IOSCO DeFi WG Report

Below the fold is the discussion of Policy Reccomendations for Decentralized Finance (DeFi): Colsultation Report that in promised in Brief Remarks to IOSCO DeFi WG.

Brief Remarks to IOSCO DeFi WG

Earlier this year I was invited to take part in a meeting of the DeFi Working Group of the International Organization of Securities Commissions' Fintech Task Force. IOSCO is the organization that links securities regulators worldwide. The goal of the meeting was to provide input for a follow-up to IOSCO's Decentralized Finance Report from March 2022. I was asked to keep this confidential until the report was published, which has now happened; Policy Recommendations for Decentralized Finance (DeFi): Consultation Report.

Below the fold is the text of my brief introductory remarks with links to the sources. I will discuss the report in a subsequent post once I have studied it.

Microsoft Keys

Back in 2021 I gave a Talk At Berkeley's Information Access Seminar that summarized two long posts from two years before that:

• Certificate Transparency
• Securing The Software Supply Chain

On Friday 25^th Dan Goodin had two posts documenting that even the biggest software companies haven't fixed the problems I was talking about:

• Renegade certificate removed from Windows. Then it returns. Microsoft stays silent.
• Microsoft signing keys keep getting hijacked, to the delight of Chinese threat actors

Below the fold I update this sorry state of affairs, which I first started cataloging a decade ago.

Prof. Hilary Allen On Venture Capital

After writing Predatory Pricing, via David Gerard, I found Prof. Hilary Allen's Interest Rates, Venture Capital, and Financial Stability. In the abstract she writes:

This Article illuminates one path through which the prolonged period of low interest rates from 2009-2021 has impacted financial stability: it traces how yield-seeking behavior in the wake of the Global Financial Crisis and Covid pandemic led to a bubble in the venture capital industry, which in turn spawned a crypto bubble as well as a run on the VC-favored Silicon Valley Bank.
...
It argues for increased monitoring of the venture capital industry by financial stability regulators, given that venture capital is well-positioned to generate asset bubbles now and in the future. More specifically, it argues for more aggressive enforcement of the securities laws to tamp down on the present crypto bubble, as well as for structural separation between crypto and the traditional financial system.

Prof. Allen describes yet another of the many ways the current venture capital industry is malfunctioning, and calls for increased oversight of these risks to financial stability. Below the fold I discuss this and one of the papers it cites.

Techno-feudalism

Source

Two of my favorite authors are making the same point. First, Kim Stanley Robinson in passing during a fascinating interview by Oscar Boyd and Akshat Rathi:

Capitalism is the name of a power relationship of the few over the many. It is a hierarchy. It is feudalism liquidified, where money has replaced land as the source of power, but there's still the powerful and there's still the weak, and there's still incredible inequality in the world system.

Second, in Autoenshittification Cory Doctorow writes:

In his forthcoming book, Techno Feudalism: What Killed Capitalism, Yanis Varoufakis proposes that capitalism has died – but it wasn't replaced by socialism. Rather, capitalism has given way to feudalism:

https://www.penguin.co.uk/books/451795/technofeudalism-by-varoufakis-yanis/9781847927279

Under capitalism, capital is the prime mover. The people who own and mobilize capital – the capitalists – organize the economy and take the lion's share of its returns. But it wasn't always this way: for hundreds of years, European civilization was dominated by rents, not markets.

Below the fold some discussion of this idea.

Optical Media Durability Update

Five 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.

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

Predatory Pricing

Adam Rogers' The dirty little secret that could bring down Big Tech is based on work by Matt Wansley and Sam Weinstein of the Cardozo School of Law, who questioned why the investors in companies such as Uber, Lyft, or WeWork would sink:

billions of dollars of capital into a money-losing business where the path to profitability wasn't clear?

The answer is the remarkable effectiveness of predatory pricing at making money for VCs and founders. Rogers writes:

Wansley and Weinstein — who, not coincidentally, used to work in antitrust enforcement at the Justice Department — set out to change that. In a new paper titled "Venture Predation," the two lawyers make a compelling case that the classic model of venture capital — disrupt incumbents, build a scalable platform, move fast, break things — isn't the peak of modern capitalism that Silicon Valley says it is. According to this new thinking, it's anticapitalist. It's illegal. And it should be aggressively prosecuted, to promote free and fair competition in the marketplace.

Below the fold I discuss Wansley and Weinstein's paper and relate it to events in the cryptosphere.

Video Game History

Arguably, video games have become the most important entertainment medium. 2022 US video game revenue topped $85B, compared with global movie industry revenue of $76.7B. Game history is thus an essential resource for scholars of culture, but the industry's copyright paranoia means they have little access to it.

