I was supposed to have a nice day today. I finished a final exam and was looking forward to meditating all evening about how nice it is living in America again, and how much I relish American-as-apple-pie customs like pick-up trucks, groundhogs, and bourbon.
When suddenly, as I sat at my kitchen table enjoying aforementioned bourbon, this popped into my feed:
Mother of God.
This reminds me of Estonia’s Estcoin proposal – which I will charitably describe as “preliminary” – published last week.
But the Petro is worse.
1) It is entirely unclear what is being proposed
Like Tether, we’re being told the Petro is
“Backed by a barrel of oil,”
…but we aren’t told what “backed” actually means or how that barrel of oil is intended to capitalize into the value of the Petro-token. Is this a promise by the Venezuelan government to pay a holder of a given Petro the proceeds from a given barrel of oil at a future date?
Is it a proportional revenue share? Is it equity in PDVSA?
We’re not sure, and buyers of the Petro should make damn sure they get sure before outlaying a huge amount of BTC on Petros in the near future.
What I am sure of is that substantially more structuring work is needed here. If any big international law firms want some consulting help in preparing your pitch, hit me up.
2) The “Petro” doesn’t need mining
Although the Venezuelan government seems to think it does. From the press release:
“Every single Petro will be backed by a barrel of oil,” Maduro said, promising to provide cryptocurrency mining throughout the country. “We will set up a special team of cryptocurrency specialists so they will be engaged in mining in all states and municipalities of our country.”
This is absurd. Thinking the Petro blockchain should be mined is a technical mistake as elementary as it is inexcusable.
Cryptocurrency mining is a game-theoretic exercise designed to keep transaction validators in a proof-of-work cryptocurrency system with no central issuer honest by granting rewards for honest transaction processing (i.e. coins) and by imposing costs on participants for dishonest transaction processing (wasted electricity).
Where an issuer can be identified (say, a sovereign) and the thing being bought and sold comes with legal rights (say, dividends from oil production), you obviate the need for mining as you vest control of the system in one person: here, it’s the issuer. (Cf. with finance where you might want to vest that power in an agent or trustee.)
This is how, e.g., the Tether cryptocurrency operates, or (preferably) any of the numerous blockchain clients incubated by the Hyperledger Project. Or other, proof-of-stake systems like Tendermint which allow you to tailor consensus to a high degree of specificity when used in conjunction with a private implementation such as Hyperledger Burrow.
If you’re a country, the kind of system you want to run is a permissioned system where you control the validators, not an open system that can be hijacked by a bunch of anonymous electricity thieves in China (miners).
The benefit to your users is the transparency and the automation, not the money-printing function which is associated with cryptocurrencies like Bitcoin, Litecoin et al.
3) There are better solutions here
Per the RT report:
The new cryptocurrency was announced by Maduro at the beginning of December as a way “to innovate toward new forms of international finance for the economic and social development of the country.”
Technology has its limits.
Cryptocurrency and blockchain tech is a tool which puts power in the hands of the individual citizen by removing the need to go through intermediaries or third-party data controllers to verify that a transaction has or has not been processed correctly.
If you’re serious about launching a cryptocurrency, or about extracting value from the country’s vast oil reserves, you should also get serious about enacting liberal free-market economic and democratic reforms that will help your country and your people benefit to the most significant degree from the platform.
What is required to get the greatest returns from this technology investment, then, is not just technology but also a healthy dose of libertarianism. In addition to cryptocurrency, Mr. Maduro, I recommend you check out Ludwig von Mises’ Economic Calculation in the Socialist Commonwealth or The Wealth of Nations. Or the Adam Smith Institute’s handy blog.
That’s all for now.