Bitcoin is as efficient as a lame hippopotamus with a hangover

I will preface this post by saying to Pierre Rochard, Nic Carter, and @Bitstein that they should withhold judgment on it until reading through to the very end.

I was perusing Twitter on my way home from Washington, D.C. this evening when I noticed that someone was wrong on the Internet. 

Jake is a litigator with the very well-respected disputes firm Kobre & Kim, which (in my several interactions with Kobre & Kim lawyers over the years) also knows the cryptocurrency business extremely well. So let me preface this blog post by saying that I throw absolutely no shade at Jake, whose professional opinion I greatly respect, and that on this question reasonable people can disagree.

Jake’s view is informed by a pervasive meme in the cryptocurrency world – chiefly  that Bitcoin, despite being expensive in the extreme to operate and secure, with such expense taking the form of expenditure on electricity to “mine” Bitcoins through proof-of-work, is in the final analysis more efficient than “fiat-based” systems.

In the view of some, fiat money requires a massive military and bureaucratic apparatus to secure and administer:

A recent Medium post by Dan Held attempted to quantify “[proof of work]’s costs relative to existing governance systems” by way of a “rough comparison to the existing financial, military, and political systems.”

Or, as put by Jake,

I think this reasoning is fallacious.

This is not really an ideological point but rather a point concerning the analytical methods we should use when asking questions about the efficiency, security and censorship tradeoffs of distributed cryptosystems and what the appropriate meatspace or centralized comparators are for the purposes of that analysis.

Bitcoin’s best comparator, in my view, is existing bank infrastructure. And not all existing bank infrastructure, but rather existing bank infrastructure which mediates either (a) equivalent notional value to Bitcoin or (b) equivalent transactional throughput to Bitcoin.

In terms of notional value, a good jumping-off point would be the Federal Reserve System. In 2016, the Fed possessed a balance sheet of $5 trillion and managed it on a budget of $4 billion. Most of those expenses were not directly related to its balance sheet but rather were labor costs associated with the Fed’s bank supervision function. The costs of electricity, as far as I can tell, were negligible.

Bitcoin, by contrast is worth $100 billion, depending on the time of day, yet costs $3.5/4 billion of electricity alone to mine/secure in a given year.

Comparing these two systems, as they currently stand, is like comparing apples and oranges. Bitcoin is, on many measures, a loser in efficiency and performance terms. Bitcoin cannot, as yet, be the world’s money; it processes no more than 7 transactions per second. It maybe does as much transactional throughput as one might attribute to a single Bank of America branch in a large city.

Dan’s response to this point was to point to a chart in his blog post:

Screen Shot 2018-10-05 at 5.09.51 PM.png

On this basis, we are told, Bitcoin is more efficient than gold mining/recycling, paper currency, banking as a whole and governments as a whole because Bitcoin costs less than these other systems.

I find such an argument disingenuous, if for no other reason than the fact that Bitcoin does not perform the functions of gold, paper currency, the banking system, or governments. While it sort of operates on a similar theme (setting down rules that govern human conduct combined with a store of value), suggesting that it is comparable as a consequence of occupying a similar conceptual space would be like if I, after deciding that I wanted to compete with Elon Musk in the orbital lift business, began experimenting with moving a watermelon with a Radio Flyer wagon in my garage and, after carefully towing the wagon back and forth across the concrete floor a few times, plugged some figures into Excel and exclaimed, “UREKA! This uses less energy than a SpaceX Falcon 9!”

That statement would, of course, be a true statement. It would not, however, be an especially helpful one if the end-goal of a nascent transportation entrepreneur was to try to devise a more efficient low-orbit heavy lift system. The new data point would be of no use because where we compare a wagon to a rocket, although these are each means of transportation, they are nonetheless very much NOT ALIKE. When the not-alikeness of two things is of a substantial enough degree, comparison does not provide clarity but rather it obfuscates. Where we try to avoid comparing apples and oranges, we must also be careful to avoid comparing apples and Tyrannosaurs.

No offense to Dan, but the chart in his blog post is just plain silly. The chart compares apples with Tyrannosaurs.

Gold, for example, is not used uniformly as a medium of exchange; indeed, not once in my life have I used gold to buy or sell anything, and the only gold I own is a crucifix that I occasionally wear around my neck. Being metal (and an excellent conductor), it is used for a range of processes in manufacturing ranging from jewellery (British spelling) to electronics.

Governments, similarly, are not primarily concerned with providing me with an online P2P payment platform. To the contrary, every government I have ever had the pleasure of dealing with has dealt with enforcing complex bodies of law and policy, including harmonization of transportation and communication standards, social welfare, public and consumer safety, spaceflight, and providing physical security from the nation’s enemies – no small task, and in any case one which does not consume electricity as much as it consumes labor.

When it comes to banks, Bitcoin does not replace those functions, either. Banks provide savings services on commercially very beneficial terms. Sure, I don’t get a lot of interest on a bank account, but my deposit is guaranteed up to a certain amount by the state, I am not liable for fraud, and there are other services – including insurance and loans – which banks offer which Bitcoin does not provide.

The closest comparison is “paper currency and minting.” Here, the Bitcoiners may have a point, but to the extent that they do it requires substantial qualification. Bitcoin in terms of its function may be best compared to the Fed – in a wacky, automatic combination of the Fed’s seignorage function and Fedwire – or the UK’s Faster Payments.

The Federal Reserve System’s opex was, in very broad strokes, dealt with above. As I mentioned, it is likely that Fedwire is a fraction of the operating costs of the Federal Reserve System as a whole. Even if we’re giving BTC the benefit of the doubt, the Federal Reserve System is still, dollar per dollar, about 1,000x as efficient as BTC, costing roughly $1 of expenditure for every $1,000 of notional ($4 billion in operating costs vs $4.5 trillion in assets), rather than $1 of mining for every $25 of notional ($4 billion / $100 billion market cap).

