? This is good for Bitcoin. Increased political turmoil, censorship, or surveillance? This is good for Bitcoin.

    Should Bitcoin “stay in business”, risk level at this point would be medium-to-high, and you could expect to be exposed to weekly swings of +/-15%, but maybe not as regularly as in Series A.

    When looked at in conjunction with some economic models like the Stock-to-Flow model, there is little reason to think a 10x growth in market cap will not be seen in this series, as per the 3 series preceding it. This would mean a series-end market cap of about USD$1 trillion, or, around USD$50k per bitcoin. Chances are that the All-time-high price achieved during this series will be dramatically higher than the end price, as this is the main driver of the “investment-to-utility” loop.

    Series C — Scale (5th Reward Era, Apr 2024 — Mar 2028)
    Businesses that make it to Series C funding sessions are already quite successful. Series C funding is focused on scaling the company, growing as quickly and as successfully as possible. (Reiff, 2019)

    Inflation is finally starting to drop, with only ~650,000 BTC needing to be absorbed by the market over the 4-year period — the inflation rate is now lower than that of Gold. Scarcity is becoming a more dominant element of Bitcoin’s value proposition.

    With basically all the infrastructure largely built, and UI/UX continuing to improve, this Era is “The Era of The Evangelist”. Bitcoin is ready for prime time; somebody just has to go out and tell everybody. This Series’ fund raising round made all the right people very wealthy (if they weren’t already wealthy from the Series B raise), and these people will begin to use their influence (i.e. money) to promote Bitcoin, and increase the “saver-base”, i.e., the number of people who buy bitcoin on a weekly basis, or, earn their living in Bitcoin.

    At this stage, to maintain a USD$500k price, about 10 million people are each saving USD$150/wk in Bitcoin. This represents 0.2% of the world’s adult population. Considering the level of utility and the seamlessness of the UI/UX in the late stages of this series, only 10 million active savers may even feel like a failure of sorts! From here, it is simply an exercise of marketing.

    medium.com/media/da4a47f6535454fc2f34dc44828543b6/hrefIPO (6th Reward Era, Mar 2028 — Feb 2032), and beyond…

    At this point, if Bitcoin is still alive, it is effectively unkillable. Major banks have now made big acquisitions, and are offering bitcoin services to their customers. Most power utilities have skin in the Bitcoin game. People won’t know that they’re using Bitcoin — and we’ll probably have 4 (or even 5) layers on top of Bitcoin now. On-chain base-layer transactions are reserved for high value transactions, all people adopting Bitcoin going forward won’t be onboarded via the base layer. The Bitcoin ETF has FINALLY been approved after an 18 year effort. Price per coin is in the millions, and fairly stable (to the downside, at least). Number still go up — just as designed.

    It’s improper to say that it is “zero risk” in 2032, but the risk is extremely low. That said, if it gets to a 7th Era, I’d be comfortable enough to say that Bitcoin may become the first ever truly risk-free asset, with inflation rapidly approaching zero. I’ll be 50 years old by the end of Era 7, so I’m literally betting my career that this will be the case. Talk about skin in the game!

    Bitcoin by Ross #7: How to Read the News
    Saturday, 28 December 2019
    Ross Ulbricht

    by Ross Ulbricht

    I wasn’t expecting to write again so soon because there have been no significant price changes yet that affect our analysis from the previous post. However, I found the reaction by the news media to “Bitcoin by Ross” to be interesting because it illustrates a point I brough

    by Ross Ulbricht

    I wasn’t expecting to write again so soon because there have been no significant price changes yet that affect our analysis from the previous post. However, I found the reaction by the news media to “Bitcoin by Ross” to be interesting because it illustrates a point I brought up here. In that post, I said the following:

    Many look to the news to get an idea of why prices have been going up or down and to find the reasons for why they’ll be higher or lower in the future. This is counter productive because the news is caught up in the same cycles as investors, so you’ll see good news and rosy projections at price peaks, with bad news and projections near lows.

    The reaction from the news to “Bitcoin by Ross” was overwhelmingly positive and optimistic. However, I was very careful to point out in my posts that the optimistic forecast was just one possibility, and even it calls for just one more relatively small advance in prices before transitioning to a massive bear market. Here’s what I said at the end of my last post:

    Whether we are in it now (our second scenario), or there is one more stab into new highs with wave (5) (our first scenario), wave II will come. As noted, it will likely be accompanied by extreme pessimism and antagonism toward Bitcoin. Long-time hodlers may capitulate and sell out. Businesses and governments may reject it. Some may call it “dead.” But so long as bitcoins are still being traded and the system remains technically sound, the end of wave II could be the best buying opportunity we will see for a very long time, perhaps ever again.

    By all accounts, this is a very pessimistic outlook for the medium term. I put forth some ideas in that same post about wave II taking prices as low as $1,500. Yet nearly all of the news coverage was about the possibility of an advance to ~$100,000. For example:

    “Silk Road founder Ross Ulbricht makes $100k Bitcoin price prediction”

    “Silk Road Darknet Marketplace Founder: BTC Will Reach $100,000 in 2020”

    “Bitcoin Set to Shatter $100K in 2020, Says Ross Ulbricht”

    Because the news is caught up in the same cycles of optimism and pessimism as everyone else, taking it at face value will only draw you into those cycles as well. A better way to see the news is as an indicator of current levels of optimism and pessimism. The fact that coverage of “Bitcoin by Ross” has been so optimistic tells us we are closer to a peak in prices than we are to a low, and there is more downside than upside potential.

    This does not rule out the $100,000 scenario. That may be the peak we are close to. $100,000 is only 5x more than the all-time high of ~$20,000. Bitcoin has seen multiple price advances on the order of 500x (as noted here), so a price of $100,000 is not as dramatic as it seems.

    But the optimistic reaction from the news should make us more cautious and give a little more weight to the pessimistic scenario from our previous posts: that the price may fall below the recent low of $3,200 before it rises above the $20,000 peak.

    Information Theory of Money
    Friday, 27 December 2019
    Dan Held

    Prices and the market are intricately intertwined

    ♦I recommend reading this article while listening to “Strix Aluco” by “Isan”Prices reflect information
    “In a free market economic system, prices are knowledge, and the signals that communicate information. Prices are not simply a tool

    Prices and the market are intricately intertwined

    ♦I recommend reading this article while listening to “Strix Aluco” by “Isan”Prices reflect information
    “In a free market economic system, prices are knowledge, and the signals that communicate information. Prices are not simply a tool to allow capitalists to profit; they are the information system of economic production, communicating knowledge across the world and coordinating the complex processes of production.”
    — Saifedean Ammous

    Prices are the coordinating force of a free market system. Each individual decision-maker can rely on the prices of goods and services to help with their decision making, as the prices themselves are a distillation of all known market information into a single metric. In other words, the compression of all relevant data is ultimately manifested as price (for the more technie minded, it’s a one-way hash function).

    Each individual’s buy and sell decisions, in turn, further shape prices that carry this altered information back out into the market. Some of you may have heard of this from “Efficient market hypothesis” which is about how information in the market is reflected in the price of assets like equities.

    Money is the measuring stick
    “Money is the central information utility of the world economy. As a medium of exchange, store of value, and unit of account, money is the critical vessel of information about the conditions of markets.
    Capitalist economies are not equilibrium systems but dynamic domains of entrepreneurial experiments. Money should be a standard of measure for the outcomes of entrepreneurial experiments.” — George Gilder

    The essence of Capitalism is all about the efficient allocation of capital given the constraints of scarce resources and time. Companies are experiments on how to best allocate capital, and money is the standard measure for efficiency. Making money represents the efficient allocation of capital, losing money is not an efficient use of capital. And competition means decentralized planning by many separate companies and people to solve a problem in the market.

    ♦Capitalism, much like nature, is about experimentationInformation is Decentralized

    “A centrally planned economy could never match the efficiency of the open market because what is known by a single agent is only a small fraction of the sum total of knowledge held by all members of society” — Hayek (Hayek’s “Local Knowledge Problem”). A decentralized economy thus complements the dispersed nature of information spread throughout society. Each company is an attempt to take the local knowledge that it has and create a good or service that ultimately is the correct capital allocation (aka profit).

    To highlight how decentralized this information is, I’m going to give an example by Milton Friedman who made the statement: “There’s not a single person in the world who knows how to make a pencil:

    • The wood comes from a tree
    • To cut down that tree, it took a saw
    • To make the saw, it took steel. To make steel, it took iron ore
    • Graphite, comes from some mines in South America
    • The eraser, which is rubber, probably comes from the tropics
    • Or the yellow paint
    • Or the glue that holds it together

    There was no central planning office. It was the magic of the price system.”

    ♦Praxeology. The study of Human Action.Central banks have an unsolvable data problem

    Central banks inherently have a data problem. There’s an ingestion, processing, decision bottleneck — same as any electronic signal processing system. An economy cannot be planned by a central authority, because there is no way that a central authority can have all of the necessary knowledge to make the best decision at any single point in time, let alone all points in time.

    “It is a problem of the utilization of knowledge which is not given to anyone in its totality” — Hayek

    To operate effectively, central banks would have to ingest trillions of data points daily, and ingest those data points in a perfect manner which is impossible. Every single uber taken, every single sandwich purchased, every single in-app purchase.

