Blockchain-based systems are not what they say they are
blog.mollywhite.net
blog.mollywhite.net
A Ponzi Scheme is where the sum of all investor's reported account values exceed the total value of assets held by the institution.
In order to sustain the fraud, new investors are sought out to get capital to pay out old customers.
Bitcoin may be a scam, or may be used by scammers, etc., but it's not a Ponzi. Rather than give it a label, say what you think is happening -- that it's an asset bubble sustained only by the existence of greater fools and thin, unregulated, manipulated markets. That's fine and we can argue points on that. But calling it a Ponzi just makes things confusing.
Which is exactly what Tether, other stablecoins, and a lot of shady centralized exchanges did. They report account values in USD, coin market caps in USD, total on-chain trading volumes in USD, where are there is often no USD to be found anywhere, just lots of digital play-money being thrown around. It's a completely false report of account values, so while Bitcoin itself might not fit the strict definition of a Ponzi, many of the enterprises operating in the ecosystem do.
[1] Anyone Seen Tether’s Billions? https://www.bloomberg.com/news/features/2021-10-07/crypto-my...
1. How much tether is held by Tether itself (and thus is a self-cancelling asset) vs. how much is held by outsiders (and does Bitfinex count as an outsider?)
2. What is the fair-market valuation of Tether-held assets. A bank may have non-cash assets (like outstanding loans); that does not make it fraudulent unless the valuations are fraudulent, and does not necessarily make it insolvent.
Regardless this doesn't make Bitcoin into a Ponzi. To even connect it to Bitcoin, the question is to what degree fraudulently issued tether affects the market for other cryptocurrencies? Madoff, for example, was a Ponzi that "operated in the ecosystem" of traditional finance, but that does not taint the stock market by definition.
I continue to feel that stablecoins are far more dangerous than floating cryptocurrencies because they are piggybacking off of the legal status of sovereign currencies but are not under their supervision, so like S&L or LTCM they are a shadow banking system that imposes two-way risks on finance systems. But this doesn't really affect my thinking around floating cryptocurrencies in any significant way.
For example UST stablecoin from Terra maintains the price in another way.
Gold has some portion of its value derived from decorative uses and numismatic purposes. People don't put 100 dollar bills on necklaces or wear quarter pendants.
If you hold Euros as an investment as an American (or vice versa with dollars) then this as an investment class is extremely similar to Bitcoin. Sovereign debt has similar characteristics but is subject to interest-rate based fluctuations to a greater dgree.
The main difference is that the markets for foreign exchange are tightly regulated and trade with huge amounts of liquidity -- it is difficult to inconceivable for any entity to affect the price in any way useful for market manipulation (with some exceptions, like Soros's little game with the Pound).
You simply cannot rely on bidding for price discovery when a significant portion (>50%) of the trading volume in cryptocurrencies appear to be wash trades, and with nothing else to tether it to, the prices keep bouncing around.
You mean like all of the "Cash 4 Gold" commercials that aired in the 2000s when gold went on a huge climb?
Also how fractional reserve banking works
If banks had been forced to mark their assets mark-to-market, then they would have had to either 1) become insolvent, or 2) write-down customer deposits, or 3) take out huge amounts of loans to cover the difference.
The idea of TARP was to artificially mark up their assets so that they appeared to be solvent, with the Fed and the Treasury acting as the backstop in case of liquidity crunches or runs on the market. This never really panned out and the Fed just took the money and did 3 instead, and Congress was just "hey, fuck it, whatever".
2 is out of the question -- the formalism of the banking infrastructure created by the Fed and later the New Deal basically forbids saying "hey, you're taking a haircut on your savings account because you were really investing and investments may lose value".
1 was what some of them did, too, and then bigger banks came in and bought them up with borrowed money.
This is an endemic problem in crypto spaces. The biggest example I see regularly is deflecting concerns about environmental impact by stating they'll move away from proof of work any day now, so it's no big deal.
Maybe you will, maybe you won't, but until you have, you haven't.
How else are they supposed to address it other than acknowledging the problem, laying out a roadmap, and taking steps towards the end goal?
Sure, they've built some stuff at this point, but have made no progress on the inner politics of the issue. So it remains in some untouchable future for the time being.
Pollution is equal to resource use, which is equal to mining rewards.
Mining rewards are proportional to market price, not # of transactions.
So lightning could help with scale (I dont think it will) but wont help with resource waste
Will the Ethereum community offset the carbon footprint of their pet project?
People love to tout this example, I did too, until that realized that one a one off event. There are regularly significantly more larger thefts of crypto currencies these days[1] and nobody is even willing to discuss a hard fork. I now chalk this up as growing mistakes which every project makes in early stages. I'm still not into this whole idea of crypto currencies, but don't think we can use this point fairly any more.
Conclusion: On the dimension of reliability and censor resistance, crypto might be as good as gold or fiat (while on all other axes it remains much worse).
