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Ribbonfarm ( Feed )
Wednesday, 05 August 2020
Amateur Vigour
While news of the death of the novel―or of the book, for that matter―may seem no better than clickbait, the time is nigh to ask what next. In its Western variant, the novel built momentum over hundreds of years to become the dominant literary form of the twentieth century; its popularity and penetrat
While news of the death of the novel―or of the book, for that matter―may seem no better than clickbait, the time is nigh to ask what next. In its Western variant, the novel built momentum over hundreds of years to become the dominant literary form of the twentieth century; its popularity and penetration dependent on―and […]
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Ribbonfarm ( Feed )
Friday, 31 July 2020
Elderblog Sutra: 11
When I started the blogchain experiment in January 2019, I had in mind a metaphor of a new system of tunnels under an old landscape of skyscrapers, creating a feel of what I called infratextuality. The decade’s worth of archives from the Rust Age (2007-12) and Snowflake Age (2013-18) would be t
When I started the blogchain experiment in January 2019, I had in mind a metaphor of a new system of tunnels under an old landscape of skyscrapers, creating a feel of what I called infratextuality. The decade’s worth of archives from the Rust Age (2007-12) and Snowflake Age (2013-18) would be the skyscrapers. The blogchains […]
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Kunt Svanholm ( Feed )
Wednesday, 29 July 2020
The AlienCoin Attack Vector

In response to Reed Wommack and John Vallis discussing Bitcoin and Scarcity www.pscp.tv/w/1PlJQNzqAMBxE

While writing these words, I’ve just finished listening to Reed Wommack’s conversation with John Vallis. Both Reed and John are great thinkers and I’m proud to have connected and interact

In response to Reed Wommack and John Vallis discussing Bitcoin and Scarcity www.pscp.tv/w/1PlJQNzqAMBxE

While writing these words, I’ve just finished listening to Reed Wommack’s conversation with John Vallis. Both Reed and John are great thinkers and I’m proud to have connected and interacted with them both on several occasions. In the conversation, the abstract concept of “AlienCoin” was brought up. Imagine that a species of alien makes contact with earth and that we start trading with them. They’re using AlienCoin, a type of money with similar properties to Bitcoin but with a longer history and overall better properties. It is, in other words, a better Bitcoin. Would we humans switch to this coin or not in our search for an absolutely scarce asset that can be used as money?

I’ve written a lot about the concept of absolute digital scarcity and how it was more of a discovery than an invention and how it could only be discovered once. This is my definition of it, from Bitcoin — Independence Reimagined:

The One Shot Principle:

Absolute mathematical scarcity achieved by consensus in a sufficiently decentralized distributed network was a discovery rather than an invention. It cannot be achieved again by a network made up of participants aware of this discovery, since the very thing discovered was resistance to replicability itself.

Hal Finney said it like this:

“Any successful replacement of the Bitcoin block chain will forever undermine the credibility of any successor. How is an investor to know that it won’t happen again? Rebooting now may benefit a few thousand early adopters. What happens when hundreds of millions use Bitcoin 2.0? They’ll be just as jealous and envious of you as you are of others. Given the precedent you want to set, how will you argue against yet another reboot?”

In the interview, Reed mentions that there’s probably a finite amount of say, Bitcoin Cash as well as Bitcoin. This is not how I see it. As I’ve mentioned before, scarcity is all about how you choose to frame it. If you see Bitcoin Cash as a “Forks-of-Bitcoin”-token, it is not scarce. There are thousands of those. Around the time when these fork-coins were popular, there was a website where you could create your own by just a few clicks. My point about the discovery of scarcity on the internet is that we needed to frame this as soon and as rigidly as possible in order for it to actually work. I believe that the early history of Bitcoin was that framing process. It is not over yet. The fact that the Bitcoin Cash fork didn’t really work was one of the main things that convinced me that Bitcoin was actually decentralized enough to not give in to proposed monetary policy changes pushed onto the project from the outside. It could only be changed from within and I concluded that this was so unlikely that it would almost certainly never happen.

Now onto AlienCoin, a very fascinating concept indeed. Even though the probability of the scenario ever happening is probably close to zero, it’s a thrilling thought experiment nonetheless. A scenario like this wouldn’t even have to involve aliens, let’s just say that we discovered another decentralized computer network with better properties and more proof of work than Bitcoin somehow. I would still stick to Bitcoin and so should (and most likely would) everyone else. I’ll try to explain why.

Have you ever played Sid Meier’s Civilization? In every incarnation of the game there’s a technology tree. Some technologies are prerequisites for others. Bitcoin is standing on the shoulders of giants. Not only did it require cryptography, hashing algorithms, merkle trees and ASICs to function properly but before that mathematics, writing, hexadecimals, semiconductors, microprocessors, computer graphics and probably the wheel, agriculture, pottery and even ceremonial burial or archery as well. The point is that time moves in one direction and one direction only. The order in which events play out have a huge impact on the results. If you dry yourself off before you shower, you will have a very different result than if you do it afterwards. This is true for Bitcoin’s own history as much as it is true for whatever historical events that played out before it was discovered as well. Each day that passes, Bitcoin becomes more “Lindy”. People have a more and more concise view of what it is, and what history it has. Bitcoin was fairly distributed among humans because the earlier you got in, the higher the risk you took. More risk, more reward. I wasn’t truly 100% convinced of Bitcoin’s functionality until the Bcash fork happened and the users resisted the will of more than 90% of the Bitcoin companies by running their own nodes. An alien coin would have to convince every hodler of last resort on earth that switching to the new coin would be a good idea before they’d part from their bitcoins. Like I said earlier, scarcity is all about how we frame it. The hodlers have agreed already. They hodl Bitcoin, nothing else. The thing about this philosophy is that we’ve already decided what the finite unit for wealth transfer we have is Bitcoin. An AlienCoin would just be another altcoin, even if it functioned as Bitcoin for the aliens. At least for a very long time. In order for anyone that has lived through the early years of Bitcoin to change their mind, they would have to be convinced of the superiority of this new system and that would take a long time, if it’s possible at all. What guarantees do we have that another, even more superior system wouldn’t show up the next day?

Bitcoin is a four dimensional invention. The direction of time itself plays a huge part in what is. Having doubts about it is a fools game because the organism works and grows precisely because we believe it does. It feeds on human incentives and the more you learn about its connection to praxeology and thermodynamics the more convinced you become. This makes the system even more robust and valuable which will onboard, and convince even more users every day and on and on it goes. It is the optimist’s version of Roko’s basilisk. If we ever interact and trade with aliens in the future, we should exchange all sorts of things with them but we’d better hold on to our most valuable possession. The thing that makes us a type 1+ civilization on the Kardashev scale instead of just a 0,7 one. The best thing we have. The pinnacle of our achievements.

Some of us have been in Bitcoin longer than others and we’re all at different stages in our perception of it. I’m not saying that I’m 100% right and that everyone else is wrong, but I have come to realize one thing. This rabbit hole is way deeper than any of us can imagine.

Loved the conversation guys, now I can’t get AlienCoin out of my head! A final question: How do you know Satoshi wasn’t an alien in the first place?

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Beautyon ( Feed )
Monday, 27 July 2020
Misjudging Bitcoin
♦MOON TIARA MAGIC

In The United States District Court for the District of Columbia, “UNITED STATES OF AMERICA v. LARRY DEAN HARMON”, Chief Judge Beryl A. Howell (a ‎Barack Hussein Obama appointee) made a problematic ruling on the nature of Bitcoin, relying only on hearsay and third party sources, w

♦MOON TIARA MAGIC

In The United States District Court for the District of Columbia, “UNITED STATES OF AMERICA v. LARRY DEAN HARMON”, Chief Judge Beryl A. Howell (a ‎Barack Hussein Obama appointee) made a problematic ruling on the nature of Bitcoin, relying only on hearsay and third party sources, which misguided her to a totally wrong conclusion. Here we dissect the part of the judgement that mischaracterises Bitcoin. It is full of errors, and should not have been used to make the judgement.

Bitcoin is not “a decentralized form of electronic or digital currency that exists only on the internet”. Bitcoin is a database, copies of which are held by people who download a piece of software to run it. Bitcoin is also not “an alternative currency” and simply asserting that it is does not make it so. Bitcoin is never transferred anywhere. Entries are made in the publicly visible database. No one “owns” Bitcoin. The fact that Bitcoin has units does not confer the property of money to it. For example, memory storage devices and rulers have units but are not considered money.

Any proof that Bitcoin has a characteristic cannot come from case law or a layman. An accurate description that is not description by analogy is possible in this matter, and in every instance this is the only description that should be submitted to any court in any proceeding. Relying on second hand descriptions of what Bitcoin is is not necessary, and it is not correct to describe discreet technical operations and devices by analogy only.

Bitcoin is not “an alternative currency”. It is a database. Bitcoin transactions are entries in a database, which is identical in nature to all other databases where information is stored. The numbers in the Bitcoin database can represent literally anything, because it is data. The idea that Bitcoin is money rests solely in the minds of the people who choose to treat Bitcoin as money. It is not actual money itself. Bitcoin is never transferred anywhere. Bitcoin users sign messages and write them to the global database. Nothing is transferred from one person to another in Bitcoin, and ownership is never transferred in Bitcoin; all data in the Bitcoin network is a property of the Bitcoin database, and not of any particular user.

The capitalisation conventions in Bitcoin have no bearing on the nature of Bitcoin, and have been adopted by people desperate to try and contextualise Bitcoin. Anyone can make a copy of the Bitcoin network’s database and call it something else, with its own naming conventions. That would not make any aspect of the copy money. It is not true that “tokens” are transferred in Bitcoin. The use of the word “token” emerged from users of Social Media attempting to contextualise Bitcoin through analogy. At no point is Bitcoin ever a “token”, like a subway token or ticket.

Units of Bitcoin are not stored by reference to an address. Bitcoin addresses are keys used to sign messages that are sent to the network for storage. The authors making this false claims cited in the memorandum admit themselves that they are analogising the address to a user name and that addresses are similar to a bank account number, both of which are absolutely false.

Bitcoin is never transferred from one address to another. Bitcoin is always sent to the network and stored. The controller of a Bitcoin address never receives anything, because nothing is transferred. Bitcoin users scan the database to see if a message signed to their key has been written to the database. This is not “reception” in any sense, because the location of the “recipient” is immaterial. People on the ground seeing skywriting are not, “recipients of messages”, they are viewers only. This is how Bitcoin works. The nodes that store copies of the Bitcoin database are not linked together; they are all separate and totally independent of each other.

The “sending” and “receiving” terms in Bitcoin are analogies adopted by the computer illiterate public to help them contextualise Bitcoin’s internal processes. Bitcoin confirmations are records on the database, and nothing more. Bitcoin is no different in function to forum software that makes note of what author wrote what text. The only difference being that people have unilaterally chosen to accept messages in lieu of money. This is a choice the public has made that has nothing to do with Bitcoin’s nature, and there have been several other attempts to do what Bitcoin does that the public refused to accept. All of these systems relied on databases, and the only difference between them all is the public’s acceptance.

Bitcoin addresses are not owned by anyone. They are pieces of text that have a context in the Bitcoin database. Users of Bitcoin have the power to sign messages with keys they keep secret, but they are not owners of those strings and neither are they owners of the copies of the database they use to verify messages. The only way a claim that users “own” keys is to suffix with “in the ordinary sense of the word”, which is not sufficient for a court proceeding where only material facts are to be taken into consideration.

Bitcoin keys can be stored in many media like any other text, or no media at all, in the form of memorised words. To make the claim that a set of memorised words is money stretches the credulity of even the most stupid person. Bitcoin is not money, has never been money, and is text only. It is always text, all the time, and you cannot assert that it is money because a computer illiterate author asserts that it is because he wants to sell a book.

