Bank Soundness and Competitiveness

Competitiveness 

 

I just read the World Economic Forum (WEC) Global Competitiveness Report and the useful (and pretty) charts Bank of America derived from it.  Then I did some comparisons.

I picked two countries (randomly-lol) and overlayed their graphs. (Note that the third panel is my responsibility, not BoA’s.)  Argentina ranks hugely better against Brazil on two categories and marginally better or worse in four.  The only large outperform by Brazil is on Bank Soundness and yet Argentina fares dramatically worse in WEC reading of Competitiveness!

Although I could not find the weights in the report, clearly (and probably rightly) the WEC places a substantial weight on Bank Soundness in promoting country competitiveness.

The argument is probably solid.  Flimsy, flaky, shady banks are no good.  However, what does it say for the evolution of finance, banking and Fintech?  Could it be that a healthy crypto alternative might pick up where sound banks falter?

 

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So bad it’s good

Jihacoin

 

I just read this paper by the Rand Corporation  called “National Security Implications of Virtual Currency – Examining the Potential for Non-state Actor Deployment

It is interesting to read because of the questions it raises:

  1. Why does the US public via government funding pay for this?  If it has any information you already do not know, then it is above your head anyway and if you are wiling and able to comprehend virtual currencies, nothing here is new.
  2. It is written rather poorly, syntax, grammar and logic, so why the waste?
  3. Is it really saying what it says or something else?  It purportedly excludes independent virtual currencies (VC) from the study, but does it?  Why would ISIS be better off with ISIScoin than with Bitcoin and why would ISIScoin be less vulnerable to US disruption than Bitcoin?
  4. Is it not that this analysis is part of a train of thought on how the US government might want to disrupt Bitcoin itself?

 

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Judas, Manhattan and my great grandfather, or the weight of history

Again, I am not Mike Hearn, so I tease to try and get you to read me through.

Remember the funny shape of one of the thirty pieces of silver that your great great grandfather paid for that flock of sheep back two hundred years ago?  You do not, and it’s probably better that way.  Why, then, is it good that you must know the history of every satoshi down a million blocks ago?  And why would the entire world provide you with storage and display of that trust for free and at your demand whenever you want?  It is neither necessary nor practical.  I would argue that the ability to forget the past and still maintain the present is good, not just necessary.  As things recede into the past, they become foggy and only the most relevant remain in the collective memory.  In fact, we all know how much Judas was paid for betraying Jesus, or what was shelled out for Manhattan or Alaska, but the billions of individual transactions made just a few days ago begin to fade healthily from memory and written records.

If Satoshi’s vision of an intergalactic currency is to be viable, there is no reason why a thousand years from now Darth Vader or Hari Seldon should be able to prove mathematically that I bought a sandwich at Rosario’s two days ago. There is no justification, in my view, to mandate that resources be spent to maintain those records. They could be periodically pruned out from the blockchain, with the appropriate cryptoalgorithms to keep consistency of current unspent outputs.

The prune up should be decentralized and autonomous, of course, but then again, interested parties, say governments, universities or Foundations, might have reasons to keeps parts of history alive and manifest it, either by directly storing them or tendering fees towards its storage.

So another time capsule to Nakamoto-san: “Let the blocks be distributed, not the whole blockchain!”

 

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Why the problem is not the block size but the blockchain size, the math and the philosophy

Bitcoin needs to support thousands of transactions per second, maybe millions. No amount of tweaking can make the numbers jive. I argue so in this post. At the same time, some of the fundamental design choices are naïve and unnecessary.  I start with this bold statement because, since I am not Mile Hearn, I do not expect anyone to read on without an initial teaser.

From SN seminal paper, bitcoin intended to have some characteristics that made it into a good currency, money, numeraire, or whatever you want to call it. Initially, it seemed that the design attained those characteristics, and indeed its phenomenal success suggests it did.

However, I think the design has not scaled well and is reaching a point where it cannot continue to grow and maintain the originally desired features.

The design assumed that the pure ‘progress’ (like Moore’s Law) would keep up or surpass the operating requirements of the btc network. Nevertheless, this is being proven unrealistic.  Even if Moore’s law continues, the scaling of btc has been and needs to continue to be explosive.

To be relevant, let’s say Bitcoin needs to account for 1% of the world’s transactions.  Roughly, if Visa processes 10k transactions per second, let’s say overall card transactions are ten times that and other transactions are on the same level, so there are today around two hundred thousand transactions per second.  That would be 17 billion transactions per day, i.e. 2.5 transactions per person per day on the planet.  This is back of the envelope, but probably not far from the right order of magnitude.

With those assumptions, Bitcoin needs a bandwidth of 2000 transactions per second (1% of two hundred thousand) just to be on the radar. And that is just 2015 rate, but it doesn’t take too much reading to see that other innovations (IOT, for instance) will add some zeros to the figure.

A naïve vision of Bitcoin as planetary (or even intergalactic) currency, then, is like the Jetsons’ view of everyday life. Cool in theory, but numerically unviable.

Again, an issue of the blockchain and its size. But there are economic and not just technical questions:

When I was a kid, they sold special “airmail” envelopes, made of lighter paper, because only critical mail was worthy of the expensive air delivery. Nowadays, all mail is airmail, even junk.

For the same reason, critical payments used to be the only handheld ‘real time’ transfers, while run of the mill transactions could take several days. Now payments are converging to real time, regardless of size, and cost is plummeting.  Special high value private networks that made sense before are merging into the internet following the same pattern.

