Belling the Cat

Spring is here! The days are warm, the birdfeeders are out, and I’m enjoying the company of songbirds who build their seasonal homes beneath my awning.

Except that the neighbor’s cat keeps coming here and killing them.

I. HATE. THAT. CAT.

I got one of those live animal traps, the kind you use for coons and foxes. My plan is to trap the cat and tie a cowbell around its neck. Maybe step on its tail a few times.

Two weeks later, the trap is still empty. Seriously, eff that cat.

There’s an episode of Tom and Jerry where a pair of mice are trying to bell a cat. Jerry the Mouse attempts to tie a bell on the cat’s neck while the cat is asleep; the cat wakes up and mauls him. Baby Mouse takes a different tack: He wraps a bell in a gift box with a bow, presents it to the cat, and the cat is so delighted by the gift that he puts the bell on himself, never realizing its underlying purpose.

Isn’t that what Google and Facebook and friends are doing? If the government demanded unfettered access to our private lives, there would be massive outrage. Instead, the tech behemoths present us with Free Email, Free Photo Albums, Free Cloud Storage, and we tie the bells around our own necks. We never intended to carry always-on location-tracking devices, but who can resist a Free Map service?

Don’t look a gift horse in the mouth — and that’s exactly how you end up with the Greek army inside your city walls.

Batching Mental Transaction Costs

 

There’s a popular American pastime that involves flinging dollar bills at scantily clad dancers. Canada, Europe, and the UK lack small-denomination banknotes, so strip club patrons have limited ability to express appreciation for their performers. Customers can either pelt the dancers with coins, which is rude; or shower them with large bills, which is extravagant. The transaction costs are unnecessarily high, and onstage tipping is rare.

In Australia, the smallest banknote is a five. While living in Sydney, I discovered (not from personal experience, really) that gentlemen’s clubs sell fake banknotes for guests to use as tips. The dancers exchange the fake dollars for real money at the end of the night.

Fake dollars for sale at a gentlemen’s club in Sydney. Why did they model their money after USD instead of Aussie banknotes? Also, I bet the US $2 bill would have much wider adoption if the note featured a pole dancer instead of Thomas Jefferson. He already has the nickel! How bout some diversity, come on.

How terribly exploitative! Instead of peer-to-peer payments, the house intermediates every transaction with self-issued fiat. It probably even takes a cut.

But… maybe it’s not so bad. I endured many a childhood birthday party at Chuck E. Cheese, where parents would hand each kid a stack of tokens and set them loose. Tokens could be used to pay for rides and games and candy, and were functionally equivalent to a quarter.

We already have quarters. Why did Chuck E. Cheese go through the hassle of minting its own coinage when it could have simply installed a laundromat change machine?

Chuck E. Cheese tokens come in a jumbo plastic cup, just like a real casino.

Chuck E. Cheese and Aussie strip clubs employ the same brilliant strategy of batching mental transactions. Every monetary exchange incurs a cognitive cost, if from nothing more than the conscious decision to spend money. The overhead is nominal for most standard transactions, but relatively massive compared to a micropayment.

By forcing customers to make a large upfront commitment, these establishments avoid imposing a cognitive load on every subsequent exchange.

Casinos employ the same strategy with poker chips and slot tokens: Gamblers wager more freely with play money they’ve already bought. Sure they can cash out, but that’s an additional transaction cost.

People have been failing to effectuate micropayments since the early days of the internet. A machine-payable web, where you pay for the content you consume, or pay-per-byte internet protocols – these sound like great ways to finely optimize the allocation of resources. But no matter what fancy new technology is employed – Digicash! Millicent! FirstVirtual! CyberCash! Blockchain! – micropayments never cease to be a bad idea.

And now the Bitcoin Lightning Network with the support of this bitcoin wallet app. With instant transactions and exceptionally low fees, this time is different.

Maybe. A user funds a Lightning channel with the intention of fully spending its contents (it is a hot wallet after all, and costs money to cash out). In these early days, each channel has limited utility. If a channel commitment represents a one-way payment for a certain set of services, then it functions more like a subscription fee than a series of microtransactions. Like buying a stack of tokens at Chuck E. Cheese.

This model isnt great for Lightning-as-a-liquidity-provider, but it does bode well for Lightning-as-enabler-of-micropayments. Who knows.

Virtual tipping. A great application for Lightning.

