Letter in Support of Responsible Fintech Policy

“Blockchain technology cannot, and will not, have transaction reversal mechanisms because they are antithetical to its base design. Similarly, most public blockchain-based financial products are a disaster for financial privacy; the exceptions are a handful of emerging privacy-focused blockchain finance alternatives, and these are a gift to money-launderers. Financial technologies that serve the public must always have mechanisms for fraud mitigation and allow a human-in-the-loop to reverse transactions; blockchain permits neither.”

Letter in Support of Responsible Fintech Policy

If you can dictate the premises, you can dictate the conclusion. It is possible to have transaction reversal mechanisms as part of a smart contract, which presumably these “experts” would know. They are worried about privacy, but at the same time, they are worried about too much privacy. Let me guess, only government hits that sweet spot of panopticon privacy and anything outside the panopticon must be used in service of crime.

As a counter to this document, I’d like to refer to the previously mentioned blog post on blockchains, where Tim Roughgarden says:

“An enormous number of people, including a majority of computer science researchers and academics, have yet to grok the modern vision of blockchains: a new computing paradigm that will enable the next incarnation of the Internet and the Web, along with an entirely new generation of applications.”

Which experts are being listened to and who does that benefit?

Metaphorical Apes & Gorillas

Apes & Gorillas is another little gem from Joe Armeanio. It closely mirrors the idea two computing revolutions talked about in this post that talks about:

  1. Apps with easy to use interfaces designed for casual users
  2. Application layers, that provide tools that allow new ways of using a computer that were previously impossible

There’s a huge difference in needs between traders doing swaps and solo miners using a node wallet. The general principle is applicable to most areas of life where technology touches.

Stable Anchors & Financial Dominance

“The less dominant the U.S. economy is, the less the dollar can function as a stable anchor for the global financial system. It was still intact in 2008-10, when a global financial crisis sent capital flooding to the safe haven of U.S. government bonds. But in recent years, people have begun to question whether Bretton Woods 2 is finally on the way out. The share of U.S. dollars in global reserves has been falling for years, and this fall has accelerated since the start of the pandemic.

-Noah Smith, “Crypto and the global financial system.” noahpinion.substack.com. December 14, 2021.

True of the U.S. dollar. True of Bitcoin itself. As the ecosystems of alt-chains are built out, the center of gravity is going to move from Bitcoin and be distributed across a few major blockchains, which will, in turn, be supported by niche chains. The same thing will play out with the U.S. and world economy. It might happen a bit slower if the U.S. government manages to create a digital dollar.

Related:

“The prevailing consensus view has been that bitcoin is a risk asset. It has an inverse relationship with interest rates. When central banks and politicians manipulate interest rates lower, and pump trillions of dollars into the market, bitcoin should go higher…

This inverse relationship is not what we are seeing between bitcoin and Treasury yields though. We are actually seeing the exact opposite. Bitcoin’s price appears to be moving in lockstep with Treasury yields.

So if this short-term trend continues to play out, what would that mean for bitcoin? Again, no one knows for sure. But it would be very interesting if the prevailing consensus view is misplaced and bitcoin would actually benefit from increasing interest rates. That would violate the framework that many people have been viewing the digital currency through…

So why could this idea of bitcoin and yields increasing together potentially be true? Well…one idea is that some people actually deem bitcoin to be their reserve currency. They view cheap capital via low rates as a path to borrowing money and making investments that could earn them more bitcoin. If rates were to rise, risk assets would sell off and these people would go back into their safe haven asset — bitcoin.

This may sound insane to the legacy Wall Street crowd, but there is an increasing number of young people who see the digital currency as that safe haven asset in their portfolio. The entire point of investing in anything outside of bitcoin is to outperform bitcoin and eventually convert back into bitcoin. Obviously, if you’re a good investor than you can pick up more bitcoin. If you’re a bad investor, you end up with less bitcoin. This is the new risk-reward that many young people are evaluating.”

Anthony Pompliano, “Bitcoin Is Moving In Lockstep With Treasury Yields?!” pomp.substack.com. December 20, 2021

We’re about to find out if cryptocurrencies with a max supply can be used as an inflation hedge. I bet they can.