Similarly, no amount of case law can turn Bitcoin into money. The genetically modified seed that grew the tree of “Bitcoin is money” found its genesis with computer illiterates and ambulance chasers desperate to sell books and run crony capitalist front foundations to control this new phenomenon. They don’t have the language or understanding to classify Bitcoin, and those that have the intelligence to do so, quickly realise that they can’t possibly tell the truth, or their new careers as Bitcoin gatekeepers and “Thought Leaders” will be over. They know that Bitcoin is just a database that people accept for accounting. It is as dull and pedestrian as that, and you can’t run a “Legal Centre” or be a “Thought Leader” in something boring and mundane as an Excel spreadsheet.

The various guides written for “Legal Professionals” will all need to be deprecated and replaced with works that accurately describe how Bitoin works without analogies, comparing its operation to other databases that are in common use. This is the only way the “Legal Professional” and the courts will ever be able to rule on Bitcoin correctly. If they do not, then all databases on earth will be subject to the same rulings that have been made against users of Bitcoin.

It will mean that all online video game companies could be sued for being “Money Transmitters” because users can trade in game goods between each other. None of the judgements against Bitcoin users make a distinction that separates game monies with Bitcoin, and the mere difference in operation does not count as a difference in nature. Both Bitcoin and MySQL (a database) are databases working with the same thing; data, or plain text.

In order to say that Bitcoin is different to MySQL in law, a distinction would need to be made so that math operations required for Bitcoin are legally distinct, separate and controlled. This would be a direct violation of the Constitution, and impossible in the USA.

Operating a Bitcoin full node or sending messages to the network is not “Money Transmission”, even if the service is paid for. If you accept money to transmit a message to the Bitcoin network you are no different to a telegraph operator. You can charge by whatever means you see fit to perform this service, per word or per character, and this is the same in Bitcoin, because the database entries are scarce. You therefore, in order to run a business, need to charge sufficient money to make a profit and replace your Bitcoin so you can continue to send messages on the network. This is not “Money Transmission” and Bitcoin has no official price either. If the price of Bitcoin by agreement of the two parties using the network is agreed to be 0, does this mean that the act is still money transmission, or not? These are the difficult questions that people who assert that Bitcoin is money cannot and will not answer, because they’re either ignorant or they know the truth and want to obscure it for their own personal gain.

In no way is writing messages on a database “engaging in the business of receiving money for transmission or transmitting money within the United States, or to locations abroad, by any and all means, including but not limited to payment instrument, wire, facsimile, or electronic transfer.” If this were not the case, every text message that had a number in it could be construed as “Money Transmission” if the two parties agreed to a fee to send or receive text. When your accounts are prepared by H&R Block, and they send you the forms to sign, you have paid them for this service. Their records are kept on a database, and you sign and return the forms for a fee. This is no different to Bitcoin.

  1. A text is prepared
  2. You sign the text with your unique signature
  3. You return the text for storage in a database
  4. You are charged for the service by a service provider

The database used is irrelevant, and so is the means of identifying you and the method used to identify you by a signature. By this, you can see that H&R Block is, “running a Blockchain”, and their name should be changed to “H&R Blockchain”.

Bitcoins are not funds, any more than your accounts or text messages are “funds”. Calling Bitcoin funds is an analogy used to put Bitcoin in a context. Similarly, in the definition of Money Transfer, “electronic transfer” applies only to dollars sent through the traditional banking network. It does not apply to any other context, and cannot, because if it did, it would capture all electronic transfers of any kind that contained an explicit representation of money, reference to money or number.

Bitcoin Tumblers are not “MTAs”. If any court asserts that they are, they will be capturing all dice on earth. A Bitcoin tumbler is nothing more than a computer programme that randomises numbers in a database. It does not accept money as inputs and does not output money either. It takes numbers as inputs, performs calculations on them and then outputs different numbers. This operation has nothing to do with money, and in fact could be done manually with a pencil and paper.

Bitcoin is not a medium of exchange, method of payment, or store of value. For certain, only a fool would assert that Bitcoin is a store of value, since it has historically been very bad at doing that in fiat terms. Bitcoin is not a method of payment either; people have chosen to use it to pay for goods and services, but that doesn't make Bitcoin a method of payment. People can use bananas to pay for goods and services, that doesn’t make them a method of payment. Bitcoin is not a medium of exchange either; it is a database of numbers. Numbers can be used to represent anything, and so can Bitcoin. People agree that it is a medium of exchange today. They may not in the future. That has nothing to do with the nature of Bitcoin. Common parlance does not change the nature of things, and defendants claiming that Bitcoin is money does not make Bitcoin money. Slave owners could testify in court that people he owns are “his property” and only a terribly immoral person would assert that because a defendant said this that people are transformed into property. The same is true of Bitcoin.

Courts do not have the power to claim that human beings are property for the purposes of a judgement, and they do not have the power to create a form of money out of thin air. Only the Congress and Senate have the power to say what money is in the United States. The ordinary meaning of money is also not applicable, as is the Appeal to the People fallacy. The court cannot prove what it is asserting about Bitcoin, and it refers to fallacious arguments to do so without making any direct reference to what Bitcoin is. This should tell you that the court doesn’t know what Bitcoin is and it simply wanted to punish a man who very foolishly sold drugs online.

Relying on other courts is also faulty. Those courts are similarly ignorant of what Bitcoin is, and are all referring to the same fundamentally flawed material to make their wrong judgements. “The federal district courts have unanimously and unequivocally concluded that Bitcoin constitutes money.” This unanimity is the Faulty Appeal to Authority Fallacy. The court is not showing us what Bitcoin is, it is merely telling us what other people have said it is and it is relying on its “overwhelming authority” to badger, bully and railroad.

All of this is enough for a higher, neutral court to reject this flawed ruling and dismiss it. Further to this, this ruling has no effect outside of the District of Columbia and cannot not affect any business in another jurisdiction, like BitMEX in Hong Kong or the thousands of companies that will inevitably be formed to work on the new global database.

This judgement is vindictive and designed to punish someone who made a very bad mistake and accepted Bitcoin in return for services that are illegal in the USA. By making this entirely erroneous judgement, the court is damaging the reputation of the District of Columbia as a place to do global business with the Bitcoin database. Fortunately, billions are already being made outside of the District world-wide, and this judgement is moot everywhere on earth but there.

Misjudging Bitcoin was originally published in Decentralize.Today on Medium, where people are continuing the conversation by highlighting and responding to this story.

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Ribbonfarm ( Feed )
Wednesday, 22 July 2020
To Attack and Dethrone Gods
Borges was introduced to the original terrorist somewhere between Sir Thomas Browne and Marcel Schwob. He had no face and a name like a resonance chamber: Herostratus, arsonist of the second Temple of Artemis at Ephesus; punished with Oblivion, redeemed by Spectacle. His subsistence, despite his damn
Borges was introduced to the original terrorist somewhere between Sir Thomas Browne and Marcel Schwob. He had no face and a name like a resonance chamber: Herostratus, arsonist of the second Temple of Artemis at Ephesus; punished with Oblivion, redeemed by Spectacle. His subsistence, despite his damnatio memoriae, means Spectacle is not beholden to its […]
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Clark Moody ( Feed )
Friday, 17 July 2020
Ten Years of Bitcoin Market Data

On July 17, 2010, two trading parties matched for the first time on the Mt. Gox Bitcoin exchange when 20 bitcoin changed hands for just under a dollar. The exact price of that first trade was $0.04951 per whole bitcoin.

Prior to the trade on Mt. Gox, real-world goods had been excha

On July 17, 2010, two trading parties matched for the first time on the Mt. Gox Bitcoin exchange when 20 bitcoin changed hands for just under a dollar. The exact price of that first trade was $0.04951 per whole bitcoin.

Prior to the trade on Mt. Gox, real-world goods had been exchanged for Bitcoin, but the existence of an electronic matching venue changed the game. Finding a trading partner on an automated electronic exchange is far simpler than making forum posts or jumping into IRC rooms. In July 2010, real-time Bitcoin price discovery began in earnest.

The First Bitcoin Trade

The exact specifications of the first Bitcoin trade:

Time: 2010-07-17 23:09:17 UTC
Amount: 20.00000000 BTC
Price: $0.04951
Value: $0.9902

At that moment ten years ago, the height of the blockchain was 68,773, and the total issued supply of Bitcoin was 3,438,650. A quick multiplication places the market cap of Bitcoin at roughly $170,000 at the time of the first Mt. Gox trade.

If They Never Sold

Though it’s probably not the case, let’s assume for a moment that the buyer of those first coins on Mt. Gox held that 20 bitcoin until today, when the price is $9,109 per coin. The return on the dollar invested would be roughly 184,000×!

Looking back to these early prices and seeing that Bitcoin has gained in value by more than five orders of magnitude offers a bit of perspective to those impatient for further price appreciation. Too often, new Bitcoiners think they’re not early enough and they missed the boat. And every now and then, the value of Bitcoin rockets by another order of magnitude or two.

Bumps and Milestones Along the Way

Around two months after the first trade, Bitcoin had doubled to pass the 10 cent milestone on September 14, 2010. Not long thereafter, Bitcoin dropped a full 90% to reach is all-time low of $0.01 on October 8, 2010. One lucky buyer snagged a full 100 bitcoin for a penny each.

Dollar parity would not come until February 9, 2011. Bitcoin would trade at $10 on June 2, 2011, already up 1000× over its ultimate low nine months earlier.

My Journey

Shortly after Bitcoin reached $1.00 in February 2011, I learned about the project. At the time, I was interested in markets and trading, so I gravitated toward the free and open real-time market data coming from Mt. Gox. By the time I announced my first Bitcoin website on the forum in early June 2011, Bitcoin had already climbed past $10.

Over the intervening years, my projects have always had something to do with the market data side of Bitcoin. It wasn’t until the launch of my Dashboard that I presented network-level stats with the same real-time focus that I dedicated to market data projects.

The markets have matured, and now we have dozens of spot exchanges, regulated derivatives products, 100× leverage casinos, and auto-buy stacking apps. There are wallets for the streets and cash-only coordinators for private Bitcoin acquisition. In the middle of it all, there is free and open data. Without the free data feeds from exchanges and the blockchain, sites like mine would have taken much longer to appear. Certainly my first Bitcoin website wouldn’t exist.

The Road Ahead

Over the course of the last ten years, the market cap of Bitcoin has gone from $170k to $170B. We’ve crashed 90%, and we’ve rallied 100×. Each order of magnitude increase in price brings a new cohort of profit-seekers, skeptics, opportunists, scammers, entrepreneurs, developers, hobbyists, and folks who finally have to figure out what’s going on with that magic internet money. Somehow this thing never seems to die.

Each wave of volatility brings a new batch of memes, startups, hacks, bankruptcies, liquidations, and of course, Lamborghinis. Bitcoin’s nature as sound money means that the miners can’t simply increase output to meet increased demand, so I don’t predict we’ll see the end of volatility any time soon.

Whatever their reasons for learning about Bitcoin, each wave of adoption causes a small few to look past the promise of riches to start asking serious questions about the nature of money and the state. These conversations take years, but in the end, Bitcoin is showing people the way toward a sound money. And that could take us way beyond the Moon.

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Ribbonfarm ( Feed )
Tuesday, 14 July 2020
Notes — Freedom’s Forge by Arthur Herman
My second deep dive pandemic read is Freedom’s Forge by Arthur Herman, covering the history of the United States’ industrial mobilization for World War 2. There is a good deal of resemblance between the mobilization to beat Covid (and coming soon: climate) and WW2 mobilization, so it̵
My second deep dive pandemic read is Freedom’s Forge by Arthur Herman, covering the history of the United States’ industrial mobilization for World War 2. There is a good deal of resemblance between the mobilization to beat Covid (and coming soon: climate) and WW2 mobilization, so it’s a good history to have in your back […]
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Beautyon ( Feed )
Monday, 13 July 2020
Pathetic. Parochial. Pusillanimous.

