“End the Fed”? — Maybe Learn What the Fed Does First!

I was recently lurking on one of the online crypto forums where a bunch of ‘connectors’ and social media mavens use to bring developers and venture capitalists together with people who want to get involved in crypto but are not sure what they can do to help.

The topic turned (as it often does) to how we should ‘take down’ the fiat money system.  *sigh*. This is quite often the battlecry used by the crypto mavens to galvanize support from developers and armchair anarchists, as the anti-establishment theme seems to be able to rouse the most revolutionaries to action. (That, and free pizza seems to work equally as well).  The discussion spiraled into a lecture where I very calmly, coldly, explained how the Fed system of money works and why fiat money was already digital to people who didn’t understand how our money system works and was hell-bent on ‘fixing’ it with crypto money, because it was digital, and therefore, modern, new, and definitely what we want for Christmas. *sigh* (again).

The problem with the crypto space in general that has become very apparant to me is that people don’t really understand how the existing money system works, and yet, they proprose to have great solutions for it.  It’s likely listening to a fengshui guru try to design and architect your house for you.  He has neither the experience or qualifications to do any sort of structural engineering or design, but he thinks that this window definitely needs to face southwest otherwise your life will certainly suffer ruin and misfortune.

Making matters worse, a lot of the misinformation comes from people who have ostensibly worked in the financial sector, albeit likely were IT in a financial tech company like Bloomberg or some other ancillary industry to the finance sector.  Unfortunately, due to the speed at which the industry of crypto has grown, there are way too many instantly rich ‘lucky fools’ to who are the new breed of venture capitalists, and an even larger cohort of ‘lucky idiots’ who found themselves involved in crypto not because of their contributions to the art, but because they got into the space early enough to be seen as ‘experts’.

Take it from me, the ratio of true experts to charlatans in crypto is a very very small fraction.  Most of the experts in the field don’t have time to write blogs, lurk on forums and prostelitize on reddit.  (Which incidentally explains why the rate at which my blogs are updated these days has fallen drastically in recent months).  But I digress.  This blatent affront on the fiat system by charlatans which clearly did not understand anything about how the money system worked demanded that I rouse myself from my productive work to explain.  After I was done, I realized that perhaps it wasn’t all the fault of the mavens who speak as if they know but know not what the speak… maybe it was the simple fact that not many people know how banking and money really works. I thought back to how I learned about this, and it was through my own research while working at Goldman Sachs, coupled with a colleague who I worked with at JPM who worked as a treasury trader.  Certainly not the kind of information or experience that is easily digestable by laypeople.

So I thought, maybe it was high time that somebody explained, in SIMPLE terms, the basic misconceptions about our money system.

Firstly, know this: Although all its operations and structure of the Federal Reserve is public information, they don’t go out of their way to teach the general public about how money works.  This is, I believe, part of the design. If too many people knew how the money system works, then they would likely find fault and think it wasn’t totally fair to [some special interest group or demographic].  So when desiging a money system that is based on the general trust and belief that money is worth something of value, then it behooves the designers not to explain the details to everyone, as faith is much stronger a motivator than logic.

But you knew this already, otherwise you wouldn’t be a reader of my blog. You want the logical facts. You want to make up your own mind about things.  Good. So here comes the firehose. Brace yourself.

I will structure this lesson as a series of commonly misunderstood things about the fiat money system.

Misunderstanding #1 – The central banks (Fed) prints money. That is how fiat is created.

Truth: Not really. Well, that isn’t how most money is created anyhow.

Contrary to popular belief the Fed while actually creating the notes and bills that represent money, (literally printing the physical bills) they don’t actually CREATE the money it represents whenever they feel like it. Money is created by the Treasury Dept (government) selling bonds to the Fed, which creates money in order to buy them. So the government is the ones actually creating money from nothing (the hallmark of a fiat money system) when they decide to print and sell more bonds to the Fed. (usually because they need to fund government spending that taxes isn’t enough to cover).  The Fed actually makes a profit from the interest on these bonds, which is shared among the Fed’s shareholding banks. The Federal Reserve system (or simply central banking system for other countries) is that banks can have a lender of last resort, in case they find themselves in a shortfall for their liabilities.  This prevents economic downturns from making banks go bankcrupt, which may have a domino effect and cause more issues for other banks, causing a meltdown.