    “We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.” — Philip Tetlock

    We’ve created central banks because we want the world to make sense, and we want to feel that there is someone in charge. Even if we were able to ingest perfect data, it is hard to infer simple causality for this complex, chaotic system which involves billions of decision makers. While determining the relationship between weather and crops might seem easy, how do we determine the causality of burrito demand? Economics isn’t like the sciences, we are hamstrung by small or incomplete sample sizes. We can’t re-run the Dot com bubble with a different central bank or a different President.

    This brings us to how central banks measure impact and make decisions. There is a classic product saying that goes “If you can’t measure it you can’t manage it.” It’s hard to even measure a kilogram with extreme precision, so how could we possibly measure inflation properly? (ex: CPI excludes food and energy!)

    “Since big events come out of nowhere, forecasts may do more harm than good, giving the illusion of predictability in a world where unforeseen events control most outcomes (Aka black swan events)” — Carl Richards

    He goes on to say “Risk is what’s left over when you think you’ve thought of everything.” Daniel Kahneman also has a great take on the dangers of using history as our guide:

    “Hindsight, the ability to explain the past, gives us the illusion that the world is understandable. It gives us the illusion that the world makes sense, even when it doesn’t make sense. That’s a big deal in producing mistakes in many fields.”

    Here’s a useful analogy: Essentially the Fed is driving the car, which is the economy, only using the rearview mirror which is foggy, and the front windshield is opaque (you can’t see the future). How could the Fed possibly drive the car with any accuracy? What if we just let the car self adjust to the conditions of the road?

    History cannot be interpreted without the aid of imagination and intuition. The sheer quantity of evidence is so overwhelming that selection is inevitable.

    So what is our alternative?

    Sound Money
    “Sound money is the equivalent of scientific integrity: the system must not permit the manipulation of data after the experiment has taken place.” — George Gilder

    Sound money keeps the ruler settings fixed so results cannot be altered by a centralized planning mechanism.

    And Bitcoin is the perfect iteration of sound money. Bitcoin has a hard cap for several reasons: being a precise measuring stick, reducing political attack vectors, and encouraging speculative bubbles which act as a viral loop.

    But why 21M? Why not 100M?

    Here’s the secret…It doesn’t matter! It’s precise length is irrelevant. What matters is just that there is a fixed amount. As economic activity moves from a primitive scale, it becomes harder for individuals to make decisions without having a fixed unit of account with which to compare value.

    Regarding political attack vectors, Satoshi felt that setting a “proper” rate of inflation rate was impossible so he decided to remove human decision making from the process. Satoshi has two quotes regarding fixed supply that support this conclusion:

    “Indeed there is nobody to act as central bank or federal reserve to adjust the money supply as the population of users grows. That would have required a trusted party to determine the value, because I don’t know a way for software to know the real world value of things.”

    Satoshi also says

    “If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that.”

    Finally, Satoshi hypothesized that a fixed supply might create speculative bubbles.

    “As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.”

    Implications of Sound Money

    Bitcoin is the ultimate safe haven asset. As more and more people buy into Bitcoin and that narrative, it becomes the de facto risk off asset.

    Post hyperbitcoiniation, when Bitcoin is the SoV, MoE, and UoA, Bitcoin will reflect the most accurate “risk free” rate of return that we’ve ever had, which enables the economy and market participants to most efficiently allocate resources. Each market participant, both individual investors and corporations, make the risk on/risk off decision which is then manifested in Bitcoin’s price.

    And finally, when Bitcoin is the unit of account and used by every business, market participants can view the flow of funds of their suppliers and customers in real time via their publicly disclosed Bitcoin addresses. This transparency makes markets ultra efficient through the best processing of information.

    Bitcoin rearchitects how capital is efficiently allocated in our economy, ultimately creating a world with more abundance and resources for all.

    By Dan Held,
    Nov, 2019

    The Bitcoin Times Ed 2 is the collaborative work of 8 writers & 1 designer with the intent to educate, inspire and spread ideas on bitcoin.

    Each section will be released on Medium as a free long form article, and the full, compiled version of the Bitcoin Times will be available for free at the link below. In 2020, we’ll release a limited edition hard cover collectible, for purchase, which you’ll be notified of by email if you download the free pdf.

    If you found value in this or any of the other essays and articles, please support each of the contributors by sharing it out & following their work.

    Download the full guide at:

    The Bitcoin Times

    (Soon to be updated to: bitcointimes.news)

    Follow The Bitcoin Times on Twitter @TimelessBitcoin:

    The ₿itcoin Times

    Written by:
    • Dan Hedl
    • Blog - Dan Held
    • Dan Held - Medium
    Editor @ Bitcoin Times:
    • Aleksandar Svetski [₿]
    • Aleksandar Svetski - Medium

    Information Theory of Money was originally published in The Bitcoin Times on Medium, where people are continuing the conversation by highlighting and responding to this story.

    Nic Carter

    Disclaimer: I have no current or future interest in a new cryptocurrency launch, either personally or professionally. This piece is intended generally as a thought experiment, and is NOT an endorsement of any specific project. I do not recommend or condone the creation of any new base-layer crypto

    Disclaimer: I have no current or future interest in a new cryptocurrency launch, either personally or professionally. This piece is intended generally as a thought experiment, and is NOT an endorsement of any specific project. I do not recommend or condone the creation of any new base-layer cryptocurrencies.


    The presence of ASICs in Proof of Work systems has always been deeply contentious. At maturity, ASICs enhance the security of the network (by forcing miners to take a long term stake in the success of the protocol), but in the transitional phase, the first hardware manufacturer to build ASICs has a near-monopoly on the minting of new coins. This can lead to the existence of an informal form of seigniorage — minting money at a discount to its market value. Protocols which fork frequently are also exposed to this risk; developers effectively have the ability to determine which PoW function the chain will move to, giving them the ability to monetize their influence over the protocol. This is a potentially very insidious form of corruption, and it impairs the ‘fairness’ quality that PoW is known for. GPU chains also have the undesirable quality of being ‘nicehash-able’ — that is, attackable by renting commodity hardware for a short period of time. There is no long-term bond required to mine a GPU coin, as the hardware is repurposable and salable.

    Mindful of these issues, I started thinking last year about how an ASIC launch might work. Not because I have any interest in participating in one, but simply because I find it interesting to think about these tradeoffs. This culminated in this tweet:

    body[data-twttr-rendered="true"] {background-color: transparent;}.twitter-tweet {margin: auto !important;}

    It's only a matter of time (&lt;12 months) until we see a fair launch with an exotic PoW released by a dev team that has also made ASICs that work exclusively with that PoW. No details of the algorithm will be released until genesis block.

     — @nic__carter

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    About a month later, Obelisk (a subsidiary of Nebulous) published their proposal for a commercial service, dubbed Launchpad, which could facilitate PoW launches with custom pre-built ASICs.

    Introducing Obelisk Launchpad

    I put my tweet in this article to demonstrate that I’ve been ruminating on these ideas for a long time, and I’m not writing this opportunistically to lend ‘moral support’ to any specific launch. I have had this piece mostly written for a long time, but I neglected it because I figured that PoW launches were essentially defunct and that there wouldn’t be a great deal of interest in them.

    In fact, I was wrong about the timeline — no such launch that I am aware of occured in the 12-month period following the tweet. But it has come to my attention that a few teams are contemplating similar launches today. Thus I felt that my thoughts on this matter might be useful. Not for the benefit of any particular team, but because this gives us an interesting canvas to evaluate issues that are critical to the social scalability and security of these networks, whether it’s Bitcoin or other PoW chains.

    If someone is intent on launching a new public blockchain, I firmly think non-premined PoW is the best way to do it, for a number of reasons, which I’ll get into later in the article. But I feel that GPU launches are increasingly more difficult and risky. I cannot stop anyone launching a chain. But I think a careful analysis of the tradeoffs might encourage teams to do things more responsibly, or, at the very least, explore other parts of the design space.

    Lastly — some of you will be upset by my musings around how a new generic blockchain might be launched. If this is the case, I’d recommend simply closing the tab and disengaging. Additionally, while I think Bitcoin is likely sufficient as far as non-state monies go, I am also not willing to permanently rule out the potential emergence of some other PoW blockchain. I don’t see why we’d need another one now, but I find it hard to believe that Bitcoin is both the first and last viable blockchain ever to be created. I’m not afraid of competition, either. I think Bitcoin has its own unique merits, and smaller launches don’t compete with it or impair it in any way. Since it’s entirely possible to me that we do end up with another PoW chain at some point, it’s worth thinking about how to launch them.

    Just so I’m absolutely clear on this: I’m not endorsing any specific launch or coin, or even new PoW launches generally. In fact, I would generally discourage anyone from launching a new blockchain. They tend to be boondoggles or ghost towns. But I am not ruling out the potential existence of a new blockchain at some point in the future.


    New cryptocurrency launches are beset by a strange paradox: they typically require a single, authoritative entity to spearhead development, to manage the process of launch, and coordinate development for a meaningful period throughout its infancy. Generally, a considerable amount of upfront investment in R&D is required to create a differentiated protocol. All of these features tend to require the organizational and financial efforts of a single entity.