This is a transcript from a tweet storm.

The self righteous and fantastically rich people in the west who have the power to solve these problems many times over are not at all concerned with the plight of other people, and are satisfied with pontificating and endlessly describing the same p

This is a transcript from a tweet storm.

The self righteous and fantastically rich people in the west who have the power to solve these problems many times over are not at all concerned with the plight of other people, and are satisfied with pontificating and endlessly describing the same problem over and over. PATHETIC

body[data-twttr-rendered="true"] {background-color: transparent;}.twitter-tweet {margin: auto !important;}

 — @greybtc

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Thankfully because Bitcoin is software and software can’t care about who writes it, the problems of fiat will be solved by people who can describe a problem, think, and who aren’t Virtue Signalling, playacting cowards. This work is happening without their permission or knowledge.

Buying Bitcoin to make payments is going to be the number one use case on Earth. It’s going to be done with Pine wallet, Blue Wallet and Azteco as the means of getting Bitcoin. I’m not speculating by the way. Mr. Jabesi is 100% correct. He can see this thanks to his perspective.

Without exposure to different perspectives and the ability to empathise, it is not possible to understand why Bitcoin was written. If you think Bitcoin’s use case is solely a “store if value”, you are parochial, ignorant, mind blind and closed off from reality. You don’t matter.

Bitcoin Matters. Bitcoin Exists. Bitcoin doesn’t follow your instructions or fit into your thinking; it is a tool that obeys the person who writes on it. If you understand what it is, you can use it to solve problems. That’s all there is to it. What you believe doesn’t matter.

Your limited imagination isn’t the standard that Bitcoin or developers must adhere to. Your lack of imagination, exposure, experience and guts is entirely your problem. It is not the reality. Other people who are not like you and who live in reality are not constrained by you.

If you’ve constructed the correct model, written the software to give your ideas the power to act, and have market access, the world can change because you’re not a coward and understand risk, problem solving and entrepreneurialism. The weak and frightened can’t do this.

WhatsApp, Airbnb, Uber, Apple, Whisper Systems and others all exhibit the correct way of thinking. If you can’t muster the thinking for yourself, you can try to emulate…but nothing can cure your cowardice. You’ll never build something like Uber, invest in it or be associated.

Cowards just don’t have what it takes to change the world. A coward could never build Uber, and similarly the global Bitcoin Unicorn will not be built by or associated with cowards. These are matters of fact, not opinion. Facts don’t care about your feelings.

Nothing in the last 1000 years would have been built if men and women spent time describing problems as an end in itself. Definition is the first step only; it isn’t the goal. Solving problems and helping people is the goal. Bitcoin exists to solve a problem. Cowards ignore this.

Bitcoin was designed to replace fiat. It wasn’t designed to co exist with it. Many people simply can’t imagine that that goal can be achieved. That’s their problem; the problem of a lack of imagination. Bear in mind, none of these people thought fiat was a problem at all.

Do you really think that these imaginationless “recent converts” who want to constrain and pigeonhole Bitcoin can imagine the future? If you do, you’re a fool; these people can’t imagine anything, let alone what the near future will be like. On the other hand developers can.

Because entrepreneurs are aiming at a point in the future, they can see a future with their tool in it. The imaginationless can’t, because they don’t even know the tools are in development. Steve jobs knew that no phone in the future would have a keyboard. Normal people scoffed.

medium.com/media/7b3818cedc9caa3c6228adc3e4bef7ff/href

And YOU are not that stupid because you understand what Bitcoin is, are not a Virtue Signalling coward, and understand that the tools and services of “The Transformation” are being built right now. You don’t just talk about solving problems, you’re solving them by acting.

And let me be perfectly clear, and I’ve said this before. People whose role it is to act as educators are essential parts of the Transformation equation. In order for anything to happen people need to be persuaded that Bitcoin is a boon, and not a threat. medium.com/hackernoon/bit…

The Transformation needs gifted writers, thinkers and educators like @saifedean who is a perfect example of entrepreneurial spirit, and risk taking with his new education platform set to disrupt the global University system. Universities won’t like it like Banks hate Bitcoin.

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Jimmy Song ( Feed )
Wednesday, 08 July 2020
Please go ahead.

Please go ahead.

Please go ahead.

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Ribbonfarm ( Feed )
The Venus Effect
Velázquez’s Venus is perhaps the most naked on record: with nothing but her lovechild, Cupid, to hold up a mirror to her difuse reflection (deflection?), she lacks most of the mythic giveaways of her traditional representations. She is unlandscaped, unjewelled and unmyrtled. She can’t be [M]arsed. If
Velázquez’s Venus is perhaps the most naked on record: with nothing but her lovechild, Cupid, to hold up a mirror to her difuse reflection (deflection?), she lacks most of the mythic giveaways of her traditional representations. She is unlandscaped, unjewelled and unmyrtled. She can’t be [M]arsed. If not for the luxuriant fabrics she is recumbent on, […]
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Charles Edwards ( Feed )
Tuesday, 07 July 2020
Cheers JohnPaul!

Cheers JohnPaul!

Cheers JohnPaul!

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Ribbonfarm ( Feed )
Monday, 06 July 2020
Notes: A Distant Mirror by Barbara Tuchman
I just finished the heaviest read so far in my pandemic reads list, Barbara Tuchman’s A Distant Mirror, about the 14th century, loosely an account of the European experience of the Black Death. It is a 784-page monster and I read it in 15-30 minute chunks at bedtime over 68 days, while live-twe
I just finished the heaviest read so far in my pandemic reads list, Barbara Tuchman’s A Distant Mirror, about the 14th century, loosely an account of the European experience of the Black Death. It is a 784-page monster and I read it in 15-30 minute chunks at bedtime over 68 days, while live-tweeting it. I […]
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Jimmy Song ( Feed )
Friday, 03 July 2020
Bitcoin: A Declaration of Monetary Independence

The system is rigged. We all can see it in the opulent residences of the rich in San Francisco which lie blocks away from the squalid tents of the homeless. We can feel it in the way that certain people and businesses do little to better civilization yet make ludicrous amounts of money. We can hea

The system is rigged. We all can see it in the opulent residences of the rich in San Francisco which lie blocks away from the squalid tents of the homeless. We can feel it in the way that certain people and businesses do little to better civilization yet make ludicrous amounts of money. We can hear it in the frivolity with which certain people spend money and the morbid gravity of those whose souls are crushed by debt.

That the system favors certain people and screws over others is obvious even to a five-year-old. Why the system is so unfair is not at all obvious and is the source of much political confusion. People on the left think the rich get there through exploiting the poor. People on the right think the poor get there because they’re lazy. What’s the truth? What’s going on and why is the system rigged?

Fiat Money is Unfair

At the root of the unfairness of the current system is money. This is not the first place people look, but it is where every sound analysis leads. The system is unfair because the money itself is unfair.

To see how this is the case, let’s start with what we’ve been observing the past 4 months. Governments all around the world have spent with complete abandon. But where does that money come from? Who’s paying for all the stimuli and bailouts and grants? The amounts in these emergency measures to revive the economy in the past few months are absolutely staggering. They are well in excess of revenue these governments collect in taxes.

There are two possible answers. The money is coming from no one in particular and not paid for by anyone (something for nothing), or the cost is hidden and paid by people, just not obviously (something for something).

How Fiat Money Works

Is it really so simple? Can we help everyone who needs help just by printing more money without bad effects? Can we get something for nothing?

If it really is that simple, this leaves us with the obvious question. If the government can just print money to pay for everything, why are we paying taxes at all? If the Fed/US government can spend $6 trillion to revive the economy and it doesn’t have any other effect, why not spend $60 trillion or $300 trillion (enough to make every person in the US a millionaire)?

The fact that this hasn’t been done (and just common sense) is evidence that we can’t get something for nothing. This is a convenient lie to give the people the illusion of getting government services without cost.

Despite what we may want to believe, we can’t get something for nothing. Such claims that legislators promote are the economic equivalent of perpetual motion machines: that is, impossible.

The spending is paid for via less purchasing power or what we call inflation. So why haven’t we seen that much inflation? Hasn’t the Consumer Price Index (CPI) been 2–3% for a long time now? For USD, at least, there’s something called the “exorbitant privilege” which is the result of a particular historical event, namely the result of WWII.

♦The Dollar Hegemony

The dollar privilege, or dollar hegemony, is propped up through its position in international trade. Oil, in particular, has to be bought with dollars, so every company and every country has to keep some reserve in dollars (or get loans in dollars) if it wants to buy oil. Because of the dollar’s usefulness in buying oil, international trade tends to be settled in the dollar as well. As a result, the dollar has far more liquidity than any other currency. So in a liquidity crisis like we have now, capital flows toward the dollar, meaning that there’s higher demand for USD.

The demand for the dollar offsets the dollar inflation or expansion. To be more precise, it’s actually the other way around. The Fed is expanding the supply of USD to offset the crazy dollar demand around the world. This, in turn, means that other currencies depreciate relative to the dollar. In other words, USD inflation gets exported. Though the US does produce many goods that get exported around the world, the exorbitant privilege is in being able to export the dollar. The trade deficit is essentially goods that enter the US for newly printed money.

Monetary expansion (a.k.a. quantitative easing, credit facilities, loan programs, money printing) is an obscured tax. We cannot get something for nothing and $6 trillion in monetary expansion will have the effect of taking stored value from all owners of the money, which is an implicit tax. What’s more, since a lot of the dollar holders are not in the US, this effectively taxes people around the world who have no say at all in US government, let alone the Fed’s monetary policy! All those people, companies and countries that hold the dollar are getting taxed without representation.

The morality of monetary expansion is explained by a 14th century Bishop, Nicole Oresme:

For every change of money…involves forgery and deceit, and cannot be the right of the prince, as has previously been shown. Therefore, from the moment when the prince unjustly usurps this essentially unjust privilege, it is impossible that he can justly take profit from it. Besides, the amount of the prince’s profit is necessarily that of the community’s loss. But whatever loss the prince inflicts on the community is injustice and the act of a tyrant and not of a king, as Aristotle says. And if he should tell the tyrants’ usual lie, that he applies that profit to the public advantage, he must not be believed, because he might as well take my coat and say he needed it for the public service.

The euphemisms for fiat money printing are legion: “loans,” “debt,” “bond issue” or some other financial instrument that implies being paid back. This is to give the illusion that the value is being taken, not from the holders of the dollar, but from some specific entity that lent it the money and that the debt will be paid back in some way later. This is the ethical equivalent of seizing my coat and saying it’ll be given back later because the government has need of it. At the very least, I should be compensated for the fact that my coat is being used by the government.

And indeed, there is compensation being paid by the government, but it doesn’t go to you or me, it goes to the Central Bank, or more precisely, the private and undisclosed shareholders of the member banks of the Federal Reserve in the form of interest. So in a way, someone else gets compensated to borrow your goods! Imagine if the government seized your car for 6 months and compensates some banker you’ve never met that doesn’t have anything to do with your car. That’s what’s happening when the Fed expands the money supply.

As Oresme says above, monetary expansion is an unjust seizure of wealth. The open and honest way for any government to pay for its services would be to explicitly tax the citizens. People generally don’t like taxes so will not consent without a really good reason. This is how governments were held accountable in hard money societies, as government couldn’t tax too much without a revolt.