See Also:
The Transaction Costs of Tokenizing Everything

Bitcoin as a Display of Wealth

I just spent three weeks in bed with the flu from hell, which means I not only missed Bitcoin’s untimely death, but also its subsequent resurrection. Did everyone remember to buy the dip?

Had I been alert and conscious, I might have worried for a bit. Paul Krugman doesn’t know anything about anything, but I’ll grant him this one: There’s nothing to backstop a cryptocurrency’s value! If people come to believe that Bitcoin is worthless, it’s worthless. There’s no tether to reality 😮. If only Bitcoin could be used to make pretty jewelry!

One of the greatest tragedies of modern money is the decoupling between a store and display of wealth. Or, more accurately, the societal decoupling between wealth and status. For most of human history, the functions of display and storage were condensed. Even before people wore clothing, they wore piercings and tattoos. A full-body ink job isn’t transferable, but it’s a sort of proof of work.

Tribal tattoos on a mummified Scythian chieftain, 500 BC.

As societies increased in wealth, both people and objects became specialized in their functions. Stores of value were selected for their resistance to corrosion and theft. Displays of status optimize for just the opposite. The more unwieldy and vulnerable the display, the greater the power it conveys.

There’s no reliable way to physically project a bank account balance, so we use costly signals as a proxy. Designer shoes indicate disposable income. A diamond ring reveals your spouse’s bimonthly salary. An American Express Centurion card communicates the ability to spend half a million dollars a year.

Abundance signaling is wasteful, and often relies on a trusted third party to maintain the integrity of the signal. Bitcoin is regarded as a decentralized store of value, but still underappreciated as a way to disintermediate our displays of wealth.

Crypto-Bling

Cryptokitties, ugh. Why would anyone waste a perfectly good blockchain on a centrally controlled collectible? The only way to generate a cat image is to rely on the Cryptokitties website. And the only way to prove ownership of that image is to reveal your account address. There’s a better way to flaunt crypto wealth.

Secure multi-party computations were first introduced in 1982 as a solution to the Millionaires’ Problem: Multiple millionaires want to know their relative wealth standing, but no one wants to reveal their actual net worth.

One solution is to distribute shares of a secret to each participant. Each person combines the secret with the value of their net worth, broadcasts the result, and a blinded function processes the values to arrive at the final rankings. This function evaluation forms the basis for a zero-knowledge proof.

This can be done with any cryptocurrency. Instead of self-reporting a net worth, each participant signs a message to prove ownership of an account. The message is combined with a secret share, resulting in an output that indicates the user’s balance relative to everyone else. Turn the output into crypto-bling by mapping it to a unique identicon. Bitcoin can now be used as a visual display of wealth.

The identicons can even be made unforgeable. If each viewer distributes a different secret, then the set of identicons will look different to every observer while still communicating the same information about relative status. A display of wealth, then, is in the eye of the beholder.

WordPress identicons

But an identicon isn’t pretty…

Paul Krugman is wrong about the pretty jewelry, cuz that’s not what gold is about. Objectively speaking, silver is the most light-reflective element that exists. If you wanted to bedeck yourself in bling bling, you’d get the most bang for your buck with silver. But pound for pound, gold is more valuable because it’s harder to obtain.

Gold isn’t valuable because it’s used for jewelry, jewelry is valuable because it’s made of gold. –Nick Szabo

A display of wealth isn’t about being pretty, it’s about having stuff that others don’t. Roman emperors knew that wealth displays were a wasteful arms race, so they created sumptuary laws to prohibit conspicuous consumption.

Bitcoin bling removes the costly signaling by re-condensing the functions of a store and display of value, and does so without the need for a trusted third party. Someday, crypto-bling will be the prettiest bling around.

Your Twitter Followers are Probably Bots

The New York Times had an interesting feature over the weekend in which it calls out various social media influencers for follower fraud. Many people who appear to have huge Twitter followings actually don’t, and their fans are in fact paid-for bots. Oooh, busted! Apparently there’s a class of people who make a career out of being popular on Twitter, and it is terribly scandalous that they are not as cool as they might seem.

NYTimes identifies a person’s fake followers by examining the account creation date of each follower, and plotting the order in which they followed the target user:

For example, this is Twitter board member Martha Lane Fox. She gained tens of thousands of followers in 2016 and 2017, and it’s super obvious which ones are fake. A bulk bot purchase shows up as a large influx of followers, all with similar account creation dates (horizontal lines in the above plot).

