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”

Hating on Crypto-Millionaires

There’s a silly article going around about crypto-millionaires who act like douchebags. “Everyone’s Getting Hilariously Rich and You’re Not,” the headline says. Better yet is the print headline: “Meet Your Masters.”

This is what me and my coworkers look like every day.

Yes yes, the goal is to make cypherpunk people seem as obnoxious as possible. The author did a great job unearthing the most repugnant techbros alive and portraying them as exemplars of the industry. Now that we’ve stacked the court of public opinion, we can all root for Bitcoin’s failure together.

Sheesh. What did Bitcoin ever do to you, NY Times columnist?

I suspect this is the result of NY Times’ prohibition on cryptoasset ownership. As much as I want to believe that journalists are aspirational ascetics who put vocational interests over financial ones…

Some of these reporters have been covering crypto since 2012! Can you imagine having the foresight to analyze bitcoin at $20, but not the wherewithal to put any skin in the game? How does it feel to sit on the sidelines for half a decade while dumb kids become disgustingly rich through no effort or talent of their own??

Let’s be honest: I would be bitter too. And I would want to portray the industry in as ugly a light as possible. Look, everyone has their biases; at least I’m honest about my lack of journalistic integrity.

Maybe it’s time for financial media to get off their moral high horse. You guys don’t have to go out of your way to invest in bitcoin; it can be as simple as holding out a Bitcoin begging bowl (Generate a paper wallet here). Crypto-millionaires tend to be a generous bunch. Get in step while there’s still time left, before the parade passes by, and so on. Really, the crypto people aren’t so bad.

The libertarian cypherpunk crypto-millionaires voted for Bernie. How bad could they be??

Disclosure: I’ve never bought crypto, and have no plans to do so in the future. Any bitcoin that I have was acquired through the trade of goods and services. Believe it or not, there’s a whole economy of human beings who spend bitcoin like cash.

My Plan for Hyperbitcoinization

If familial history is any indication, I’ve got about thirty years left on this planet. Forty if I play my cards right. That’s not a lot of time, and I’m worried that I’ll miss out on the era of hyperbitcoinization.

See, as Bitcoin establishes itself as a supreme store of value, people will continually abandon their local currencies until central banks capitulate. In time, fiat money will die, all the worlds’ wealth will be denominated in bitcoin, and anyone who had the foresight to accumulate even a few satoshis will find themselves tremendously rich.

I’ve decided that the most extropian thing I can do is have myself cryogenically frozen with my private keys. In a few thousand years, when hyperbitcoinization puts me squarely in the 1%, they’ll thaw me out and I’ll live like a king. Yessssssss.

For inspiration, I look to King Tutankhamun, Egyptian pharaoh of the 18th dynasty. King Tut was entombed at Luxor in 1323 BC with all manner of gold jewelry and artifacts. With sufficiently advanced medical technology, we could, in theory, rehydrate his mummified body and bring him back to life. Presumably he would demand the return of his buried wealth, which insurers have appraised at $680 million.

$680 million is a lot of money! Still, King Tut might be disappointed. The last president of Egypt had a net worth of $70 billion. The reanimated corpse of Tutankhamun is unlikely to restore his pharaonic privilege with such a relatively meager hoard. Turns out military contracts and foreign property would have made for a better investment.

This high-status dude was buried at the Varna Necropolis. After HODLing for 6600 years, today his gold is worth about $181,000 by weight.

Perhaps Tutankhamun’s mistake was choosing gold to escort his wealth into the afterlife. The purchasing power of gold is mean-reverting over the long run, because mining operations can scale according to the price level. In other words, gold doesn’t meet the criteria for a securely constrained supply.

This guy in Sungir, Russia – now he had the right idea. In 32,000 BC, this Paleolithic man was buried with 13,000 mammoth ivory beads. Mammoths have been extinct for four thousand years, so the supply doesn’t get any scarcer than this! It might take some time for doctors to figure out how to revive Sungir Man from his temporarily dead condition, but once they do, boy will he be excited about hypermammothization.

Bad news. Despite embodying all the attributes of trust-minimized money, mammoth ivory has not been embraced as a global store of value. A few weeks ago, an entire mammoth skeleton was auctioned off for just $645k. The CEO of a roofing company bought it to display at his office.

This family of four sold for $550k last year.

Things don’t look so promising here. It seems that no matter how reliable my store of value, the world will keep producing more wealth. As we all know, you’re not truly wealthy unless you have something that no one else can afford.

Let’s do one more.

Qin Shi Huang, the first emperor of China, is resting in the largest underground mausoleum in the world. According to historical records, 48 concubines were buried alive to service the emperor in the afterlife. We’re really pushing the bounds of medical imagination here, but suppose we brought the harem back to life. The four-dozen ladies would be just as valuable today as they were in 208 BC!

What is the purpose of money if not to increase reproductive success? The Qin emperor cuts right to the chase by stockpiling concubines in his tomb. There is one catch: Modern-day China does not abide women as chattel the way they did during the Qin dynasty. Wouldn’t it suck if the emperor HODLed for 2200 years only to have his wealth emancipated?

Circumstances change. Bitcoin can’t be seized or censored, but what if we enter some post-scarcity future with replicators and transporters, where money itself is irrelevant? You know, like Star Trek.

Star Trek’s communist utopia transcends money because energy is free and objects can be replicated in abundance. Even then, the Federation recognizes the need for a pecking order. Captain Kirk gets all the ladies while the Redshirts get vaporized. In a world without wealth, social status is denominated by shirt color. Attain it by ingratiating yourself with Hollywood scriptwriters.

