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Kindle Notes & Highlights
by
Neel Mehta
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December 15 - December 17, 2022
Bitcoin is probably rat poison squared. — Warren Buffett, CEO of Berkshire Hathaway[2]
It’s actually pretty common for bitcoins to be lost forever: by one estimate, 30% of all mined bitcoins have been lost.[124]
Miners get to choose the transactions they put in their next block; you can imagine they’ll choose the transactions that offer them the highest fees.
This means that, when there are more transactions vying for a spot in a block, transaction senders have to offer higher fees to win out. (It’s like how Ubers and Lyfts cost a lot more during periods of peak demand, like right after New Year’s.) Note that the fee doesn’t depend on how much money you’re sending.
Anyway, the average fee was just a fraction of a cent back in Satoshi’s and Hanyecz’s days, but now that Bitcoin’s price has risen and there’s more interest in Bitcoin, the fee tends to hover between 50¢ and $1.[210]
China has dirt-cheap coal power[337] and ever-increasing internet access, making it the most popular place to mine: by one estimate, 80% of all bitcoins are mined in China.[338]
Quebec for its plentiful hydroelectric power (it’s two to three times cheaper than the rest of North America), and Russia for its cheap nuclear and hydroelectric power.[340] Cloud miners started using so much electricity in Quebec, in fact, that the province temporarily stopped selling power to miners in 2018 because they needed to save some power for actual Quebec residents.[341]
Other companies have gotten shockingly rich off ASICs. The most famous is Bitmain, a Chinese that started off selling their Antminer line of ASIC-powered mining rigs. Bitmain now controls 70-80% of the Bitcoin mining hardware market.[363] Bitmain became so flush with cash that it has since branched out into running a cloud mining firm[364] and mining pools. Its two largest mining pools, AntPool and BTC.com, once owned almost half of the world’s mining power.[365]
Bitcoin’s blockchain is huge: at the time of writing, it’s over 250 GB and packing on about 50 GB a year.[368]
most Bitcoin users don’t store the entire blockchain on their devices. Instead, they only store a partial copy of the blockchain on their devices, making them what are known as lightweight nodes. They rely on other people to run full nodes, or computers that store the entire blockchain, to validate transactions and make sure they have the latest blocks on the blockchain.[371] The tradeoff is that people with lightweight nodes can’t be 100% sure that all the transactions they’re getting are legitimate; they have to trust the owners of the full nodes.
At the time of writing, the number of Bitcoin full nodes hasn’t budged from about 10,000 in the last two years.[373]
The second case of Bitcoin’s troubling centralization is with the software that runs on full nodes, known as Bitcoin clients or implementations. At the time of writing, 97.5% of all full nodes run the Bitcoin Core client software — that’s 10,341 nodes out of 10,605. The second-place client, Bitcore, only runs on 111 nodes.[375]
The top pools are always jostling for position, and pools are always emerging or going out of business, but generally, we’ve found that the top 15 pools mine about 95% of all Bitcoin blocks.[383] And, generally, the top 5 pools control between 60-75% of all Bitcoin mining.[384]
Another surprising feat of centralization is that most of the top pools are based in China; at the time of writing, Chinese pools control over 80% of the Bitcoin network’s hash rate and thus mine 80% of the world’s bitcoins,[394]
Altcoins have gotten bigger and bigger over time — Bitcoin controlled 90% of the cryptocurrency market back in 2015 but just over 60% at the time of writing.[411]
In 2016, the early Bitcoin developer and former Google engineer Mike Hearn called Bitcoin a failed experiment, citing many of its flaws:[412] Low capacity: about 3 transactions per second. Highly unpredictable fees and waiting times, especially in periods of high demand. Remarkable centralization in the hands of a few (mostly Chinese) miners, who in Hearn’s view refuse to make changes that would make Bitcoin more popular because that would eat into their mining profits. The community’s inability to agree on anything — including a popular amendment to grow the block size, or the number of
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The DAO quickly became very successful, raking in $150 million from 11,000 investors in 28 days.[482] But the smart contracts behind The DAO were filled with bugs and security holes, and in June 2016, an unknown hacker exploited an unknown bug[483] to steal 3.6 million ether, then worth about $50 million, from The DAO’s coffers.[484] This was a massive amount of money: about 14% of all ether coins that had been mined up to that point.[485]
The challenge with pegs is that the currency board offering the peg has to have enough of the bigger country’s currency, known as the reference currency, sitting around.
For many years, Tether committed to keeping $1 in reserve for every USDT in circulation.[513] With this approach, known as a 100% backed currency peg,[514] Tether ensured that it could always honor its promised exchange rate — even if every single USDT holder tried to sell back all their coins for dollars.
In 2017, the United States’ Internal Revenue Service (IRS) forced Coinbase to hand over the names and Bitcoin addresses of people who had bought or sold large amounts of Bitcoin.
In 2017, the popular torrenting, or digital piracy, website The Pirate Bay started running CoinHive on visitors’ browsers without letting them know or giving them anything in return.[568] This wasn’t a harmless trick, either, since all that mining activity heats up visitors’ computers, makes their fans kick into high gear, and drains their batteries.[569]
This tactic of hijacking a visitors’ browser into mining coins for a shady operator is known as cryptojacking, and it’s rapidly become a scourge across the internet.[570] It’s incredibly lucrative, too: by one estimate, a website operator can earn over $300,000 a month by cryptojacking their visitors.[571]
In 2017, attackers hacked the popular Showtime website and quietly installed a cryptojacker,[572] thus earning the attackers XMR for each of Showtime’s millions of visitors. Hackers mounted a similar attack on the LA Times’ website in 2018.[573] Hacks became so widespread that cybersecurity analysts started calling cryptojacking the top malware threat they were tracking.[574]
After years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain—besides currency speculation and illegal transactions.
And, no matter what blockchain you use, blockchains are slow: a classic centralized database called MySQL can handle 60,000 times more transactions per second than Ethereum (which itself can handle five times as many as Bitcoin)![626]
(It’s estimated that 90% of all blockchain trials never turn into reality, so this program’s success is rare.[668]
Surprisingly for a technology widely associated with illegality, fraud, and distrust of governments, the path to trusted blockchains runs through governance, regulation, and law. —Kevin Werbach, author of The Blockchain and the New Architecture of Trust[699]
A full 80% of ICOs are estimated to be scams,[775] and from 2016 to 2018 ICO scams stole almost $100 million from everyday investors.[776]
This scam is known as an exit scam:[777] it’s when a company raises money based on a whitepaper but disappears before building anything.
The SEC has a longstanding test, known as the Howey test, to check if an asset is a security. The test says that an investment is a security if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”[791]
Bitcoin is a fraud worse than tulip bulbs… it will eventually blow up. —Jamie Dimon, CEO of JPMorgan[907]
