Dissecting Ponzi schemes on Ethereum: identification, analysis, and impact
arxiv.org
arxiv.org
Written by a former cryptocurrency dev who later joined Lyft.
Some choice quotes:
"Context—and wide margins—are the bedrock of every white paper."
"We’re living in a world where developers are Kickstarting Pets.com every week"
A very smart but non-engineering friend of mine was asking about cryptocurrencies, and - in trying to explain why i think ethereum's "improvements" over bitcoin are anything but - I directed him to read about The DAO.
He promptly rabbit-holed and came up an hour or so later with your gem of a paper.
So ... nice work! A sanskrit professor found, understood, and thoroughly enjoyed the paper. And then hipped his programmer friend to it :)
I seem to recall that there was another more fundamental difference at the blockchain level, was wondering whether there was any link for that ...?
It's the 'smart contracts' that I think are foolish.
Replacing the legal system with code only makes sense if all of the following obtain:
(a) the code is 100% bug-free (b/c accidents cannot be rewound)
(b) all code-writers are 100% honest (their code does what they say)
(c) all contract participants are 100% perfet code readers (so as to not enter into fraudulent contracts)
(Strictly speaking, only one of (b) and (c) needs to be true).
None of these conditions will ever obtain.
(And, actually, even transactions entirely within the blockchain may trigger legal consequences, so even for them you've merely supplemented, rather than replaced, the legal system.)
This is pretty great.
...
This search resulted in further 55 potential new Ponzi schemes, not included in our original collection of 137 contracts.
It's so awesome that it's possible to do this and that it actually works!
(Obviously this is based on the view of cryptocurrency as purely speculative, not as an actual currency with which to buy things, but even now, it's still pretty difficult to buy a lot of things with Bitcoins.)
The acquisition of bitcoin by newcomers in no way enriches earlier adopters, as in a classic pyramid scheme. Miners continually invest huge sums in capital equipment with the hope that the price continues to rise. If it does not, they are toast. This is not gambling or a Ponzi; this is just a risk/reward business decision. It's the exact decision that the capitalist makes when she decides to build a new production line at the factory.
Buying bitcoin early is like investing early in any new technology: it could be worth nothing, or it could go bananas. Many alt-coins have trickled down to very low prices over time or stopped functioning altogether. There are no sure things in this space, even for the early adopters.
Of course it does. Bitcoin used to be at $1, now it's at $1,xxx. What happened in between was a massive influx of newcomers.
The difference to, for example, the stock market is in the "underlying value". If I buy some stock and it's price collapsed the next day, I'm still entitled to my share of future profits etc. If the company is sound, I have lost nothing.
A ponzi scheme's underlying value is only the future growth of the scheme itself.
I'd say the jury is still out for bitcoin et alt: how much of the growth is being fuelled by speculation, and to what extend is that speculation actually speculating on future speculation?
Bitcoin is a payment network (Even if the price collapses to really low).
Ethereum is a smart contracts platform, so you can still build certain kind of apps on it even if it's price collapses.
A ponzi scheme as NO business model (or the business model claimed, isn't a valid one).
Using bitcoin I can actually transfer wealth from one part of the world to another, similarly using Ethereum I can create decentralized applications funded by payment (like pay-to-seed bit torrent network).
That Bitcoin is speculation, a brand, and useful in some ways - that is why it can be sustained ... because the network of speculators/investors is global, and people with $100 or people with $10s of millions that want to gamble can join in on.
The 'single issuer' could also be considered the Bitcoin blockchain itself.
Years ago I met someone who sold off $20MM+ of Bitcoin, bought real estate for rentals, then bought more Bitcoin when low to rinse and repeat. How many people are doing this which keeps Bitcoin going, while slowly increasing the price? It could easily be 50%+ of money, of course everyone with Bitcoin is incentivized to increase adoption - so their Bitcoin doesn't become worthless, and so in fact it becomes worth 100x.
