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Kindle Notes & Highlights
by
David Gerard
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December 22 - December 26, 2021
$1.5 billion of venture capital gets back, so far, zero. The main visible product is consultant hours and press releases.
Bitcoin and blockchains are not a technology story, but a psychology story: bubble economy thinking and the art of the steal.
This electricity is literally wasted for the sake of decentralisation; the power cost to confirm the transactions and add them to the blockchain is around $10-20 per transaction. That’s not imaginary money – those are actual dollars, or these days mostly Chinese yuan, coming from people buying the new coins and going to pay for the electricity. An ordinary centralised database could calculate an equally tamper-evident block of transactions on a 2007 smartphone running off USB power. Even if Bitcoin could replace conventional currencies, it would be an ecological disaster.
Most of Bitcoin’s problems as money are because it’s built on crank assumptions.
The word “libertarian” originally meant communist and anarchist activists in 19th-century France.
Computer programmers are highly susceptible to the just world fallacy (that their economic good fortune is the product of virtue rather than circumstance) and the fallacy of transferable expertise (that being competent in one field means they’re competent in others). Silicon Valley has always been a cross of the hippie counterculture and Ayn Rand-based libertarianism (this cross being termed the “Californian ideology”).
Old ideologies come back when they fill a present desire and there’s an opening for them. So these claims, somewhere between incorrect and nonsensical, showed up full-blown in Bitcoin discussion, proponents straight-facedly repeating earlier conspiracy theories as if this was all actually proper economics. Because if it is, then maybe they’ll get rich for free!
In this context, and particularly in Bitcoin discourse, you’ll see many words that look like English but are actually specialised conspiracy theory jargon. “Liberty” means only freedom from government; “tyranny” means only government; “force” and “violence” mean only government force and violence; “open societies” is a code word for “free market without regulations”; “freedom” means “free market without regulations” and only that.
Bitcoin ideology assumes that inflation is a purely monetary phenomenon that can only be caused by printing more money, and that Bitcoin is immune due to its strictly limited supply. This was demonstrated trivially false when the price of a bitcoin dropped from $1000 in late 2013 to $200 in early 2015 – 400% inflation – while supply only went up 10%.
Sadly for Bitcoin, most Austrian economists aren’t fans – even as Bitcoiners remain huge fans of Austrian economics.
Proponents of Austrian economics include the fringe economics blog Zero Hedge, which has confidently predicted two hundred of the last two recessions.
In practice, mining naturally recentralises due to economies of scale, so a few large mining pools now control transaction processing
Of course, with every confirmed transaction logged in the blockchain forever, it’s pseudonymous at best; as the case of Ross Ulbricht and the Silk Road showed (see Chapter 4), law enforcement will happily do the tedious legwork of tracing your transactions if you motivate them sufficiently.
Transactions are irreversible, and no human can intervene to fix mistakes. You might think this is obviously bad, but the white paper claims this as an advantage of the Bitcoin system.
In practice, consumers, businesses and banks overwhelmingly expect errors or thefts to be reversible. There is negligible demand for a system where human intervention to reverse an error is impossible. Even merchants, as much as they dislike chargebacks, turn out to prefer consumer confidence and payment methods people will actually use.
Bitcoin offered “equality” in that anyone could mine it. But in practice, Bitcoin was substantially mined early on – early adopters have most of the coins. The design was such that early users would get vastly better rewards than later users for the same effort.
Cashing in these early coins involves pumping up the price and then selling to later adopters, particularly during the bubbles. Thus, Bitcoin was not a Ponzi or pyramid scheme, but a pump-and-dump. Anyone who bought in after the earliest days is functionally the sucker in the relationship.
Citigroup analysis from early 2014 notes: “47 individuals hold about 30 percent, another 900 hold a further 20 percent, the next 10,000 about 25% and another million about 20%”; and the distribution “looks much like the distribution of wealth in North Korea and makes China’s and even the US’ wealth distribution look like that of a workers’ paradise.”
The usual excuse is to say that it’s still early days for Bitcoin. However, there are no forces that would correct the imbalance.
Venezuela is a typical example: all the coverage traces back to a story in Libertarian magazine Reason, fiercely advocating Bitcoin as a way to avert the spectres of socialism and regulation.41 One of their interviewees had been arrested for stealing electricity to mine bitcoins, which the author describes as a “government crackdown” on “freedom” because “bitcoin mining is arguably the best possible use of electricity in Venezuela”.
As a financial instrument born without regulation, Bitcoin quickly turned into an iterative exploration of precisely why each financial regulation exists. A “trustless” system attracts the sort of people who just can’t be trusted.
Many Bitcoin advocates consider the scammers worth it to be free of government regulation.
They also had evidence from the Bitcoin blockchain – which, of course, contained a tamper-proofed record of every transaction ever conducted on it and which addresses were involved.117 Which is why Bitcoin is otherwise known as “prosecution futures”.
By the end of 2016, 75% of the Bitcoin hashrate was being generated in one building, using 140 megawatts133 – or over half the estimated power used by all of Google’s data centres worldwide at the time.