Why Ergo?

Ergo is different from other blockchains. It is focused on providing a decentralized, open, permissionless, and secure platform for contractual money that is usable by ordinary people to pursue their common good over the long term. It is designed to be resilient in the face of different economic environments and competing interests, allows individuals to choose how much privacy is right for them, and offers economic opportunity to the people using the blockchain.

Ergo has the technical capability to provide a wide variety of services to the decentralized financial cryptocurrency ecosystem and to enjoy comparative advantages, whether that comes from oracle pools, logarithmic mining, profit sharing protocols or other innovations. However, while Ergo offers a lot of technical capability not available on other chains, the real value of Ergo is its focus on providing the tools for the financial success of ordinary people, like you and me.

Introduction

“The real problem of humanity is the following: we have Paleolithic emotions, medieval institutions and god-like technology.”

–E.O. Wilson

We are witnessing the birth of a new era, one where well-established elements of computer science, such as cryptography and distributed systems, are combining with fields of finance and game theory to bring a new economic and social order. Who will reap the benefits of this new era?

Shifts of this kind tend to create new social classes. For example, the Industrial Revolution and the emergence of capitalism made being royalty and a feudal landlord less important.

With change, there is opportunity. But, frequently, the opportunity is limited.

What is new is that blockchains make it possible to facilitate transactions between businesses of any size, between people in any geographic location and that can work in any economic, social or political environment. Blockchains can unlock synergies and new ways of exchange and interacting.

Blockchains are a new method of accounting. Just as double entry accounting introduced a formal and methodological rigor to bookkeeping that transformed medieval businesses into capitalist enterprises, blockchains have the potential to upgrade our medieval institutions into something that serves the common interest more than elite interests by providing mechanisms for financial exchange, decision-making, arbitration, and so forth that were not possible before.

The Challenge

People don’t like change. Medieval institutions who serve entrenched corporate, state and other interests will want to limit the opportunities of blockchains to enrich themselves. Even with the best of intentions, it is a challenge to broaden access to opportunity. Everyone wants to help the hungry, but few people want to give up their lunch in order to do it.

So, the question is how do you grow the pie? Do you grow the pie by focusing on large economic actors, such as governments or businesses in the Fortune 500, who then, presumably, pass along portions of the pie in the form of more goods and services at less expensive prices? Or, do you grow the pie by focusing on the needs of ordinary people and creating new opportunities with this technology that didn’t exist before?

And while it is necessary for a blockchain to have multiple constituencies with different interests, such as miners, liquidity providers, developers, entrepreneurs, users and so forth, some groups are in opposition. If you are focused on cross-border payments for large businesses, it’s not the same as being focused on cross-border remittances of people without access to traditional financial services. The software for these two use cases will be very different. While it is possible the same blockchain can serve both groups, it’s going to serve one of them better.

When using, or investing, in a blockchain, one of the key questions is: Whose interests does the blockchain serve? Who is threatened by it? And how can it be attacked?

The Power of Ergo’s Proof of Work

Ergo’s proof of work provides a powerful example of seriously considering the problems that come from various attacks, whether they be 51% attacks via centralized pools or regulatory attacks on infrastructure, such as China’s displacement of blockchain miners.

Ergo addresses this issue by implementing an algorithm designed to be mined on commodity hardware by users of the blockchain. Right now, there are smart contract pools that allow people with a single GPU graphics card to mine Ergo and verify the blockchain in return for some cryptocurrency. And with Moore’s Law, this commodity hardware becomes more accessible over time, as graphic cards with the same capability become less expensive.

It provides more opportunity, for more people and results in a more secure blockchain. What’s not to like?

Capabilities & Environments

Almost every blockchain claims to value decentralization. But, if you need people with specialized hardware to maintain your consensus, then you are beholden to people with that specialized hardware, or to the governments that can ban them.

People talk about the number of transactions per second, the market capitalization, the price, the size and productivity of the applications on the chain. But, there is much that is not discussed.

For example, people rarely think about longer term issues, such as the fact that blockchains have lifecycles. Blockchains will have to operate during times when a significant portion of the local, regional and global environment is experiencing a pandemic, a war, or some other factor that threaten their ability to function. How prepared are they to meet that challenge?