    But of course the backing of a corporate entity (or the more subtle, let’s-pretend-there’s-no-organization-pulling-the-strings-here model) is a critical point of centralization. This means that adversaries have very obvious buttons to press if the protocol grows too big or disruptive; generally speaking, anyone hostile to the network will have an abundant ability to interfere with it. Additionally, these administrative entities often choose to retain not only a large fraction of supply, but also discretion over decision making, trademarks, and vetoes over future development directions. Much like Engels’ quote around the “withering state” as the end result of a socialist utopia, the claimed “path to decentralization” in monetary protocols is closer to rhetoric than reality.

    To truly commit to surrendering power, the founders of these projects must be comfortable with austerity and eventual irrelevance. It’s sometimes said that Satoshi’s second most brilliant insight, behind creating Bitcoin, was leaving the project. Lamentably, virtually no cryptocurrency founders since have followed his lead, preferring filthy lucre and a shot at joining the Davos class, alongside their fellow central bankers.

    Numerous models of protocol financing have been attempted over the years: the bitcointalk premine, the more sophisticated ICO, the founders reward, the covert premine and backdated whitepaper, the instamine, the merged fork. The purists will maintain that nothing other than a proof of work fair launch (ensuring no seigniorage, not even for the developers) is sufficient to confer the founding team with the legitimacy to create a worldwide protocol.

    They have a point: it’s vanishingly unlikely that, if a meaningful portion of the world switches to a neutral cryptocurrency protocol, that future buyers of the coin would find it acceptable to enrich founders who allocated themselves 20% or more of this global currency for free. Seigniorage — more generally, the distinct feeling of unfairness, or being cheated — leaves a particularly nasty taste in one’s mouth. This, rather than any technical foibles, will be the doom of most of those sexy new high-TPS VC-backed base layer protocols. These aren’t startups: these are monies, competing on credibility, neutrality, institutional stability, and fairness. Private equity is concentrated and unfair, but you don’t need to use Uber stock to buy your daily bread. For something as essential as money, fairness is critical. A deeply unfair launch is an ugly miasma, lingering nastily, poisoning the authenticity of the project.

    The singular appeal of a Proof of Work launch is not simply in the distributional advantage that at-home mining gets you (although this is a potent and underrated feature). No, the most important feature of the PoW fair launch is that it ensures that it is impossible to acquire coins for below market rate. You can purchase the coins on the market or with electricity; no one is entitled to an insider deal. Compare this to a dev team premining an ERC20 and then dripping it out on the market over a period of years. This looks cosmetically the same a PoW. But it’s not — because that team was able to acquire all the coins for $0. It would be similar to PoW if the dev team took the funds they received in exchange for the coins and set them on fire.

    Of course, the disadvantage inherent in the ‘fair launch’ is the fact that it’s challenging to monetize the network, especially early on. This is fine if developers are happy to work idealistically or altruistically. In Bitcoin, patrons eventually emerged, as the network came to be systemically important. Today, a rich and diverse set of patrons subsidize dozens of core developers to keep the chain running smoothly and work on long term infrastructure. This is perhaps the ideal model; but Bitcoin has the advantage of being the first, the most critically important, and not having venture backers to reckon with. Today, any new cryptocurrency struggles to distinguish itself. Obtaining sufficient traction to survive on patronage or donations is a tall order. And as far as front-loaded R&D goes, this is virtually impossible to finance without some sort of sale of future rights to protocol tokens. Many will point to the Grin case study here. Having made the somewhat anachronistic decision to aim for a proof of work fair launch targeted at GPUs, the Grin team struggled to monetize. Donations so far have been relatively scarce. A cautionary tale, to many.

    Of course, those smugly deriding the weaknesses of the fair launch model tend to do so with the implicit intention of advertising straightforwardly exploitative launch models of their own. Let he who is without premine cast the first stone. Even though Grin has struggled for financing so far, its odds of becoming a significant monetary asset are not encumbered by securities laws issues, by the risk of the founder being arrested, or by the community becoming disenchanted as they are exploited by VCs dumping on them at the the first opportunity (For those who don’t believe me, read the fundraising decks of the crypto funds targeting token strategies. That language about low “time to liquidity” — that’s code for “we plan to exit our token positions at the public sale, because we want to secure a riskless return and dump this asset as soon as possible”).

    The 2014–18 era ICO was, for the most part, a disastrous financial instrument. I have never come across a single one that I felt was issued responsibly to the public. Once these stopped being accessible to the general public, they lost their sole advantage: wide, permissionless distribution (note that this is a native feature of PoW). The issues with ICOs, especially those opting immediately for a proof of stake authority model (instead of a PoW bootstrapping, as Ethereum wisely opted for), are numerous:

    • Insiders can purchase their own crowdsale, and covertly obtain an arbitrarily high fraction of supply for free (because they also get to collect the funds committed to the crowdsale)
    • Buyers can obtain tokens for arbitrarily low prices, since they are not created in a costly manner through proof of work, but summoned out of thin air. Thus, the private rounds that predate public sales often consist of pure seigniorage
    • Tokens often end up being a bizarre mishmash of an informal investment contract, and an arcade token for unlocking network resources. This causes speculation to crowd out usage and leads to very confused theories of value accrual
    • Tokens sold to the public (or done obliquely, a la Telegram) closely resemble investment contracts in most sensible jurisdictions, and this tends to make the issuers subject to securities laws, whether they like it or not
    • Issuers that retain a large fraction of supply tend to retain authority in the network, especially if a Proof of Stake model is opted for. This hampers the path to decentralizing authority, as issuers tend to resist divesting their share of the network
    • Early backers can obtain disproportionate shares of supply for essentially free, and then costlessly retain that advantage in perpetuity if the network follows a PoS model. This is a potent force which chills the dispersion of tokens, as stakers are not compelled to sell. In PoW, by contrast, miners must constantly spend and invest to retain proportional network authority. In PoS, retaining stake is simply the cost of running a server

    My central point is this: the principal challenge in the administration of a new monetary commodity is not a technical one. Of course, your blockchain must have compelling technical features. But ultimately the difficulty lies in climbing the wall of indifference. At inception, no one cares about your system. At maturity, you need tens and possibly hundreds of millions of individuals to care. If you give early investors discounted access to a significant fraction of supply, and then give them powerful anti-dilution rights (while hoping/expecting that future individuals will use your network as working capital and tolerate some dilution, in effect subsidizing the early buyers who passively stake), you risk creating a patently unfair system in which the winners are a function of the arbitrary prehistory of the chain.

    Attracting anyone to a network like this strikes me as profoundly unlikely. Why your chain? Why not an equivalent fair launch, where every owner worked for their coins, instead of receiving an allocation through some proximity to the founding team?

    But, ICOs, premines, and founder-tax coins have a crucial advantage: the ability to subsidize work on the protocol, even prior to its launch. Naively presuming that, in 2019, not all the cryptocurrency protocols that will ever exist have already been launched, one might go as far as to say that subsidizing work on a protocol prior to its launch might be a desirable property. So can one mix and match the desirable qualities of a coin launch while avoiding the worst of them? I certainly think so. Let’s review three popular models:

    Certainly more cons than pros in this case. In the U.S., selling rights to a cryptocurrency, especially to the general public, seems to be out of favor with our securities regulators. Not recommended. Additionally, giving early backers or big holders permanent, cheap-to-exercise anti-dilution rights dulls the dispersion of tokens, limiting its reach. We have fairly good data on this, thanks to the transparency that blockchains offer us. (I’d love to see a serious piece of work comparing the dispersion of ownership in PoS chains versus PoW chains. If you’re a researcher who is interested in taking this on, get in touch! I have data.)

    A classic. The Bitcoin, Litecoin, Monero, and Grin model. A sensible approach, but difficult to bootstrap support, and reliant on community funding or patronage for ongoing support. Very effective and hard to kill if you can pull it off — but it requires a huge amount of community building to get traction. These appear to be getting less and less viable with time, especially as the financial stakes have grown. I’d expect that virtually all GPU launches today would be subject to the risk of insiders with prior knowledge of the algorithm covertly creating ASICs.

    This this hybrid model, pioneered by Zcash. This is essentially equivalent to a vested premine. It better aligns incentives than a pure premine, as the allocations are not unlocked for a number of years. Nevertheless, the proposal has issues of its own: in the case of Zcash, the protocol has been racked with controversy over whether the administrator should receive additional protocol-derived funding. The spigot of seigniorage is very hard to turn off, once active.

    At this point, you might be wondering why I don’t simply agitate for vanilla PoW fair launches. By this rubric they seem plainly superior. But they aren’t without their issues. I think it’s worth being realistic about GPU PoW launches. Let’s look at a couple recent case studies.

    Why GPU fair launches might be a thing of the past

    As someone who followed the Grin launch rather closely, I must admit that it felt like a nostalgic last foray into a prior era. I got a decidedly Proustian pang from watching the process play out. As if I had dipped my madeleine in the tea and been transported back to the glory days of PoW launches from 2012–14.