Misunderstanding #2 – The Fed is run by the Government

Truth: No. The Fed is actually a privately owned bank, which is owned by shareholder banks and some super secret entities (cue tin hat conspiracy theories here). They operate on a government mandate, but they are their own masters.  The only pull the gov has over the Fed is that the president gets to nominate the Chairman of the Board of the Fed. Effectively assigning its “CEO”.  But the shareholding parties also have their own governing board members and it acts very much like a bank.  Other central banks around the world may have different setups, but they are generally not directly controlled by the government.

Misunderstanding #3 – The government creates most of the money we use.

Truth: No. Actually your local bank that you get a loan or mortgage from is how most of the money in the system is created.

Both retail and commercial banks are the only ones that create money outside of the Gov issuing treasury bonds.  They do this by creating loans.  Every bank is allowed to have outstanding loans as a ratio to the actual cash reserves that they have on hand at their reserve bank accounts (an account which is held at a local Reserve Bank which is part of the Federal Reserve system). In accordance to this, e.g. if they accept $100 worth of deposits from customers they are allowed to create $900 of outstanding loans.  This 900 dollars is created from thin air, added as a cash credit to the borrowers account, and added as a loan asset on the banks balance sheet, balanced by a liability for the borrower.  This is how MOST money is created in the economy.  So the banks create money in response to the market’s demand for loans. This is a good thing, as it ensures that money is always ‘available’ to fund developments.  It is a bad thing, when too many banks given out loans to people to can’t actually repay them, which was the case in the financial crisis of 2007.

What? You mean banks can just create money they need to lend to people? But what about inter-bank loans? Overnight swaps? LIBOR swaps? And the whole FX market of derivatives? How can they just create all this ‘fake’ money? This leads us to the next one…

Misunderstanding #4 – Investment Banks and Commercial Banks are the same

Truth: False. Ever since the Glass Steagall act, they cannot be the same company. In fact, they were only licensed equally because of the obvious benefits of being the lender of money and also the facilitator of fund raising for companies.  Investment Banks cannot create money. Commercial Banks can.  Investment banks (the guys like Goldmans) who engage in the securities market activities have their primary purpose hedge risk, raise funds, and to do M&A and IPOs, acting as a ‘facilitator’ for businesses who need capital. Even though some of Glass Steagall has been since repealed, and the same company can be both a commercial bank and an investment bank, the point is still that the commercial banks are the parts that can create money via loans. Not the investment bank businesses. So banks cannot create money to pay for their debts to other banks.  They have to borrow money from other banks in order to fufill their daily cash settlement demands. This is one of the reasons why an overnight swap, spot, and forward markets exist (among others). Because if any bank (or company for that matter) cannot settle their daily liablitities, then they are technically in insolvancy. Not a fun place to be if you are a bank. (or any entity for that matter).