The UK’s Faster Payments system, operated by Vocalink, illustrates the other end of that equation; except, rather than assets, Vocalink more or less blows away any other payment services provider on the planet in terms of performance. It would not be much of an exaggeration to say that nearly every payment in the UK runs through Vocalink. Its revenue per year is £195 million. Even assuming £0 profit, that system runs an entire country’s retail banking transactions – and it does so today at 1/20th the annual cost of mining the Bitcoin network, which (maxing out at 7 TPS) might be able to compete with a single branch of a high street bank in London’s West End.

What to do when presented with Bitcoin, then? Well, I think we can give Bitcoin some credit for being sui generis (that’s lawyer-speak for “unique, with emphasis”). This recognition includes acknowledging Bitcoin’s potential as an alternative to centrally issued, or “fiat,” monies such as those used by the United States.

What we shouldn’t do is get sloppy when we think about Bitcoin. That includes not comparing the cost of operating Bitcoin to bloated strawmen such as, e.g., the total cost of world government, which, while more expensive than Bitcoin, also provide far more by way of services than Bitcoin does (of which the issuance of money is merely one). On a similar vein, we shouldn’t overstate Bitcoin’s abilities. We should ensure that when we compare it we compare it to systems with similar throughput, such as a prepaid web app like PayPal, rather than projecting hopes and dreams into the analysis.

Above all, it also means that we really shouldn’t make the amateurish mistake of making claims for Bitcoin that are unfalsifiable. This includes thinking along the lines that because “fiat money has no worth beyond the military power required to ‘back’ it” this means that the cost of fiat money is equal to the cost of the military apparatus. One could just as easily argue that it is the military apparatus which makes the fiat worth buying, and the continuing value of the currency is a dividend of power, rather than a reflection of the expenditures incurred to obtain power. This is not something which, as yet, we can empirically test.

Finally, it’s just generally a good idea to keep expectations low, that way people will never be disappointed in what they receive.

With that in mind, I say gladly: today, Bitcoin is as efficient as a lame hippopotamus with a hangover. And that’s totally cool. Projects like Lightning promise to increase its performance. Brilliant people the world over are working on scalability proposals to help make Bitcoin more useful to everyday people. I know many of the people working on those proposals and respect them and their work. I look forward to seeing what they build.

With time and effort, Bitcoin might one day become as efficient as a creature far sleeker than aforementioned hung-over hippo, such as, e.g., a Class 4 Battle Marmot equipped with 2,000 megajoule ion thrusters. But today is not that day and continued reliance on proof of work, which consumes more energy as Bitcoin’s price rises, will not help to bring that day about.

Bitcoin with POW is already vastly more expensive than existing systems which, being proper points for comparison with Bitcoin, perform substantially the same function as Bitcoin. If efficiency is the objective, Bitcoin’s basic operating assumptions – including whether to use POW to determine consensus on each block – will need to be revised. If efficiency is not the objective but, say, censorship resistance is, then let us continue as we have before. But let’s not delude ourselves about the costs.


A good point:

For the last time, Ripple Labs created XRP

Not a U.S. lawyer, not your lawyer, and what follows is a blog post, not legal advice.

There has been a meme propagated in recent months by the folks over at Ripple Labs. That meme is that the cryptocurrency token known as “Ripple” or “XRP” has absolutely nothing to do with Ripple Labs the company, that XRP pre-existed Ripple Labs the company and was gifted to it, and that the protocol that runs XRP is totally decentralized, à la Bitcoin.

See, e.g., this blog post:

Screen Shot 2018-09-23 at 8.54.47 PM.png

Or, in the alternative, Ripple’s testimony to Parliament (pay particularly close attention to the text in red):

“XRP is open source and it was not created by our company, so that existed as an open source technology. We created a company that was interested in modernizing payments and then began using that open-source tech to do so … We didn’t create XRP… What we do have is we do own a significant amount of XRP, it was gifted to us by some of the open-source developers that created it. But there’s not a direct connection between Ripple the company and XRP.”

– Ryan Zagone, Ripple Director of Regulatory Relations

I disagree.

Why Ripple Labs has elected to push this line of reasoning, I cannot say. If I had to venture a guess, I should think that running a company that does not manage or issue a cryptocurrency is far less of a pain in the ass than running one that does. Bolting on a token to one’s commercial offering means introducing into one’s life a panoply of the worst and best elements of the crypto world: community management, troll bot armies on Twitter, Telegram groups, Subreddits, and the like. It also promises the possibility of undertaking some of cryptoland’s most sublime pleasures, including sending some love letters to any or all of the Securities and Exchange Commission, FinCEN and the Commodity Futures Trading Commission.

Now, I don’t mean to throw shade at Ripple Labs here. More power to them. Like the famous firsts of Neil Armstrong landing on the Moon, or Charles Lindbergh flying across the Atlantic in a single-engine propeller-driven aircraft, I can think of few acts of such singular daring as voluntarily wading into an ocean of complications, licences (note: British spelling) and litigants… as a cryptocurrency issuer.

In exchange for forging ahead through these many annoyances and dangers, the possibility of vast wealth awaits the Ripplenauts on the other side, a decentralized latter-day El Dorado, with vast mountains of fidget spinner-branded treasure gleaming just beyond the shore. Equally there lies the possibility of total, abject ruin. As Kazantzakis put it in The Last Temptation of Christ, “the doors to heaven and hell are adjacent and identical.” Nowhere is this more true than in cryptocurrency issuance and investment.