The 11 level limit intersecting with time will dictate how much time Bitcoin folks have to gain mass adoption..
It's now at $2,4xx.
Let's assume the newcomer is a miner, spending money to acquire the newly-created bitcoins from block coinbase transactions. That new money is created through inflation, which makes all existing bitcoin less-scarce. The miner must pay electricity costs, probably in terms of fiat currency, so there is continual sell pressure from coin inflation.
That doesn't sound like it enriches earlier adopters. Rather, mining hurts the value of earlier coins through the two mechanisms of inflation and continual selling pressure.
If the newcomer purchases bitcoin on an exchange, then it may cause upward pressure on the price (it depends on market conditions / liquidity). If the newcomers are purchasing bitcoin at a slower rate than the miners produce & sell, then there may be a decreasing price.
And finally, those with lots of coins cannot simply dump them on exchanges and expect not to drive down the price.
There is no direct mechanism whereby newcomers to bitcoin enrich existing holders. Instead, all value is derived from market forces of supply & demand on the exchanges. Bitcoin is no more a Ponzi / pyramid than Google stock.
And you can bet those who bought at $1 sold all they had at $10 ("wow, it's like 10 times what I invested, this is insane, this probably won't go any further!"), those who bought at $10 sold everything at best at $100, those who bought at $100 sold at $1000, etc. Actually, I'm not sure the people bitcoin made rich are that many. I have yet to see an article explaining how someone got millionaire by getting early into bitcoin.
As for fundamentals, the underlying value of cryptocurrencies is to be a store of value that is not as easily stolen than cash, while still not sitting in at a bank. You can see it as cash that can be transmitted over the network, in small or big amount (and quite fast in that case, comparatively to a wire transfer). Of course, whether this tech will become mainstream is yet to be seen, it can still fail. On the other hand, the company you bought stocks from can also bankrupt and close.
That argument does not follow. An equivalent argument is:
"A house in San Francisco used to cost at $100k, now it costs $1000k. What happened was a massive influx of new people to San Francisco."
What happened is that the utility of a house in San Francisco changed and no one was willing to sell below $1000k.
Seems pretty reasonable to me.
Real estate crashes when the last marginal buyer is priced out of the market. California real estate has crashed 2-3 times just in my lifetime. It will crash again and whoever bought at the top will be bagholders. It is the immutable law of bubbles.
Doesn't it though? The reason we're talking about ethereum here is because it's got the best adoption of any of the newer altcoins. And the more people talk about these altcoins the better they seem to do. Hence things like "this is good for bitcoin", they're trying to get buy in.
As OP pointed out, everyone who is investing in mining / purchasing these coins is hoping they will be a store of value that will appreciate. At some level, it's no different from betting on specific commodities. No one is promising anything. I think that's an important distinction.
>there is no guarantee of return, or even the promise of return
You should check out some altcoin subreddits and /biz/ and I think you might disagree with yourself.
"Frgtpsswrdlame-coin is going to the moon! You guys need to hop onto this, I already have a 100% return. Plus it's safe because frgtpsswrdlame-coin has <encryption gibberish>. It's still early so get in!"
"Buy the dip! If you look at frgtpsswrdlame-coin's charts you can see that there's a <technical analysis gibberish> pattern forming which means this is going to bounce right back!"
Perhaps what seperates this from a more traditional pyramid scheme like door-to-door knife sales is that you can't point to the guy who convinced you to buy in and you can't point to the guys at the top of the hierarchy but they still exist and they still misled you. It's just obfuscated because of the internet.
Look, every Ponzi that ever existed has anecdotes about those who made it big--it's part of the con. Getting rich quick is the dream of every peon everywhere.
To argue that's a Ponzi scheme reduces down to arguing that the entire economy is a Ponzi scheme. There are some Marxists who argue that. If that's true we have bigger problems.
Replace "mining" with investing and currency with stock and tada.
That's not a pyramid scheme, that's risk/reward investing 101.