Misunderstanding #5 – Fiat money isn’t digital

This is actually how the debate on the online forum started.  Some person was adament that fiat money wasn’t digital.  They likely took an old Economist magazine front page headline a bit too literally. (and didn’t have the wherewithal to realize it).
Actually this is even where most people who you would think know better (even ones that worked in the industry) get it wrong.  Fiat money is >90% digital.  M0, which is the classification of money that is in the form of notes and coins, makes up for less than 10%.  And of that M0, 2/3 lives outside of the US.  All other forms of USD, live in bank account balances, which is reconciled up to the the top level Fed accounts.  Therefore, fiat currency is very much digital.  It’s just not cryptographically secured, nor is the supply of it metered by some algorithmic process as is the case with cryptos such as Bitcoin.  Instead the Fed system uses a hierarchical tree of double entry accounting books to reconcile from your bank account at your local bank all the way up to the accounts at the Fed and other central banks around the world.  The way this is structured is that each bank in addition to keeping the books for their clients must keep accounts for other banks they have dealings with.  This is the system of NOSTRO and VOSTRO accounts and it is necessary that each bank in order to have a banking license in a country must have a NOSTRO account at a bank further up the chain, ending with a bank that has an account with the Fed (central bank) itself.  Normally this layering is only 2 levels deep for the big banks, but smaller regional banks may have to bank with a larger bank who in turn will have a NOSTRO account with a bank which is directly part of the Federal Reserve network.  This is how all daily reconciliations are done, so that every penny is counted and the system is ties out. The only potential source of error to this balanced accounting system is due to the paper notes and coins that could be counterfeit or lost to the system.  Which is the reason why banks want to reduce the use of physical bearer instruments such as notes and coins as much as they can.  You can go look up the Fed’s balance sheet which is public and see for yourself, but knowing you are likely too lazy to click on the link and find it I’ll put it here for your convenience. You see that number under liabilities labelled “Federal Reserve notes in circulation”? that is the exact number of M0 money of USD that exists in the world, (excluding the exceptions mentioned). Yep. You read right. That is 1.6 trillion dollars in cash floating around in the system.  How can the fed possibly come up with this number in a reliable fashion if it were not reported back up to the Fed by the Reserve banks who have their master accounts at the Fed themselves?

Which leads us to the last one…

Misunderstanding #6 – Banks are evil because they can create money when they want to make loans, while at the same time when they need money they can always borrow from the Fed

Well, this is somewhat true.  Banks which are part of the Fed system that have accounts with the Fed directly CAN borrow money from the Fed through what is called the Discount Window.  This is supposed to be the lender of last resort. As such, the discount rate (interest charged) is not attractive nor meant to be.  Instead banks borrow from each other through what is called the Fedfunds rate. This is somewhat controlled (through a market process) by the Fed board of governors, but in practice this is just the average rate that depository institutions will lend to each other.  If too much or too little lending is happening at a given rate, then the Fed will step in with open market operations (buying or selling of treasury bonds or other instruments) to reduce or increase the amount of money in the system so that the Fedfunds rate move closer to what is targeted by the Fed’s board of governors.  What is borrowed needs to be repaid with interest, so it isn’t in a banks best interest to borrow more than they need, or to hoard cash and not lend.  Banks that borrow too much, or make too many bad loans and end up not being to meet their obligations will go bust.  (or should go bust).

The last point is really the main problem with the central banking system.  Banks need to be allowed to go bust if they, through the process of making too many bad business decisions, end up not being able to make their interest payments.  That, and simply the fact that by centralizing the management of money, a single failure in a system of highly inter-dependant banks, stands to have large scale systematic effects if any bank large enough (thus having many liabilities owed to other banks) were to fail.

Crypto may have some part to play in improving the system.  But I believe it will be more on the aspect of making financial transactions transparent, and accountable. Not simply from the fact that it will make things digital or more readily reconciliable.  The current system is already pretty good at accounting and keeping balances straight.  All that is needed is to make the system more transparent, and perhaps reintroducing the notion that banks should once more be in the business of raising capital, instead of simply creating it when needed.

/EOL

Update:

It works now!

Ripple and Lightning Networks: The Nuts and Bolts

Last time, I spoke about how the bread and butter use case of Ethereum was going to be soon challenged by Bitcoin Cash, when the missing op-codes are re-enabled in the upcoming May 16th upgrade.  Today, I will discuss more about the other use cases which BCH is going to challenge, as a payment system and the biggest challengers in that space.  Yes, many expert bitcoiners will recognize that Bitcoin Cash is aiming to be CASH first and foremost, but that doesn’t preclude its use as a payment rail as a secondary use case.

