Blockchain and Muddy Waters

I was led by @Chris Skinner to a string of articles (this and this) regarding a bank and blockchain and finally to this fine chart from NIST.  The bottom is obviously my add-on.

As I and other have pointed out before, it is kind of fashionable to draw a distinction between Bitcoin and the underlying blockchain construct.  It may be particularly attractive to do so if you want to sound profound and not feel like a sucker who lost money on bitcoin.  And, if you are trying to sell one particular tech, understandable.

However, I think it muddies the waters on the profound and lasting impact Mr. Nakamoto’s insight is likely to make in the future on society as an alternative to the state’s monopoly on a practical, universal, unbreakable money seeps its way into the mainstream.

It is just as is understandable various public and private incumbents might want to pile on the mud.  “We’re well past peak bitcoin.”  Give me a break!

 

 

 

 

 

 

 

 

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When the Scholar is Angry

I just read, a week after publishing, The Big Blockchain Lie, by Nouriel Roubini on the often thought-provoking if sometimes bland and sometimes self-congratulating Project Syndicate.

I was surprised by the angry and poorly supported rant from a thinker who, generally, I find cooler and more balanced that like-minded opiners such as Joseph Stiglitz or Yanis Varoufakis.  If he wanted to create controversy, though, it was a good play, with seventy-nine comments so far, six of them while I write this piece.

Rather than going after each unsubstantiated jab, which I may do separately in my blog, let me stick to the panoramic view of this article.

1. The doomsday view.

Is there a bloodbath?  You might say so judging by the standards of traditional assets with clear established prices that are the promise to deliver a static and clearly stated underlying good.  However, if one thinks cryptoassets are in the process of price discovery, oscillations might not be such a surprise.  Think of the present as the first few minutes of the Big Bang and consider how behavior deviates from standard physics in this environment.  Some “retail” investor likely lost some money, sure, but this is far from rational evidence of a scam.

2. Blockchain vs Bitcoin

I deride blockchain lovers in Coffe Talk, but I have a hard time believing Mr. Roubini buys his own claim that a blockchain is just a spreadsheet.  By that measure, penicillin is just random mold and the internal combustion engine just arson inside some iron ore block.  The concept of blockchain, though far from the final, winning representative of crypto-value structures, is a genial construct that offers opportunities to coordinate and therefore enhance human activity in ways we cannot completely imagine yet.  Claiming the contrary is disingenuous and, from an accomplished academic, suspect.

3. Economic Hell

The spectre of monopoly, centralization and manipulation is real.  I pointed out in Another take on what makes a good cryptocurrency some problems with bitcoin as Satoshi Nakamoto laid out in his seminal paper.  Bitcoin has a scaling problem that goes beyond the petty dispute about megabytes.  A truly global crypto platform must scale by distributing and not concentrating and it must be able to forget as much as it is able to remember.

Nevertheless, Mr. Roubini’s arrogant underestimation of the buying decisions of free economic actors is insulting.  He assumes mathematicians, financiers and data scientists are regularly duped by very bad hombres in undisclosed unsavory locations.  In reality, most crypto holders are highly educated individuals who buy the concept of crypto and use the currencies for their advantage.

Monopoly and manipulation are unpleasant and not necessarily persistent phenomena and roadkill, though unfortunate, should be viewed in a Shumpeter-like fashion, as part of the creative destruction intertwined with progress.

4. No institution under the sun.

Well, no institution under the sun would have trusted email contracts, digital signatures, telephone conversations for that matter just a few years or decades ago.  ‘Nough said.

5. Appeal to discrimination.

I have no time now to reread and find where in the rant the writer regrets the absence of minorities in crypto (he shouldn’t really, if this is such a scam).  But this cheap shot is just in line with attributing it all to “greed” a concept that hardly fits with economic science.

Finally,

My father used to ask “cui prodest”, perhaps assuming someone who pushes something often does it out of self interest of, as Mr. Roubini would put it, greed.  In this case, I wish I knew.

 

 

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Another take on what makes a good cryptocurrency

Sent to the Lifeboat Foundation new money systems group.

The thing is that block size is really irrelevant in the big scheme of things.  What matters is blockchain size.  (I know the two are connected, but the problem is the overall size of the DB, not the size of each chunk.)

Great as it is within its design boundaries, Bitcoin and most other cryptos have a self-imposed limitation that is totally unnecessary and needs to be lifted.  My question is: why in heaven would someone on Proxima Centauri five hundred years from now need to know what I spent on a cup of coffee in a Mexico City Starbucks in 2017?

To some, it is important that it was 30 pieces of silver that were exchanged for Jesus’s capture, for others that Manhattan went for twenty-some dollars.  Yet in no case we know which specific coins were used.  Bitcoin confuses a value transmission and storage medium with a notarization system.  Of course we need to know pretty much forever which land belongs to whom, but that body of knowledge is likely to grow roughly arithmetically.

Payment transactions, if the recent past is any indication, are on the other hand likely to grow with population, AND with wealth AND with technology AND just accumulating with the passage of time.  Cryptocurrency  transactions are also likely to grow with adoption. It is, therefore, disingenuous to gloss over the fact that a blockchain as envisioned by Satoshi will be unmanageable regardless of Moore`s Law et similia.