    The gossip going around about “$100m in VC-backed SPVs” was hyperbolic, but the launch certainly had problems. Initially hoping to stay ASIC-resistant in perpetuity, the developers ultimately opted for a pragmatic GPU-to-ASIC phased approach, envisioning a slow transition to an ASIC dominated network, but hoping for some more widely accessible GPU mining to begin with. There was a period of GPU mining, but some miners are now reporting to me that ASICs, or at least more efficient hardware (FPGAs), have begun to take a significant share of hashrate, somewhat ahead of the desired schedule. This isn’t exactly a failure, but it does illustrate the colossal difficulty inherent in the notion of ASIC resistance.

    You are creating an enormous bounty for anyone to anticipate the PoW change, or to lobby the developers for a favorable outcome. The Grin developers did dither a little bit on the ultimate model for PoW (this was naturally a rather fraught discussion) and this ambiguity caused a lot of gnashing of teeth and lobbying efforts. It would have been far more efficient, overall, if resources had not been allocated to lobbying developers for a favorable hash function. Ultimately, the devs took extreme care to make the chain hostile to ASICs at inception, but they couldn’t stem the flow. They didn’t opt for ASICs right away due to a naive view that GPUs would dominate for the early history of Grin (and the difficulty coordinating this model with a distributed, non-corporate team), but ASICs (or at least FPGAs) appeared anyway.

    Most ASIC resistant chains are beset by this same difficulty. They effectively create a massive bounty for teams to create FPGAs or ASICs and fly below the radar, hoping they aren’t discovered. Su Zhu says it well here:

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    Every coin which is targeting GPU-mining is being stealth FPGA-mined at the very least, if not ASIC-mined already. There is some analogy here to exchanges w/ speedbumps vs HFT. The speedbumps mean the game theory is more complex, but in the end fastest players still win.

     — @zhusu

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    You might imagine future teams would learn from this and bite the bullet, issuing ASICs right off the bat.

    A proposal

    Having rambled long enough, I’ll share what I have in mind. Let’s revisit what we’d like to optimize for:

    • we’d like to limit seigniorage; that is, we want virtually every participant to have the ability to obtain the tokens at market price, with relatively few exceptions to this rule
    • we want the distribution period to be as long as possible
    • if being an early backer of the network does confer an advantage, it should be a temporary one and erode over time
    • a position of authority in the system should be costly to retain; it should not be costless to exert influence in perpetuity
    • being an early backer of the network should not grant you permanent anti-dilution rights
    • we want the system to work under existing securities laws in the U.S.: we want to disentangle the investment contract from the asset issued by the protocol
    • we want the network to be secure at inception (from a crypto-economic perspective)
    • we want the founding team to be able to meaningfully divest power and authority from the network; and
    • we want to inculcate a feeling of fairness and to minimize information asymmetries surrounding the network launch

    I believe virtually all of these qualities can be obtained in a model that has not been tried before:

    The ASIC presale model

    The basic idea is:

    1. Some developers create a new cryptocurrency protocol.
    2. To finance this, they sell rights not to tokens, but to physical ASICs
    3. Together with trusted supply chain partners, they manufacture these ASICs ahead of launch
    4. These ASICs are sold to investors or, better yet, to the community of users who want to explicitly support the network in its early days. They are possibly securities, although I haven’t done the legal analysis here. (I am rather uncertain about this part.) These sales are booked as revenue for the issuing corporation
    5. The ASICs support a custom hash function (which is not being employed by any other blockchain)
    6. The developers keep this hash function a secret until the day of launch
    7. At launch, the hash function is disclosed, and a race kicks off among the ASIC manufacturers to build the second generation of ASICs
    8. Within 4-6 months, the first batch is rendered obsolete as new ASICs are manufactured, and the temporary monopoly on issued supply that early backers enjoyed is eroded
    9. Over time, the advantage that early miners enjoyed fades away
    10. The developers commit to never changing the PoW function
    11. The developers hold few/no coins and can exit the project if necessary or adopt a Red-Hat/ Commercial Open Source approach to managing the chain, retaining no explicit in-protocol authority

    Let’s consider the pros and cons of the model.

    I think the primary advantages of the ASIC presale model are as follows:

    You get ASIC-tier security at inception

    This is a big advantage over GPU PoW fair launches. As we learn more about the PoW security model, it’s clear that all but the largest GPU-mined networks are simply unsafe. Ethereum is probably an exception because it accounts for such a large fraction of the world’s GPUs, and they cannot be sold or rented in sufficient numbers. Aside from the structurally difficulty of acquiring sufficient hash power, this means that successfully attacking Ethereum would cause the value of GPUs worldwide to depreciate, which is a strong disincentive for any attacker. Aside from Ethereum though, most GPU mined coins are exposed to this risk of rented hardware being used to attack the chain, and we’ve seen copious examples of this. If you believe that dedicated hardware helps with security, then you will prefer the ASIC model. This approach gives you ironclad security from inception.

    The investment contract-like element is firmly disentangled from the actual coins

    In the case of an ICO, you have tokens which are presold to buyers. If these are understood to be investment contracts, or securities, this potentially compromises the entire supply of tokens, and inhibits their ability to circulate on exchanges. In an attempt to circumvent this, it has been argued that the investment contract covers only rights for future tokens, and that the tokens themselves are not the subjects of the investment contract. It’s under this reasoning that the ETH in the presale are understood to have likely been the subject of an investment contract, but the outstanding units of ETH at delivery of the blockchains were not themselves securities. I don’t really buy this distinction — at the very least, I find it tortured. I find it easier to simply distinguish the two.

    In the case of the ASIC presale, you very clearly distinguish the investment contract from the coins themselves. If there’s anything which is security-like, it’s the ASIC sold to investors (although, as noted, it’s entirely possible that these aren’t even securities, as end users have to actually operate them and feed them with electricity, obviating the ‘efforts of third parties’ prong of Howey). The actual coins themselves are totally in the clear, in my opinion, since they are issued by the protocol in the manner of a conventional fair launch. I think we have copious evidence that fair launch tokens are not understood to be securities by the SEC. This gives potential users really convenient assurances that the trading of the asset won’t suddenly be restricted to security token trading venues. This is one of the greatest advantages of the model.

    You get PoW distribution AND developers can finance themselves in a limited capacity

    The distributional advantages of PoW have, to date, not been very well documented, but I have a strong intuition that they lead to better dispersion of supply. Relative to the vanilla PoW launch, developers can also finance R&D and administrative costs involved in launching a new chain. And they’re not violating securities law. Sweet!

    You get an arbitrarily long distribution period

    Many have noticed that, as far as new monies are concerned, the existence of temporal contingency in distribution introduces an arbitrariness which limits the dispersion of the currency. In other words — short issuances (some ICOs were over in minutes) guarantee that the supply will be highly concentrated. Longer issuances give everyone a shot at obtaining the units of coins. This was part of the intuition behind the yearlong EOS ICO, which was a rather clever idea (aside from the fact that the crowdsale wallets had continuous outflows during that time, leading to conspiracies about recycling treasury funds back into the ICO). If you think about it, the EOS yearlong tokensale was somewhat akin to a PoW launch (with the exception being that the coins contributed to the crowdsale were not burned). Proof of Work gives you an extended permissionless distribution phase, although the decaying block reward means that new supply is much more abundant early on. Bitcoin’s issuance will last over 100 years, but over 80% of all Bitcoins have already been mined.

    Comparing a PoW launch to a generic ICO, it’s very clear that permissionless access in a newly-launched ICO is impossible. Tezos straddled this transition, following a no-KYC crowdsale with a subsequent forced KYC process to unlock user Tezzies. I would imagine that all subsequent ICOs (to the extent that they do occur) will follow suit. The difference with PoW is that you are acquiring coins from a protocol. While ASIC suppliers might ask for KYC, generally speaking, mining is a much less permissioned environment than ICOs or crowdsales. Add in the reality that electricity is much more globally available than access to capital markets, and PoW looks very attractive. A protocol retailing off coins in exchange for electricity over a long period of time is an extremely potent means to issue an asset to a global audience. No one has devised a better way so far.

    The rules of the game are very clear

    One of the biggest issues with PoW chains in this day and age is ambiguity, especially around changing hash functions. When you have ambiguity, you have debate, and lobbying, and the possibility for developers to exploit their privileged status within the system. This is generally disastrous, and reduces social scalability, as well of the credibility of the system. If a small group of individuals if found to be abusing their protocol access to monetize, the system’s credibility is compromised. One alternative is to simply set the PoW function and commit to never changing it (this is essentially what Bitcoin has opted for, and why Bitcoin should never change its PoW unless something catastrophic occurs). That’s what this model calls for. No debate; no lobbying; no covert exploitation.

    The initial advantage depreciates over time, providing the system with natural dispersion

    Unlike something like a PoS token sold in a presale, the initial balance of power in the ASIC launch system changes dramatically over time. Initially, a select few have near-monopoly rights on supply. But this is a temporally limited advantage, and the appearance of new ASICs, or even simply the passage of time, and the depreciation that that brings, erodes that initial advantage. I want to emphasise that I consider this a good feature. Too much power granted to the early stakeholders in the network — plus the ability to retain this power, costlessly, in perpetuity, is a dysgenic feature. This massively inhibits the dispersion of the holder base. The presence of PoW is useful here. It induces constant selling on the part of miners, reducing their protocol-proximate privilege. The same cannot be said for staking. While in the case of the ASIC launch we have a privileged few early on, their advantage rapidly depreciates.