Firstly, it will be good to explore exactly what is the difference between a payment network and cash.  Most simply, cash is an asset.  It is something that cannot be taken away from you without force, because you solely have the ownership of it, and you solely decide when to keep it or when to give it away.  A payment network is simply a system by which transfers of ownership rights can be tracked, requested, processed, and settled.  SWIFT is the most popular payment system among first world banks today, and among consumers VISA is a payment network that allows you to pay for things with credit extended to you by a credit issuer.  It is important to note that while Bitcoin can be thought of as a payment network, (given the nature that all the assets are publicly visible and moved on the blockchain) it is first and foremost an asset ownership ledger.  And Bitcoin (the coin) is an asset, not just a utility token.**

The biggest players in the digital payment network space these days are Lightning Network (built on top of the Bitcoin asset blockchain), and Ripple.  Both have a ‘usage token’ that you have to buy to use it, BTC and XRP respectively, but these networks have a very different approach to solving the same problems.  And, I will argue, these problems don’t exist in the Bitcoin Cash blockchain.

Lightning in a Bottle

First off Lightning Networks. I first spoke about it back in Oct 2016, when the developers first said that they were ready to deploy the network real soon.  The problems I saw were not so much the technical issues (because there were so many technical issues that it wasn’t worth getting too deep into the details at that early stage) but more the economic problems –IF the network were to be adopted at scale.  Those issues have not changed, and we will re-iterate on them later in this post.  Let’s first discuss the matter of trying to “Fix something that isn’t broken”.  The best way to think about LN technically is through an analogy in the physical world.  In the world of motorcycles, there are many types of experimental steering mechanisms.

This is what Lightning developers think they are building:

LN is betting that their technology is both sorely needed and will revolutionize the industry

For those not into bikes, the way a motorcycle steers is very different from how a car does.  Basically, you have to move the handlebars in a direction which is opposite to the direction that you want to turn.  This is called counter-steering.  In addition, the front wheel due to its role in steering has been traditionally mounted using a fork system.  This means that the wheel is held between 2 shock absorbers, which joins the main frame of the bike at the headstock, or the pivot point of the steering system.  This wheel mounting configuration, while most common and simple, combines the steering system, with the braking system, and the suspension system.  This has some disadvantages however, which I won’t get into here, as this is a financial technology blog, and not a motorcycle one (though I’m happy to go into for the riders out there). Very much like Bitcoin, the LN developers and many of those who support the legacy version of Bitcoin (the one disabled with 1mb maximum blocks and segwit) they see these self imposed issues needing to be fixed and LN seems to be the solution.  The bizarre bike in the following figure is how they see the LN network becoming:

LN developers think they are going to ‘fix’ Bitcoin with revolutionary technology

Keep in mind: this is IF the dream of LN can be realized without any complications or fundamental bugs.  In the best case scenario, we will get something like the Bimota Tesi, a beautifully engineered, overly complicated, and expensive motorcycle that looks bizarre and exotic, sure to turn heads, but is very rarely seen on the road as a performance bike because the complicated steering removes all the ‘feel’ and control out of the steering.  Needless to say, for all its purported benefits, no rider of MotoGP has ever taken a Tesi to the track in a serious race.  That pretty much says it all.  However, this was in the best case.  In reality, the LN technology at present looks more like the following bike experiment:

LN: the current state of the technology

An overly engineered experiment that suffers from having to solve engineering problems that it introduced itself due to its overly complex fundamental design.  The world doesn’t really need a hub-steering, 2-wheel drive, diesel powered motorcycle.  Well, not presently anyhow.  The other critical point is the matter of ownership. Recall that I mentioned that Bitcoins are assets.  And that having total and complete control of your assets (or having the option for complete control) is part of the rights of the owner of an asset.  In LN, you are forced to put your asset (Bitcoins) into what is effectively a bank account.  This bank account is a weird jointly owned bank account that you have opened with another peer, which LN folks call a payment channel.  Your Bitcoins locked in such a channel can only go to or from the peer that you opened the channel with, so in order to fix that problem LN network is developing a massive IOU balancing/routing system to make sure that if you need to pay somebody or get paid that it can be done through one of your existing payment channels if possible.  Even if this were all to work, the fact of the matter is that your Bitcoins are still locked in channels, and even though you can technically remove them all if you wanted to that would require many transactions to do so in practice for any decent sized wallet, which would be costly. In addition, there are also new attack vectors that are introduced where a thief can try to steal your locked coins in the hope that you aren’t watching the channel.  Don’t take my word for it (though I DID warn about all these things back in 2016, but you probably don’t remember) read it from the LN Dev blog yourself!  If you manage to get through the post without being totally confused, then at least you will have an impression of all the extra complications that using LN coins will involve.  I would rather not peg my Bitcoins into the LN network if I could just use bitcoins directly.