[1] Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve in exchange for $20.67 (equivalent to $413 in 2020)[5] per troy ounce. https://en.wikipedia.org/wiki/Executive_Order_6102
I completely agree. My only point was its bizarre that people choose the DAO incident to bash crypto people. They have plenty of evidence that the community learned from the incident.
Except it's not new at all; regular banks and the fiat money they have been handling have been dealing with these things for literally centuries.
But the cryptobros decided they could do better, converting their PHP Magic the Gathering trading platform to a Bitcoin trading platform and thinking yeah, that's good enough for handling billions. To name but one example.
For Ethereum and most other altcoins, it's not possible to run a full node on a home computer. That's why most of the nodes are run by companies such as Infura.
This is also the root of the argument why many bitcoiners think that most altcoins such as Ethereum are scams. Like the article suggests, they're promoted and sold as decentralized but in reality are quite far from it.
It's important to distinguish "decentralised" as in "can't sue me bro" from "decentralised" as in actual operational terms. Bitcoin contains tremendous operational centralisation at all levels.
I have never tried to run a full node, but from what I read, the specs for a full node are nowhere near the realm of impossible: https://www.reddit.com/r/ethereum/comments/jv8ovb/what_are_t...
1TB SSD, 16GB RAM, an i5 is pretty run-of-the-mill.
You can run an Ethereum node on a Raspberry Pi with a 1TB USB hard drive, what are you talking about?
That is a really interesting question. Would that NFT be illegal to own or posess? It isnt the actual material. It could be a hash and ownership information, but the illegal material need not be in the NFT. Hashes for such material are not illegal. In fact there are databases full of such hashes in use by file hosting services to detect and remove such things. Owning an associated NFT would be like owning an NFT for "cocaine" but never being anywhere near real cocaine. It may be worthless, but i dont see how it would be actually illegal.
That said there is an explicit link between the NFT and the child sexual abuse material so I'd presume there is a legal case that keeping one is keeping the other. Like if you made sure your hard-drive was totally clean but kept bookmarks to abuse material.
In the example of cocaine there is no explicit link but if they could connect the NFT to a criminal enterprise then I guess there's likely some laws around profiting/handling gains from criminal activity.
Perhaps their best defence would be that NFTs are complete nonsense which have no tangible connection with the mutable, third-party-controlled URL endpoint they are supposedly a token representation of...
You are not guilty of owning CSA material until it's found on your computer.
You do not own that cat picture unless you have some documentation that transfers copyright from the author to you (like a receipt, a contract, or similar). An entry on a blockchain is not that.
This issue came up a few years ago with those stolen iphone images of celebs, some of which were underage. If the photos are illegal, then DMCA takedowns might not work if one cannot own the copyright to an illegal image.
Yes. Web2 is where users generate content and generate profit for companies.
Web3 is where companies went further and offload storage/compute costs to users, while maintaining control over services/apis. It's like Youtube where videos are hosted by users but Google gets the money.
That chain is no where near as valuable today - that's true of most forks, one wins and the other loses. For most Ethereum users, and for the Polkadot users for which a similar fork happened recently, the early reversion to remedy loss caused by an exploit is considered a feature, not a bug and it was the community that decided which fork would win.
There has been much more money lost to similar exploits in various contracts since the infamous DAO hack, and the chain was not rolled back - if it ever was it would likely be a losing fork unless the community of users agreed on its value.
For Ethereum specifically this is more problematic as its full nodes are expensive to run and don't have much say compared to miners or centralized node providers like Infura, but this type of fork in principle isn't an example of immutability, and chains which do subsidize node costs to avoid the centralization seen in Eth's user facing nodes remain in control of the users.
In total, picking out the worst parts of the Ethereum network and generalizing it to 'blockchain' is lazy, and doesn't even fulfill the modest goal of the essay to "[discuss] how these technologies work in practice today," as it ignores the nascent systems whose developers were the first on scene to many of these problems and decided that they were solvable rather than bloggers with slightly deeper than surface level understanding seeing the same problems years later and deciding they were unsolvable.
The concern about forks happening willy-nilly at the expense of users is sometimes legitimate in smaller chains or maybe even chains like Ethereum which do not incentivize decentralized node services and as a result has majorly centralized nodes, but for Bitcoin and more nascent protocols which understand this problem the concern over arbitrary forks is thankfully frivolous.
Calling it out to all blockchains is valid in my opinion, as it counts for all blockchains despite happening more often around some than others.
Well its easy, a sufficiently decentralized protocol, like Bitcoin for example, can have a large group of miners and nodes agree to scam one or more users out of their account balances by simply forking the chain. Anyone not in on the scam, even if it was as small as to take $10 from a single user, has no reason to even consider that fork - the fork which scams any user to any degree is worthless, as well as being provably invalid. It only takes one node with the honest history to maintain what users care about.