Yet the government can and does tax its citizens, just not explicitly or openly. Instead it does so covertly and implicitly through inflation. By this mechanism, it satisfies the right by having low explicit taxes and the left by providing lots of government services. Deficit spending/monetary expansion is a loophole that every government has exploited to tax its citizens for the last 50–100 years.

How Bitcoin Is Different

Bitcoin has two unique qualities which make it especially fair. First, it is near impossible to counterfeit. Anyone running a full node can check quite easily whether the bitcoins they received are genuine (spoiler: BCH is not bitcoin nor is BSV). That is, Bitcoin is easily recognizable and cannot be faked.

Second, it is impossible to inflate Bitcoin beyond the supply schedule created at its inception. The entire community of full node operators and bitcoin holders would have to agree to make that happen (spoiler: it won’t). That is, it’s a hard money with a hard cap.

These are specifically the two properties that make implicit/covert taxation so difficult and incentivizes an open and honest government. No longer can the sovereign just print more money to fund its latest program, it would either have to save revenue from prior years, cut some other program or tax the populace to pay for it. The loophole of deficit spending, which is really just printing more money and imposing an implicit tax on all dollar holders, is closed and spending has to be aligned with revenue.

Oresme’s insight that money belongs to everyone that owns it reveals a fundamental truth: monetary expansion violates the property rights of everyone who holds the money. Bitcoin is the first money to enforce the ideal that the money belongs to everyone who holds it, and not some authority that claims it with threats of violence.

Bitcoin is the first money that makes the monetary abuse by authorities impossible. Bitcoin is impossible to inflate without consent from everyone. On a Bitcoin Standard, the path that governments have to take in order to raise revenue is to get explicit consent for taxes instead of implicit theft through inflation.

Conclusion

The monetary system that we’re under is a tyranny. The Fed is an independent organization and is not accountable to voters. Furthermore, the dollar standard means that inflation gets exported to people outside the US, who have even less say. The dollar hegemony is an unjust system where the wealth of the world is controlled by an organization that’s able to tax without anyone’s consent.

The rallying cry of 1776 was “no taxation without representation.” The entire world is being taxed by an organization in which only the very powerful and rich have representation. It’s time to end the Fed.

This isn’t a new sentiment. Ron Paul wrote a book about it over a decade ago. But now, we can do something about it outside of our broken political system. We can buy bitcoin and declare monetary independence. Real justice means economic justice. Fairness means a system that isn’t rigged. Bitcoin propels meritocracies. Bitcoin expunges systemic unfairness.

The system is rigged. Bitcoin fixes this.

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Elaine Ou ( Feed )
Thursday, 02 July 2020
Cancel Caltech
There’s a petition circulating around Caltech to remove Robert Millikan’s name and image from campus buildings and fixtures. Millikan won a Nobel Prize in Physics for his oil drop experiment and was the founding president of Caltech. But, it turns out he was also a proponent of eugenics,

There’s a petition circulating around Caltech to remove Robert Millikan’s name and image from campus buildings and fixtures. Millikan won a Nobel Prize in Physics for his oil drop experiment and was the founding president of Caltech. But, it turns out he was also a proponent of eugenics, and that is Unacceptable.

I’m reminded of an incident a couple years ago, when one very woke Stanford student urged the university to rename Terman Library. You see, Lewis Terman was a eugenics supporter, and that kind of hate has no place on a diverse and inclusive campus like Stanford University.

That was all well received, until someone informed the kid that Terman was in fact named after Frederick Terman, the former Dean of Engineering and cofounder of Stanford Research Park. That’s why Terman is the name of the Engineering library and not the Race Science library. Lewis Terman, the eugenicist, was Frederick’s dad.

This mistake has happened multiple times.

I’m also reminded of that time the Palo Alto school board decided to rename Terman Middle School (this time they got the right Terman). A board committee chose the name Yamamoto Middle School, in honor of Fred Yamamoto, a Japanese-American who was sent to FDR’s concentration camps during WWII. Staunchly loyal to the country (or inordinately optimistic), Yamamoto later enlisted in the Army and died in battle.

A hero and inspiration to us all. BUT —

The school board somehow overlooked the fact that Fred shares a surname with another famous Yamamoto — Admiral Isoroku Yamamoto, who led the bombing of Pearl Harbor.

Parents complained, and the school board swapped in the name of a Holocaust survivor, Ellen Fletcher. Fletcher Middle School it is.

Maybe the lesson here is that building names are stupid. It’s not an honor to have a namesake if names change with the latest Radical Chic. And if names are so impermanent, it’s stupid to affix one to a building. Just put a Victim-of-the-Month placard on the front entrance, if that’s what you’re trying to do.

I’m not surprised to see this kind of bullshit go down at Stanford, where they have multiple departments dedicated to Grievance Studies. But I always had higher expectations for Caltech. No athletic recruits, no diversity quotas, no humanities department. That’s what a real university should look like.

Many years ago, when Quora was still a thing, I answered a query: “Does Caltech have the hardest undergraduate experience in the world?”

It’s all a matter of perspective: To a Caltech student, the Feynman Lectures might be a little bit hard. To a Stanford student, 8th grade algebra might be hard.

Show More

Having volunteered on the Caltech admissions committee, I know that every single student admitted to the university has the background and capability to take on Caltech’s curriculum.

Hans pointed out that most of the undergraduates were 1st or 2nd in their high school class. This is true. Caltech’s student body is not diverse. Because of the uniformity of academic backgrounds, Caltech can optimize its course curriculum to a very specific and high-achieving demographic.

Why are there are no introductory classes? Caltech does not admit students who need introductory classes. Freshman Math starts with multivariable calculus. If you need a bit more handholding when it comes to partial differential equations, you go to MIT.

When comparing average course offerings between universities, Caltech might seem hard. In reality, Caltech puts highly-capable students on track to achieve the best of their potential.

Then there’s the other type of “hard” – not in terms of academic rigor, but in sheer number of hours. Yes, with 130+ units of core curriculum in the hard sciences, the course requirements are indeed hard work.

This is the part that usually causes students to become jaded. The long hours consumed by coursework leaves little time for socializing or exploration. Caltech has a relatively low graduation rate compared to other top-ranked universities. The students who end up leaving, generally do so because their priorities are no longer academic — not because the school was “too hard”.

Hard as in demanding, time-consuming, you-must-surrender-your-soul. You’re not left with spare bandwidth to notice microaggressions, and it doesn’t matter because Demoralization is a Feature, not a Bug — That overwhelming sense of inadequacy is exactly how you’re supposed to feel when contemplating the Poincaré conjecture! There’s an old Caltech webcomic called Crippling Depression, which basically sums up the nature of scientific research and life at Caltech.

We always thought it was the challenging coursework that crushed our egos, but hey maybe it was actually the racist building names. The students should demand reparations.

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Charles Edwards ( Feed )
Monday, 29 June 2020
I very much like the theories for the broad phases of transitions.

I very much like the theories for the broad phases of transitions. There are also correctly identified issues with S2F.

However, the biggest assumption I can see here which causes this case to break down is that there is a "limit" on the electrical input for Bitcoin.

It has b

I very much like the theories for the broad phases of transitions. There are also correctly identified issues with S2F.

However, the biggest assumption I can see here which causes this case to break down is that there is a "limit" on the electrical input for Bitcoin.

It has been assumed here that the S19 energy efficiency holds through time. But in reality, Bitcoin mining efficiency has increased exponentially. Bitcoin mining is more than 10,000X more efficient than it was 10 years ago today. And average electrical prices drop every year. These two together mean that mining can continue to grow, provided efficiency continues to improve in a manner similar to Moore's Law.

You can read more here:

medium.com/capriole/bitcoin-value-energy-equivalence-6d00d1baa34a

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Beautyon ( Feed )
Bitcoin as Time Saver
♦Time is Bitcoin

Bitcoin is an amazing tool in many ways, and every one of its aspects is enough to drive its adoption across the world. There is one improvement however that’s often overlooked, and that’s how fast Bitcoin is compared to sending international bank transfers.

If you have money

♦Time is Bitcoin

Bitcoin is an amazing tool in many ways, and every one of its aspects is enough to drive its adoption across the world. There is one improvement however that’s often overlooked, and that’s how fast Bitcoin is compared to sending international bank transfers.

If you have money to send from A to B, you’ve got limited means at your disposal to get it done. Let’s say you’re in Finland and you want to send $20,000 to California. You don’t have many good options available to you, believe it or not, even in 2020.

To move your money, you could try a bank transfer. That means filling out a long form and submitting it to your bank, who if staffed by incompetents, will start asking you for the ID Card of the recipient. I’m not making this up. Then, once the form is submitted, you have to wait days for the money to arrive.

You could try sending the $20,000 with a Credit Card, but your recipient has to receive that payment on the Credit Card rails. If they accept Credit Cards, that has it’s own risks and high costs, if your Credit Card account will even allow you a transfer that large.

Many American services to send and receive money are USA only, so your contact in Finland can’t use those because they won’t give him an account. Sending money from one first world country to another is surprisingly onerous, long winded, risky, invasive and time consuming.

There is one way that your Finnish friend can send you money however. It will get to its destination instantly, is guaranteed to arrive correctly, requires no bank form to fill out or a teller to inspect, trust and second guess your intention or record the identity of the recipient.

That one way is Bitcoin.

With Bitcoin, all you need is the recipient’s Bitcoin address and you can send any amount of money anywhere, at any time, without a third party facilitator. Not only that, but it arrives instantly, and your goods can be shipped the same day because the vendor knows they’ve been paid for.

Imagine counting up all the bank transfers done per day, and assume that they take three days each to complete. That’s a lot of time, and if that time was saved by using Bitcoin, the efficiency gains would be worth a lot of money. Because, “Time is Money”.

This is similar to the savings made by email and the web replacing mail order by post. No one today would tolerate having to use a paper catalogue to order pet food, shoes or nuclear submarines, but that’s what some people believe should be the case with sending money from A to B. It’s crazy.

♦Image from the Johnson Smith Catalogue used by generations of Americans to buy normal and very odd things.

And don’t forget too, that Bitcoin transactions are irreversible and payer fraud-free. Once a payment is made, it is guaranteed. There can be no “charge backs” or other surprises and annoyances that are a permanent part of the legacy rails. Bitcoin totally eliminates these problems completely.

This single aspect of Bitcoin should be enough to make it totally replace credit cards, for small purchases online to large international bank transfers. All that’s missing are consumer grade interfaces to render using Bitcoin as easy as using a Credit Card. These interfaces are being developed right now.

And the public will need a trivially easy way to buy Bitcoin, that they already understand and which takes no skill to use. That’s what “Azteco” is, the Bitcoin Voucher company. Billions of people around the world top up their mobile phones with paper vouchers, and that’s exactly how Azteco works.

♦In South Africa, “Spaza” stores sell mobile topup vouchers for different phone networks. These stores are everywhere, and will sell Azteco Vouchers.♦An example Azteco Voucher, printed in the wild.

An azteco Voucher can be printed anywhere that mobile phone topups are already sold. The vouchers are simple to use, and require no training.

Each voucher can be issued in only four clicks, and if your staff can issue a Lotto ticket or any sort of receipt, they can easily sell an Azteco Voucher.

With an Azteco Voucher, people who don’t have access to banking or online eCommerce suddenly have the power to pay.

Merchants across the world can accept payments of any size from anyone without the fear of charge-backs or fraud. Billions of people will be empowered by Azteco and Bitcoin.

Bitcoin empowers people and brings them into the global eCommerce community as first class citizens. It is a tool of empowerment and equality.

On top of the time savings that will benefit westerners, Bitcoin will open many doors for an astonishing number of people.

Billions of people on Earth can’t access any sort of global money service, despite being able to make calls to any phone in the world. With Bitcoin it is now possible for them to participate in financial transactions globally. This is an important, entirely beneficial and significant empowerment.