In practice, LN is exactly like the existing banking system.  Yes, you put your money in the bank and it is ‘technically’ still yours, and yes, you CAN take your money out when you wish, and 99.9% of the time that is fine.  But just like in a banking system, the 0.01% the ownership of your property can be violated, as those who had money in Cyprus Banks found out in 2013, when the banks basically bailed in themselves with their own customers money.  LN seems very similar to this system.

 

Ripple: The network that tried to bootstrap itself with its own tokens

With Ripple, the situation is slightly different.  They were originally a IOU passing network, which wanted to have everyone issue their own IOU tokens on the network, and to manage the transfer of these IOUs on a standard platform.

Ripple’s original network was designed to be an IOU passing network

That standard platform would be a shared ledger with a common consensus protocol, which is what most people call the Ripple network today.  The token XRP was created from nothing, and was originally intended as a spam prevention measure, as to send increasingly more transactions to a node would mean that it would cost more and more XRPs.  Also the intent was that every transaction would destroy a small amount of XRPs so that increased use of the network would slowly appreciate the value of XRP, due to fixed number of them in existence.  It may surprise most people to learn that Ripple actually existed before Bitcoin was released, though it should be mentioned that the Ripple network today looks very different from the original one.  Ripple didn’t like the concept of doing work to earn the inflation of the coin, and thus it had a distribution problem.  Where PoW in Bitcoin made the distribution of the coins very simple (you spend time and energy to mine, you earn coins, whoever you are), Ripple created all 100,000,000,000 XRPs and granted it to themselves a non-profit foundation, early investors, and struggled to figure out how to get them distributed down the pyramid to regular people.  The way XRP was distributed harkens back to how money in a central banking system is distributed.  It is printed by the central bank, then it is sold to large investment banks, which then pass it onto regional banks, and finally to the regular people through loans.

Their approach brought about it some self-induced problems that they then had to solve.  How do prevent some of the large early holders of XRP from hoarding their distribution?  How much should be kept aside to pay for development? How much XRP should be burned on each transaction?  And most importantly, if all the tools and applications look like they are useful, what is to prevent a rival network from just forking the code and running their own version of XRP with a NEW distribution of funds?  These are big issues with the Ripple business model, which requires that they sell the technology to large banks first, which ostensibly want a payment system that costs less than the existing SWIFT payment systems.  To this strategy Ripple is developing trading interfaces and applications to make exchanging IOUs (which may represent fiat currencies or other tokens) to/from XRP easier.  The strategy that they are now pursuing is to position XRP as a bridge currency for FX speculators to hold in order to reduce the volatility of marking markets in low liquidity currencies such as Venezuelan Bolivars or Israeli Shekels.