Saying this is practically mutable is like saying today's newspaper is mutable because we can all agree to print an altered version of it, while ignoring the fact that it is trivial to find and prove ownership of the original (being generous with my analogy, carbon dating, time-stamping the paper, w.e.).
Either way, members of each fork kept their account balances, so anyone who really believed in Eth Classic but held their forked tokens is no worse off. If you want to talk about Eth politics and immutability (which is a good conversation) then it shouldn't be applied to all blockchain; not all chains are subject to such political influence if you claim that was a factor.
I don't claim anything, except that the blockchain we now call "Etherium" does not contain the deleted blocks, and that therefore blockchains are not immutable.
I like how nuanced the moxie.org article was, compared to this one.
Another aspect is how quickly it becomes centralized and privately controlled. And then there is a whole story about social media hype and anxiety. It also had recent heavy real world effects: The protestors in Kazakhstan have shut down a large bitcoin facility.
It's an interesting experiment to say the least. Sure there are parallels to previous instances in history, which is why many of us have been very critical of it, but it seems to be a unique blend.
The downsides of centralization are mostly longer-term issues like moral hazard, privacy, cost of scaling, and robustness, and those can be ignored for a while. Up front centralization is incredibly easy to reason about and deploy while the costs can be ignored for a long time.
Markets optimize for cost and efficiency now, not later. It's the same reason things like climate change or the eventual danger of fossil fuel depletion are ignored by the market. They haven't happened yet. Centralization is cheap coal; decentralization is solar power and batteries. Pay later vs. pay now. Pricing signals and markets are great optimizers but they have very little foresight and can't consider issues that can't easily be priced.
As a result even if a system is designed to be decentralized, centralization will usually start creeping in. It starts at the edges with convenient SaaS APIs, value-add services like search and filtration, and dashboards and moves inward from there. Eventually the entire system is embraced, extended, and extinguished. It doesn't matter if anyone planned it this way. It happens organically because centralized systems are cheaper and easier to build and can iterate fast.
The last part, fast iteration, is massively important in today's fad-driven hyper-accelerated shifting sands software market. If something can't iterate fast the sand will get washed out from under it and it's dead.
The truth about web3 is that much of it will remain centralized or peer to peer, but the fallback to certainty is the ultimate value; avoiding the long term moral hazard you mentioned the market often ignores, or at least deterring it. There will always be people who prefer control over convenience and distributed ledger technology hopes to raise that ceiling of user control over what they own significantly.
It is like bashing the internet of not fulfilling the potential people pitched about it in the 90s. Blockchain is currently in the dail up stage of the internet, it is centralized, slow and needs adoption and lots of man hours to unleash its potential. There are second and third order effects that need to actualize before the "dream" of blockchain technology can be realised. The article purports the lack of this actualisation of the blockchain dream as if we are being deceived.
It's like when people bashed Tesla and said it wont work because there were not enough charging stations across the USA, as if world changing technologies are realized in a day. I find it boring that people push these kind of articles as think pieces. We can do better
Tesla built a network of chargers to fix that problem. They didn't hand-wave it away with "it probably won't work that way in the future" - they came up with a real plan of action and executed on it. After that a lot of the skeptics came around.
The same is true for cryptocurrencies and NFTs I imagine. When devs in that industry come up with a workable solution and execute it people will change their minds. Until that happens it's entirely fair and reasonable to say that cryptocurrencies and NFTs have some serious problems, and claiming "it probably wont work that way in the future" is not an answer.
You can't just ignore problems by saying they're not problems. That doesn't work.
With Bitcoin, anyone can audit holdings of BTC since the ledger is public.
Email has a large degree of centralization with gmail/outlook etc but it is still meaningfully decentralized because it is very hard to get the vast majority of email servers to ban an address. Bitcoin is similar, its advertised decentralization is not a scam
Sounds about right.
Bundling a bunch of bad sounding things up and pretending they are interrelated is intellectually dishonest and counter productive to anyone who takes the time to read the article.
Care to give an example for the uninitiated?
Centralised exchanges can't freeze the exchange of Bitcoin. They themselves can decide that THEY won't accept money from certain individuals (Centralised exchanges are required to complete KYC for users), but they have no power to stop UTXOs being spent on the network. The only way UTXOs can be prohibited from being spent is via consensus between node operators.
This is just one example of many points where the author decides to fuse centralised services which interact with the decentralised network with the network itself.
This is the basis for mixing services which do this at scale.
The fact is that the author is using intellectually dishonest arguments to try and convey something as the truth, which is not true.
The above also doesn't take in to consideration any L2 or Taproot transactions that provide even easier ways to mitigate Government overreach.
It is like you haven't read the preceding and the following paragraphs.
Author was simply relying his/her experience in discussing with crypto supporters. In the paragraph you quoted the response of crypto supporters is that exchanges have no power. In the following paragraph the response of crypto supporters is that exchanges have the power.