With this as our background, long have I been willing to extend Ripple the courtesy of not writing about them on this blog. No longer. Unfortunately, like my friend Bitfinexed I too am a “shill for truth,” so when I see Bloomberg reporting that XRP and Ripple are totally independent of one another – specifically,

XRP, which is an independent digital asset

…which is then repeated on Twitter by folks like this charming fellow,

…I am compelled to respond. This is wrong. I was there in 2013; I remember the days when Ripple owned the fact that it had built the Ripple… excuse me, XRP… protocol. Now, when the mainstream media, like Bloomberg, start to categorize XRP as an “independent digital asset,” like Bitcoin, we should, as a community, push back.

It’s crucial to ensure the market has accurate information about how XRP was created, how consensus is achieved on the XRP ledger, and therefore how XRP should be treated by an investor running a risk analysis and making an investment decision on whether and how to buy the token. Or as my friend Colin puts it:

I set the record straight below with a helpful timeline.

1) Did Ripple Labs create XRP?

Ripple Labs’ own documents speak for themselves. In my opinion the answer is “yes, Ripple created XRP, they own most of it and it was issued after company formation.” Open-and-shut determination.

a) 17-19 September 2012: Ripple Labs is incorporated

Ripple Labs was incorporated as “Newcoin, Inc.” in the State of California on 17 September, 2012, at which point a de facto corporation came into being. On the 19th of September the company’s articles of association were stamped by the CA Secretary of State, at which point “Newcoin, Inc.” formally came into being.

Screen Shot 2018-09-20 at 6.30.03 PM

Contrary to what many of Ripple’s defenders on Twitter and the forums claim, “Newcoin, Inc.” is, for all intents and purposes, the same company as present-day “Ripple Labs.” Newcoin, Inc. was renamed to “Opencoin, Inc.” in October, 2012. OpenCoin Inc. was later re-named to “Ripple Labs, Inc.” in 2013.

California-incorporated Ripple Labs, Inc. was then merged into a wholly-owned subsidiary, a Delaware corporation also called “Ripple Labs, Inc.,” in 2014. This is the Ripple Labs we all know and love today.


Anything done by Newcoin/Opencoin/Ripple Labs (CA) was done by a direct predecessor of the current Ripple entity that runs the business. All those names refer to the same company. For the sake of this analysis, therefore, each of the four names should be treated as if they refer to the same enterprise.

b) 17 September 2012: The Founders’ Agreement is signed

On the same date and presumably at or about the same time, the Ripple founders Arthur Britto, Jed McCaleb and Chris Larsen signed the following short-form agreement:founders-agreement-2

Now, I’m an English lawyer rather than a California lawyer (because the Countenance Divine shines forth upon England’s clouded hills, whereas California is just awful). But if this agreement were governed by English law, it would achieve three things. I’ll work through them in reverse order, because it makes more sense that way.

In the third paragraph, we have what appears to be either a very slapdash IP assignment or a reference to an IP assignment which is taking place in some agreement that’s outside of the four corners of this letter.

Crucially, the assignment shows that the intellectual property in Ripple the software was to be transferred to Ripple Labs (technically Newcoin Inc., renamed to Opencoin Inc. 30 days later, and eventually renamed to Ripple Labs, Inc.) and would thereafter be owned by Ripple Labs and not by Arthur Britto. There was, furthermore, an agreement, either here (if so, poorly drafted) or referenced here and agreed somewhere else more fully, that any further contributions by Britto or anyone of the other Founders to the Ripple software would be open-source. In exchange for that assignment, Ripple granted a lifetime licence to Britto to build apps with the coin (no word on whether that licence is assignable or not).

IMV Ripple got the better end of that deal. But I digress.

Moving up to the second paragraph, here we have the three Founders making agreements about how credits will later exist on an “Official Ledger” which “it is anticipated” (a) will have 100 billion credits and (b) if it has more credits than that, will permit Britto to acquire (again, per a fairly loosely-drafted anti-dilution provision) a number of credits, at no charge, that will bring his total holdings of credits to 2% of the total number of credits in issue.

Finally, we have the first paragraph. We know from the third paragraph that, per this agreement, Ripple Labs owns the Ripple software. We know from the second paragraph that, per this agreement, there’s going to be an Official Ledger built with the software Ripple Labs owns and, based on the construction of that paragraph, it is likely that the Official Ledger does not yet exist as it is referred to in the future tense. Therefore “Ripple Credits,” later re-branded XRP, also do not yet exist. 

Now, we are told that on that Official Ledger, 80% of the Ripple Credits “shall be allocated to the Company, as determined by the percentage share of all existing Credits set forth in the ledger created, approved and adopted by the majority of Founders as the Official Ledger.” So we know that of the software Ripple owns, that does not yet exist, in relation to which an official ledger is to be created, Ripple is to be allocated 80% of the tokens thereon for its own purposes.

So when were the tokens actually created?

c) 1 January 2013

The first Ripple transaction in existence was made on 1 January 2013, when the network was publicly launched. We can assume that this is the “Official Ledger” as, presumably, no launch would have occurred without the requisite majority of the Founders providing their consent (and at least Chris Larsen and Jed McCaleb would have consented to this version of the ledger, based on the historical record). Ripple Labs, Inc. also will have owned all the IP in the Official Ledger if it had executed anything like market standard agreements with its founders and employees. More on IP ownership in the “conclusions” section below.

Here’s what the transaction explorer says about all of the transactions on the Ripple ledger from 17 August 2012 (a month before Ripple Labs was incorporated) through 31 December 2012:

Screen Shot 2018-09-20 at 6.59.17 PM

Zero. Zilch. Donut.

So are there any transactions on 1 January? Why yes. Yes there are. 18 of them to be precise:

Screen Shot 2018-09-20 at 6.59.43 PM

d) So is XRP an “independent digital asset?”

The terms “independent” and “digital asset” are not defined when used by Ripple, so rather than go back and forth about semantics all day, I suggest we simply ask a different question.