The platform that enables this transformation is the humble and ubiquitous mobile phone, that has spread to every corner of the globe. The on-ramp that makes it possible is Azteco; the easiest way to get Bitcoin, tailored to the consumer who needs access to it’s world changing properties.

This is a big deal. The Consumer Bitcoin market will be worth billions of dollars. To say, “This is exciting” is the understatement of the decade.

Azteco is growing the number of its outlets. Follow us on Twitter for announcements as we roll out integrations and new vendors!

Bitcoin as Time Saver was originally published in The Startup on Medium, where people are continuing the conversation by highlighting and responding to this story.

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Ross Ulbricht ( Feed )
Friday, 26 June 2020
Remaking the Maker Protocol

by Ross Ulbricht

I read the Maker Protocol white paper recently. What a cool concept! The people behind Maker have created a cryptocurrency that tracks the value of the US dollar (a stable coin). You get all the benefits of a cryptocurrency without the crazy price swings. Naturally, it has b

by Ross Ulbricht

I read the Maker Protocol white paper recently. What a cool concept! The people behind Maker have created a cryptocurrency that tracks the value of the US dollar (a stable coin). You get all the benefits of a cryptocurrency without the crazy price swings. Naturally, it has become very popular, and hundreds of millions of dollars worth have been minted.

I dug further into Maker’s documentation, and read some articles about its recent collateral crisis in March 2020. There is no way I can get a full understanding of the system and what happened from within prison, but taking what I have read at face value, I believe I can contribute some ideas that will help keep this kind of crisis from happening again.

The stable coin issued by the Maker protocol is called DAI. The value of DAI is backed by collateral held in virtual vaults on the Ethereum blockchain. Vault owners are the foundation of the whole system. The value in their vaults backs the value of all DAI in circulation. If the total value in the vaults ever falls below the dollar-pegged value of all the DAI, then the system is insolvent and can be considered a failure.

I think the problem with the Maker Protocol which led to its recent crisis is a misunderstanding of the role of vault owners. In several places, I have seen them referred to as “borrowers,” which did not make sense to me at first. What are they borrowing? And then it clicked: the idea is that vault owners are borrowing DAI from the Maker Protocol itself and putting up collateral (usually ether) in their vaults to back the loan. This is like taking a mortgage out on your house with the ether being the house and the DAI being a loan from a bank. Just like with the mortgage, vault owners have to pay interest on the money they have borrowed in what is called a “stability fee.” And if the value of their collateral drops too low, their vault can be auctioned off. This is like a house going into foreclosure. Here is why this analogy does not work: the DAI being “borrowed” has no value apart from the collateral that is backing it. Its value comes from the fact that, when push comes to shove, it can be redeemed for the collateral in a liquidation auction. The Maker Protocol has assumed the role of the bank, issuing loans backed by collateral, but it seems to me that the vaults themselves are the banks, at least how banks used to be.

Before the advent of modern central banking, banks used to hold gold in their vaults, then print and lend out paper currency backed by that gold. Vault owners in the Maker Protocol are doing something similar. They are holding ether in their vaults, then lending out DAI backed by that ether. So, they would be more appropriately thought of as lenders, not borrowers. Banks were supposed to keep enough gold in their vaults to cover all outstanding currency that the gold was backing. In practice, they printed more currency than they could back and just hoped everyone didn’t show up at once for their gold. When the inevitable bank runs did occur, bankers looked to their pals in government for a bailout. Nowadays, dollars are backed by nothing and fractional reserve banking is the norm. Banks still get into trouble and expect to be bailed out. It’s a bit of a mess, really.

This is not a good model for Maker to emulate. The protocol is not a modern bank because it doesn’t have the backup of the government. Instead, vault owners should be treated like good old-fashioned banks, except they can’t cheat because all of the accounting is done publicly on the blockchain. If they try to issue more DAI than their ether can support, they run the risk of being liquidated. The fundamental difference between this and the current way the Maker Protocol is designed is that, as lenders, vault owners should collect interest, not pay it.

When I read the white paper, my first question was “why on earth would anyone put their valuable ether in a vault to back other people’s stable coins (DAI) if they are going to be charged a fee? And on top of the stabilization fee, they also risk losing 13% of their collateral to a liquidation fee if the collateral’s value drops too low. So why take all this risk without a reward?” It turns out the system rewards other behavior (that should not be rewarded), and vault owners can take advantage of it.

The protocol has a smart contract users can lock their DAI in and receive a “savings rate” while it is there. “Ok,” I thought. “If the savings rate is higher than the stability fee, then vault owners can just mint DAI backed by the ether in their vaults, put it in the savings contract and — so long as they mind their liquidation ratio — get a return on their ether (savings rate minus stability fee).” But why would we want to incentivize this? The whole point of DAI is that it can circulate as a decentralized, blockchain-based stand in for US dollars, not be locked in a smart contract.

It turns out before the crisis in March, the savings rate was around 8% and the stability fee was around 0.5%. So my suspicions were correct: vault owners could get a return (7.5%), not by selling DAI into circulation and being good stewards of their vaults, but by keeping their minted DAI for themselves and parking it in the savings contract. Apparently, a huge fraction of all DAI in existence was in the savings contract before the crisis hit. (see Figure 1.)

♦Fig. 1

The purported purpose of the savings contract is so the committee overseeing the protocol (Maker DAO) can adjust the savings rate to draw DAI in and out of circulation in order to influence the price and keep it close to parity with the dollar. I really don’t think this is necessary. Market forces are what keep the price stable because there are arbitrage opportunities on both sides of parity that push the price back to equilibrium. The savings contract just feels like a tool a central banker would want so he can imagine he is “managing the economy.” This top-down impulse to control the price is not in harmony with the decentralized ethos of the protocol. Worse, it is incentivizing behavior that makes the system less, not more stable.

A fully decentralized protocol is “governed” by math and logic, leaving the human decision making to the end users. The reliance on a central committee to set important parameters within the system is a weakness, not a strength. That is not to say that the Maker Protocol could necessarily function without a governing committee. It is a complex system, and the fact it works at all is impressive. However, the committee must be seen for what it is: a stop-gap. It is not an efficient mechanism for discovering the best values for the system parameters it oversees.

Crisis

Around mid-March, the price of ether dropped suddenly by about 50%, and the price of DAI spiked by over 10% (a huge amount for something that is supposed to trade one-for-one with the dollar). Many vaults became under-collateralized as the value of their ether dropped and were forced to liquidate. That’s a risk vault owners take. It is their job to make sure ether is added to make up the shortfall or that their outstanding DAI balance is paid down. However, the crisis became so acute that some vaults were forced to liquidate at extreme discounts, losing nearly all (and in some cases all) their collateral.

The problem stemmed from the fact that the whole system is chronically under-collateralized. Not only are vaults owners penalized with a stability fee for collateralizing the system, but the DAI burden is constantly being added to by the savings rate. Then during the crisis, no one wanted to give up their stable, high-yield DAI for a crashing, negative-yield ether in the liquidation auctions.

In the end, DAI had to be backed by USDC, a stablecoin backed by cash in a bank (hardly a decentralized solution). If the Maker Protocol is to become truly decentralized and independent, it has to get the fundamental incentives right and reject the allure of top-down control.

A Modest Proposal

Obviously, I advocate abolishing the savings contract and stabilization fee, but to replace them with what? First of all, the savings contract need not be replaced. The value of DAI is its stability, not some arbitrary rate of return. With regard to the stability fee, it should be negative. That is to say, vault owners should be rewarded, not penalized for providing collateral. So, it shouldn’t be called a stability fee at all. It really should be called a savings rate because vault owners are saving their ether in a vault and earning a return on it for the service of backing DAI. But this could be confusing because that term has already been used. Instead, it could be called a “collateral rate” for the rate of return on collateral.

Whatever its name, it will draw collateral into the system rather than repelling it. Where, you may ask, will the DAI come from to pay this collateral rate? It should come from the DAI issued by the vaults providing collateral. It is the holders of DAI who are being provided a service (a decentralized stablecoin), so it is they who should pay. And how should this rate be determined? A simple fix to the current system would be for MakerDAO (who already sets the stability fee and savings rate) to reduce the savings rate to zero and the stability fee to some small negative number, perhaps -1%. This would have to be done such that DAI would simply disappear at a rate of 1% per year, leaving that much more collateral unencumbered than would be otherwise.

A better solution would be to set up a system whereby vault owners set their own rates and compete with each other for the interest from DAI holders, with the lowest rates winning. This would keep rates low generally, but when there is a serious collateral shortage, rates will automatically rise via market forces, encouraging more collateral to come in and discouraging DAI hoarding. This is exactly the opposite of what we saw during the crisis of mid-March.

With the incentives appropriately aligned, there should be a much deeper market for DAI with tighter bid/ask spreads. The reason for this is that, with a positive rate of return, vault owners will be wanting to get their newly-minted DAI out onto the market so that others will be holding the depreciating asset (the rates cancel out while they are holding their own DAI). Thus, there will be ample liquidity above parity.

Below parity, there is an arbitrage opportunity so long as DAI holders can redeem DAI for collateral. If the price is below parity, people can buy discounted DAI, redeem them for excess collateral at the oracle exchange rate from the issuing vault, and then sell the collateral on the market at full value. (The oracle exchange rate is how the Maker Protocol determines collateral value). Thus, there will be ample liquidity below parity.

These forces will stabilize the price and ensure full collateralization, especially in turbulent market conditions.

Technical Part

The mechanics of this market-based system for determining the collateral rate get a bit complicated. Just skip to the conclusion if you are not interested in the details.

As noted above, vaults should set their own rates, with low-rate vaults winning the competition. However, unless there is excess collateral in the system, there is no competition. If all collateral is backing DAI, vault owners can charge whatever they want, with redemption for collateral the only recourse left to DAI holders. We can solve this by allowing unencumbered collateral to collect the interest of another vault’s DAI if its collateral rate is lower than the other vault’s rate. Thus, without having to mint DAI and sell it on the market, a vault owner can collect interest just by charging a lower rate. This is great for keeping rates low, but now there is no incentive to actually issue and sell DAI, especially because the vaults that do risk liquidation.

A compromise must therefore be struck whereby excess collateral in a low-interest vault can capture only a fraction of the issuing vault’s interest, with the rest going to the issuing vault, but at the low-interest vault’s rate. Thus, with excess collateral in the system, there will be a natural cutoff rate above which vaults that have issued DAI are losing interest to vaults with excess collateral below the cutoff, with both earning at the lower rate.

Which vaults capture from which? The vaults above the cutoff with the lowest rates should be captured from by the vaults with the highest rates below the cutoff. This will incentivize high-rate vaults to keep their rates low.

What fraction of the issuing vault’s interest should be captured by excess collateral below the cutoff? This should vary based on how much excess collateral is in the system compared to how much total DAI there is outstanding. If all DAI is paying interest to excess collateral (i.e, vaults with only excess collateral are below the cutoff), the capture rate should be 0%. The system is awash in excess collateral. The rate should increase linearly, reaching 100% when there is no excess collateral in the vaults below the cutoff: the system is near insolvency and needs excess collateral fast.

All of this handles the incentives keeping excess collateral in the system and collateral rates low, but the reason we want excess capacity is so we can use it when needed. To do that, there needs to be a mechanism whereby DAI are automatically switched from vaults close to insolvency to ones with excess collateral. This could be done through liquidation auctions the usual way. Vaults would mint DAI with their excess collateral and use it to bid. However, it would be good if this were done automatically to speed things up in a crisis, with the assets and liabilities (collateral and DAI) simply transferred to the well-capitalized vaults. Vaults could mark a portion of their excess collateral for this purpose and set a fee, with vaults liquidating to the low-fee vaults first.