So if we’re trying to preserve status rather than wealth, that leaves a limited window for hyperbitcoinization. It has to be far enough in the future that society recognizes Bitcoin as a status symbol, but not so distant that it becomes completely irrelevant. I think we’re almost there. Live long and HODL. 🖖

See Also:
Gold Rush, What Took Ye So Long?

A Bitcoin ETF is a Good Way to Ruin Bitcoin

I don’t understand why people want a Bitcoin ETF.

I mean, I get that retail investors want exposure to Bitcoin. Who wouldn’t? Bitcoin has outperformed every asset class in the last decade, with an annualized return of infinity percent!

But treating a utility as a speculative asset is a great way to ruin its utility. A high Bitcoin price results in high transaction fees, and high transaction fees make for a sucky medium of exchange. For those who actually care about using Bitcoin as a peer-to-peer payment service, speculative traders are a pain in the ass.

Who the hell is this guy? Does he have any idea how dysfunctional transaction costs are gonna be at $400,000??

It’s not just Bitcoin, either:

Here’s a story: The first petroleum-fueled combustion engine was created in 1873. That was a big deal. Combustion engines had previously run on coal gas, which provides limited mechanical energy for a volume of fuel. Whereas gas-fired engines were big and stationary, liquid petroleum engines could be mobile.

Wall Street immediately recognized the potential, rushed in to HODL petroleum, and sent light sweet crude to the moon. Gasoline become unaffordable, and the automobile never advanced beyond a plaything for the wealthy elite.

1885 Daimler Reitwagon

Or how bout this: In 1882, Thomas Edison switched on the first system for electrical power distribution. Over the next few years, competing currents battled to connect America’s homes. The most enterprising individuals saw rising demand for copper wire, cornered the copper supply, and made conducting metals inaccessible to the masses. Electricity failed as a consumer product and was forgotten as a scientific curiosity.

One more: In 1669, German alchemist Hennig Brand was examining his own urine when he discovered the elemental form of Phosphorous1. As it turns out, phosphorous is crucial to fertilizer production. Speculators took to hoarding phosphate rock and bodily fluids, fertilizer became too expensive for agricultural use, and civilization fell into a Malthusian trap, where we live on the brink of starvation today.

None of those things happened. It doesn’t make sense to hoard a commodity because humans always figure out how to make things cheaper. No matter how often alarmists scream about Peak Oil and Peak Copper and Peak Phosphorous and Peak Coal and Peak Water and Peak Gold, commodity prices have stayed constant in the long run. To believe otherwise is to ignore thousands of years of human progress.

Bitcoin has only one unassailable use case: It pays transaction fees on the Bitcoin network. For everything else — whether remittances, micropayments, or means of cyber-extortion – there exists a substitute. What do Bitcoin ETF buyers think they’re getting here? A cryptocurrency is not a business – software contributors aren’t employees, and they’re certainly not working to maximize returns for investors. In fact, they’re working towards the opposite: Recent developments enable users to create more transactions while paying lower fees, and do Bitcoin things without even using Bitcoin.

Maybe ETF buyers have priced in decades of technological advancements, and are buying a future where the nation-state is dead, layer-2 networks are ubiquitous, and all the world’s wealth is denominated in Bitcoin. That would be nice. But the current price action is a great way to guarantee we’ll never get there.

1. Brand was looking for gold in the yellow liquid. Is it just me or does this seem like a particularly German thing to do?

The Nuts and Bolts of Redemption

Sima Qian (146-86 BC)

The great Chinese historian Sima Qian became a eunuch at age 46. After disputing the emperor’s criticism of a military officer, Sima Qian was sentenced to castration at the Inner Palace Office.

However, there was one possible recourse: Sima Qian could offset his crime for 20 liang (approx. 310g) of gold.

Chinese legal records have a term for this transaction: 贖 (shú), or redemption. Payment is voluntary, because it’s a choice to atone for your sins. This is different from a fine (罰 fá), which implies coercion. Even the death penalty could be “redeemed” for 620 grams of gold.

Paying your way out of castration doesn’t seem like an elective transaction, but the goal was to make redemption seem accessible, even if not always affordable. Sadly, Sima Qian could not afford to redeem his crime1.

Ancient Chinese wealth transfers placed strong emphasis on noncompulsion. The earliest documented tax system (ca. 2070 BC) was called 貢 (gòng), which means “gift”. Citizens were expected to volunteer contributions to the government as an expression of gratitude. This stands in contrast to the early Germanic system of weregild, where a debt was imposed under threat of state-sponsored violence.

Weregild is supposed to feel coercive, because punishment deters misbehavior. It’s like the angry Old Testament God versus the compassionate New Testament God. Except that here, the difference between coercion and persuasion is entirely a function of wealth. Big banks have billion-dollar litigation reserves: They knowingly do bad things, they’ve done it often enough to know the price for getting caught, and their lawyers and accountants can perform a cost-benefit analysis before engaging in criminal behavior. For rich people, a financial penalty is like paying for indulgences.

For the less well-off, even an accusation is coercive.

Two years ago, a judge in Alabama gave criminal offenders a choice between donating blood or paying a fine. It was a clever homage to the origins of blood money! But the judge was suspended after the SPLC filed a complaint: Most of the criminal defendants were indigent, thus the blood donations constituted extortion.

For whatever reason, our society deems it necessary to give poor people fewer choices, not more. And if the lower class is forced to accept compulsory fines, then we should make it look like rich people are being forced into them too. Or at least their shareholders are. The only difference between extortion and bribery is marketing.

1. To put numbers in perspective: The average laborer earned about eight copper coins per day, and one liang of gold represented 72 days’ work.

See Also:
Anthony J. Barbieri-Low and Robin D.S. Yates. Law, State, and Society in Early Imperial China, 2015.