R3 Should Just Buy Ripple

Previously, we made fun of R3 for complaining about a billion-dollar Option Contract that Ripple decided to terminate. R3 should have used a smart contract!

Now we have the actual court documents (thanks @MrDuke67).

According to Ripple, the Option was given to R3 in exchange for a technology and commercial partnership. Ripple claims that they were fraudulently misled into the partnership, and that R3 failed to deliver anything of value. Not only does Ripple want the agreements declared invalid, they also want R3 to pay punitive damages and legal fees:

But according to R3’s complaint, the Option had no strings attached:

I can’t help but feel sorry for Ripple here. It’s hard to imagine anyone agreeing to a partnership with R3 unless fraudulently induced, and the Option contract does kinda look like a freebie (full text here).

To make matters worse, the Option contract is now worth over a billion dollars, which is almost certainly more than Ripple’s entire company valuation (They raised $55M in last year’s Series B).

So here’s a modest proposal that should make everyone happy:

  • R3 goes to one of its banking partners for a billion-dollar loan*, using the XRP Option as collateral.
  • R3 acquires Ripple for a mix of cash and stock, up to a billion dollars.
  • Withdraw the complaints, exercise the Option, sell the XRP, pay back the loan in full.
  • Burn Ripple’s business to the ground.

Lo and behold, we’ve created shareholder value for all. Blockchains really are like magic.

*Better yet, tokenize the Option Contract and do an ICO.

Anti-Capitalist Propaganda in China

This is what Chinese people think America looks like:

We’re a bunch of greedy capitalists who objectify women and stomp on minorities.

This poster circulated around China in the 1960s. During that time, our National Education Program distributed pro-capitalist propaganda here in the States:

Fast-forward fifty years. Last week, I found myself in an impossible debate with a Chinese national over whether China allows greater freedom than America. He claimed that it was much easier to start a company or invest in business in his country, because they don’t have all the complicated regulations of the US.

That’s sort of true. China is free in the sense that you can litter everywhere and dump toxic waste in the water supply. There are fewer business-stifling regulations, but there are also fewer externality-preventing regulations.

I asked about censorship, capital controls, political prisoners. He replied that the government only did what was necessary to speed up economic growth.

China is basically an authoritarian regime, but two decades of progress have convinced the population that communism is the epitome of economic liberty. Meanwhile, a snapshot of our daily news feed looks exactly like China’s anti-capitalist propaganda from the ’60s. It seems that over the course of a half-century, the US and China have magically traded places.

Diversity and Inclusion for Bitcoin

No field of technology has accomplished as much as Bitcoin when it comes to promoting diversity and inclusion. Check it out — In recent weeks, we’ve learned:

  • North Korea spun up hundreds of Bitcoin (mining?) nodes beginning in May.
  • Japanese digital services company GMO is investing $90M in a new Bitcoin mining facility.
  • Putin’s Internet ombudsman is raising $100M for a Bitcoin mining farm. It will reportedly take advantage of Russia’s excess power capacity at deeply discounted rates.

Bitcoin’s strength lies in its jurisdictional diversity. Every transaction is created equal, no matter by whom or where. China’s concentration of mining power has been one of the biggest threats to Bitcoin, but if these new developments play out, we could see multiple state-sponsored server farms jockeying for power.

The biggest benefit of diversity is that every new idea is confronted with lots of competing opinions, so no decision ever gets done. This preserves the blockchain’s doctrine of immutability and permissionless access. The most inclusive state of the network is one in which every node is divided in a Mexican standoff.

I know, I know: People like to signal virtue by bemoaning Bitcoin’s lack of gender diversity. That’s okay. Signaling serves an important evolutionary function, and I have much respect for anyone privileged enough to expend resources on such an activity.

Still, diversity-driven virtue signaling is horribly misguided. Gender diversity is of zero concern for anything but the elitest of elite Western institutions. Bitcoin and its blockchain brethren are global: No other technological advancement so effectively serves state-oppressed Venezuelans as well as Silicon Valley software engineers. That’s the power of inclusion and equality.