The question that really should be asked is “Is calling XRP an ‘independent digital asset’ potentially misleading given the factual matrix surrounding its creation and issuance?” This is a question I cannot answer; you, dear reader, will have to do that for yourself. Our information, available from public documents and block explorers, tells us:

  • The “Official Ledger” did not exist on 17 September 2012.
  • I assume the “Official Ledger” is the XRP everyone uses today. Indeed, it can have no other meaning. In that case, transaction data on the Official Ledger shows that it did not exist until 1 January 2013.
  • On 1 January 2013, Ripple Labs very likely owned all right, title and interest in the software on which the Official Ledger was being run that had been generated by its founding team. If they covered their bases Ripple Labs will also have owned all the IP contributed by any other team members, e.g. David Schwartz.
  • On the launch date, Ripple Labs owned 80% of the tokens on the network, being 80 billion tokens.
  • The tokens were called “Ripple Credits.” As in Ripple Labs, the company.
  • To the extent any Ripple Credits tokens owned at one point by Ripple Labs are now being traded by third parties, it is because those tokens were first sold into the public markets by Ripple Labs or otherwise found their way there by some volitional act of Ripple Labs.
  • To the extent any Ripple Credits tokens are being traded at all, these will have at one point been part of contractual arrangements to which Ripple Labs was a party.
  • Any Ripple Credit token on the network was created pursuant to a pre-incorporation agreement, which Ripple Labs appears to have adopted, in relation to which Ripple Labs appears to have been an intended beneficiary and which assigned Ripple Labs the rights in the software with which that Official Ledger was, and any Ripple Credits in it were, to be instantiated.

To really drive the point home about who calls the shots about XRP, look at the branding of the product itself. When I go to Ripple’s website, on the upper right, there’s a heading that says “XRP”…

 Screen Shot 2018-09-20 at 9.40.44 PM.png

…which, if I click through, leads me to a big honking logo reading “XRP…”

Screen Shot 2018-09-20 at 7.13.56 PM

…a brand name owned by none other than… you guessed it!… Ripple Labs. 

Screen Shot 2018-09-20 at 9.14.44 PM

If, in Ryan Zagone’s words,

XRP is open source and… was not created by our company,

…what business, exactly, did Ripple Labs have registering that trademark with the USPTO, thereby representing that Ripple Labs owned that IP, on 17 May 2013 – nearly six months after the network launched on 1 January 2013?

My conclusions

The Ripple vs. XRP situation appears pretty straightforward to me. All of the above makes no sense if Ripple did not create XRP, and makes perfect sense if Ripple Labs did in fact create XRP. This rather suggests that it may be less than accurate to characterize XRP as being fully independent from Ripple Labs. Certainly it is absolutely not accurate to say that XRP’s existence has always been separate from Ripple Labs.

The fact is, Ripple Labs is all over XRP. The XRP brand name is owned by Ripple Labs. The fact that Ripple Labs filed a trademark application over the word mark “XRP” six months after launch, and 8 months after Jed McCaleb’s GitHub commit on 4 November 2012 that first changed the ticker symbol from “XNS” to “XRP,” shows that (a) XRP did not exist before that date, which in any case is two months after Ripple Labs was incorporated and (b) the company regarded the “XRP” IP as its own.

From the date of incorporation onwards, the software which runs XRP appears to have been owned by Ripple Labs. The copyright notice over the software specifies that Ripple Labs began asserting copyright over the software as early as 2012, consistent with our interpretation of the “Founders’ Agreement” that appears to show the company was concerned with getting the IP in the product away from the developers and into the Ripple Labs, Inc. vehicle.

Furthermore, the software was not open-source when XRP were created, as the company claims. Rather, Rippled as a whole was closed source and proprietary until 26 September 2013. (And here’s the GitHub commit proving same), although some FOSS code was incorporated into it. Although the “Rippled” software is currently open-source, according to the file currently found in in Ripple Labs’ GitHub repository, Ripple Labs continues to own and assert copyright over the protocol to this day.

Screen Shot 2018-09-21 at 3.02.10 PM
In software-land, this is what ownership looks like

Then there’s the matter of the tokens which Ripple claims it received as a “gift.” A very large number of the tokens were, are, and will likely continue to be owned by Ripple Labs. XRP tokens were not “gifted” to Ripple Labs but rather were granted to Ripple Labs by Ripple Labs itself in consideration of and in accordance with certain mutual obligations contained in a commercial contract to which the original Ripple Labs, Inc. was bound. (See, e.g., the language: “[Ripple] Credit Grant.”) This commercial understanding, when signed, was not yet implemented on an “Official Ledger” that was to be created by engineers who either founded Ripple Labs or were otherwise employed by Ripple Labs, meaning that it is exceedingly likely that Ripple Labs owned the resulting work product outright.

The “Official Ledger” was that work product. No “Official Ledger” containing XRP or any transactions on the ledger which is today used as “XRP” existed before Ripple Labs, Inc. (initially named Newcoin Inc.) was incorporated on 19 September 2012. What we call XRP came into being at Ripple Labs, Inc.’s behest and with its very close involvement on 1 January 2013 when Ripple Labs launched what was referred to in the Founders’ Agreement of 17 September 2012 as the “Official Ledger.”

The “Official Ledger” was later called the “Ripple Network” or “Ripple.” Today the “Official Ledger” is called “XRP.”  It’s the same thing.

Until recently, this view was shared by Ripple Labs, who wrote in 2013 that “Ripple was created by Opencoin, Inc.” (h/t Michael del Castillo for the image.)

Screen Shot 2018-09-25 at 6.36.30 PM.png

It doesn’t really get much clearer than that. XRP is a Ripple Labs project.

End of discussion.

And that’s fine. Many companies are embarking on token projects and I wish them all the very best of luck. However, only one company is, for whatever reason, trying to convince us that none of this ever happened. That company is Ripple Labs. And that I cannot abide.

2) Is XRP decentralized?