The issue with the strategy is that many times in economic history people attempted to create a stable bridge currency for the banks of the world and have failed.  The original attempt was proposed by Maynard Keynes, the bancor, and was a failure (no relation to the recent ICO called Bancor, which was also a colossal failure).  The second more recent attempt in the last couple decades is the SDRs proposed by the IMF, which is based on a basket of the G8 currencies, also largely a failure.  Something about having to use a complex instrument controlled by a 3rd party to hedge your own foreign currency risks didn’t appeal to the central banks of the world.  After all, every central bank had a different unique set of problems they are faced with, which necessitates a different hedging strategy.  For instance, a country in South America may do most of its trade with the US, which means it would want to hedge its balance of trade risk with a heavier weight put on USD instead of say, EUR.  At the end of the day, hedging FX with a specific central bank non-negotiable instrument wasn’t as straightforward as just holding the foreign currencies yourself (and less useful).  That is the problem with the “XRP as a bridge currency” strategy.  Why hold XRPs when you can just hold the USD, JPY, EUR yourself?  Which means XRP becomes nothing more than an necessary evil, in order to use the payment network, to put a cost to DDoS attacking the network with many transactions.  But if the network is going to be a wall-gardened curated network and used only by registered banks, then the risk of attack is minimal.  Leaving XRP’s only true value as a speculative instrument that is loosely and informally tied to the usefulness of the Ripple network itself, and the applications that Ripple Labs is creating for it.  Astute readers will note that this is also the same base value proposition as Bitcoin. (that its value is related to the usefulness of the blockchain itself) but the difference is that Ripple created all the XRP out of thin air themselves, and they themselves decided how to distribute the tokens.  Who knows if they played favourites.  Also creating the tokens ex nihilo means that they may very likely be treated as a security by the SEC.  As only securities are created in this way, (well currency is as well, but the central banks have the exclusive license to create those), so there may be complications for those that raised funds by granting XRP to investors.  Furthermore, if XRP were to be considered a security that would severely limit its trade in US and other first world countries further limiting its use as a bridge currency for FX liquidity providers.

Lastly, the problem with XRP comes back to the beginning statement where I posited that Bitcoin is an asset, which means you own it, and nobody else. This is achieved in Bitcoin through both asymmetric key cryptography (you own the knowledge of your private keys), and the decentralization of the mining ecosystem itself. Mining is its own business, and the business of the miners isn’t to run a payment system.  The unique fusion between a commodity extraction business that is concerned more about cheaper greener power generation and the processing of a financial payment system is what gives Bitcoin its power, and Satoshi’s true innovation.  If you build a token market on top of BCH, trying to steal peoples assets, or to freeze their BCH would be very costly and not guaranteed to work.  In comparison, if Ripple at its hypothetical apex, when all central banks were to use it for its inter-bank transfers, and you were a liquidity provider who have been stockpiling XRPs in order to make profit from the imbalance of flows between North Korean Won to the US dollar, you could be denied access to your XRP if all the central banks of the world just refused to listen to the nodes that broadcast your transactions.  Where Ripple uses similar cryptographic security to enforce proper signing of transactions, unlike Bitcoin, a Ripple that banks will use will only trust transactions from each other.  You will not be able to submit a transaction that the banking consortium disapproved of***.  And the banking consortium would not allow a trusted validator into their cartel without ensuring that they were going to play by their rules.  So the difference between Ripple’s decentralization strategy vs Bitcoin’s is that Ripple has a trusted server list (called the UNL) and transactions received from the list are assumed ‘blessed’ (assuming they are valid).  Transactions received from outside the list are not treated the same.  Basically in Ripple, anyone can connect to the network and send transactions, but unless your txn is acknowledged somewhere down the line by the main validators, it won’t make it into their ledger.  And membership to the main validator pool is similar to a cartel formation.  “I’ll put you on my trusted list if you put me on yours”.  Every bank using Ripple will certainly guard its UNL list and ensure that only other licensed banks are on their lists.  Contrast this to Bitcoin, where nobody can stop anyone else from participating in mining, — that is the true key to decentralization.

It is going to be an exciting next few months, as more and more features of ‘speciality Altcoins’ stand to be usurped by BCH as the true power of the original Bitcoin design starts to come to fruition.

For the industry to grow and expand in order to reach the maximum number of humans on the planet,  therefore ensuring its survival through future regulatory and political pressures, it needs to be simple, elegant, and functional.  So despite the above experiments in technology being very cool for bike geeks like myself, I would much rather just have the original and best:

Bitcoin – The original and best. Simple, elegant, beautiful, efficient

/EOL

** this stems from the fact that Bitcoins require energy to be burned on creation.  Which means they are at least worth the value of the cost of mining them when they are granted.  Utility tokens, on the other hand, like all tokens, have no intrinsic value, and are created ex nihilo.

*** well, you could submit it, but it will never make it into their ledger.  It may make it into yours if you reduced your UNL list to only have validators which were not part of the banking cartel, but in that case, you have effectively forked off into a parallel ledger.

