Economic Incentives

Economic incentives are the glue holding the cryptosphere together. The security of Proof-of-Work blockchains depends upon the cost in hardware and power of an attack being more than the attack could gain. The security of Proof-of-Stake blockchains depends upon an attack reducing the value of the stake. There are economic incentives for market manipulation, pump-and-dump schemes, rug pulls, front-running and many other market behaviors. These are all very effective, but in this post I look at what appears to be a glaring exception to their effectiveness.

Permissionless systems are less efficient, slower, and vastly more expensive to set up and operate than permissioned systems performing exactly the same task. One would think that the permissioned systems would out-compete them, but in the cryptosphere they don't. Below the fold I attempt to answer the following obvious questions:

• Why are permissionless systems more expensive?
• How large is the investment in avoiding the need for permission?
• Where does the return on this investment come from?
• How large is the return on this investment?

The answers to these questions show that Prof. Angela Walch is correct when she writes:

the common meaning of ‘decentralized’ as applied to blockchain systems functions as a veil that covers over and prevents many from seeing the actions of key actors within the system.

Regulatory Capture In Action

On January 20^th, SEC Commissioner Hester Peirce gave a long speech at Duke University entited Outdated: Remarks before the Digital Assets at Duke Conference essentially arguing against doing her job by regulating cryptocurrencies.

Below the fold I point out how she is shilling for the cryptosphere, with a long list of excuses for inaction.

Binance's Time In The Barrel

The bulk of last month's Dominoes was about Binance, the dominant unregulated cryptocurrency exchange, and the risk that in the wake of FTX's collapse it might be the next victim of cryptocurrency contagion. Just as happened with FTX, once the media picked up on reports of problems, further stories came thick and fast. So below the fold are updates on two of the problems facing Binance.

Matt Levine's "The Crypto Story": Postscript

Source

Sam Bankman-Fried's implausible PR strategy since his companies collapsed has been to claim that he "f**ked up", that it was simply a mistake and no-one had evil intent. Matt Levine has a post-FTX postscript to The Crypto Story entitled How Not to Play the Game providing a somewhat less implausible explanation. Below the fold I explain why Levine is still too generous to SBF.

Dominoes

When important parts of the cryptosphere collapse, such as Terra/Luna or FTX/Alameda, people often ask "is this the end of crypto?". The answer so far is no. But as the "crypto winter" continues, and contagion spreads from exchanges to miners and their financiers, the number of important parts still standing is decreasing.

Below the fold I explain why crypto will effectively end when there are no large, liquid exchanges, and look at the possibility that failures of major exchanges might happen.

Brio-Compatible "Big Boy" Model

One of the things our grandson is interested in is trains, especially steam trains. Via gifts from various friends and relations he accumulated a vast collection of the Brio wooden model trains and tracks; it is favorite plaything at our house. I added needed pieces to the collection by downloading models from the amazing selection of Brio-compatible pieces on Thingiverse and printing them using the Creality CR6-SE that I got via Kickstarter two years ago. These included switches, buffers, gender changers and long straight tracks.

E's & D's Adventures in Life
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Another part of his train interest is "Big Boy", Union Pacific 4014, "the biggest steam train there has ever been in the whole wide world". So my wife decided that a suitable Christmas present would be a Brio-compatible model of Big Boy. You can't buy one, and I couldn't find one on Thingiverse, so I flexed my Tinkercad muscles and started on what turned out to be quite the saga. Below the fold, the details.

The Synchronous Delivery Problem

Parked at the end of the alley behind our house as I set out on my morning bike ride was a large pickup marked Nuro hauling a large trailer with some vehicle inside. I often see Nuro's "autonomous" Priuses in our neighborhood, so I assumed one had failed and was being collected. Near the end of my ride a few blocks from our house I passed another. At the end of the alley as I returned was this unfamiliar vehicle, so I stopped and took a picture.

As I watched it drove forward about 15 feet, paused, drove forward another 15 feet and stopped about 4 feet from the back of a parked SUV. It thought for a while then backed up, returning to near its starting point. I understand, I too think it is a problem that our streets are infested with parked monster SUVs.

Unlike Tesla's "Full Self-Driving" I don't think testing the Nuro-bot on our streets is a significant danger. They move slowly, make noise, are clearly cautious, and aren't being used by cult members. Below the fold I question not the technology but the economics.