I’ll be staying out of that debate save to say that there is disagreement, and I am happy to point you to it.

Ayes to the right:

Noes to the left:

And in the opinion of BIS:

And with that, my friends, I bid you good evening.

Thoughts on GeminiCoin

Today we learn that Gemini, the exchange owned and operated by the Winklevoss Brothers, has launched a “stablecoin:”

Some thoughts.

1. This isn’t a stablecoin

First, this isn’t an “algorithmic stablecoin” à la Basis, Reserve, MakerDAO, et al., although those schemes will no doubt point to the Winklevoss solution as a vindication of their (deeply flawed) approach to dollar parity.

A stablecoin is legit if it is convertible. If there is no convertibility, there can be no parity. Viewed thus the algorithmic stablecoins are basically accidental Ponzi schemes where you need to introduce new buyers constantly in order for the scheme to perpetuate itself, otherwise it collapses.

The Winklevoss scheme, by contrast, is a coupon which is redeemable 1:1 for an actual deposit held with a trust company or an actual bank. In this way the Gemini “stablecoin” is in fact quite similar to existing interbank solutions such as Clearmatics’ Utility Settlement Coin, save that in Gemini’s case the stablecoin is publicly viewable by anyone who wishes to inspect the smart contract and Clearmatics’ system is presumably run over a VPN.

2. KYC?

Big question mark how this is going to be done although having seen how the Winklevoss brothers run their businesses over the past couple of years I am fairly sure they got their bases covered. I’m going to be lazy and just quote my own tweet here rather than explore this issue in detail.

tl;dr the Bank Secrecy Act and the Wu-Tang Clan have one thing in common, and that is that both of them ain’t nothing to f*** with.

3. HybridChains

The most interesting thing about this is structural: Gemini has built a public, permissioned application that effectively hybridizes the separate approaches of the coins on the one hand and the enterprise blockchain applications that have been developed on the other, to bring something to the marketplace that is unique and genuinely new.

I don’t count Tether as unique and new because of the huge question mark raised by public whistleblowers over their regulatory compliance. To do this correctly you have to do all of the regulatory legwork. Gemini appears to have done this. (…so has Paxos as well, it seems.)

Gemini’s experiment with a permissioned smart contract on a public blockchain shows that there is thought by them to be considerable value in leveraging the security and auditability properties possessed by blockchains without needing to pair them with an incentive mechanism such as a coin. Few banks would expose their own internal ledgers to the public internet. Gemini has no fear of doing this as long as this ledger is on a blockchain, meaning that tampering is very hard and they can stand up the application on the public internet, public-facing, with little fear of, say, a SQL injection attack or the like altering the records.

It logically follows that any “permissioned Ethereum” implementation a la Hyperledger Burrow or BlockApps has the same security and auditability properties running in a public setting as the main public Ethereum chain. So while Gemini is running this stuff on an ERC20 now, as Gemini wants to increase the complexity of the applications it is running – say, to run a financial instrument over the public internet – it may choose to simply deploy its own blockchains – permissioned, but publicly viewable – in future.

“Why not just use the banking system?” I hear you say. Well, the answer may not immediately be apparent because the financial products to which a GeminiCoin might be best suited do not yet exist: chiefly, fully-automatic products that need to be able to interact with suppliers and retail investors with zero supervision from a centralized authority such as a bank or a registrar, but which are readily and automatically auditable on request.

Imagine for a moment that we live in a world where asset ledgers run on their own chains that can be viewed by anybody (and transacted with by anyone), and let’s say you want to securitize a fleet of self-driving, battery-powered Amazon delivery trucks, not by pooling the trucks but by selling ownership in individual trucks that service particular neighborhoods, so people could invest in the Amazon infrastructure that they use on a daily basis.

Here, it might be possible for a holder of shares in a particular truck to run nodes on both the truck’s chain (TruckChain) and the GeminiCoin chain. The truck’s “administrator” would also run a node on TruckChain and the GeminiCoin chain. If the holder of a share in the truck (Alice) wished to sell the shares to Bob, Alice would simply post a transaction to the truck’s chain, or more properly an escrow contract, stating that the administrator of TruckChain was authorized to transfer Alice’s shares to the next user who who paid Alice a particular amount to Alice’s account on GeminiCoin chain. If Bob, who is also running a node of GeminiCoin, then does so and provides also a public key address of a keypair to be registered on TruckChain in the transaction to Alice on GeminiCoin,  the administrator’s node would check the proof and transfer the ownership of the shares in the truck to Bob.

There’s no need for this to be confined to GeminiCoin, either. Any liquidity/coin provider could provide this service, so long as the admin of TruckChain is willing to read the chain and Alice is willing to accept funds from it.

Completing such a transaction would happen automatically and in a matter of seconds with zero human involvement apart from the provision of payment and address details by Bob as the buyer of the shares. The low infrastructure overhead from automating the entire process is why you can securitize the truck individually instead of pooling, say, 30,000 trucks together and creating a single bond from the aggregate cashflows arising from them. Rather than tranching up the risk, as is done today and which can operate to conceal the real risk of the investment under the right circumstances, exposure here might (e.g.) be backed by Amazon’s receivables and backed out by a bog-standard auto insurance policy.

More transparent financial system ahoy.

That said. It’s good to see people figuring out that permissioning == more functionality. Many people have given me a lot of shit for many years over “permissioned blockchains” (see e.g. this WSJ piece from 2015), which I’m pretty sure Monax invented in 2014, on the basis that “without the coin providing incentives for users to secure the network, there is no purpose to the chain.”

Screen Shot 2018-09-10 at 11.59.21 AM
My life, circa 2014-15

Or this more recent quip from Fred Wilson:

Well, Fred, I can only suggest you chew on the implications of Geminicoin, publicly-auditable trust accounts with open APIs, and fully automatic securitization of self-driving truck fleets for a little bit. After you do that, then I’d be happy to hear from you why you think permissioned blockchains don’t have a future.