Fork Wars Episode I – The Phantom Futures

If you haven’t been living under a rock for the last couple of weeks then you know that the whole block size debate is boiling to a close.  Segwit2x arose to be a compromise solution, lead by ex-core developer Jeff Garzik, brokered and agreement in New York after the Consensus 2017 conference which had over 90% of the miners and ecosystem in agreement.  Since then BIP91 has locked in, which is an effective lowering of the much exalted soft fork consensus threshold of 95%, by which half of the inner circle of core devs felt was deficient. Regardless of how this was on the surface seen to be a ‘lowering of the standards’ it was done anyway and conveniently so, as segwit was not looking like it would ever pass the 95% bar anyhow (ahem. “I TOLD YOU SO” to all the neckbeards out there, and u/jonny1000!).  Now that segwit2x/segwit is going to be ‘forced’ by way of 90% of the miners starting to reject non-segwit signaling blocks, this ensures that segwit’s threshold of 95% of last 1000 blocks will be met sometime in mid-August.  (yes, you read correct, BIP91 was an 80% majority agreement to come to a 95% agreement by forcing the 20% to agree with you or be orphaned — by force!).

This has set the stage for the drama to follow.  For one there is already a growing group of big blockers who have mobilized to fork off the current Segwit2x/Segwit Bitcoin (let’s call this SegwitCoin) who have identified themselves as BitcoinCash.  They are a fork of BitcoinCore 0.14.x with Segwit and RBF components disabled, and a 8mb Hard Fork coded to engage at Aug 1, 12:20 UTC time.  This guarantees that there will be a ‘big block’ Bitcoin regardless of what happens with the SegwitCoin and the expected in-fighting among the new ‘stewards’ of the main chain (Jeff Garzik and his btc1 team) vs. the old guard which have been deposed (Bitcoin Core, Blockstream). Continue reading

Yoga Splits, Banana Splits, why not Bitcoin Splits?

The world is filled with great splits.  Sometimes a split is just the best way of getting the best of both worlds. It let’s bygones be bygones and leaves freedom of choice to the market which is in the ideal position to determine the best way forward.   But in Bitcoin space, talk of a split is tantamount to talking about White Privilege, racism, or dog meat as a food delicacy. Make no mistake, this is a carefully manicured and cultivated reaction culminating from 4 years of careful opinion “shaping” by interested parties, which I have written about several times in the past, but this is not a post to rehash those arguments.

Splits are Tasty. Why not in Bitcoin?

Splits are Tasty. Why not in Bitcoin?

This is an attempt to examine the practical realities of a split in Bitcoin, WITHOUT any of the ethical/emotional/political/ideological baggage that so many have deliberately or inadvertently attached to the debate.

Continue reading

Ouija Board Consensus – Decentralization Myths: Part 4

This is the fourth part of a multi-part series on the myths of decentralization. You can read the previous installments here:

Part 1 – Decentralization Redefined
Part 2 – Decentralization Myth
Part 3 – Decentralization comes with People

I’ve written quite a lot about the misconceptions and deliberate misdirection that some proponents in the Bitcoin community choose to spread around in order to shape the public perception of what makes Bitcoin valuable, and as a result change the fundamental value proposition of Bitcoin.  As you all should know by now, “Value does not exist outside the consciousness of Man” – Carl Menger.  So changing people’s consciousness by way of affecting their ideas, affects the value of Bitcoin.  Thus it is important that we re-evaluate our notions of why Bitcoin is valuable every so often with a huge dose of skepticism.ouija_board

In today’s article, I’d like to review what the fundamental security model of Bitcoin is, as intended by its mysterious creator, Satoshi Nakamoto, (at least in my interpretation of it) why that model is the best we can possibly hope for, and why any further attempts at adding extra layers of ‘security’ on top of this model just ends up making it less secure by making it more centralized.