It is not hard to imagine that various blockchain ecosystems becomes important to our daily lives, such as when there is a digital national currency, and a failure could lead to catastrophic outcomes, such as famine. How many people in the cryptocurrency space have given that possibility consideration? Your lambo is useless in an environment where you don’t have enough food to eat.

At this time, most blockchains are building their infrastructure. They aim to increase their market share and capability of their dApps. But, if you don’t have your eye on the potential problems that will manifest over time, you’ll make design decisions that will be difficult to fix later, e.g., Ethereum’s move toward Proof of Stake in an effort to resolve their problems with fees. And every design decision has positives and negatives.

Ergo’s Positives & Negatives

  • Financial capital: A fair launch means you don’t have a lot of money sitting around to fund development. There are ways this problem can be solved, such as establishing funds that people that are interested in certain kinds of development or a particular dApp could contribute to that would help make them a reality. This also has the advantage that it establishes that there is interest and perhaps even a market for the software being developed.
  • Human capital: There are many excellent developers already working on Ergo. With financial constraints, it isn’t possible to bring on as many developers as some other blockchains, but this fact also leaves more room for organic growth. If adoption were only about market share, then Ergo is at a disadvantage. However, there are many niches that Ergo’s technology can fill. Some niches may not have many options and developers will be enticed to the platform because it can solve problems other blockchains cannot.
  • Infrastructure: You need wallets, dApps, APIs and so forth. The software that faces the user of the chain needs a lot of work. However, the underlying chain technology is great, or has great potential, and the dApps and consumer facing technology will only improve from this point.
  • Open source: It’s important to recognize that open source does have drawbacks. Many open source projects are a labor of love that don’t have good incentives, which can negatively impact projects by making it difficult to keep developers, create schisms that undermine the project or lead to other problems . But, there is also real value in not having to reinvent the wheel when building an application. It’s easier to leverage an existing code base, modify, and iterate than it is to write code from scratch. However, open source requires evolution, which takes time and implies some tolerance for error.
  • Synergy: The ecosystem is young. But, there is evidence of clustering of services, such as the development of a profit sharing contract that can be used by any dApp, the building of cross-chain functionality, the launch of a variety of stablecoins, etc. These kind of interactions implies both competition and an attempt to accommodate a variety of use cases.

Conclusion

Who is using the blockchain? Without many dApps, it is primarily people investing in the chain and transferring Ergo to and from exchanges and wallets. So, Ergo is a promise. It’s an idea that blockchains can be a vehicle for the economic good of ordinary people. But, there needs to be a lot of development before Ergo can fully deliver on that promise. Investing in that promise before it is fulfilled will both help make it reality, and it has the potential, if the promise is fulfilled, to benefit those willing to make that investment.

Acknowledgements: Many of the ideas in this essay came from Joe Armeanio’s response to a reddit post outlining Tascha’s A Checklist for Layer 1 Blockchain Investment.

A Full-Fledged Enemy of Web3

Ethereum should inspire any­one inter­ested in the future(s) of the inter­net, because it demonstrates, pow­er­fully, that new pro­to­cols are still pos­si­ble. I do not think Web3 is a desir­able or even tol­er­a­ble path for­ward for this web right here, but I take its les­son well. “Code wins arguments”, and so do clubs, and cults; time remains to build all three.

-Robin Sloan, “Notes on Web3.” RobinSloan.com. November 2021.

Nice quote there at the end. Code, clubs and cults win arguments. Law, weapons and partisans would probably also work, but it wouldn’t have that nice alliteration.

The Internet of Grift (Non-Fungible Tokens Edition)

“The moment that something has bubbled up to the surface long enough for it to establish real value is the exact moment at which those engineering the system for their profit are planning to exit or have already left. All of the flashy press has likely died down due to the market cap crashing from $1.1 billion to today’s cap of $726 million and $1 million in volume – with a few days this week below $350,000. For context, the top cryptocurrencies have daily volume in the billions or hundreds of millions of dollars. Now the market is flooded with cheaper cards that people can’t recoup value from, with no real market to sell them into. But the guys who got in early got rich, as they always do…

…When you remove the idea that an NFT could forseeably be sold for more money than you paid, what value does it have? What beauty? What does it symbolize? What meaning does it have? And what’s the point of it being unique? It’s not a Rolex, that actually has a quality and heft and look to it, nor is it something you can admire outside of the computer, and even if you don’t care about that, it’s a status symbol of wealth and taste (if you feel that way about expensive watches).”