The collateral rates set by the various vaults in the system will tend to converge on a single “market rate,” which is just the cutoff rate. Vaults below the cutoff are “leaving money on the table” because — so long as they don’t go above the cutoff — they can charge more without losing to a cheaper vault. One the other hand, vaults above the cutoff will be losing out to vaults below it with excess collateral.

When collateral (or the value of collateral in the case of an exchange rate change) drops, the cutoff will automatically rise because there will be less excess collateral below the cutoff, leaving higher-rate vaults to collect their full interest. The capture rate will also increase because a smaller fraction of DAI is paying interest to excess collateral. Both of these things will encourage new vaults and new collateral to flow into the system, alleviating the shortage, all without intervention from MakerDAO.

I tried to think of a way that the capture rate too could be decentralized and governed by market forces rather than by the linear formula above, but could not. The problem is that vaults are already competing based on their collateral rate for the benefit of DAI holders, so how could they also compete based on the capture rate for the benefit of vaults issuing DAI at the same time? One could devise a two-parameter formula that weighs these two values, leading to a single case, with interest going to the vaults with the lowest score, but this seems very complicated and rife with hidden loopholes. One could also leave the collateral rate and capture rate up to the vaults and direct interest to the vaults with the lowest total income, but then vaults could use extreme setti ngs, favoring DAI holders with very low collateral rates, but capturing 100% of the interest, for example.

Conclusion

The Maker Protocol is a very cool concept, and I hope it succeeds, but I fear it will meet with the kind of crisis we saw in mid-March 2020 again if these fundamental issues are not addressed. The next crash could result in systemic insolvency and catastrophic failure. There is a lot of money and even more potential riding on this. The crisis should be a wake-up call that reform is needed or new protocols need to be tried. I just hope the ideas above can help point that reform in the right direction.

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Ribbonfarm ( Feed )
Mansionism 1: Building-Milieu Fit
In politically turbulent times, when it is not clear which way the arc of history will bend, it is useful to reframe the question of political futures in terms of built-environment futures. Instead of asking, what kind of milieu will we inhabit, you ask the potentially easier question, what sort of b
In politically turbulent times, when it is not clear which way the arc of history will bend, it is useful to reframe the question of political futures in terms of built-environment futures. Instead of asking, what kind of milieu will we inhabit, you ask the potentially easier question, what sort of built environment will we […]
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Nik Bhatia ( Feed )
Thursday, 25 June 2020
Various Writings for Tantra Labs
1. The Triumvirate of Liquidity♦Introduction

US Treasuries, gold, and Bitcoin serve as a triumvirate of global liquidity, a powerful trio of safe haven assets that shelter their owners from the risks of our highly leveraged, credit-based monetary system. Of the $300+ trillion in financial assets ar

1. The Triumvirate of Liquidity♦Introduction

US Treasuries, gold, and Bitcoin serve as a triumvirate of global liquidity, a powerful trio of safe haven assets that shelter their owners from the risks of our highly leveraged, credit-based monetary system. Of the $300+ trillion in financial assets around the world, only $32 trillion exist at this echelon of safety and liquidity.

Bitcoin captured an astonishing 1% of the trio’s total market value after only eight years in existence, yet this was only a glimpse of the future. In its next chapter, Bitcoin will catapult toward gold’s $9 trillion size, fulfilling its destiny as digital gold. After that, Bitcoin will morph into digital Treasuries and replace them as the world’s risk-free asset before eventually achieving world reserve currency status. Replacing the dollar as the world reserve currency is a lofty ambition, but it will occur only as a byproduct of Bitcoin embodying digital Treasuries.

Gold was the dollar’s source of legitimacy

Gold is the original liquid global asset, a millennia-old money. The US dollar’s gold-backing during the 20th century earned it legitimacy, culminating in the 1944 Bretton Woods agreement in which the world’s leaders assigned the dollar as the world reserve currency. Even though gold no longer officially anchors global finance, central banks still hoard it as the world’s safe haven asset, presumably as insurance against a dollar system failure. Today, global central bank gold holdings exceed $1 trillion.

♦Bretton Woods, New Hampshire, 1944Dollars, meet Eurodollars

In the 1950s, a new form of dollar emerged in Europe called the Eurodollar, a book-entry dollar to facilitate interbank settlement outside of the United States and outside the Federal Reserve banking system. As Eurodollar usage popularized, banks in London, Zurich, Montreal, and Tokyo gained the power to create the international settlement currency away from any regulatory purview. By 1971, excessive dollar redemptions for gold had depleted the United States’ reserves. In order to protect its holdings of the world’s safe haven asset, the US ceased all dollar-to-gold conversions, and the dollar officially lost backing. It still, however, had the confidence of global financial participants as their ultimate unit of account.

Treasuries, not dollars

Dollars weren’t backed by risk-free assets anymore, so how did investors store dollar reserves safely? Bank deposits are essentially loans to banks and come with an inordinate amount of counterparty risk. Withdrawing truckloads of $100 bills isn’t feasible either, nor does it come with convertibility to an underlying asset. Deposits and cash simply aren’t palatable investments for the risk-averse. The solution and capital market tendency is to purchase US Treasuries, a $23 trillion market, in order to safely store dollars.

The dollar loses its identity

From 1971 to 2007, banks took complete control of the dollar, obfuscated its identity, and built an inherently unstable financial system on top of it. Eurodollars grew both in supply and sophistication. Banks stopped funding themselves with deposits; instead, they used US Treasuries as collateral to borrow book-entry dollars from each other. A bank license and US Treasuries together wielded the power to create seemingly unlimited money, obscuring money’s very definition. The dollar lost all of the identity it once had as a gold claim and became purely a banking liability, a loan to the overly-leveraged financial system. Instead of dollars, Treasuries became the most desirable global asset, not only because of the US government’s counterparty superiority, but also because Treasuries possessed omnipotent collateral powers that enabled money creation. Banks use US Treasuries, not dollars, as their risk-free asset, collateral anchor, and primary leverage vehicle.

The dollar system breaks in 2007

In 2007, banks began facing funding pressure. The previous culture of strike-of-the-pen collateralized lending withered away, and banks were unable to roll forward their maturing debt. Banks relied on their ability to constantly issue new debt, and when confidence in them faltered, so did solvency.

For decades, the relationship between dollars and Eurodollars existed without much drama; Federal Funds and LIBOR, the interest rate of each dollar type, mostly mirrored each other. In August 2007, however, LIBOR drifted higher relative to the Federal Funds rate, a sign of acute credit risk in the Eurodollar system. In hindsight, the problem wasn’t acute: banks began pulling back from each other as the global dollar system had reached an inflection point. This interest rate divergence foreshadowed the subsequent cascade of dollar-funding shortfalls and bank collapses. The multi-decade free run of money creation had cracked irrevocably.

In 2008, the Federal Reserve bailed out the world by liquifying the entire system. It chose not to discriminate between dollar liabilities and Eurodollar liabilities, and provided a lifeline to any bank or central bank in need by injecting reserves onshore and providing currency swaps offshore. Demand for the safety and liquidity of US Treasuries skyrocketed as they became the world’s security blanket, trapping the world in a dollar denomination even though the dollar’s long term viability as world reserve currency was irrefutably in question.

Permanent disrepair

The financial system is infected with a chronic disease that won’t go away. The dollar is no longer solely the national currency for the United States issued by the Federal Reserve. Instead, the dollar is an international banking instrument without limits, form, or the ability to sustain itself. The system decays as contractions in interbank liabilities cause repeated liquidity shortages for leveraged asset holders. Banks choose not to provide collateralized liquidity to other banks, even when the collateral is Treasuries themselves. This is the ultimate warning sign that banks don’t trust each other anymore. Furthermore, the Federal Reserve always bails out the system as the lender of last resort, permanently eliminating any motivation whatsoever for banks to provide liquidity to each other. The Fed’s default response is to create US dollar bank reserves, but this does not address the core problem of broken interbank trust. The Fed only provides a numbing mechanism, keeping the dying patient alive as long as they can.

Bitcoin is digital gold and digital Treasuries

What’s the endgame? Bitcoin is. Its software is engraved with “Chancellor on the Brink of Second Bailout” to proclaim an elegant solution to our banking system nightmare. Bitcoin is a bearer asset like gold, a risk-free asset like Treasuries, and a currency denomination like the dollar, rising up in parallel over the next couple decades as the infrastructure for the next financial system.

♦The original newspaper article referenced in Bitcoin’s genesis block

Gold and Bitcoin are both scarce assets without counterparty risk, yet Bitcoin’s digital final settlement functionality gives it a massive advantage over gold in the coming decades. Bitcoin is not only digital gold though, it’s also digital Treasuries. Bitcoin is the safe haven from all other digital assets, just as Treasuries are the safe haven from all other dollar assets. Bitcoin is used as collateral for derivatives agreements just like Treasuries are. But Bitcoin doesn’t have the counterparty risk or supply variability of Treasuries, positioning it perfectly for the forthcoming competition.

Bitcoin is the risk-free asset of the future.

The anti-Bretton Woods

The Bretton Woods monetary system established the dollar as the world’s reserve currency in 1944, but the next monetary system will not be determined by agreement between nations. Bitcoin’s path to world reserve currency status will occur one asset holder at a time. Thanks to the early-stage Lightning Network, Bitcoin’s design now includes an instantly settling currency function in addition to its slower asset function, a characteristic neither Treasuries nor gold possess. But Bitcoin first needs to add many trillions in market value to truly compete with Treasuries and gold as an asset class.

Uncertainty demands liquidity

Investors demand risk-free assets when they face geopolitical and economic uncertainty. Securing the liquidity of these assets is paramount when other asset classes experience the brutal combination of increased performance risk and liquidity deterioration that is so common in today’s financial world. In this era of dollar system fragility, the Triumvirate of Liquidity will reign supreme. Investors will scramble for financial safety, causing intense and persistent demand for US Treasuries, gold, and Bitcoin.

2. The Rise of Bitcoin: A Source of Yield

This is not financial advice. Please note, these examples are purely theoretical in nature, and this article is not an endorsement or recommendation of these strategies. Do your own research.

Eleven years and more than six hundred thousand blocks ago… Satoshi bestowed upon us a financial revolution unlike anything in the history of humankind. Few realized it at the time, but now, with each passing block, Bitcoin gets stronger, and more and more naysayers become Bitcoiners.

Scholars will look back on this era and fill pages upon pages with their thoughts and analyses, but they will not characterize this time as “The Death of Fiat.” Rather, they will hail it as the “Rise of Bitcoin.”

We are, without a doubt, amidst a mass conversion to a world denominated in Bitcoin. Take these religious overtones with a grain of salt, but investors are becoming increasingly focused on Bitcoin-denominated gains, foregoing the antiquated mental model obsessed only with how much Bitcoin’s price can appreciate versus the dollar. In fact, many American Bitcoiners transitioned away from their mental dollar denomination in part because of their displeasure with the current “religion” of the Federal Reserve, issuer of USD.

We have entered the era of dual-denominated approach to portfolio management, in which investors measure profits and losses in both BTC and USD terms.

In Tantra Labs’ BTC Denominated Portfolio Management & the Structure of Bitcoin Interest Rates, we identified several ways to generate a Bitcoin-denominated yield by using Bitcoin as collateral: exchange lending, depository instruments, Lightning Network routing, and as collateral for derivatives trading.

In this piece, we will take an inside look at one specific derivatives strategy — selling covered calls — and how that strategy is front and center in the exploration of dual-denominated portfolio management.