Continue reading

Coming to Consensus: Governance is just as important as Blocksize

One of the heated debates that has raged over the years in Bitcoin space is whether the idea of a developer team lead by a benevolent dictator is the appropriate model to employ for a network worth more than 15 billion dollars in market capitalization.  Many have cited examples of how Satoshi, and then Gavin himself were benevolent dictators, and also how some well known projects have been successfully managed under the watchful eye of a wise and benevolent (though sometimes abrasive) dictator such as the Linux project.  It is also true that most civilizations evolve from dictatorships, starting with the tribal chiefs, to feudal warrior kings, to aristocratic monarchs, to emperors.  The transition to a democracy is not always a smooth one, and is mired by both slippages into oligarchies, totalitarian fascism to misguided experiments into socialism.  It is important then, to keep in mind that while most organized groups start as dictatorships, they eventually evolve into a system that is more inclusive of the common people’s will.

Oh, Glorious Leader, shepherd for the weak, show us the way!

Firstly, let’s get the obvious out of the way.  Dictatorships are vastly more efficient than a republic or democracy.  635984715851776795-AFP-551724097This is due to the fact there is little bounds on the leaders power, and his followers will carry out his instructions in the most expedient fashion.  Contrast this to a democracy where leaders are continually second guessed by their opposition, and their political opponents who are all vying for their own chance to run the show.  In a dictatorship, the only way a change of regime is possible is through open and widespread revolution.  This is why despotic Chinese emperors of old made it illegal to congregate in groups of 3 or more, restrict what can be discussed in public and on occasion just committed mass murders of all the academics and scholars for fear that they may spread seeds of dissent and dissatisfaction among the peasants with their pesky logic, philosophy, and ideals of morality. Continue reading

Hard Fork Risk Analysis: If the worse happens, how bad can it be?

This post is a culmination of about a year’s worth of thoughts and research that I have been informally gathering, which started with a simple question that started last year when I first read a piece which was written in the middle of the Bitcoin XT heyday describing what would be so bad about having 2 persistent forks by core developer, Meni Rosenfeld.

Forks are not scary, they are upgrades!

Forks are not scary, they are upgrades!

The post described the general understanding of forks at the time, and it was in this context that I wrote my original piece which was very much a pro-Core stance on the dangers of hard forks.  I was wrong on some of my assumptions when I wrote that, which I have over the course of the year corrected, but nevertheless that original piece earned me many twitter RTs and ‘follows’ by core devs and supporters at the time (who have mostly now, funny enough, all banned me).

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ScalingBitcoin Milan, not so much about Scaling Bitcoin.

Sitting at the airport in Milan, I have a chance to reflect upon how fractured (and self deluded) the Bitcoin community has become.  First off, I’d like to state for the record that I believe that many if not all of the people I had a chance to meet with this weekend honestly are doing what they feel is best for Bitcoin.  But articles from media sites like CoinDesk such as this paint a very different picture from reality.  They would have you believe that the world is in consensus and its time to put this block limit debate behind us.  I cannot blame them for their pieces.  They are indeed, a subsidiary of the Digital Currency Group, which is also a large investor in Blockstream after all.  So my goal here is to paint the other side of the story, the side seen from the viewpoint of the ‘Free Speech, Free Bitcoin’ party.

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Lightning network: will it save Bitcoin? Or break it?

Lightning network has been heralded as the way to scale Bitcoin into the future, but as it is starting to become apparent that two very separate camps with differing opinions on how to scale Bitcoin are starting to draw lines in the sand, it’s worth taking a pragmatic look at this technology, seeing as it seems to be shaping up that once adopted, it will be very difficult to back out¹

First off, I want to say that Lightning as a concept is pretty interesting.  I think that it will have many uses in the world of Bitcoin.  Yes, I have read the white paper (both long and short version) and I believe I have pretty good understanding of how it works.  A disclaimer, as most of the development is happening behind closed doors via BifFury, it’s hard to comment on any of the new yet unreleased progress, such as developments on the routing algorithm.

Let’s examine the pros and cons of the Lightning overlay network.

  1. Unlimited txn/s
  2. Secure from double spends
  3. Requires Bitcoin to use

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