Fiat Institutions in Virtual Worlds

Long before the age of billion-dollar Bitcoin mines, China was the world’s richest source of World of Warcraft gold.

WoW gold is a virtual currency that players use to buy weapons and animals for in-game missions. The currency is normally earned by completing challenges and killing monsters, but professional “farmers” spend their days performing rote tasks to acquire gold which they resell for US dollars. For a while, Chinese prison guards forced labor camp inmates to play Warcraft so that they could harvest the gold. Even Steve Bannon helped run a gold farming business.

There’s more: Each game server features an auction house, where gold can be used to buy tokens redeemable for digital goods and access to other Blizzard games. Tokens trade in a real-time market. It’s not that different from the ether-ICO economy, except that central banks haven’t tried to ban World of Warcraft.

A number of countries now want to control how people invest their digital currencies, but they will fail. Fiat authority is not transferable.

Just like money is a shared hallucination, so is authority. It makes no difference whether players are using virtual gold to buy virtual swords to join virtual guilds; or if they’re using virtual ether to buy virtual tokens issued by virtual companies. The only way to assert authority over a Warcraft realm is to become a max-level paladin, and the only way to assert authority over a decentralized currency is to control 51% of the nodes.

As a reminder, here is a handy guide from Mircea Popescu on how to interact with fiat institutions that attempt to claim jurisdiction over virtual realms.

See Also:
A history of World of Warcraft’s gold economy –Memory Insufficient

R3 Should Have Used a Smart Contract

Ripple (XRP) one-year price chart

Don’t you hate it when you become a billion-dollar company through no effort of your own, only to have some asshole take it away from you?

Such is the plight of R3.

A year ago, Ripple gave R3 an out-of-the-money call option to buy 5 billion XRPs at $0.0085 apiece. Now that the price of XRP has gone up by 4000%, the option is worth a billion dollars and represents R3’s single most valuable asset. Ripple wants to renege, and R3 is understandably annoyed.

You guys!! This is exactly the type of thing that should have been done with a smart contract.

R3 is a busy consortium, so maybe they forgot what line of work they were in. A quick reminder: R3 created their own distributed ledger platform to execute smart contracts in a trust-minimized manner. It’s called Corda, and it already has a contract template to represent blockchain token assets.

People will be quick to point out that the Ripple agreement can’t simply be a smart contract, because there are weird edge cases and unforeseen circumstances that can’t be accommodated with code. For example, Ripple claims that they were misled in the agreement, because they thought they would benefit from R3’s banking partnerships. “R3 turns out to be useless” is not a state that can be codified by a smart contract.

That’s fine: Nobel Prize laureate Oliver Hart has a whole body of work about how to deal with incomplete contracts. The solution is to pre-allocate decision rights. In a Corda smart contract, it might look something like this:

A feature of Corda contracts is that they have transferable exit keys, which are used to remove an obligation from the ledger. The holder of the exit key determines when to exit, and where the assets end up. In other words, the party that controls the exit keys has decision rights for what to do next.

Legal courts can still overrule, but the burden of lawsuit has shifted to the counterparty. R3 could secure a much better outcome if it already had its billion-dollar XRPs cashed in, and Ripple was the one who had to sue to get it back. Possession is nine-tenths of the law.

It’s interesting to see that R3 filed a complaint in the Delaware Court of Chancery, while Ripple decided to countersue in California. Legal interpretations vary by state, so contending parties often file in the jurisdiction most favorable to themselves. Delaware happens to be particularly generous in awarding contract expectation damages.

Dispute over choice of venue: Another problem that can be avoided with a blockchain!

R3 has wasted a lot of time writing whitepapers about whether smart contracts can be legally binding. The answer is always no, of course not! It would be a shame if R3’s legal contracts weren’t binding either.

The default issuer name for R3’s smart contract template is “Snake Oil Issuer”. Seriously, look at the source code.

Update (September 20, 2017)
Now we have a copy of the actual court documents: R3 Should Just Buy Ripple

See Also:
Contracts and Trust