    Let’s unite everything in a big chart, to compare how the alternative launch methods deal with various downsides.

    While I think this is an interesting and attractive model for a new launch, there are certainly some open questions still, especially as we’ve never seen it done in the wild. These are some of mine:

    • is it possible to extract a margin on ASICs sufficient to render this a profitable enterprise?
    • what is the shape of the supply curve such that the temporary monopoly on supply would be considered acceptable to future users?
    • how can ASIC buyers have confidence that no additional ASICs were covertly created?
    • can one-shot financing be sufficient to bootstrap a business building an open source protocol?
    • is the limited amount of seigniorage disqualifying in terms of creating a monetary asset?
    • are the ASICs themselves investment contracts/securities, or are they in the clear?
    • is it possible to build an ASIC supply chain that doesn’t concentrate with one or two entities having unilateral control over the hardware production process?

    What do you think? Worth trying or a pointless waste of time? I’m curious to hear your thoughts. I feel that launch methods are generally under-covered, so I hope that this post kicks off some discussion, regardless of whether this model is considered viable.


    I will consider a few objections here.

    If you applied this model to Bitcoin, six months of mining would represent 1.3m BTC, which is an excessively large fraction of supply

    You can tune the shape of the supply curve however you like, to give the monopolists in those first 4–6 months an arbitrary fraction of supply. You could design the curve such that they get 0.1% of supply or 99.5% of supply. I think an issuer would probably aim to target something like 5–10% of supply for that initial period, but that’s a totally wild guess.

    Why do you expect that the initial batch of ASICs will last 4–6 months? Why wouldn’t they last essentially forever and give ASIC buyers a permanent advantage?

    If the protocol actually ends up being relatively significant, market cap-wise, then ASIC manufacturers will inevitably jump in and make ASICs for it. From conversations with ASIC manufacturers that I know, the shortest period it takes to make a useful ASIC for a new cryptocurrency algorithm is about four months, although I would happily take expert input here. FPGAs in this example wouldn’t suffice, because the existence of ASICs at inception means there’s a relatively high bar to clear in terms of competitive hardware. Either way, the point remains — I fully expect that the first miners would be met with competition within six months at the latest.

    The ASICs in this example actually aren’t securities

    This isn’t exactly an objection but I wanted to address it anyway. I’ll admit I don’t know the answer here. You definitely have to mix the ASICs with your own labor (and electricity) to get a return, so their value doesn’t purely derive from the efforts of a third party. I am just vaguely guessing that the ASICs might resemble an investment contract. I am not a lawyer. This isn’t legal advice. Either way, if they weren’t securities, that would be even better for the model. We’re trying to avoid violating securities law, remember.

    The issuers are giving ASIC manufacturers total power. They could create extra ASICs and cheat the process

    This is definitely a risk, so the ASIC manufacturers must be contractually bound or closely trusted by the issuing team. The risk is that they covertly create too many ASICs. There are potential ways of mitigating this. I haven’t put a lot of thought into it, but I feel like the team could set up a protocol similar to google authenticator where they give miners ciphertext to include in coinbase outputs for the first few months, to ensure that the blocks being mined are being created only by ASICs which are accounted for. I’m not sure. I think someone clever could come up with a better way to ensure that only members of a permissioned set of ASICs is permitted to mine for the period in which they have a temporary monopoly.

    We don’t need any more blockchains. Stop helping people figure out how to issue new cryptocurrencies

    I basically agree, but I’m not going to stop exploring these issues just because you don’t like the idea of new coins existing. We may well discover a reason to create another blockchain at some point. Who knows.

    This launch is actually quite unfair, as you’re suggesting creating a premine

    Definitionally, this isn’t a premine. There is no “prior mine”. (I’ll admit that quibbling over definitions misses the point). What we have are the issuers monetizing their informational advantage. They know what hash function will be used, and they are selling that information in the form of purpose-built hardware. The mining is up to whoever the ASICs are sold to. They do get a temporary monopoly. Think of it like a taxi medallion which decomposes after six months. It’s clearly unfair. But having observed the Grin launch, and the ProgPoW debate, and the many Monero and Vertcoin “ASIC-resistance” hard forks, it’s very clear to me that developers are extremely susceptible to lobbying over PoW. I would prefer that the hash function is never changed, so that the rules of the game are fixed and the returns to lobbying are 0.

    So in this case we have a transparently unfair model, as contrasted with a (potential) covertly unfair situation which people naively think is fair. The latter would be disastrous. Imagine a chain which was ASIC resistant, forked to a new PoW, for which it later emerged that the developers had custom-designed hardware, while everyone else mined with GPUs. This would constitute an exploitation of the community, and a breach of trust. This is entirely possible within the framework of ASIC-resistant coins, and I expect it to happen at some point. I’m proposing a situation with temporally limited unfairness, which decomposes over time, and becomes pretty explicitly fair thereafter.

    Developers shouldn’t monetize. They should work on these things altruistically. Otherwise you cannibalize intrinsic motivation

    I pretty much agree! I think that one of the most perverse outcomes with protocol-funded rewards is that FOSS developers lose their incentive to contribute to the protocol, leaving it all to the professionals who are paid directly from that protocol-funded spigot. This essentially turns a FOSS project into a corporate one, obviating all the advantages of using FOSS in the first place.

    This specific configuration is a very limited monetization. The developers sell ASICs at the price that the market will tolerate, and that’s the only chance they have to directly monetize their protocol access. Later on, they can think about adopting the Red Hat/ COSS / Blockstream model, where they monetize their protocol-specific expertise. But this model also empowers the initial issuers/developers to exit the project without destroying it. Because they do not have permanent authority in the network, as would be the case with an issuing team retaining a large fraction of PoS tokens, for instance.

    Developers can’t sufficiently monetize under this configuration

    Excessive developer monetization of a monetary protocol they develop is a very dangerous thing, in my opinion. At a certain threshold you have an operation which is primarily dedicated to extracting rent, rather than delivering computational services at commodity prices. Anything developers to do abuse their authority in the system — including extracting value in excess of the minimum required (which may well be 0) — undermines its credibility and raises the likelihood of users leaving for a less extractive system. I am generally of the belief that no protocol-funded monetization whatsoever is optimal. But if there is to be some, I would tolerate it under the conditions that it is temporary, limited, and does not give the developers permanent authority within the system. This meets those restrictions.

    It’s too expensive to launch in this manner. Issuers won’t be able to sufficiently finance themselves

    This is a fair critique. Instead of creating the tokens for ~free and selling them, developers have to literally create hardware and sell it. ASICs are generally quite expensive. I suppose it might vary on the type, but a decent run will cost millions of dollars. So the issuers will need to be able to charge a sufficiently high price to extract a margin. This has the interesting effect of “pricing” the offering.

    If the ASICs are expected to have a monopoly on issuance in the first six months, and 10 percent of supply will be issued in that period, the value of the fully diluted supply will roughly be 10 times what buyers pay for the ASICs. This establishes a floor for the required valuation of a project for issuers to be able to monetize in this manner. Let’s say it costs $5m to create a run of 1000 ASICs (it may well be much more — I don’t know much about hardware). Developers need to collect a decent chunk to finance R&D, let’s say another $5m. So they need to be able to retail the ASICs for $10m collectively, or $10,000 each. Let’s also say they decide to issue 10% of supply in the first 6 months and they think the ASICs will hold up for that period. This means that the chain has to be priced by the market at a $100m valuation in the aggregate (at the time of the ASIC sale) for the issuers to collect sufficient margins.

    Why go through all this trouble to launch in this convoluted way? Why not just do an ICO and retain a treasury for long term incentive alignment?

    First of all, ICOs appear to be a violation of securities law in virtually every sensible jurisdiction. Going “offshore” probably won’t be enough, as many issuers will likely discover in 2020. This post is a proposal for an alternative to the PoW ‘fair’ launch, and the claim is that it improves along a couple directions. It’s not an alternative to ICOs. I believe that in today’s day and age (really anytime post the SEC DAO Report (released July 2017)), ICOs are largely unworkable from a regulatory perspective. Additionally, I think the ICO launch method will have a very hard time creating lasting monies.

    This is still a hypothesis, but I strongly feel that the most important trait of a novel monetary system is a widely dispersed ownership. It starts with a GINI of 1 and its objective is to get to a reasonable level of dispersion with time. Now I don’t mean perfect equality of outcome — such a thing is impossible, and it’s unclear how that would even work. Every adult in 2019 receiving an equal entitlement to a share of the new monetary system? What about future humans? Unborn children? Even if mechanically possible, a global UBI would still be exposed to immense temporal contingency — privileging the interests of people today.