I certainly think they do. But then, we’ve known that for awhile, haven’t we.

4. Marmot pictures

To close, here are some pictures of marmots.

$100 Ether, revisited

Ethereum’s cryptocurrency, Ether, peaked at $1397.48 per coin on 14 January, 2018.

Eight months later, Ether is today at $190 per coin. Put differently, Ether has lost 87% of its value since January.

This is not something Ethereum’s promoters expected, nor is it the vision they sold, a year ago.

Buy the dream

A little over a year ago, my longtime acquaintance and philosophical opponent Vinay Gupta wrote a very well-shared piece titled “What does $100 Ether mean?” as the price of Ethereum’s cryptocurrency, Ether, blew through $100 (then $200, then $300… all the way to nearly $1,400). At the time, Vinay wrote:

Today, Ether hit $100 (update: it’s $300 now, five weeks later). I’m sure by the time you’re reading this it will be in The Guardian and the New York Times as a curiosity piece. Our market cap will approach thirty billion dollars. By all and any standards, this is a success beyond anything dreamt of when the project started, and the money raised will continue to finance technical innovation for years to come. While the impact and worth of a technology cannot be measured by money alone, on this occasion, celebration is appropriate. We have done well.

What followed was a paean to Ethereum as the future of the internet. The price of the coin, Vinay said, was the very embodiment of the hope Ethereum’s most fervent adopters; its entry into the annals of titans of world finance, like JP Morgan or Goldman Sachs, guaranteed:

I think Ether at $100 means that so many people believe in the world they think Ethereum will create, that it is becoming inevitable. I suspect that the full implementation of that vision will be a lot more humane and user-friendly than most of what people are thinking about right now…

…Regardless of how the technological details are worked out, I am more convinced than ever that the smart contract ecosystem is here to stay, because people want it, they need it, and it solves problems they face regularly. It may well be used by ordinary people 50 times a day without ever realizing they have touched it.

And how many “ordinary people” will Ethereum service? According to Vinay & co, “millions:”

It means that enough people are rallying around this vision of the future, and putting their money on the line for it, that the core development teams and entrepreneurs building that future will be funded more-or-less indefinitely. It means that there’s a massive wave of product innovation as people try to figure out how to get the millions of Ethereum users to spend their money on our products, and that evolutionary process builds further into the potential that the Ethereum system has to satisfy real human needs and desires.

Ezekiel’s Wheels, Ethereum Edition

Sell the news

But, of course, there aren’t millions of users; there are perhaps 100,000 active addresses on the network each day, and roughly only 5,000 or so DApp users (I stress, these are maximum numbers, and the likely number of actual users is considerably lower than this). Absent some very major technical innovations which do not as yet exist, Ethereum breaks whenever a few hundred people try to use it at the same time. Ethereum very obviously lacks the capacity to address millions of users, unless those users do absolutely nothing with the cryptocurrency except hold onto it and hope that the value will rise.

I have been aware of these limitations from the start, which is why I have long been skeptical of the Ethereum team’s claims. I remember, back in 2014, attending the very early Ethereum meetups and being told that Ethereum would become a “world computer” capable of running the entire internet on this one, fully-decentralized platform. This is a contradiction in terms, mind you, as it seems awfully centralizing to be using a single instance of a blockchain database to decentralize all the things.

But the “world computer” made for fantastic advertising. Remember the marketing? Hospitals, automobiles, groceries, identity, local government, payments, cloud storage, encrypted messaging, airplanes, power stations Ethereum, Ethereum the World Computer, the one Ethereum that held its ICO back in 2014, that Ethereum whose coin we were all told to buy, was quite literally “the secure backbone for everything” and was going to do it all.

And you people believed it.

It was all bullshit, of course. Ethereum can barely handle the traffic it gets for a single Initial Coin Offering. But it was easier, and it apparently continues to be easier, for uncritical journalists and conferences looking to fill airtime to find some coin sellers wearing unicorn t-shirts to talk nonsense for 45 minutes than to learn who is actually building real applications with actual, working code, and ensure that those people get airtime instead.

I never bought Vitalik’s vision. Loathed the Ethereum-as-cryptoccurency vision, actually. I always thought smart contracts should be free to develop and use, as Nick Szabo first described them in 1997, rather than pairing smart contracts with an investment scheme designed, seemingly, only to extract economic rent for the benefit of early adopters at every stage of the system’s future use.

Indeed: what is now known as the “permissioned” or “private” blockchain grew out of the realization that a single, stateful Ethereum instance shouldn’t scale, doesn’t scale, and never will scale, but stateless standards for blockchains and languages, like HTML, can scale (giving rise to a codebase that lives on today as the absolutely-free-to-use Hyperledger Burrow, the Hyperledger project’s Ethereum Virtual Machine).

Practical concerns about Ethereum’s capabilities were not, last year, foremost in everyone’s minds. Making money, however, was. As Ether blew past $300/coin in September of last year, I had lunch with a private equity bod one afternoon in New Haven.

Echoing similar noises that could be heard about the housing market in 2006, the investor told me that “nobody in cryptocurrency could imagine the price of this stuff going down.” “Is that so,” I thought.

I wrote my most popular blog post ever, the Bear Case for Crypto, later that night. I recommended that people run away from Ether as quickly as they could. At the time Ether was $385/coin.

Ether is now at $190 and falling fast, with no end in sight.

Takeaway points

I write this blog post only to put down a marker for historical purposes. My thesis in “the Bear Case for Crypto,” for those of you who do not care to read it in full, was simple:

First, cryptocurrencies are being wildly over-sold by their promoters. Technical promises – such as Zerohedge which name-checked Microsoft in an Ethereum Enterprise Alliance puff piece while repeating the garbage claim that Ethereum can process a million transaction per second (it can’t) –  bore no relation whatsoever to reality. Most code-free ICOs are in the same boat: as Matt Levine put it, people selling things in crypto are “like if the Wright brothers sold air miles to finance inventing the aeroplane.”