Bitcoin’s current bandwidth, however, doesn’t even match the throughput of high value networks.  There are various proposals to bifurcate the rails, like sidechains, Lightning network, altcoins, etc. It seems as we are reliving a millennium of payments kludge history in just a year. In a world where Faster Payments is implemented in a few countries and private firms are marketing this service to many others however, a system that can only handle high value transfers is a weak competitor.

If I could send a little note to Nakamoto-san in 2008, I would tell (her/him/them/it?): “Think this through a little longer. Bitcoin is not ready.  Your fundamental ideas are sound, the implementation still is not. In six years your heirs will be squabbling over details because the whole thing is bursting at the seams.”

Next issue: Judas, Manhattan and my great grandfather

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Satoshi Nakamoto is Hari Seldon, or what is wrong with Bitcoin

I was 16 when I picked a small book off my father’s library. It was also one of my first hard reads in English.  It was called ‘Foundation’, by Isaac Asimov.  Foundation, for those who do not know, was inspired by The Rise and Fall of the Roman Empire and, if you ask me, must have at least in part inspired Star Wars (we all stand on the shoulders of giants, after all).  It is a story of galactic scale and millennial span.

What matters here is that the great mathematician Hari Seldon forecasts the fall of the Galactic Empire and strives to alleviate the upcoming suffering by creating the Foundation.  Events Hari couldn’t forecast (no spoilers) throw a wrench into his master plan.  Read Foundation and Empire and Second Foundation to get the whole thing.

Digression over, Satoshi reminds me of Hari. She saw and tackled a problem.  Some things he foresaw, some others they may not have, or it tackled covertly.  These issues need to be tackled.

Some of these issues have been covered by others, but I have not seen all of them in a single post. Since single proposals are out there already, I know the technical solutions are conceivable.  Here are the wrenches as I see them.  I will go into more detail on each in other posts:

Wrenches in Bitcoin’s machine

Issue BIPs
Ecosystem rules:

 

The issue is not block size, it’s blockchain size. A large blockchain:

Requires large storage space,

It is more susceptible to DB corruption,

It becomes harder to manage and explore,

Setting or rebuilding a node takes days,

These issues all conspire against widespread nonprofessional participation.

 

Nodes need to be reformed to stay small, numerous and motivated.

Redesign the blockchain DB so nodes can store individual parts of it.

Establish a reward system for block storage and broadcast.

Privacy

 

Value transfer is a private affair. Only parties should be able to allow its view to the public. Transactions should be cloaked unless parties de-cloak them. Getting a bonus, paying for a child’s cosmetic surgery or ordering a million triangular Gorilla Glass screens for a new product launch should not be visible to nosy neighbors or competitors. The state itself would certainly not pay for military issue toilet seats or fighter jet fuel with bitcoin if everyone could know the details.

 

History

 

Remember the funny shape of one of the thirty pieces of silver that your great great grandfather paid for that flock of sheep back two hundred years ago? You do not, and it’s probably better that way. History needs to be forgotten.

Introduce jubilee points into the blockchain.

Rely on block storage incentives to induce progressive forgetfulness of old blocks.

Bandwidth

 

Bandwidth needs to be expanded by several orders of magnitude

 

To be relevant, let’s say btc needs to account for 1% of the world’s transactions. Roughly, if Visa processes 10k transactions per second, let’s say overall card transactions are ten times that and other transactions are on the same level.  So there are today two hundred thousand transactions per second in the world economy.  That would be 17b transactions per day, i.e. 2.5 transactions per person per day on the planet.  This is back of the envelope, but probably not far from the right order of magnitude.

With those assumptions, Bitcoin needs a bandwidth of 2000 transactions per second (1% of two hundred thousand) just to be on the radar.

Security Security needs to be variable according to the value of the transaction, so as to decouple growth in the size of the mining network from growth in the size of the economy If the security of the network is a one size fits all, low and high value e payments cannot live together unless cost is no object.
Economic issues, a.k.a. Elephants in the room A couple of guys cannot own five percent of the planet’s wealth I do not offer a solution to this one, but the issue stays. It may solve itself with growth or it may not, through losses, dilution etc., but if it does not, it jeopardizes bitcoin adoption.
A large portion of usable tokens is that unleashable at any moment is a risk factor to the value of the token and its related economy. Whatever your regard for the quantity theory of money, Nakamoto & co. huge pent up spending power is a threat to everyone’s savings.

 

Now, I am no great coder and any BIP needs coding, so I apologize in advance and expect the flack.

Note:

You do not hear much about this book and the sequels, but it has always had a place in my heart. Asimov was a bright physicist and a great communicator, although a bit of a collectivist (and who can blame him, since most of his productive life happened while the Soviet Union was humming along just fine? Lol.)

 

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Blockchain Inside Regulations Is NOT Innovation

I agree with the thesis of this article by William Mougayar.  However, in my view, a definitional point is in order to be fair to all involved.  Financial firms have innovated, or at least evolved their product lines.  As someone old enough to have had his tongue gummed up with stamp glue from mailing checks, things have indeed come a long way.

What is incompatible with regulated enterprises, though, is disruption. Regulators and their charges can hardly destroy their business model, after all.  As Shumpeter had pointed out way before we entered this current age of acceleration, creative destruction is not a gradual, but a traumatic phenomenon.  As for permissioned blockchains, I struggle to find parallels from the past, but I have this image of chariot makers adding speedometers to their horse drawn vehicles to compete.

 

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