Call Options

A call option gives the buyer the right, but not the obligation, to buy an asset, in this case Bitcoin, at a specified price within a specific time period. Here’s an example, from a USD perspective (spot price of BTC as of this writing is ~$8,000, options data is from Deribit): a call option to buy 1 BTC at a $20,000 strike price expires on September 25th, 2020. The price of this call option is $480. That means the buyer pays a “premium” of $480 for the right to buy 1 BTC at $20,000 on 9/25/2020. If Bitcoin’s price rises to $25,000, the owner of the call can “exercise” the option, pay $20,000 for 1 BTC, sell it for $25,000, and realize a $5,000 profit. Or, the investor could just keep 1 BTC. The seller of the option sells 1 BTC for $20,000 (instead of at the market price) and collects $480 in premium. As we begin to see, profits and losses are happening simultaneously in two denominations, BTC and USD.

Which denomination should investors target for returns? It depends, and each investor will prioritize gains and losses differently for each denomination.

The BTC perspective

Let us now think about these trades from a BTC perspective. Deribit, a cryptocurrency derivatives trading platform, only allows BTC as collateral, not USD. Example: a call option to buy 1 BTC at a $20,000 strike price expires on September 25th, 2020. The price of this call option is 0.057 BTC. If Bitcoin’s price rises to $25,000, the owner of the call can exercise the option, and take delivery of 1 BTC for only $20,000. The seller of the option is forced to sell that 1 BTC for $20,000 instead of the market price of $25,000, and retains the 0.057 BTC original premium collected.

The Dual perspective

We can make some assumptions about the buyer of these call options. He or she is essentially looking for a cheaper way to acquire Bitcoin versus buying at market price. Now, take the perspective of our covered call seller, Alice, as she thinks about her strategy in both denominations. She owns 5 BTC, and decides to post 1 BTC as collateral to Deribit. She can now sell a “covered” call, which means she actually owns the 1 BTC she would have to deliver in case the contract is exercised.

In other words, she is not taking any leverage. She collects a premium of 0.057 BTC and keeps the 1 BTC posted as collateral as long as the price doesn’t rise above $20,000. Her worst-case scenario, selling 1 BTC for $20,000 if the price is above that amount, is an acceptable risk to her, partly because her remaining BTC holdings will show phenomenal USD-denominated gains in that scenario. She is taking a dual-denominated approach to portfolio management because her worst case scenario in BTC terms is actually a very profitable scenario when expressed in USD-denominated terms. If Bitcoin’s price doesn’t explode, she gets to keep the premium and her original 1 BTC that was posted as collateral.

A Source of Bitcoin Yield

Collecting options premiums by selling covered calls is a form of Bitcoin income. This strategy alters the overall Bitcoin-denominated return profile for a Bitcoin holder. Alice reduces her exposure to parabolic upward price movements, but she trades that exposure for a stream of income in the form of BTC-denominated options premium. The yield, in this example, would be over 7% annualized, earned in BTC.

Large equity holders regularly employ such a strategy: if an investor owns several million shares of a leading technology company, selling covered calls against those shares gives the investor a nice income boost from options premium, foregoing any upside beyond the option’s strike price. The investor is comfortable with such a strategy because he or she doesn’t mind sacrificing some of his or her ownership of the company, especially if that means the rest of his or her holdings are experiencing impressive price appreciation.

The covered call seller is similar to an insurance provider. Insurance providers collect thousands of smaller premiums but are exposed to large events that trigger insurance payouts. Options markets can be thought of in a similar way: covered call premiums might be collected along the way, but if the price of Bitcoin explodes, the seller will have to payout in the form of relinquishing Bitcoin for a discounted price when buyers exercise their call options.

Bitcoin is Productive Collateral

Bitcoin has been deemed a commodity by the CFTC and property by the IRS, but as the financial ecosystem around it evolves, Bitcoin is starting to resemble multiple asset classes at the same time.

In this case, Bitcoin’s options markets resemble features of the equity options market, especially from the perspective of dual-denomination. Large shareholders think both in terms of USD profit/loss and in terms of total percentage ownership of companies. Their strategies in options markets mirror what a large Bitcoin holder might consider to generate income from the asset they hold.

This strategy is ideal for sideways markets and also a decent way to compliment USD-denominated losses if the price of Bitcoin declines. It is a way to turn the hype cycle of Bitcoin, specifically the thirst for exposure to parabolic rises (of which we’ve had several in Bitcoin’s short 11 year history) into cash.

The demand for such exposure, is strong in the market, evidenced by record Bitcoin options volume. Holders of Bitcoin can consider risking some of their Bitcoin in order to monetize that demand, and use their Bitcoin collateral in order to generate more Bitcoin by selling call options and collecting BTC-denominated premium.

3. BTC Denominated Portfolio Management & the Structure of Bitcoin Interest Rates

Since Google’s IPO in 2004, its stock is up over 2,000% while the S&P 500 is up less than 200%. This type of relative outperformance is nothing new to bitcoin investors, many of whom have seen astronomical returns no matter what performance benchmark is used, as long as that benchmark is in dollars. But what happens if your home denomination isn’t US dollars? In this research piece, we examine what happens when investors start to think about bitcoin in relation to itself rather than in relation to dollars.

The stock market index is a century old invention by the financial press in order to track a basket of companies with one value. Benchmark indices became ubiquitous because every corporate executive and portfolio manager wanted to measure performance versus their competition. But the benchmark for Bitcoin fund managers shouldn’t be anything USD related like the S&P 500, Russell 2000, or Bloomberg Barclays US Aggregate Bond Index. The benchmark is now BTC.

What’s your denomination?

Investing in Bitcoin will always have fluctuating performance when converted back to USD, but what about for an investor who has switched his or her home denomination to BTC? While you might not see Wells Fargo offering a toggle feature for viewing USD deposits in a BTC denomination today, the prospect of entirely BTC denominated investors is now a reality.

♦♦Alice’s portfolio after her first bitcoin purchase

Here’s an example: Alice is an early investor in Bitcoin. She buys 500 bitcoin for $50,000 in 2013. As the price reached an uncomfortable level for her in late 2017, she decided to liquidate half her position, 250 BTC, at a price of $12,000 for a capital gain of nearly $3 million. She uses the $3 million to pay off debts and taxes, and sets up a steady income stream using a USD bond portfolio. She is now free from any dollar debt, has dollar inflows to cover monthly expenses, and also still has 250 BTC. Should she be thinking of her remaining bitcoin wealth in dollar terms? No. Her USD balance sheet is now stable, so she can start to think about a portion of her overall portfolio in bitcoin denomination.

♦♦Source of Alice’s USD income streamBTC is a home denomination for a growing population

At Tantra Labs, we argue that Alice should be looking at her bitcoin holdings as a standalone investment portfolio granted her USD balance sheet is completely sound. Alice has already diversified away from her bitcoin wealth by setting up a USD fixed income portfolio. Her next step should be to diversify her bitcoin portfolio by altering her current allocation of 100% cold storage.

Remove yourself from the shackles of a USD denominated world, for Alice’s sake. How can Alice maximize her BTC denominated wealth? Can she balance security and risk appropriately? With her USD portfolio properly allocated, Alice is ready to turn her attention to her Bitcoin wealth. She should use some principles from traditional portfolio management, but many of them don’t apply to Bitcoin. Tantra Labs introduces a new framework for BTC denominated portfolio management and the overall structure of bitcoin interest rates.

The structure of bitcoin interest rates

We have identified five main types of Bitcoin portfolio allocations currently available in the BTC denominated investment universe. Each sleeve has Bitcoin-native attributes and characteristics completely unique to this new cryptography-based asset class. We will make analogies to traditional investing with the caveat that not all analogies are complete or sufficient to describe Bitcoin.

The first Bitcoin allocation type is bitcoin held in cold storage. This investment is holding bitcoin without any counterparty risk and likely with a marginally negative return when factoring hardware and software wallet solutions, multisignature key signing services, and storage and redundancy costs.

The second and third Bitcoin allocation types carry varying levels of counterparty risk: exchange lending and depository instruments. Exchange lending of bitcoin is very similar to the concept of securities lending of bonds and equities to facilitate short selling. Bitcoin deposits work similarly to bank deposits; Bitcoin banks will profit by capturing a spread between borrowers and lenders. The interest rate in each transaction represents a combination of the time value of bitcoin and any risk premiums associated with the borrowing party, whether bitcoin exchange or bitcoin bank.

The fourth Bitcoin allocation type is bitcoin allocated to payment channels in the Lightning Network, a high-velocity routed network of Bitcoin nodes. Currently, nominal returns from routing fees still are outweighed by bandwidth and electricity costs because Lightning Network is in a nascent stage. Importantly, however, counterparty risk does not exist for the individual Lightning Network node operator; payment channels in Lightning Network use Bitcoin’s blockchain as its security anchor. The ability to earn bitcoin without taking explicit counterparty default risk is truly novel in monetary history.

The fifth Bitcoin allocation type is represented by Tantra Labs and its BTC denominated debt instruments. Returns are achieved by using algorithmic trading strategies with an explicit bitcoin benchmark. The objective is to outperform bitcoin held in cold storage. While cold storage bitcoin will have dollar returns dependent on bitcoin’s USD price performance, its bitcoin returns will essentially be zero. Tantra Labs is trading to outperform bitcoin itself, giving the investor access to an entirely new way of earning bitcoin.

Other BTC denominated return opportunities are coming online, all with their own idiosyncratic and counterparty risk. Derebit and LedgerX, online exchanges, allow writing options and collecting premium directly in bitcoin. Time value, risk premium, and volatility can all be theoretically determined from observing these transactions. A fund by Wave Financial started to capture this option premium and turn it into an income stream for investors.

Within bitcoin portfolio management, opportunities currently have varying degrees of liquidity, preventing a true comparison of interest rates right now. Lending bitcoin on BitMEX, for example, is a much higher capacity avenue to invest bitcoin versus payment channel routing in the Lightning Network.

Cold storage

Management of a bitcoin portfolio demands a first principles approach because the underlying money does not conform to what is currently considered money: central bank liabilities. Bitcoin is more comparable to gold or land than dollar deposits, as dollar deposits are liabilities on banks’ balance sheets. Bitcoin is a bearer asset much like a physical gold coin — once final delivery occurs, counterparty risk is eliminated.

This distinguishing characteristic between dollars and bitcoin alone should mandate an entirely different portfolio management approach, particularly in what the investor considers as the risk-free sleeve. Dollar investors buy US Treasury securities as the risk-free asset due to its dramatically reduced risk in relation to dollar deposits at individual financial institutions. Reserve assets are not held in dollar deposit form, they are held in government securities.

On the other hand, bitcoin held by investors using a variety of cold storage methods does not need a US Treasury equivalent as a risk-free security. The holder of bitcoin using his or her own cold storage does not have a counterparty like a dollar deposit has, and therefore the bitcoin holder does not demand a liquid asset equivalent to US Treasuries. Bitcoin’s underlying nature as an asset eliminates the need for the asset/liability security/deposit tradeoff existing in traditional portfolio management. The bitcoin asset itself has deep liquidity and fungibility. Holding BTC is logistically superior to the USD process of earning dollars, depositing them at a bank, and purchasing US Treasuries to negate any counterparty risk to that bank.

Exchange lending

Exchange lending was the first example of bitcoin exhibiting time value. Exchanges wanted to allow customers to go short bitcoin. Mechanically, shorting bitcoin requires borrowing bitcoin at an interest rate and then selling it. Customers with bitcoin deposits accrued interest on their holdings by lending to short sellers.

Bitcoin exchange lending works in a similar way to securities lending in traditional capital markets. Investors with custody of securities can lend them to short sellers. Bitcoin exchange lending transactions carry an interest rate comprised of some combination of bitcoin’s time value and the default probability associated with the borrower and exchange.