It's still a little scary, but I'd say it's less scary than safety-critical embedded code.
Gold, like fiat currency, like "cryptocoins" are all just stores of value that a market sets a value to.
The people that were born early win out, and the people who are born later have less and less chances of striking it rich.
So human societies in general.
Never said we weren't generally better off. But none of us have a shot at being oil barons, logging millionaires, retail moguls, etc.
Striking it rich now generally means achieving a higher level of knowledge and education first, then you can try to make your mark.
The previous generation hordes vast sums of wealth from endeavors that required less up front preparation and less capital (which was often provided rather no strings attached by the government, a tap which is being shut off (look at IBM's history of being gifted government funded inventions, among others)).
Bitcoin, ethereum, dollars, euro - there isn't anything fundamentally different. Printed money is just that, and the guy who controls the printer can choose to print more and inflate the currency. But we all believe it's worth something... Because we believe it. It's a tautology. Cryptocurrencies are no different.
Consider this: Would divers risk their lives to recover paper money from a sunken 1930s era shipwreck? Yet for gold or silver, they will readily do that. I'm not gold bug, but I can understand why--gold and silver have a loooong history as stores of wealth. That's probably more important than any other consideration--how long has the "money" been "money?"
If that's all it takes to be a pyramid scheme, then any high-growth stock is a pyramid scheme. I could have struck it rich by buying Apple in 1999, but I don't think it would happen now.
There have been stock swindles in the past--the 1800s up to the 1920s were full of them. There have been insurance and bond swindles, too.
High growth stocks may be bubbles, but are not pyramid schemes.
The market capitalization of gold currently stands at 7.5 trillion USD. All cryptocurrencies combined currently stand at a market capitalization of 87.6 billion USD (1.14% of the market capitalization of gold).
Cryptocurrencies with a finite supply can supplant other finite stores of value and actually provide a number of benefits over existing finite stores of value (instant exchange to sterling currencies, improved transactional ability, traceability and general liquidity). It is likely we are just getting started.
Calling any legitimate store of value a Ponzi scheme is missing the point.
What does legitimate mean? The only difference between monopoly money and bitcoin is that people right now believe in bitcoin. But that belief could easily falter.
The same could be said about gold, but gold a very long history and has somewhat strong demand for use in jewelry.
At this point in time, essentially all demand for cyrpto is for speculation purposes. There is some use for illicit markets but it's very minor.
I wouldn't call it a ponzi scheme because those are intentional. But the current pricing for cryptos is definitely an embodiment of the Great Fool Theory of investing.
The vast, vast majority of the price of gold is the same "it is scarce and other people value it so I too value it" that composes bitcoin or usd or any other thing you consider valuable.
By comparison, a lot of metals like aluminum have relatively low portions of their valuation wrapped up in stores of wealth.
We really should strive to replace gold with crypto. All the gold reserves in the world could be put to much better use than sitting in a vault as bricks. The artificial price inflation caused by the use of gold as reserve has inhibited its use in many practical applications due to its dramatically higher price per gram compared to many other metals in similar problem domains.
Search for ponzi: https://dapps.ethercasts.com/
Ethereum has no cap on supply. Bitcoin is capped at 21m coins.
Making Etherium contracts a full byte code execution engine was a big mistake. That form is too bug-prone and led to the DAO debacle. It should have been something simpler, such as a decision table.[1] That simple declarative form can handle most useful business logic, but can't loop. It's always decidable and is easy to hand-check.
full byte code execution
engine was a big mistake
The proofs could be auto-generated for decision table based contracts, so a decision table could be a convenient DSL for simple contracts, without preventing more complicated contracts. The average contract writer would never need to see the full language or be exposed to proofs.
But that's not to say that a blockchain with functionality aside from store of value (like Ethereum) couldn't pan out and enable a whole new universe of use cases for trade, company formation and ownership, and contracts in general, on a global, super-fast, completely automatable scale. It could be yuge - but since no-one knows what will happen and it's still early days, the current valuation of Ethereum is also highly speculative. If it works out though - maybe the current valuation of Ethereum will look cheap in retrospective.