    Airdrops don’t appear to work very well. Stellar’s attempt to distribute their coins as widely as possible has been a truly dismal failure. Something received for free tends not to be valued by the recipient. No surprise. Proof of Work is a potentially superior system. Miners must work for their share. They must commit time and effort to mining. This distribution method is truly underappreciated. If Ethereum succeeds, it will be in large part because it was mineable for 5+ years on commodity GPUs. Delaying the switch to PoS (which I argue above dulls the dispersion of coins) was a saving grace, in my opinion. As stated, this is still just an intuition. But I feel that PoW’s distributional qualities are very underrated. Many of these closely held monetary protocols will face the sisyphean task of getting users to store value in their currency.

    ASIC manufacturing is a concentrated industry where foundry allocations and political connections determine the winners. You are ensuring the ASIC manufacturers will be kingmakers here

    It’s true that cryptocurrency ASIC manufacturing is currently rather oligopolistic. For a rather eye-opening take on how the industry operates from a U.S. based ASIC manufacturer, read David Vorick’s take here. What’s interesting about the ASIC launch is that is actually strips power from the big manufacturers like Bitmain, and restores it to the issuers of the coin. A fair GPU launch just sets of an arms race among the big ASIC manufacturers over who can build ASICs fastest. When they get there, they intensely lobby the team to not change the algo (see the ProgPoW debate in Ethereum).

    In this situation, the team works with an ASIC manufacturer of their choice to create ASICs for launch, and ASIC manufacturers then have the opportunity to make chain-specific hardware subsequently. What is very clear is that the early returns to mining will not accrue to the big ASIC manufacturers. If they exist, they will accrue to the community members who purchased the ASICs from the issuers. This is overall a significant improvement. I’ll add that there’s an awkward transition that virtually every ASIC resistant chain has to and will make as they eventually capitulate and embrace ASICs. Choosing to trumpet ASIC resistance, coordinating a couple hard forks, and eventually accepting the inevitability of ASICs is to create a huge amount of ambiguity that ASIC manufacturers can and do exploit. I much prefer a game where the rules are explicit from day 0.

    Lastly, there’s the possibility to create ASICs which aren’t as exposed to supply chain idiosyncrasies that SHA-256 ASICs currently require. The kingmakers for Bitcoin ASICs are the foundries, which privilege the big ASIC manufacturers who can pre-pay for access and compete for allocations. Some alternative technologies like optical Proof of Work purport to inculcate a fairer ASIC manufacturing processes. I haven’t independently verified this, but this is the claim. If so, ASICs of that sort would be easier to mass-produce in a greater variety of settings.

    Any amount of seigniorage is disqualifying

    I am not entirely sure that I would call this seigniorage, as it’s entirely possible that ASIC buyers lose money and end up effectively paying $1.10 for each dollar that they mint. It’s not guaranteed seigniorage, at least. ASIC buyers are taking on a degree of risk. That said, if the model works well, ASIC buyers will be minting coins below market rate — if there wasn’t the possibility of doing that, they wouldn’t participate. So there is potential seigniorage. If you feel that even the slightest amount of seigniorage permanently ruins the credibility of the project, this model won’t work for you. But if you feel, as I do, that a small amount of seigniorage can be very useful, even if it trades off against credibility, you might find this model attractive.

    Why are you wasting your time thinking about this? We already have Bitcoin and we don’t need any new chains

    I reserve the right to think and write about whatever I find interesting!

    Gabriel Shapiro
    Size Does Matter — Part 3A Philosophy of Securities Laws for Tokenized Networks♦

    Thanks (in no particular order) to Ameen Soleimani, Peter Pan, Marc Goldich, Drew Hinkes, Olta Andoni, Marc Boiron, Lewis Cohen, Grant Gulovsen, Adrian Cortez, Jake Brukhman and the rest of the Hardcore CryptoLaw crew

    Size Does Matter — Part 3A Philosophy of Securities Laws for Tokenized Networks♦

    Thanks (in no particular order) to Ameen Soleimani, Peter Pan, Marc Goldich, Drew Hinkes, Olta Andoni, Marc Boiron, Lewis Cohen, Grant Gulovsen, Adrian Cortez, Jake Brukhman and the rest of the Hardcore CryptoLaw crew for feedback on the ideas in this Part 3.

    What Are “Blockchain Foundations”?

    As we discussed in Part 2, the Exchange Act is huge and multifaceted might apply to various tokenized open networks in multifarious and variegated ways. I cannot comprehensively speculate on all of them in one article (not even a multi-part article).

    What I’d like to do is focus especially closely on something very weird and unique to the blockchain world — the integral role of “Foundations” — and then discuss how they would be affected if the Exchange Act applies to them.

    A blockchain technology “Foundation” is typically (not always) an organization that:

    • is allegedly run on a not-for-profit basis
    • serves as a steward of a blockchain protocol (usually with a focus on one particular network instantiating that protocol — e.g., the Ethereum mainnet in the case of the Ethereum Foundation)
    • is funded directly or indirectly by the sales of pre-mined network tokens to the general public or a narrower group of sophisticated investors
    • is staffed, or at least led at an executive level, by the developers who first launched that protocol/network
    • holds, and is staffed and/or led by individuals who also personally hold, a very material amount of the pre-mined network token — in the case of the Foundation, as its “treasury” and source of continued funding, and in the case of the individuals managing the Foundation, as part of their personal wealth
    • uses funding to directly or indirectly pay people to continue research and development for, or encourage adoption of, the protocol/network — which may be achieved through grants, investments, commercial partnerships or direct hiring

    It appears to me that many blockchain Foundations, such as the Ethereum Foundation, the Tezos Foundation, and the MakerDAO Foundation, fit all or most aspects of this basic pattern. Let’s call that pattern the ‘prototypical blockchain Foundation’.

    Interestingly, some for-profit companies, like Block.One, also would fit the prototypical blockchain Foundation pattern, but for the fact that they choose to operate on an expressly for-profit basis rather than styling themselves as non-profit Foundations. There are also some blockchain Foundations that significantly deviate from the prototypical pattern— for example, the ZCash Foundation is not funded by ICO proceeds but by donations from the recipients of a post-network-launch founders’ reward generated gradually by the protocol. Now that the founders’ reward is over, the protocol is being updated to give the ZCash Foundation new block rewards directly. The Electric Coin Company has similar funding, but operates on a for-profit basis and may work on multiple blockchain projects rather than ZCash alone. There also are other types of for-profit companies that are highly influential on certain protocols/networks, but arose significantly after network launch and/or have a much more diversified L2 or enterprise application focus — companies like Blockstream and ConsenSys could be viewed in this light. It would also be interesting to analyze the regulatory considerations around all these slightly different types of companies and Foundations, but in the interests of time/space/attention, I am not going to deal with them here. Instead, I will focus on the prototypical blockchain Foundation.

    When will a prototypical blockchain Foundation be a securities issuer? When will it be a securities issuer that is subject to reporting obligations under the Exchange Act? What are the implications of this potential reporting status, and is it good or bad for the technology? Should the reporting obligations stop at some point — at the point of “sufficient decentralization”?

    Let’s talk about all these things.

    A Prototypical Foundation

    To avoid throwing shade on specific projects, let’s take a hypothetical Foundation with the following fact. Some of the details listed below are not directly relevant to this Part 3, but will become more relevant in Part 4 when we discuss the process of “sufficient decentralization”. Feel free to skim for now.

    • Power Foundation raised $50M by selling network tokens (PowerCoins) for PowerChain to the public
    • the token sale was done based on a whitepaper which set forth the following roadmap for tech development: (a) launch as a Nakamoto-consensus PoW blockchain (b) add private transactions after launch (c) switch to a new consensus algorithm and leader-selection mechanism that enables the developers and users of DAPPs to receive block rewards→”(b)” will make PowerCoin a little more valuable but not that much more because there are many competitors with privacy solutions; by contrast, “(c)” is expected to ultimately make PowerCoin enormously more valuable because all DAPPs will want to be on PowerCoin to gain extra revenue from block rewards, fueling network effects
    • there was no KYC done on token buyers; Power Foundation has no idea who they are, where they live or whether they are “accredited investors,” but does suspect there are likely to be over 1,999 buyers, many of whom are in the U.S.
    • the Foundation used $1M of the token sale proceeds to develop a single software client embodying the protocol, the MegaZord
    • the Foundation funds a team of four full-time developers to maintain and improve MegaZord
    • all nodes on the Power network are powered by MegaZord
    • the Foundation also has a full-time marketing and finance department
    • the tokenomics are as follows: 100M total maximum supply (pre-mine and future mining combined); 20M supply at the time of the Token Sale (all pre-mined); 7M of pre-mine was sold in the Token Sale; 3M of pre-mine was rewarded to founders/developers who work for the Power Foundation; 10M of the pre-mine is being retained by the Foundation to fund future marketing and development
    • so, right after the Token Sale, the Foundation holds 50% of the current supply of the token, insiders of the Foundation hold 15% of the current supply of the token and the general public holds 50% of the current supply of the token; let’s also assume that the inflation rate from block production rewards is pretty low, like 2% / year, so these percentages may be pretty stable for a while
    • the Foundation has a grants group that aims to prospectively fund or retroactively reward developers who build things on top of PowerChain, integrate PowerCoin functionality into existing applications, etc.; many of these grants are paid in PowerCoins out of the Foundation’s stash, but some are also paid in ETH or BTC or USD, and some are paid in a mix of PowerCoins and other currencies

    To me, it is pretty simple: at its current stage, the Power Foundations is a business for developing and marketing an open blockchain network. Even if the Power Foundation is not trying to generate profits at the entity level, it is managed by people who stand to profit from the tokens and likely have a strong profit motive.