BitMEX, for example, offers lending rates across multiple timeframes; rates fluctuate depending on market conditions. Earning interest by lending to short sellers is currently the most relevant example of bitcoin interest rates because exchanges like BitMEX see billions of dollars worth of daily volume. We’re able to see bitcoin’s collateral-like traits most clearly in this setting.

Deposit rates

Companies such as Unchained Capital, BlockFi, and Celsius offer deposit rates on bitcoin in order to capture a spread on lending activity. The source of interest is similar to exchange lending: the depositor is being compensated for the time value of bitcoin and any counterparty risk associated with the borrower.

BlockFi offers insured deposits at attractive rates, but the most interesting aspect of its current rates offerings is the stark difference between interest offered on small versus large deposits. On large balances of bitcoin, deposit rates are materially lower than on small balances. Tiered rates are an indication of insufficient market depth.

Insured deposits also carry denomination risk. If bitcoin are lost or stolen from an insured fund, the depositor should be aware that insurance payouts might occur in dollars instead of bitcoin. Payouts can also occur with some delay, leaving the depositor exposed to price movements if payouts aren’t denominated in bitcoin.

♦A sample BTC portfolioLightning Network routing

In 2017, the Bitcoin protocol’s Segregated Witness upgrade allowed Lightning Network to become a reality, forever affecting the way we think about settlement of money. Anybody with bitcoin could now join a peer-to-peer network and settle transactions instantly, without having to wait for block confirmations. Bitcoin simultaneously demonstrated two powerful traits as money when Lightning Network adoption began: velocity and native time value. A most welcome byproduct was a new way to allocate bitcoin: productive Lightning Network payment channels.

Investors should take note of Lightning Network not just for its unprecedented settlement characteristics but also for its Hashed Time-Locked Contracts (HTLCs). Lightning Network contracts can be compared to zero-coupon fixed income instruments, making Lightning Network essentially a web of financial agreements all with embedded time value. In order to use Lightning Network, users pay for the right to use others’ channel capacity; the fees incurred by users are fees earned by network routers. Time value can be calculated from three observable metrics: channel capacity representing principal, routing fees earned representing income, and the measurement period representing time.

In a previous work, I introduced the idea of a Lightning Network Reference Rate (LNRR), an average of interest rates that Lightning node operators earn from providing liquidity to the network. Large node operators such as BitMEX Research have already published realized interest rates for their routing activity. We don’t know their exact calculation metrics, nor are we able to audit them, but the fact they are disclosing an interest rate is a promising sign that LNRR might become a reality one day. With LNRR, Bitcoin will have a native time-value component free from centralized decision makers, such as LIBOR panels or central banking monetary policy committees.

Lightning Network routing is not yet a profitable endeavor. Fees in Lightning Network are extremely low, and the size of the network isn’t big enough to offer a material return to even the largest capacity node operators. The fact that routing has a positive nominal return, however, is monumental for Bitcoin’s capital market because LNRR can theoretically function as Bitcoin’s reference rate. A reference rate should be free of counterparty risk so that borrowers can offer lenders a risk premium instead of an absolute value. Lenders use risk premiums to determine the quality of investment, and on goes the debt capital market. LNRR offers Bitcoin an opportunity to take the traditional debt capital market’s first principle, the structure of interest rates, and make it its own.

Tantra Labs

Tantra Labs has created a brand new type of BTC denominated instrument, one which sources return from the volatility of bitcoin’s price. The instrument is structured as a debt vehicle paying quarterly interest, with an additional performance-tied dividend.

Tantra Labs uses algorithmic trading strategies programmed to capitalize on one of Bitcoin’s inherent characteristics, price volatility. We’re of the few, but not alone; Wave Financial recently launched a fund with a bitcoin option writing strategy designed to accrue BTC yield to investors.

Bitcoin price volatility is a robust source of income for arbitrage, market making, and speculative strategies, and it shouldn’t be expected to decline until adoption has increased materially. If Bitcoin follows an internet-like adoption path, it will become the worldwide standard for value transfer online, its terminal market value is magnitudes higher than today’s; adoption waves will lead to massive price swings as more investors and savers coalesce around Bitcoin’s terminal value.

Tantra Labs’ mission is to deliver BTC denominated investors more bitcoin by taking advantage of that unpredictably volatile path forward. Additional performance-tied BTC payouts will help provide optionality to the current yield landscape and attract capital looking to invest in instruments with proper risk compensation.

Portfolio management♦

Bitcoin investors should be keeping the majority of holdings in some form of cold storage. Custodians are starting to offer robust solutions, and some with enough multi-signature features to mitigate any counterparty risk. Whatever the storage method, the age-old adage of Bitcoin should be held paramount: “not your keys, not your coins.” Bitcoin flourishes because of the paradigm shift it created in securing wealth and protecting it from confiscation. No matter how much financialization of Bitcoin takes place, people will always hold their own keys to ensure their financial sovereignty.

Bitcoin denominated investors now have many options to invest in order to earn more bitcoin and should consider part of their portfolio to be allocated away from cold storage. Exchange lending of bitcoin is definitely the deepest market; returns can be made on very large balances. Depository institutions are growing in popularity, but tiered rates are a sign that the market for deposits is immature. Lightning Network routing is fascinating, exciting, and the source of swells of Bitcoin enthusiasm, but the rates are extremely low and the liquidity is relatively non-existent today.

Tantra Labs and its new BTC denominated debt instruments have a unique opportunity to find a home with the bitcoin-benchmarked investor. Opportunities to use bitcoin to make more bitcoin are growing by the day, creating a bitcoin structure of interest rates complete with term structure and credit spreads. Any investment that requires signing a transaction, sending bitcoin, and receiving a BTC denominated return needs to be thought of in its own category, and soon we’ll have a robust BTC denominated interest rate market.

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Ribbonfarm ( Feed )
Tuesday, 23 June 2020
Two Spooks
It may or may not be true that there are no extant photographs of Johann C. Schmidt, aka Max Stirner. The ones I may know of lack the auratic power of the two penetrating character sketches Friedrich Engels did of him: the first, a remarkable, vulpine profile he drew from memory for John Henry Mackay
It may or may not be true that there are no extant photographs of Johann C. Schmidt, aka Max Stirner. The ones I may know of lack the auratic power of the two penetrating character sketches Friedrich Engels did of him: the first, a remarkable, vulpine profile he drew from memory for John Henry Mackay, […]
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Beautyon ( Feed )
First of all, their website has this:

First of all, their website has this:

"We use cookies to improve your experience on our site"

Which means they're not for Liberty.

Second, this tool sits on top of the existing internet as a layer. It isn't a replacement for it.

It's very unlikely that

First of all, their website has this:

"We use cookies to improve your experience on our site"

Which means they're not for Liberty.

Second, this tool sits on top of the existing internet as a layer. It isn't a replacement for it.

It's very unlikely that it will take off, especially since it relies on a new exotic language that no one knows. In order to win, they must get widespread adoption of this new language (after they've finished it) and then get developers to adopt it, and then businesses to run on it. That's a, "Big Ask".

Ruby on Rails and Ruby itself are a good example of how great sounding languages and tools are cool for a while and then fade away. Rust is the latest version of this, where hobbyist developers are re-creating tools in Rust. Will it take off? Who knows?

What we can say for sure is that none of these projects help people serve the public in ways that are exponentially better than LAMP on the existing rails. Bitcoin, which is a truly novel addition to the existing tools people can use is something much more interesting precisely because it does something that wasn't possible before and it integrates with the existing tools and infrastructure without novel languages or rebuilding and replacing the entire internet.

I could be totally wrong, of course!

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Elaine Ou ( Feed )
Friday, 19 June 2020
Happy Juneteenth!
Happy Juneteenth everyone! Here is how NOT to celebrate: Allow me to translate: Juneteenth is a dumb contrived holiday that does nothing to end racism. It’s a pointless ritual on par with canceling Aunt Jemima and Mrs. Butterworth. The day has zero relevance to me or my family, aside from the fact th

Happy Juneteenth everyone! Here is how NOT to celebrate:

Allow me to translate:

Juneteenth is a dumb contrived holiday that does nothing to end racism. It’s a pointless ritual on par with canceling Aunt Jemima and Mrs. Butterworth. The day has zero relevance to me or my family, aside from the fact that we really like fried chicken and watermelon.

Professor Hanson’s crime isn’t that he’s racist; it’s that he pointed out the hollowness of celebrating Juneteenth. Blasphemy! That’s almost as big a crime as noticing that George Floyd and Rayshard were not exactly model citizens.

On Juneteenth, every major corporation will engage in collective self-flagellation, host an office wide Eight-Minutes-46-Seconds Hate against toxic whiteness, and pay homage to Black Lives Matter♦. Be sure to purge the noncompliant from positions of power before upcoming elections.

Large numbers of strangers can only cooperate by believing in common myths. You know, like religion. This ensures that everyone knows their place and follows the rules. Blessed are the meek. You don’t have to deep down believe every story, but at least pretend and signal that you’re willing to play along. Heathens must be rooted out, because anyone who doesn’t fear the same God can’t be trusted to cooperate and play by the rules.

An actual productive way of celebrating Juneteenth might be to refuse to pay taxes until the government ends its War on Drugs. But that would defeat the purpose of the exercise, which is not to empower but to subjugate. Diverse thinkers be damned.

On a side note, this would be a good time for China to scoop up some smart, but insufficiently woke, academics. It’s not like Professor Hanson will find gainful employment in the US after an outburst like that. On second thought, maybe faux-libertarian economists are just as useless in China as they are here.

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Ribbonfarm ( Feed )
Wednesday, 10 June 2020
A Spectre Is Haunting The West
A tiger was reported loose in Oakland on the night of May 31. The report was false, yes, but it hardly mattered because―as is rarely the case with fake news―it had vision. In short, the report was false but the tiger was Real. To cite @aesthetikeit, here was a “symbol of the aimless and violent [R
A tiger was reported loose in Oakland on the night of May 31. The report was false, yes, but it hardly mattered because―as is rarely the case with fake news―it had vision. In short, the report was false but the tiger was Real. To cite @aesthetikeit, here was a “symbol of the aimless and violent […]
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Brandon Quittem ( Feed )
Tuesday, 09 June 2020
I think you're on the right track with this article, except for this section:

I think you're on the right track with this article, except for this section:

"Principle of Rights and Responsibilities. Designs should make rights symmetric with responsibilities. (e.g., the right to free speech should be replaced the the right and responsibility of meaningful comm

I think you're on the right track with this article, except for this section:

"Principle of Rights and Responsibilities. Designs should make rights symmetric with responsibilities. (e.g., the right to free speech should be replaced the the right and responsibility of meaningful communication; the right to private property should be replaced with the right and responsibility of stewardship of property)."

While your intentions are good, this type of human discretion is not desirable. It inevitably becomes co-opted and politicized.

Who decides what speech is "meaningful communication?" This is too easily co-opted. We need free speech to underpin a free and open society, we need to accept the fact that some speech is harmful. Minimize the attack surface or the risk is too great.

Who decides what is considered "responsible stewardship of property?" Again, this is too easily co-opted and will inevitably be politicized against those who cannot fight back. Another backfire.

The real goal here with property rights (I assume) is to ensure housing is affordable and to prevent "rich people from getting all the land." However, there is a better solution here, Bitcoin. Now let me explain:

Currently real estate is used as a Store of Value because our monetary system is inflationary. Inflationary meaning purchasing power of USD goes down over time. This incentivizes those with a surplus to invest in order to beat inflation (preserves purchasing power). Basic incentives at play.

Bitcoin is a deflationary monetary system which means the money (bitcoin) will increase in value over time instead of decrease in value (USD). This will reduce the "monetary premium" placed on real estate -- "why buy risky, illiquid real estate when you can beat inflation by simply holding bitcoin." Bitcoin simultaneously makes housing more affordable AND creates a more fair monetary system.