Second, on account of this expectation/reality mismatch, the 2017 bubble was unsustainable and anyone who advised you otherwise was a charlatan or a fool, or possibly both.

Third, it was, as of last September, very likely that a crash and regulatory intervention would create a self-reinforcing feedback loop which would bring about it a catastrophic crash in the value of cryptocurrencies. I referred to this event as the “zombie marmot apocalypse.”

Re: 1, res ipsa loquitur. That’s Latin for “I am dropping my microphone.”

Re: 2, see above.

Re: 3, it is of course difficult to gauge why investors are dumping their coins, as I have not yet learned telepathy. However, if we’re selling the news, last week Shapeshift’s announcement that it was implementing basic KYC procedures (pursuant, in all likelihood, to a request from the Department of the Treasury) resulted in a 20% sell-off in Bitcoin.

Which means there is indeed a relationship between regulatory action in the U.S. and the price of Bitcoin, such that we may expect an end to regulatory forbearance to exert downward pressure on Bitcoin’s price and indeed the price of all coins in the ecosystem.

I will therefore update my prediction from a year ago. If

  • a civil case and criminal charges are brought against a major ICO promoter and/or cryptocurrency exchange operator for perpetuating coin investment schemes in contravention of some provision of the Securities Acts other than obvious fraud (any day, now, SEC & DOJ, you’ve had four years);
  • a major exchange is shut down for AML violations or charges of market abuse/manipulation; and/or
  • Tether, the central bank of Bitcoin, implodes due either to the allegations of noncompliance or allegations of non-possession of funds turning out to be true,

you should expect drops in the value of the crypto-economy roughly on par with, if not greater than, the plunge in value we saw when ShapeShift announced its KYC policy last week.

Mission accomplished

Thus ends roughly a year of blog posts I have written about ICO Mania, which – seeing as the conventional wisdom, i.e. the Economist, has now adopted the view I have espoused consistently since 2014 (and the Economist quoted me in the process as well!) – also means that I have accomplished everything I set out to do when I started this series last August. Chiefly, I have done my part to convince the world – before the world even wanted to be convinced – that most ICOs were a pile of hot garbage.

Going forward, I am planning to redirect the majority of my writing and research efforts into other less critical, and more productive, areas of the blockchain and cryptocurrency space, like building systems that automate securities lifecycle management or figuring out thorny legal questions for clients who are developing new and interesting peer-to-peer network applications.

I may, of course, chime in from time to time on this project or that one, but will be de-emphasizing the criticism from here on out.

So, what does $100 Ether mean?

Or rather, what will $100 Ether mean, when that price level is inevitably reached once again in the next few weeks?

What Stephen said.

As a parting note, to close this series, I would encourage everyone reading this post to remember the following:

Remember the future you were sold in 2017. Remember who sold it to you. Remember the fairweather folks who were made rich by these offerings, or worked for ICO mills, but now feign disapproval as the wind blows against them. Remember how those the coin bubble enriched the most cavalierly dismiss criticism of their products’ nonperformance, now that the tide has gone out.

Remember the small cadre of skeptical voices that tried to warn you about all of this so that you did not get burned, as you have undoubtedly been burned very, very badly.

Remember to apply that same skepticism to every investment decision you make from here on out.

With crypto, the United Kingdom needs to put its house in order

This is the latest entry in my ICO Mania series of blog posts.

The Shapps Incident

Speaking as one who has long waited for legislators and regulators to get serious about cryptocurrency and blockchain tech, yesterday’s alleged scandal involving Grant Shapps MP is not only shocking, but it tells me that the state of ICO regulation in the UK is years away from being what it needs to be.

For those of you who were living under a rock, Grant Shapps – former co-chair of the British Conservative Party and a member of Parliament in that country – yesterday stepped down from both a Parliamentary working group and an ICO’s advisory board after it was alleged in the pages of the Financial Times that Shapps apparently failed to disclose a $3.7 million interest in tokens issued by an ICO. Note, officers of the allegedly offending ICO itself also advised the Parliamentary working group.

That something this inappropriate could allegedly happen in such close proximity to the heart of the regulatory process shows that it is more likely than not that the British government is, currently, totally blind to the size of the issues presented by the space they are only now beginning to understand, and the extent to which they are failing to exercise their duty to the public to quickly achieve competence and work with industry to establish appropriate supervisory frameworks.

It’s time for regulators around the world to (a) get serious about learning how this technology does and does not work, (b) work with legislators to get the power to put an end to market conduct which is abusive of the investing public and (c) put those powers to use.

An exercise in futility

Over the years, I have had the privilege to speak with regulators, law enforcers, legislative aides and legislators alike, in several countries, about the danger that the proliferation of ICO, or “Initial Coin Offering,” schemes poses to the investing public. I have done so consistently and unwaveringly since 2014.

To date, warning regulators about this misconduct has been an exercise in futility.

The more money these ICO schemes make for their promoters, the less the warnings are taken seriously, not only by new entrants seeking to raise money in the space or investors doing diligence, but also by regulators who have become accustomed to coin offerings as a fact of life.

The reasons why this should be the case are clear enough to me. Cryptocurrency companies with vast marketing and lobbying budgets have sent sufficiently hip and sloppily dressed technology emissaries ’round the capitals of North America and Europe, peddling decentralization prosperity gospel to our leaders, and blinding them with the promise of “blockchain technology.”