The NYTimes analysis is compelling, but their target account selection was awfully limited. So I reproduced their Twitter tool to continue the investigation.

First, I ran the tool on my own Twitter account and charted my followers:

See that clump on the left? My first thousand followers were all bots. I know this, because I made them myself. For the first several years of my Twitter existence, the only people I interacted with were bots. Didn’t realize the platform could be useful for humans until 2016.

My account isn’t too interesting, because I don’t have many followers. The NYTimes neglected to conduct the fake-follower analysis on any of their own staffers, so for the sake of journalistic objectivity, let’s look at NYTimes columnist @paulkrugman.

Paul Krugman has over 4 million Twitter followers. It would have taken forever to download the entire list, so here’s a plot of the most recent ones:

Over the last 3 days, @paulkrugman gained over 20,000 followers, and nearly all the accounts were created just minutes before the follow. That’s the solid horizontal line you see across the top.

Who are these mysterious users who join Twitter and immediately follow @paulkrugman? Let’s have a look:

I’m gonna guess that approximately zero of these accounts belong to real people. This is not to imply that Paul Krugman paid for his followers – many bots automatically follow popular accounts upon creation. Every chart we generate will show a concentration of followers created at the most recent date. If you have more than a few thousand followers, you probably get a lot of bots too, whether you pay for them or not.

Fake followers are nothing new, and mostly harmless. But for whatever reason, New York attorney general Eric Schneiderman was concerned enough that he opened an investigation into the matter. You’d think he’s never used Twitter before, except that he’s had an account since 2010.

While Attorney General Schneiderman is busy chasing bots on the internet, let’s have a look at his Twitter followers:

@AGSchneiderman acquired 25,000 followers from the date he joined to the end of 2016. While the initial growth looks organic, his account suddenly gained over 125,000 followers during 2017. Of those 125,000, a significant number created their accounts within days of each other. This shows up as a solid horizontal line during the last week of January 2017.

Fascinating! It would appear that Attorney General Schneiderman has a lot of fake followers himself. I hope he includes this analysis in his investigation.

Note:
You, too, can help Eric Schneiderman solve the mystery of the fake Twitter accounts! The script for generating Twitter-follower plots is available here.

Trusted Third Parties are Moral Hazards

Yesterday an exchange called Coincheck got hacked and lost $400 million worth of NEM, a token I’d never heard of. Woops! That sounds like a lot of money, but it’s just another line item in the long list of crypto hacks.

Cryptocurrencies get a bad rap for being susceptible to theft. Bitcoin &co function as bearer instruments, where transactions are pseudonymous, irreversible, and potentially quite valuable. But people get unduly worried about assets where the holder bears the consequence of loss. Cryptocurrency is no more prone to theft than any other item of value, like a bicycle or wallet or social security number. That’s why we try to protect these things.

You know what’s worse than an irreversible transaction where the holder carries the risk of loss? A reversible transaction where the holder doesn’t carry the risk of loss.

I’ve had my credit card info stolen. A lot. Sometimes it’s my fault, sometimes it’s the fault of JP Morgan Chase, Equifax, Home Depot, Target, the gas station, or the asshole who stole my wallet. Maybe I should be more careful about where I swipe my card, but the onus isn’t on me to do so. The card issuer offers fraud protection, which insulates me from the consequences of being a dumbass.

$190 Billion. That’s how much US merchants lose each year to credit card fraud. Risk doesn’t ever disappear; we just push the liability on to someone else.

When it comes to credit cards, the issuing bank wants me to swipe with reckless abandon, because they make money off interest on my outstanding balance. Intermediaries work for the customer. That’s why Ebay always sides with the buyer in the event of a dispute. There’s no such thing as a trusted third party that serves as an impartial arbiter of justice.

The creators of NEM have come up with a clever solution for Coincheck’s situation. They’ll update the software to flag any account that receives stolen tokens! Ordinarily, users would be hesitant to adopt a modification that ruins the token’s functionality as a bearer asset, but NEM can get away with it because the software is closed source and centrally maintained. Coincheck will come away from this disaster with the same lesson Ethereum learned from the DAO: Socialism for the rich and capitalism for the poor! Trusted third parties are great when they’re on your side.

See Also:
Stop calling Bitcoin hacks, “Bitcoin hacks”