The consensus model relies on the fact that you can’t outdo all the other miners casually – so it’s not “secured by math,” but secured by economics, balanced between multiple players.
Nakamoto’s original Bitcoin white paper assumes a peer-to-peer network that anyone can join. In practice, the miners operate their own centralised communication pool, previously the Bitcoin Relay Network and now called the Fast Internet Bitcoin Relay Engine (FIBRE), as it’s more efficient.
As of March 2017, three pools controlled over 50% and six pools over 75% of the hash rate, with the largest individual pool at 21.3%.135 There is no reason that multiple pools could not have a single owner. The largest mining pool owners already meet and operate as a cartel.
If you control more than 50% of mining power, you can perform a “51% attack,” which allows you to write the longest blockchain, which will then be taken by the rest of the network as canonical. You can double-spend confirmed transactions, or reject any new transaction you don’t approve of. You can reject other miners’ blocks. You can’t spend someone else’s bitcoins, but you can stop the owner from spending them.
Even if you have a bit less than 50%, you can still mount similar attacks with a better-than-average chance of success. From 25% of the hash rate upward, a selfish miner can mount 51%-style attacks and expect to turn a greater profit than they would otherwise.
Bitcoin decentralises things that should not be decentralised, then centralises them anyway but wastefully.
(Only 57% of transactions are confirmed in the first hour; 20% never get confirmed at all, and are eventually dropped.
IT professionals recommend keeping Windows fully updated for security, and keeping reliable daily backups, so that if you’re hit you can just wipe the PC and restore your data. When the NHS was hit by WannaCry, no patient data was stored on the affected machines and they did not pay the ransom – they just spent the next day reimaging thousands of PCs afresh.
an A/B test showed that prominent mention of Bitcoin acceptance reduced gross sales by 5.8%.
“This is why you don’t hear about businesses publicly dropping Bitcoin as a payment option. Bitcoiners will make your life a living hell if you do.”
It came out in May 2017 that the operator of the Dogecoin tipping bot on Reddit had stolen all the deposited Dogecoins two years earlier.294 Much sorry, many loss.
One Chinese “ICO” broke new barriers in market efficiency: you didn’t even need to put your ether into it yourself! Because the “white paper” contained malware that found your Ethereum wallet and emptied it. Now that’s a smart contract.
Computer programmers who don’t have an aptitude for social or legal conventions, but do have an aptitude for programming, so they’d like social and legal conventions to work a bit more like that.
Some advocates speak of replacing lawyers and judges with computer code,331 as if this is an obviously good idea; there are even anarcho-capitalists who seriously posit replacing most functions of government with a computer program.332 Others speak of completely autonomous corporate entities, doing deals with real money and goods without even the possibility of outside interference.
The trouble is that this conception of smart contracts is based on a severely limited understanding of how contracts, the law and social agreements work. It concentrates on a technical form that can be put into computer code. It doesn’t address the social meaning of what a “contract” is, the changeable contexts real-world contracts operate in, how they’re fulfilled in practice – or how you fix them when things go wrong.
Technology and business journalists writing about non-cryptocurrency use cases for smart contracts never seem to mention that their “trustless” system will still involve trusting humans wherever it touches the physical world.
The eventual fix for The DAO hack demonstrates the other problem with smart contracts: the “immutable” system containing the smart contract was suddenly considered changeable the moment the big boys risked losing enough money.
A much-touted advantage of smart contracts is that the code is public, so anyone can check and verify it before engaging with it. The problem is that it is extremely difficult to tell precisely what a program might possibly do without actually running it.339 Even if you do see any obvious (or exploitable) bugs, nobody can fix them once the contract’s been deployed – your bugs are immutable.
as of May 2016, Ethereum contracts averaged 100 obvious bugs (so obvious a machine could spot them) per 1000 lines of code.348 (For comparison, Microsoft code averages 15 obvious bugs per 1000 lines, NASA spacecraft code around 0 per 500,000 lines.)
If you have programmers, they probably save their code in Git, which is the closest I can think of to a useful blockchain-like technology: it saves individual code edits as transactions in Merkle trees with tamper-evident hashes, and developers routinely copy entire Git repositories around, identifying them by hash. It’s a distributed ledger, but for computer programs rather than money.
I sat in on one presentation by a Big Four accounting firm on the Blockchain in health care: three blokes (one with a tie, two without) talking about the hypothetical possibilities a blockchain might offer health care in the future, all of which was generic extruded blockchain hype, and much of it Bitcoin hype with the buzzword changed. When an audience member, tiring of this foggy talk, asked if there was anything concrete that blockchains could offer the NHS, they responded that asking for practical uses of Blockchain was “like trying to predict Facebook in 1993.” The main takeaway for the
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The music industry lives entirely off people’s discretionary income, which is highly sensitive to consumer confidence. When times are tough, attitudes are hard.)
Everything to do with cryptocurrencies and blockchains is the domain of fast-talking conmen. If anyone tries to sell you on either, kick them in the nuts and run.