    The Power Foundation is funded by the proceeds of sales of network tokens to people who hoped to profit from them and is holding onto a stash of tokens it hopes to sell in the future after they have increased in value. The proceeds of those sales are what is referred to as “risk capital” in securities law. The token holders expect to achieve profits predominantly from the efforts of the Power Foundation and the people the Power Foundation pays as they continue to develop and market the network.

    In my view, these facts make the tokens both “network equity shares” for financial purposes, and securities for legal purposes and they make Power Foundation a securities issuer.

    Since the Power Foundation has more than $10M in assets, then if the Power tokens are held by more than 499 unaccredited investors (which they almost certainly are), then the Power Foundation will meet the “size matters” test and be subject to Exchange Act reporting.

    What would this look like? Would it be good or bad?

    Imagine A World Where Foundations Were Exchange Act Reporters

    Let us imagine a world in which the Power Foundation is a “reporting company” under the Exchange Act.

    1. Positive Consequences

    First, the positive consequences: token holders and the public would get all of the types of disclosures I listed in Part 2 of this article when I explained the purposes and effects of the Exchange Act. The Power Foundation would be the organization acting as “the securities issuer” in this circumstance. It would need to keep the public up to date regarding its financials, its sales of additional tokens, its governance and compensation arrangements, and any material conflicts of interest on the part executive officers or directors.

    It’s hard for me to understand why this disclosure, in and of itself, would ever be anything but a positive thing. It’s also unlikely that an organization would ever provide this level of disclosure voluntarily, and even if it did so, the disclosure would be less trustworthy, because the SEC would not be reviewing the disclosure and discussing it with the Foundation before it is published to ensure it meets quality and credibility standards.

    Not only would token holders and the public get more information about the Foundation, but the Foundation would also get more information about the market through regulations such as Section 13 of the Exchange Act. This could be very helpful, especially in the early stages of development. In the early stages, the network is very vulnerable (due to factors such as low token price (and/or hash rate, if applicable), potentially relatively high Gini coefficient, still experimental, etc.). During that early period, anything could ruin the network’s burgeoning network effect; the network must be managed with care if it wishes to reach escape velocity, and the Power Foundation will be able to manage it better if it is more informed about the marketplace.

    For example, if Power Blockchain is a PoS network and someone was planning to 51% attack it by accumulating a huge stake, there would be a significant benefit to the fact that the attacker would be legally required to disclose the accumulation and plans once it reached the 5% ownership level. These disclosures would also operate as a natural regulation-based inducement to maintain and increase decentralization, since people accumulating too many tokens must either KYC themselves to the SEC and the public or be breaking the law, neither of which is very appealing.

    Section 13 of the Exchange Act is essentially an out-of-protocol “silly whale penalty”: depending on your biases about how decentralization affects price, you might even consider it an added pumpamental for enhancing network equity. Sure, people can always break the law, accumulate, not disclose, and 51% attack anyway — but surely they will at least be somewhat deterred if they know the SEC may find them and retaliate.

    Token holders would also have confidence that the Power Foundation’s executive officers and directors have interests aligned with theirs. Those officers and directors would be required to disclose their token holdings and their token purchases and sales; if they bought and sold tokens in a given six month period — making ‘short swing profits’ — they would be punished and required to return those profits to the Foundation for the benefit of the other token holders.

    2. Negative Consequences

    A. Compliance Costs

    The biggest negative consequence to tokens being freely trading equity securities is that the Power Foundation will face a lot of compliance costs. “Public company compliance costs can range from $1.0 million to over $3.0 million annually even for such a relatively small company.” One has the sense that money could be “better spent” on development, marketing, etc. That, I suppose, is a values judgment, but I believe that the disclosures I outlined not only are very valuable from an investment perspective, but also would contribute to network security.

    I also believe that not all of the same disclosure obligations as reporting companies face — such as the extensive financial controls obligations of the Sarbanes-Oxley Act — would be particularly important to most token investors, and that the SEC and legislators would be willing to work with token issuers to reduce disclosure obligations that impose an unreasonable cost/benefit ratio in the context of tokenized networks, even though those same obligations make more sense for traditional corporate entities.

    B. Limited CryptoSecurities Exchanges

    A current, but temporary, negative consequence associated with tokens being securities is the limited choice of token exchanges that are also qualified to be securities exchanges or securities ATSs. Of course, it is not exactly a choice whether a token is a security — it either is or isn’t. But since, in a way, I am advocating that tokens being a security can be a good thing, it is also incumbent upon me to note the potential negatives.

    However, there are some good options — like OpenFinance, which allows trading of Ethereum-based tokens through MetaMask and has 24/7 trading hours. it should only be a matter of time until there are more venues for trading security tokens, and I would be surprised if Coinbase and Kraken do not eventually get registered as securities exchanges. Even some pure cryptocurrency exchanges are trading security tokens: for example, the non-U.S. version of Binance trades STX tokens, which are securities issued by a Blockstack in a qualified Regulation A+ offering.

    Let’s also not forget the ever-exploding world of DeFi and decentralized exchanges. Uniswap is a completely autonomous, decentralized smart contract exchange which sets prices through an automated market making function, and now openly facilitates trades not only of cryptocurrencies but also security tokens. The 0x protocol is also interesting, in that it distributes functions that would ordinarily be performed by one centralized exchange operator across multiple smart contract mechanics and more limited types of market participants called relayers, and thus facilitates trust-reduced peer-to-peer trades.

    I am not prepared at this point to comment on whether these decentralized solutions may escape regulation by the SEC as securities exchanges, but there is at least the possibility that they might do so — after all, there is no “intermediary” in the traditional sense, and thus many of the policy concerns underlying regulations of exchange operators arguably do not apply. Perhaps more to the point, a DEx like Uniswap is effectively unregulatable unless the SEC can somehow convince a wide cross-section of ETH client devs, node operators and miners to hardfork it away in an irregular state change — a highly unlikely scenario. In my personal opinion, this is the right way to escape regulation — by eliminating the need for intermediaries and decentralizing the power of potential censors. I see a bright future for such innovations.

    C. Loss of Anonymity for Benevolent Whales

    The same ability to identify ill-intentioned whales referred to above, can also be a negative — benevolent whales would be subject to the same disclosure requirements. Privacy-oriented whales would be deterred from buying as much of the token as they might otherwise be inclined to — they might try to keep their stakes below 5% of the supply, so that they never have to identify themselves in public filings. Alternatively, they might acquire large stakes and simply not disclose, thus breaking the law and opening themselves up to risk of SEC actions or lawsuits by the issuer. While discouraging evil whales is good, discouraging benevolent whales is bad — and you can’t do one without doing the other. This is a potentially material negative, particularly for a proof-of-stake network where benevolent whales may be seen as particularly critical to securing consensus.

    D. Miscellaneous Negatives

    There are a few other potential issues that people have occasionally raised as potential negatives of tokens constituting freely trading securities securities, but I consider them to be rather speculative, and there is fairly good evidence that, at least for the moment, the SEC does not take them seriously either. These include the following arguments, which I believe have largely been debunked:

    • if protocol tokens are securities, then every miner must become a registered broker-dealer (debunked in Section 1 here)
    • if protocol tokens are securities, then miners and/or the issuer and/or “the blockchain” would need to become a registered transfer agent or clearing agency (debunked in Section 2 and Section 5 here)
    • if protocol tokens are securities, then websites, wallets, or other interfaces to the blockchain need to be registered securities exchanges or ATSs (debunked in Section 3 here)
    • a Foundation would be violating Regulation M when it sells further protocol tokens, if they are securities (debunked as to one potential fact pattern in Section 6 here)
    • every Foundation, by virtue of holding tokens which are securities, would need to become a registered investment company (debunked in Section 7 here)
    • tokens would be taxed as securities — well, they are already taxed just as punitively, if not more so; while some attorneys have argued for more beneficial kinds of taxation , there is little evidence to suggest such approaches will be adopted even if tokens are not deemed securities

    I very frequently hear other lawyers and various blockchain enthusiasts claim that blockchain tokens would become “unusable” if they were deemed securities. Kik and Telegram have both made such claims in the context of defending themselves against pending SEC suits. However, I have yet to hear a single example or strongly reasoned argument showing why an SEC-registered, freely trading network token would be unusable for its intended purposes merely because it is a security. If you have any examples of something I’m overlooking, by all means, contact me — I would love to hear them.

    A Better Kind of Foundation?

    We’ve discussed a lot about securities laws, in fairly granular and semi-technical detail. I realize it is probably a lot for non-lawyers, and that’s even with me eliding many technical nuances. I appreciate the patience and intellectual openness of anyone who has read everything so far.

    To keep us grounded, before we break for Part 4 of this article, I want to pause here for a moment and get back to the problems I pointed out at the start of Part 1 of this article. Let’s do a bit of score-keeping and think about how securities laws could possibly help with them.

    founders don’t want their token to be a security, so they can’t or won’t talk about, worry about, or work on token price

    In a world where tokens are simply accepted as being securities, this would no longer be an issue. Then, an amazing thing could happen — protocol devs could actively and openly work to drive value to the token, without hiding their intentions. We all know influential devs like Vitalik want to create value for their network token of choice, and all holders of that token want and expect them to do so.