There may also be use cases for private blockchains, and there are startups pursuing those, such as http://chain.com (though I'm not sure why regular databases wouldn't work for most of those use cases), but I think there is also a need for a global decentralised network (or networks) for other use cases - global transactions/contracts, decentralised companies, probably other use cases yet to emerge.
Current scaling/latency issues with blockchains - there is ongoing work to solve those via off-chain networks, sharding etc - it's still early days, it will take some time to develop.
Data storage is also a moderately interesting application. Decentralizing data persistence, and being able to take advantage of the enormous amount of excess hard drive space that exists in the world is an interesting concept. Things in this category are Sia, Storj, and MaidSafe. While i'm not sure the economics and logistics will actually work out, I do think there is something there.
The price of USD has gone down steadily since its inception.
I don't think you can say it's "near worthless" to keep your value in an appreciating medium rather than a depreciating one..
My bitcoins are probably not worth the $2400 they traded at today... but they are definitely worth more than the $400 of USD they used to be (now worth $376 USD2013).
>I don't think you can say it's "near worthless" to keep your value in an appreciating medium rather than a depreciating one..
I'm not sure it's useful to group all cryptocurrencies together as a single medium. You should look at them individually and make your own projections. The current valuation the market is giving to 98% of coins, IMHO isn't based on anything except uneducated speculation - there is no utility function or current/potential revenue that reflects the valuation of most coins. If/when there is a correction I don't know - people might just leave their money in for a long time.
But is there any coherent explanation for why bitcoin should be priced at 2500 dollars rather than 2.5 dollars? or 2.5 cents?
The US dollar is a bad example because it's not supposed to be used as long term store of value at all. The inflation is purposeful and much more importantly fairly predictable. A bank can lend me 1,000,000 dollars to buy a house because they can be fairly confident that inflation is going to be ~2%.
except that time the S&P dropped 57% (2007 to 2009 from 1,565.15 to 676.53)
>But is there any coherent explanation for why bitcoin should be priced at 2500 dollars rather than 2.5 dollars? or 2.5 cents?
Are you similarly skeptical about the price of gold? There is a universal need for a store of value which is not only insulated from global financial markets, but also a hedge against them. Due to mathematically certain scarcity and decentralized resistance to manipulation, crypto fulfils that need better than gold. Assuming that gold is priced primarily to fulfill this same market need, and that no gold is ever mined again, a bitcoin should be valued at $377,000.
This is also very honest: https://medium.com/@cincinnati/the-ponzico-white-paper-8baa9...
So.. Gambling. It's like academic clickbait.
Cryptocurrencies are the baseball cards of a new generation of wealthy libertarians (they have no inherent value like a useful commodity, and they have no backing of a powerful government. They just have value because some people decided they are valuable.) How badly the next financial crisis effects those people will determine how much cryptocurrency values are adjusted.
This is the basis of any currency. Backing of a powerful government is a mixed blessing.
(If those downvoting would care to explain in what way I'm wrong, it would be appreciated.)
The good part of the government management is the part where they investigate instances of counterfeit, but that part's already taken care of with cryptocurrencies.
With USD, the government can print as much as they want.
Gold, on the otherhand, is finite, and NOT backed up by a government. And, like bitcoin, is basically worthless except as a speculative asset. (gold is not worth even close to the actual price that it is sold at.)
I do think if we want a cryptocurrency that can also function as money we need one that inflates, rather than deflates, its money supply. It should grow dynamically as a function of the monetary base rather than with fixed payouts (that gradually, due to the amassment of money, mean you are influencing the economy less and less each payout).
For example, you would strive to maintain 1% inflation, and when the velocity of the currency drops you increase that inflation, and when it speeds up you slow or even stop printing money. Its basically automated central banking with an algorithm rather than a commissioner.