Salvador Table 1

In 87% Missing: the Disappearance of Classic Video Games Kelsey Lewin of the Video Game History Foundation describes their recent study in cooperation with the Software Preservation Network, published by Phil Salvador as Survey of the Video Game Reissue Market in the United States. The report's abstract doesn't mince words:

Only 13 percent of classic video games published in the United States are currently in release (n = 1500, ±2.5%, 95% CI). These low numbers are consistent across platform ecosystems and time periods. Troublingly, the reissue rate drops below 3 percent for games released prior to 1985—the foundational era of video games—indicating that the interests of the marketplace may not align with the needs of video game researchers. Our experiences gathering data for this study suggest that these problems will intensify over time due to a low diversity of reissue sources and the long-term volatility of digital game storefronts.

Below the fold I discuss some of the details.

This Could Be An Issue

Allyson Versprille's Wall Street Banks Side With Nemesis Elizabeth Warren on Crypto Crackdown describes this improbable occurrence thus:

The Bank Policy Institute, a trade group for lenders that Warren often blasts, threw its weight behind bipartisan legislation that the Massachusetts Democrat and three of her Senate colleagues reintroduced this week. The bill aims to force the crypto industry to comply with tougher rules for combating money laundering and terrorism financing.

“The existing anti-money laundering and Bank Secrecy Act framework must account for digital assets, and we look forward to engaging in this process to defend our nation’s financial system against illicit finance in all its forms,” BPI said in a statement.

The three colleagues are Joe Manchin (D-WV), Roger Marshall (R-KS) and Lindsey Graham (R-SC). It is worth noting that Senators Warren and Graham also have a bill to tighten regulation of big tech, described in their "Guest Essay" for the New York Times entitled When It Comes to Big Tech, Enough Is Enough.

Follow me below the fold for the sting in this bill's tail

Anti-trust

Technology markets, and others that share their strong economies of scale, naturally tend to evolve into oligopolies, if not outright monopolies. Brian Arthur described the mechanism in 1994's Increasing Returns and Path Dependence in the Economy. This tendency has been supercharged ever since Richard Posner and George Stigler of the Chicago School got the Reagan administration to hamstring anti-trust enforcement. We see the result in technology and many other markets, dominated by a few giant companies devoted, in Cory Doctorow's memorable coinage, to enshittification:

Here is how platforms die: first, they are good to their users; then they abuse their users to make things better for their business customers; finally, they abuse those business customers to claw back all the value for themselves. Then, they die.

This process applies more broadly than just to platforms, except the part about dying. Below the fold I discuss a recent development that provides an opportunity for you to take action to push back against it.

NY Fed: Metastablecoins

Stablecoin circulation

Last May, in the wake of the Terra/Luna crash, I wrote Metastablecoins, describing how coins like USDT intended to be stabilized via arbitrage were always at risk of the market over-running the arbitrageurs firepower, and More Metastablecoins, quoting from Bryce Elder's report on Barclay's analysis of "asset-backed" coins such as USDT that, while they claim to be fully reserved, do not offer immediate unrestricted liquidity:

We think that willingness to absorb losses, even though USDT is fully collateralized and has an overnight liquidity buffer that exceeds most prime funds, suggests the token might be prone pre-emptive runs. Holders with immediate liquidity demands have an incentive (or first-mover advantage) to rush to sell in the secondary market before the supply of tokens from other liquidity-seekers picks up. The fear that USDT might not be able to maintain the peg may drive runs regardless of its actual capacity to support redemptions based on the liquidity of its collateral.

Now Kenechukwu Anadu et al of the NY Federal Reserve have a deep dive into the events of May 2022 entitled Runs on Stablecoins. Below the fold I have some comments.

Blog on vacation

I have a stack of books that I set aside for summer reading, so this blog is on vacation for two weeks so I can at least reduce the height of the stack.

The Philosopher of Palo Alto

I just finished reading John Tinnell's The Philosopher of Palo Alto. Based on Stanford Library's extensive archive of Mark Weiser's papers, and interviews with many participants, it is an impressively detailed and, as far as I can tell, accurate account of the "ubiquitous computing" work he drove at Xerox PARC. I strongly recommend reading it. Tinnell covers Weiser's life story to his death at age 46 in 1999, the contrast between his work and that at Nick Negroponte's MIT Media Lab, and the ultimate failure of his vision.

Tinnell quotes Lucy Suchman's critique of Weiser's approach to innovation:

Under this approach, Suchman claimed, a lab "[provided] distance from practicalities that must eventually be faced" — but facing up to those practicalities was left up to staff in some other department.

To be fair, I would say the same criticism applied to much of the Media Labs work too.

As I was at the time a member of "staff in some other department" at Sun Microsystems and then Nvidia, below the fold I discuss some of the "practicalities" that should have been faced earlier rather than later or not at all.

2023 Storage Roundup

It is time for another roundup of news from the storage industry, so follow me below the fold.

Code Isn't Law: An Analogy

Source

In Trader Charged in $110 Million Market Scam Faces Dec. 4 Trial David Voreacos reports that Avraham Eisenberg is now in the "find out" phase:

Prosecutors claim Eisenberg manipulated Mango Markets futures contracts on Oct. 11, when he drove up the price of swaps by 1,300%. He used them to borrow about $110 million of cryptocurrency from other Mango depositors, the US alleges.