-Ed Zitron, “The Internet of Grift.” ez.substack.com. October 1, 2021.

It’s interesting because there are people that make this same argument about cryptocurrencies, “They are a solution looking for a problem.” I’d argue that programmable money does have obvious utility in ways that a non-fungible token of art doesn’t. But, it’s a point where reasonable people can disagree.

Grok the Modern Vision of Blockchains

“…this course will focus on the fundamental principles of blockchain design and analysis, such as they are in 2021 (it’s still early days. . . ). The goal is to equip you with the tools and concepts to evaluate and compare existing technologies (cutting through the rampant marketing crap), understand fundamental trade-offs between the goals one would want from a protocol or application, and perhaps even create something new and important in the near future (because it’s early days, you can have a tremendous impact on the area’s future trajectory).

It’s worth recognizing that we’re currently in a particular moment in time, witnessing a new area of computer science blossom before our eyes in real time. It draws on well-established parts of computer science (e.g., cryptography and distributed systems) and other fields (e.g., game theory and finance), but is developing into a fundamental and interdisciplinary area of science and engineering its own right. Future generations of computer scientists will be jealous of your opportunity to get in on the ground floor of this new area—analogous to getting into the Internet and the Web in the early 1990s. I cannot overstate the opportunities available to someone who masters the material covered in this course—current demand is much, much bigger than supply.

And perhaps this course will also serve as a partial corrective to the misguided coverage and discussion of blockchains in a typical mainstream media article or water cooler conversation, which seems bizarrely stuck in 2013 (focused almost entirely on Bitcoin, its environmental impact, the use case of payments, Silk Road, etc.). An enormous number of people, including a majority of computer science researchers and academics, have yet to grok the modern vision of blockchains: a new computing paradigm that will enable the next incarnation of the Internet and the Web, along with an entirely new generation of applications.”

-Tim Roughgarden, “Lecture 1.” COMS 6998-006: Foundations of Blockchains. github.com. September 15, 2021.

h/t Alex Taborrak in Marginal Revolution.

The first lesson is fairly easy to understand. Looking forward to reading more.

The State of Cryptocurrency, Mid-2017 Edition

Main takeaways:

  1. It’s not that hard to get up to speed.
  2. Overall, the cryptocurrency ecosystem feels younger than I thought.
  3. Blockchain is the technology that will let lifestyle businesses cross the chasm from fringe to mainstream.
  4. Micropayments still aren’t going to work.
  5. Money leads to Power which leads to Centralization.

Cryptocurrencies and their technologies can seem overwhelming, but it’s easy to get up to speed.

“I really only started reading up in depth on cryptocurrency and the related technology like blockchain three months ago, and felt like I could at least follow all the talks.

If you want to get up to speed, you’re only a couple Saturdays of reading away…”

—Pearson, Taylor. “The State of Cryptocurrency, Mid-2017 Edition.” Hackernoon.com. August 16, 2017.

Redecentralize the Internet

“Every new medium (read: technology) has four sets of effects, he said, which can be best discovered in answers to four questions:

  1. What does the medium enhance
  2. What does the medium make obsolete?
  3. What does the medium retrieve that had been obsolesced earlier? 
  4. What does the medium reverse, or flip into, when pushed to extremes?”

—McLuhan, Marshall quoted in Searls, Doc. “The Actually Distributed Web.” Linux Journal. August 8, 2017.

Interesting argument that decentralized protocols integrated with blockchains are more efficient than centralized systems and have the potential to undermine the platforms of the major Internet fiefdoms of Google, Apple, Facebook, Amazon and Microsoft. I am not sure I believe that this is likely to happen, but it is a refreshing change from the doom and gloom of many technology discussions these days.