Sabotaging Bitcoin

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I find myself in the unusual position of defending Bitcoin from its critics, if only reluctantly.

In 2024 Soroush Farokhnia & Amir Kafshdar Goharshady published Options and Futures Imperil Bitcoin's Security and:

showed that (i) a successful block-reverting attack does not necessarily require ... a majority of the hash power; (ii) obtaining a majority of the hash power ... costs roughly 6.77 billion ... and (iii) Bitcoin derivatives, i.e. options and futures, imperil Bitcoin’s security by creating an incentive for a block-reverting/majority attack.

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It is worth noting that they are not talking about profiting from double-spending. The Bitcoin blockchain transacts around $17B/day of nominal value in around 450K transactions (average ~$38K), but in 2021 Igor Makarov & Antoinette Schoar found that:

90% of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities but is the byproduct of the Bitcoin protocol design as well as the preference of many participants for anonymity ... exchanges play a central role in the Bitcoin system. They explain 75% of real Bitcoin volume.

Of course, just because they aren't "economically meaningful" doesn't mean they aren't worth attacking! The average block has ~3.2K transactions, so ~$121.6M/block. As a check. $121.6M * 144 block/day = $17.5B. So to recover their cost for a 51% attack would require double-spending about 8 hours worth of transactions.

I agree with their technical analysis of the attack, but I believe there would be significant difficulties in putting it into practice. Below the fold I try to set out these difficulties.

Data Centers In Spaaaace!

Pigs in Spaaaace!

The AI bubble has been kept inflated by journalists uncritically reporting whatever CEOs say as they frantically pump the stock. Right now, you can observe a wonderful example of this by searching the Web for "orbital data centers". My recent search turned up pages of links, including SpaceX’s Lofty IPO Valuation Hinges on Big Bet on Outsize Growth from Bloomberg's Bailey Lipschultz, Sana Pashankar, and Loren Grush:

To buy into SpaceX’s audacious $1.5 trillion valuation in a listing next year, investors will need to have faith in Elon Musk’s equally galactic vision for his rocket and satellite maker, from orbital data centers to lunar factories to human settlements on Mars.

I chose one that ought to be more credible than Musk from Scientific American. Jeremy Hsu's Data Centers in Space Aren’t as Wild as They Sound reports that:

In early November Google announced Project Suncatcher, which aims to launch solar-powered satellite constellations carrying its specialty AI chips, with a demonstration mission planned for 2027. Around the same time, the start-up Starcloud celebrated the launch of a 60-kilogram satellite with an NVIDIA H100 GPU as a prelude to an orbital data center that is expected to require five gigawatts of electric power by 2035.

To do Hsu justice, he did point out a few of the problems. But follow me below the fold for more.

Mind The GAAP

Senator Everett Dirksen is famously alleged to have remarked "a billion here, a billion there, pretty soon you're talking real money".

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Oracle is talking real money; they're borrowing $1.64B each working day. Mr. Market is skeptical that the real money is going to be repaid, as Caleb Mutua reports in Morgan Stanley Warns Oracle Credit Protection Nearing Record High:

A gauge of risk on Oracle Corp.’s (ORCL) debt reached a three-year high in November, and things are only going to get worse in 2026 unless the database giant is able to assuage investor anxiety about a massive artificial intelligence spending spree, according to Morgan Stanley.

A funding gap, swelling balance sheet and obsolescence risk are just some of the hazards Oracle is facing, according to Lindsay Tyler and David Hamburger, credit analysts at the brokerage. The cost of insuring Oracle Corp.’s debt against default over the next five years rose to 1.25 percentage point a year on Tuesday, according to ICE Data Services.

Mutua reports that:

The company borrowed $18 billion in the US high-grade market in September. Then in early November, a group of about 20 banks arranged a roughly $18 billion project finance loan to construct a data center campus in New Mexico, which Oracle will take over as tenant.

Banks are also providing a separate $38 billion loan package to help finance the construction of data centers in Texas and Wisconsin developed by Vantage Data Centers,

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But notice that only $18B of this debt appears on Oracle's balance sheet. Despite that, their credit default swaps spiked and the stock dropped 29% in the last month.

Below the fold I look into why Oracle and other hyperscalers desperate efforts to keep the vast sums they're borrowing off their books aren't working.

Metastablecoins Are Go!

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Terra (UST) was suppposed to be a "stablecoin", trading very close to $1. It rapidly became the third largest such coin. From April 11^th 2022 it started trading mainly around a 10% discount, and by May 11^th it was essentially worthless. The crash destroyed about $45B in notional value.

In Metastablecoins I pointed out that, absent the backing of a central bank, dollar "stablecoins" like UST were misnamed. They were, as UST had shown, in fact metastable so should be called metastablecoins. Wikipedia explains that:

By Georg Wiora

metastability denotes an intermediate energetic state within a dynamical system other than the system's state of least energy. A ball resting in a hollow on a slope is a simple example of metastability. If the ball is only slightly pushed, it will settle back into its hollow, but a stronger push may start the ball rolling down the slope.

Exactly what the "stronger push" that sent UST into its "state of least energy" was still isn't clear, but the coin's metastability is.

On July 18^th this year the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act) was signed into law. It purports to regulate metastablecoins but, like most things about cryptocurrencies, it is largely gaslighting. Below the fold I explain why this is and discuss some recent publications about metastablecoins.

The Bathtub Curve

The economics of long-term data storage are critically dependent not just upon the Kryder rate, the rate at which the technology improves cost per byte, but also upon the reliability of the media over time. You want to replace media because they are no longer economic, not because they are no longer reliable despite still being economic.

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For more than a decade Backblaze has been providing an important public service by publishing data on the reliability of their hard drives, and more recently their SSDs. Below the fold I comment on this month's post from their Drive Stats Team, Are Hard Drives Getting Better? Let’s Revisit the Bathtub Curve.

Wikipedia defines the Bathtub Curve as a common concept in reliability engineering:

The 'bathtub' refers to the shape of a line that curves up at both ends, similar in shape to a bathtub. The bathtub curve has 3 regions:

1. The first region has a decreasing failure rate due to early failures.
2. The middle region is a constant failure rate due to random failures.
3. The last region is an increasing failure rate due to wear-out failures.

Depreciation

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More than three years ago, based on Paul Butler's The problem with bitcoin miners, I wrote Generally Accepted Accounting Principles. The TL;DR was that the economic life of Bitcoin mining rigs was estimated at 16 months, as Moore's law in a competitive ASIC market rapidly generated more power-efficient rigs. But the Bitcoin miners' accounts were using 5-year straight-line depreciation for their rigs, which was significantly increasing their nominal profits.

Below the fold I look at the same problem unfolding in the heart of the AI bubble.

The Gaslit Asset Class

James Grant invited me to address the annual conference of Grant's Interest Rate Observer. This was an intimidating prospect, the previous year's conference featured billionaires Scott Bessent and Bill Ackman. As usual, below the fold is the text of my talk, with the slides, links to the sources, and additional material in footnotes. Yellow background indicates textual slides.