A small but not insignificant number of the companies in “blockchain” do good, honest, and solid development work. But they are in the minority. To any half-decent engineer, most of the claims peddled by the average ICO firm these days are, transparently, garbage. So-called “stablecoins” set themselves apart as being particularly awful, but many others that don’t try to be anything other than a cryptocurrency are themselves chronically oversold. The much-vaunted Eos scheme, for example, which raised more than $4 billion, utilizes four-year-old consensus tech known as delegated proof of stake which wasn’t that impressive on the two occasions it was tried previously (Bitshares and Steemit) and remains unimpressive now, at least to anyone whose opinion I respect.

The issue, of course, is that most people in “blockchain” arrived on the scene in the last 12 months. As a consequence, they are unable to exercise the requisite levels of diligence to sift out the marketing B.S. from genuine innovation. This explains, for example, the U.S. Securities and Exchange Commission’s legally puzzling pronouncement, which appeared to borrow heavily from the logic put forth by U.S. lobbying firm Coin Center, that Ethereum, which virtually any legal professional I know will agree started its life as a security, somehow transmogrified into a non-security by the mere passage of time (despite there being no basis in the precedents I’m aware of for such an interpretation).

Or why a European Parliament subcommittee produced a breathless resolution that read like a marketing document that might be more at home on the blog of the European Commission’s “blockchain observatory” development partner, ConsenSys, than it would be as serious legislation that could be found within a library of evenhanded assessments of blockchain tech.

Those of us standing against unqualified evangelism – the half-dozen or so consistent and battle-weary public “skeptics” like myself, Izabella Kaminska, Tim Swanson, and David Gerard, who between us have $0 in marketing budget and have to earn a living without recourse to the coin-capital markets – look on with ever-increasing levels of horror as unbridled greed goes unchecked and indeed is endorsed by regulators who have been told, and in good faith believe, the lie that in order to utilize blockchain cryptography, a coin is required.

This is not to say that the entire space is a waste. I firmly believe that cryptocurrency and cryptography combined with distributed systems, which currently takes the form  of blockchains, will change the world. Indeed, these things already have changed the world. 

However, I also believe that ICO boom is to “crypto” what the Railway Mania was to the industrial revolution. Lasting change will come not from an infinite proliferation of instamined “shitcoins,” or by handing hundreds of millions of dollars to un-tested novices whose only objective is to drive up the price of the digital assets they sell. Distributed cryptosystems will, as with all technologies, evolve incrementally and as a result of a slow and gradual process of adoption and developer familiarity with the tooling.

There are well-worn methods for promoting innovation in cryptocurrency (see e.g. the BIP process for Bitcoin) and in blockchain-without-the-coins (see e.g. the development process utilized by the Hyperledger project). Note, in each case, that the substantial development – hundreds of thousands of man-hours – that has occurred in either project has required the sale of precisely zero coins of any description, and certainly not the excessive sums like the $1.5 billion raised by Telegram or the $4 billion purportedly raised by Eos.

This brings me to my main point. What is not required for a healthy innovation sector is the repetitive, cookie-cutter ICO industry which has been allowed to proliferate in the U.S. and the U.K. almost completely untrammeled for the last four years. Which I find problematic, which practically every lawyer I know finds problematic, and which regulators on both sides of the Atlantic Ocean have singularly failed to address directly for half a decade or more.

Legislative failure

Parliament, in particular, should bear some responsibility for the inability of British regulators to address market misconduct occurring within the jurisdiction. Numerous coin schemes have been run out of London. Stand-out examples of regulatory inability to come to grips with “blockchain” include:

In May 2016: A “decentralized venture fund,” calling itself the “DAO,” is launched from London and Berlin. The scheme  quickly raises $150,000,000 in outside capital. However, because the smart contract administering the scheme was sloppily written, the DAO was hacked and the scheme collapsed, causing user funds to be lost (although later efforts by the Ethereum Foundation ensured that some of the funds would be reclaimed). No action was taken in England and Wales; the U.S. S.E.C. wrote a “report of investigation” in July 2017 rapping the DAO scheme on the knuckles for violating securities laws in that country.

September 2016: the UK FCA warns consumers about the Onecoin Ponzi scheme while at the same doing nothing to intervene in the scheme: “This firm is not authorized by us and we do not believe it is undertaking any activities that require our authorization. However, we are concerned about the potential risks this firm poses to UK consumers.”

September 2017: the FCA, after what must have been a thorough review, confirms what many practitioners suspected when it says it has almost no statutory power to supervise cryptocurrency and ICO offerings, leaving no dedicated regulator with the remit.

January 2018: The Bitconnect Ponzi scheme, which was apparently administered by an English registered shell company, is shut down. More to the point, it is shut down after regulators in Texas of all places filed a cease-and-desist order against the company and the founders cut and run. As far as I can tell, no investigation or regulatory response ever occurred in the United Kingdom.

May 2018 – Ripple Labs states, to a committee of Parliament, that its business has no relationship with the cryptocurrency XRP despite the fact that this assertion is frequently disputed in the cryptocurrency community.  Members of the Parliamentary Committee lack the competence or sector knowledge to challenge this assertion on the spot.

July 2018: Grant Shapps MP, former co-Chairman of the Conservative Party, steps down from his role in the All-Party Parliamentary Group for Blockchain tech for allegedly receiving compensation from one of the schemes he’s meant to be supervising and allegedly failing to disclose this to Parliament.


Stop equivocating

I warned in November of 2017 that failure to adequately supervise the cryptocurrency space will create levels of systemic risk which could potentially endanger the mainstream financial system. Last week we learned from the erudite Bitcoin banker OG Caitlin Long that ICO issuances were, in dollar terms, equal to 45% of IPO issuance in Q2 – with nary a prospectus or registration statement in sight.

Regulators of the world, the time for exploratory work is past. Clean house, come up with a battle plan, establish a supervisory framework, and enforce it.

It’s long overdue. There’s a real possibility it will soon be too late.


I usually end my posts with a picture of a marmot but because this is for Britain, I end this one with a badger