Notarization is costly.  It need not be as costly as today’s services by protected oligopolies in most countries, but it cannot be free.  Free stuff is used in infinite amounts.   Yet, Satoshi did not bake in any compensation for record keeping nodes.  Increasing recordkeeping needs and no comp are a recipe for collapse, soon or by the time we colonize Proxima.

I lack the math skills to make in code the design changes that I just exposed, but I think until the following appears in a cryptocurrency, whatever its name and be it through a fork, hard, or soft, or a completely new development, the promise of Satoshi will not be realized:

1. Decouple current ownership from transaction history.
2. Create a market for transaction storage and make transaction recordkeeping costly.
3. Truly make transactions confidential, i.e. provable only at the desire of the parts.
4. Allow multiple paths of transaction chaining, so that throughput can grow in parallel and not only serially.
5. Eliminate economies of scale in transaction verification, so that mining on a billion cellphones is roughly just as profitable as mining on a petahash asic rig (in proportional terms, of course)

In this vision, all payments could be made in crypto.  No one could censor the network or attack it.  If every person on the planet makes today an average of three payments a day (I know, some of us make a multiple of that, but some still make none) there are today around 20 billion payments per day, i.e. over two hundred thousand payments per second.  Imagine why we need  points 1-4.

Without point 5, Mr. Xi’s successors will hold the keys to the throne of Emperors of the Galaxy.  I wish work on these five points could advance as fast as possible.  It would take not just math, but also economics, strategy and diplomacy and evangelization.

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My email to Lew Claasen on the Bitcoin Foundation Manifesto

Dear Lew,

Thanks for your message.

Please see my comments to the Manifesto.  I appreciate the effort put into it, and I thought I would give you my remarks.  Would be happy to discuss further.

Cheers,

 

Claudio Migliore

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I can recognize the intentions in this manifesto and some are hard not to agree with.  Nevertheless, I would give another whirl to it:

1. The listed truths are arguably correct, although they range between timeless principles and contingents short term facts
   1. You could argue that the first statement is confusing, since gold backed money is not strictly fiat
   2. Even when there was some gold “standard” around the world, governments happily debased their currencies and then they played around with words to get some legal cover.
   3. The statement about the gold standard is very US centric and is only good to cling to often repeated stats about the loss of dollar purchasing power.
   4. Truths 3 to 7, while significant, refer not to systemic economic issues but rather to the contingent state of financial intermediaries
   5. The huge truth that is not mentioned at all is that:
      1. The Internet has subverted and continues to subvert all connections between humans, making intermediaries generally unnecessary
      2. Crypto makes permissionless transactions possible
2. The word “accordingly” suggests that the Foundation beliefs somehow derive from the listed truths, which I do not think to be the case.
   1. All the listed rights probably derive in cascade from the principles already established (if routinely trampled upon) by the constitution and laws of most of the world and not from the before mentioned “truths”
   2. More in detail:
      1. Although politically correct, it is debatable whether the expression “transactions harming no others” has any real meaning
      2. The right to economic participation is also a PC term.  There could be mention to economic freedom, but this also entails the right of anyone NOT to transact with anyone else.
3. About the MISSION:
   1. The Bitcoin Foundation cannot coordinate any efforts of free people.  It can only attempt to, based on intellectual leadership and personal effort of its members.  The statement contrasts with the factual observation five lines up about the different views within the ecosystem.
   2. The mission could, and does not, address the issue of scientific study and understanding of the cryptocurrency phenomenon from and economic and technical point of view.  Past the simple though substantive statements  in Nakamoto’s paper, little has been done regarding understanding the ramifications of Bitcoin adoption, with the irony that a legacy institution of dubious neutrality like the Bank of England has been a major contributor in this field.
4. About the VISION:
   1. I think it is a bit narrow.  I believe Bitcoin will play a crucial role as global money, but it is naïve to assume that there will be no third parties.  In fact some initiatives within Bitcoin are creating third parties.  Third parties will always exist in any advanced free economic system since anyone can attempt to, and may succeed in, adding value in a transaction chain.  The point of Bitcoin is permissionless access, not lack of intermediaries.
   2. The vision should, I believe include the contribution of Bitcon to freedom and economic progress
5. About the values:
   1. PC at work again.
   2. “Guaranteed financial access”?  Who is guaranteeing? What is financial access?
   3. What is “financial access” and how is it different from financial inclusion? Why is one guaranteed and the other is not?
   4. What does the word “Autonomy” mean?

Stable money supplies (Plural?) is very vague.  It sort of tries to reassure inflation hawks.  I am one, by the way, and am not reassured.

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Bank Soundness and 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

 

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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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) that a mutant would 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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Fedcoin Helpers

Following up on posts by David Andolfatto et al. on the issue of state sponsored digital currency, I came across the following article.  IBM is looking to support central banks in setting up some form o digital currency.  Whether or not it is the right approach, it seems to me that the arrival of industrial strength suppliers is good news.

Ultimately, even if taxpayers’ money is not put to the best possible use, community/open sourced alternatives will not be crowded out, but rather spurred by any large scale implementation.

Reuters article on IBM move here

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