Investment Frauds

It appears that Preston Byrne, inspired by @DontPanicBurns, coined the term "Nakamoto Scheme" in 2017's The Problem with Calling Bitcoin a “Ponzi Scheme”:

The Nakamoto Scheme is an automated hybrid of a Ponzi scheme and a pyramid scheme which has, from the perspective of operating a criminal enterprise, the strengths of both and (currently) the weaknesses of neither.

The Nakamoto Scheme draws strength from the same things which make pyramids and Ponzis so compelling, in that it promises insane investment returns, can be accessed by the man on the street with almost no effort at all, and recruits individual participants as new, self-interested evangelists of the scheme.

Byrne made no suggestion that the fraudulent aspects were intentional, and in riffing on Byrne's post David Gerard amplified the point:

The problem with calling Bitcoin a “Ponzi scheme” or “pyramid scheme” is that a Ponzi conventionally has a mastermind at the top, making the money.

Bitcoin doesn’t have that. (And Bitcoiners are very big on this as a reason not to call it a “Ponzi”!) Satoshi Nakamoto appears to have been completely sincere in setting up Bitcoin.

Even given Nakamoto’s extensively documented political aims for Bitcoin — an anarcho-capitalist reimplementation of the gold standard, with banker conspiracies along for the ride — he was disconcerted at just how rabid the fans got about the possibility of profit. He even asked them to hold off on video card mining because it would spoil things for getting everyone involved.

Now, in THE STRANGE CASE OF NAKAMOTO'S BITCOIN - PART 1, Sal Bayat repeats Byrne's analysis in much greater detail but does suggest that Nakamoto intended the fraud. Below the fold I critique Bayat's post

Forking Ethereum

The problems caused by making vulnerable software immutable were revealed by the first major "smart contract". The Decentralized Autonomous Organization (The DAO) was released on 30th April 2016, but on 27th May 2016 Dino Mark, Vlad Zamfir, and Emin Gün Sirer posted A Call for a Temporary Moratorium on The DAO, pointing out some of its vulnerabilities; it was ignored. Three weeks later, when The DAO contained about 10% of all the Ether in circulation, these vulnerabilities were exploited:

allowing the removal of more than 3m ethers.

Subsequent exploitations allowed for more funds to be removed, which ultimately triggered a ‘white hat’ effort by token-holders to secure the remaining funds. That, in turn, triggered reprisals from others seeking to exploit the same flaw.

An effort to blacklist certain addresses tied to The DAO attackers was also stymied mid-rollout after researchers identified a security vulnerability, thus forcing the hard fork option.

The "hard fork" split the Ethereum blockchain into two. On the fork that became today's Ethereum the coins in The DAO ended up in a new "smart contract" from whence they could be recovered by the investors. On the fork that became today's Ethereum Classic, the coins stayed in the various attackers' wallets and were renamed ETC. When ETC started trading on 27^th July 2016 it opened at $0.60; ETH was trading at $12.97. Since then, ETH peaked at $4.8K and ETC peaked at $137, so it is clear which fork the market preferred.

Back in February Laura Shin published Austrian Programmer And Ex Crypto CEO Likely Stole $11 Billion Of Ether claiming to identify the perpetrator. The headline overhypes the story. The 3.6M ETH stolen from The DAO wasn't worth $11B at the time of the theft, more like $43M. After the hard fork, the 3.6M ETC was worth under $3M; back in February it was worth about $100M.

Now, as the Ethereum team attempts to finalize their long-delayed goal of switching from Proof-of-Work to Proof-of-Stake, another hard fork looms. Below the fold, I look into why this time things are much more complex.

Optical Media Durability Update

Four years ago I posted Optical Media Durability and discovered:

Surprisingly, I'm getting good data from CD-Rs more than 14 years old, and from DVD-Rs nearly 12 years old. Your mileage may vary.

Three years ago I repeated the mind-numbing process of feeding 45 disks through the reader and verifying their checksums. Two years ago I did it again, and then again a year ago.

It is time again for this annual chore, and yet again this year every single MD5 was successfully verified. Below the fold, the details.

The Exchange You Can Trust

One of the many ironies about "decentralized, trustless" cryptocurrencies is that they are neither decentralized nor trustless. Since in practice you can neither buy nor sell real goods using them, you need to trust an exchange to convert fiat to cryptocurrency and vice versa. Exchanges range from those you definitely shouldn't trust, such as Binance, through somewhat less sketchy ones such as Kraken (now being investigated for sanctions busting) to Coinbase, which presents itself as a properly regulated, US based exchange that is totally trustworthy.

But recently cracks have been appearing in their façade of respectability, big enough that even the New York Times has noticed. The Humbling of Coinbase by David Yaffe-Bellany and Mike Isaac summarizes the situation:

Coinbase rose to prominence as one of the first major crypto companies, a gateway to the chaotic world of digital assets for amateur investors. But as it has grown from plucky start-up to publicly traded company, its status as an industry leader has been threatened by a series of missteps and a steep decline in the crypto market over the last six months.

Below the fold I probe into some of these cracks.

Helium

A major reason that cryptocurrencies have become such a problem is that mainstream journalists normally just regurgitate the hype they are fed by people Talking Their Book. Kevin Roose is a New York Times "technology columnist" who is infatuated with cryptocurrencies. Last March he wrote The Latecomer's Guide to Crypto, which was so bad that Molly White assembled a group of experts to perform a devastating fact-check. Roose responded by justifying "talking his book" in a since-deleted tweet:

Crypto is pretty experiential compared to traditional finance, and it's going to get harder for journalists to report on this stuff if they're prohibited from touching it at all (especially as more activity moves into token-gated Discords, DAOs with ownership requirements, etc.)

He conveniently ignores that conflict of interest policies prevent journalists owning cryptocurrencies, not experiencing them using the paper's money.

A month earlier Roose had published another masterpiece of credulity entitled Maybe There’s a Use for Crypto After All whose subhead was:

Helium, a wireless network powered by cryptocurrency, hints at the practical promise of decentralized services.

Below the fold I compare reality with Roose's naive boosterism.

Another Infinite Money Pump

Datafinnovation's 3AC, DCG & Amazing Coincidences is a long and complex investigation of one of the key elements of the recent "crypto collapse". Fortunately. at FT Alphaville Bryce Elder uses an analogy that helps explain the basic idea. Below the fold I try to explain Elder's explanation of Datafinnovation's investigation.