    Moreover, with the planned transition to PoS, we can no longer pretend that issues of token value are incidental or trivial, since the security of the network directly depends on token value. So why are we playing these ridiculous games of make-believe that no one cares about and that leading devs are not in a position to positively impact valuation? It is simply not true.

    What we arguably gain from such games is that a token is not classified as a security and $1–2M of compliance costs per year are saved.

    What we lose from such games is disclosure, market momentum, and the ability and willingness of technical leaders like Vitalik Buterin to respond to basic questions about token value and market dynamics. Imagine if a CEO like Sundar Pichai or Elon Musk got on an investor call and refused to answer basic questions about price and finances and projections and market momentum? It’s no less absurd for Vitalik Buterin and other blockchain technology leaders to refuse such questions when token holders ask.

    Here are the kinds of things Elon Musk says on investor calls: “Musk confidently told investors on the call that autonomous driving will transform Tesla into a company with a $500 billion market cap [and] existing Teslas will increase in value as self-driving capabilities are added via software, and will be worth up to $250,000 within three years.”

    Shouldn’t we want blockchain founders to be able to talk to us the same way? They could, if only they weren’t trying to preposterously pretend their tokens are not securities.

    the tech isn’t getting built as fast and well as it could be because everyone is engaging in “decentralization theater” to keep the regulators off their backs; instead of investments, project management and carefully negotiated joint ventures, we have “grants” and “rough social consensus”

    In order to make software development look decentralized and thus (try to) avoid being subject to securities laws, Foundations don’t hire people and direct and manage their efforts — instead, they give “grants” to “independent teams” and then claim not to know exactly what those teams are doing.

    This can be fine, and in fact is desirable, when a network is relatively mature and only needs maintenance and incremental improvements. However. when a network is waiting for a massive upgrade like the change from ETH 1.0 to ETH 2.0, this type of approach is counterproductive and potentially disastrous. This is no way to launch what is essentially a new network run on a new protocol.

    Instead, new technologies should be launched start-up style — under the benevolent dictatorship of a founding genius (or at most a few founding geniuses). Why are we building 10 clients that all do the same thing with 10 separate teams engaged in overlapping efforts? Though having multiple clients could lead to a more decentralized network, and that is good, there is no independent, long-term funding plan for any of them — and thus no particular reason to expect that almost all of them won’t go the way of the Parity Client when their devs run out of grant money or just lose interest. This is not an efficient use of capital or time.

    By contrast, if we embraced an initial period of relative centralization and coverage under the securities laws, these technology projects could be managed efficiently and aggressively to yield much better results for token holders, DAPP developers and users.

    NOTE (post-publication update): For a counterpoint to this perspective, please read Ben Edington’s article here.

    While he admits that Ethereum 2.0 project development takes the “bazaar” model farther than is typical even by open source standards (“we’ve taken it further. We’re applying this approach to the development of the Eth2 protocol itself, its very design and the R&D behind it…”) and confesses candidly that “failing to have answers on issues like [an exact date when Ethereum 2.0 will go live, a 2-year committed road map, and how cross-shard transactions will preserve DeFi composability] would have gotten me fired from my old, corporate job,” he nevertheless argues that this chaotic development process is “the magic of Ethereum’s development approach…Ethereum’s superpower.” I disagree. There is a difference between chaos and openness. But I felt his that his views were worth including here.

    token HODLers have been punished by one of the worst bubble pops in human history, they feel like their investments turned founders into celebrity millionaires and the investors were left behind

    Bubbles occur in regulated and unregulated markets, so it’s a bit hard to call this one. I do suspect that much of the current depression in token markets is due to regulatory uncertainty. To the extent regulation were actually embraced — perhaps recognizing that, while it comes with some costs, it also comes with benefits — that uncertainty would be reduced, and perhaps that set the stage for a market rebound. Of course, markets are complicated, and part of the intent of the regulations is to prevent speculative bubbles by smoothing out information asymmetries. Ideally, a regulated market might grow more slowly, but also more steadily and sanely; however, of course, even with regulations, there are no guarantees.

    new money is sitting on the sidelines, deterred by the first three points and a host of Peter-Schiff- and Nouriel-Roubini-style shade thrown at blockchain, duly amplified by the normies in mass media

    It is certainly possible that institutional investors and other sources of fresh capital could be enticed into funding tokenized network development by a more regulated market. This would be particularly true if, unlike with the ICOs of the past, Foundations gave tokenholders rights to enforce good Foundation governance— such as the right to vote on election of directors. In the past, granting such rights was likely avoided in part because developers feared that if they gave tokenholders rights, the tokens would be deemed to be securities. Once regulation is accepted as normal, this concern would no longer apply.

    regulators are 2–3 years behind the tech curve, are easily duped, are confused, and are terrified of losing cases, so they only go after the easy targets that don’t require rethinking the laws

    In my opinion, while some no action letters were obtained from the SEC this year stating that certain tokens are not securities, they did not really advance the dialogue — they were no-brainers as a matter of law, and the tokens present no realistic possibility of generating upside for tokenholders or fueling enthusiasm for a new open network. This is not the path to progress.

    To me, it would make much more sense to do what Blockstack did with its Regulation A+ offering — embrace regulation, but work closely with the SEC to get flexibility where it counts. For example, the SEC appeared willing to accept Blockstack’s arguments that STX might be debt securities rather than equity securities (though I personally think those arguments are wrong), and that Blockstack and miners on the Blockstack network did not need to register as broker-dealers. By accepting regulation as a threshold matter, one opens the door to modifying regulations as they are applied to open network technology, so that the law complements rather than inhibits the technology.

    legislators are primarily influenced by D.C. insider lobbyists, who in turn are funded by corporate-style blockchain projects, and are proposing truly terribly drafted and ill-considered laws

    I will address this in part 4 when I discuss “sufficient decentralization.” Suffice it to say, I do not think that just because a database is a “blockchain” it should be subject to less regulation. A blockchain is just a data structure. By contrast, I do think open networks that essentially serve as ownerless, decentralized public infrastructure deserve special privileges and exemptions under the law. The lobbyists and legislators working on these issues are easily swayed by enterprise-style blockchain projects or projects more concerned with evading the consequences of their past mistakes than being good stewards of the law; they often do not recognize what makes decentralized networks special, and therefore do not know how to properly draft these types of laws.

    millions of dollars are getting poured into securities law defense suits and “defense funds” instead of invested in tech development that could one day make the laws irrelevant

    Obvious. Fewer securities law violations, fewer lawsuits, less waste.

    our tech is “don’t trust, verify” but our governance is “just trust us,” with black-box “Foundations” making pretty much all major decisions for tokenized blockchain networks; they justify whatever they do based on meaninglessly vague concepts like “social contract”

    This gets into deeper issues of governance, and does not depend solely on securities laws. Maybe I’ll save this for a Part 5 — or another article entirely. For now, it’s enough to consider that if tokenholders have good disclosure, they’ll have a greater chance of monitoring and providing feedback to Foundations, and they will be able to hold Foundations accountable for malfeasance.

    the tech is creating new monsters every day; cryptocurrency exchanges are turning into investment banks that just hold your crypto and pay you interest; meanwhile, many DeFi projects are just a slightly de-risked variation on the same trend

    I frankly don’t think securities laws will do much to reverse this; they might even make it worse. However, at least there would be greater accountability for such actors — many of them would have to become registered securities intermediaries.

    the crypto whales of 2015–2017 are our new tech VC gods who need to get paid their vig before they’ll let you access the broader capital markets

    Again, not a whole can be done here — wealth tends to concentrate. However, a more regulated market for open network tokens could bring in larger amounts of retail money (legally) as well as other types of large investors like investment banks and pension funds. To the extent you might think stakeholder diversity is positive, this could be beneficial to the health and governance of the network.

    every lawyer whose career needs a boost is now a “crypto lawyer” and they’re making bank even as the tech and culture languish into utter inanity

    Well, this would continue to be the case. Except maybe it’d be less litigation, and more advanced deal structuring. Over time, advanced deal structuring scales and becomes cheaper — SEC filings are public, and anyone can leverage them. By contrast, litigation facts are obscure, fact-specific, and don’t tend to help make life for new projects easier. You end up paying more in the long run when you took shortcuts early on.

    the buzziest project launch of 2019 is fucking Libra by Facebook!!!!

    Maybe with a more regulated market, more projects could get funding — and they’d be better, more inventive, more worthwhile for humanity?

    In Part 4, we’re going to get to the good stuff — when do securities laws cease to apply? When is the point of “sufficient decentralization” reached?

    There is no binding legal precedent on this yet. However, I fully expect that — provided we can avoid passing garbled legislation that makes things even more confusing — clear guidelines could be defined.

    In Part 4, I will propose my own version of a test for when “sufficient decentralization” has been achieved and open network tokens should stop being securities. I can’t guarantee that test will be adopted or even considered by the powers that be, but perhaps it will add some momentum to the discussio