Four days later he posted on Twitter: “I was involved with a team that operated a highly profitable trading strategy last week.” He also said he believed “all of our actions were legal open market actions, using the protocol as designed.”

Below the fold, my analogy

A Local Large Language Model

I wanted to see what all the hype around Large Language Models (LLMs) amounted to, but the privacy terms in the EULA for Bard were completely unacceptable. So when I read Dylan Patel and Afzal Ahmad's We Have No Moat: And neither does OpenAI:

Open-source models are faster, more customizable, more private, and pound-for-pound more capable. They are doing things with $100 and 13B params that we struggle with at $10M and 540B. And they are doing so in weeks, not months.

I decided to try open source LLMs for myself, since as they run locally the privacy risk is mitigated. Below the fold I tell the story so far; I will update it as I make progress.

Flash Loans

I have been generally skeptical of claims that blockchain technology and cryptocurrencies are major innovations. Back in 2017 Arvind Narayanan and Jeremy Clark published Bitcoin's Academic Pedigree, showing that Satoshi Nakamoto assembled a set of previously published components in a novel way to create Bitcoin. Essentially the only innovation among the components was the Longest Chain Rule.

But, for good or ill, there is at least one genuinely innovative feature of the cryptocurrency ecosystem and in Flash loans, flash attacks, and the future of DeFi Aidan Saggers, Lukas Alemu and Irina Mnohoghitnei of the Bank of England provide an excellent overview of it. They:

analysed the Ethereum blockchain (using Alchemy’s archive node) and gathered every transaction which has utilised the ‘FlashLoan’ smart contract provided by DeFi protocol Aave V1 and V2. The Aave protocol, one of the largest DeFi liquidity providers, popularised flash loans and is often credited with their design. Using this data we were able to gather 60,000 unique transactions from Aave’s flash loan inception through to 2023

Below the fold I discuss their overview and some of the many innovative ways in which flash loans have been used.

Be Careful What You Vote For

One big idea in cryptocurrencies is attempting to achieve decentralization through "governance tokens" whose HODLers can control a Decentralized Autonomous Organization (DAO) by voting upon proposed actions. Of course, this makes it blindingly obvious that the "governance tokens" are securities and thus regulated by the SEC. But even apart from that problem recent events, culminating in "little local difficulties" for Tornado Cash, demonstrate that there are several others.

Below the fold I look at these problems.

Fractional Reserve Crypto-Banking

Source

Michael Lewis is writing an eagerly awaited book on Sam Bankman-Fried and the collapse of FTX, and on his podcast series he has been interviewing sources he used in his research. The latest one is an entertaining interview with Molly White. The best part is their discussion of how the story justifying cryptocurrencies keeps changing.

Nakamoto's goal for Bitcoin was:

What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.

Below the fold I examine how this earliest cryptocurrency story changed.

Lies, Damned Lies, & A16Z's Statistics

This post is a quick shout-out to two excellent pieces documenting the corruption of the venture capital industry:

• Molly White's Narrative over numbers: Andreessen Horowitz's State of Crypto report
• Matt Levine's Crypto Had Its Bank Runs Too

Below the fold I comment on both.

Flooding The Zone With Shit

Tom Cowap
CC-BY-SA 4.0

Much of the discussion occupying the Web recently has been triggered by the advent of Large Language Models (LLMs). Much of that has been hypeing the vast improvements in human productivity they promise, and glossing over the resulting unemployment among the chattering and coding classes. But the smaller negative coverage, while acknowledging the job losses, has concentrated on the risk of "The Singularity", the idea that these AIs will go HAL 9000 on us, and render humanity obsolete^[0].

My immediate reaction to the news of ChatGPT was to tell friends "at last, we have solved the Fermi Paradox"^[1]. It wasn't that I feared being told "This mission is too important for me to allow you to jeopardize it", but rather that I assumed that civilizations across the galaxy evolved to be able to implement ChatGPT-like systems, which proceeded to irretrievably pollute their information environment, preventing any further progress.

Below the fold I explain why my on-line experience, starting from Usenet in the early 80s, leads me to believe that humanity's existential threat from these AIs comes from Steve Bannon and his ilk flooding the zone with shit^[2].

The Cryptocurrency Use Case

Paul Le Roux
By Farantgh - Own work

A frequently-asked question about cryptocurrencies is "do they have an actual use case apart from speculation?" Jemima Kelly's Using crypto for crime is not a bug — it’s an industry feature starts:

One of the (many) times I have been heckled during a panel on crypto was when I argued that it shouldn’t be thought of as money. The only reason to use it other than for speculation, I said, was to buy drugs on the internet. This was a preposterous idea, the heckler retorted; crypto is used for so much more than that.

and ends:

So in a funny way, my heckler was right: crypto isn’t just used for speculating on and buying drugs on the internet: it’s used for much murkier criminal activities, too.

Below the fold I discuss the details of the "murkier criminal activities".

Crypto: My Part In Its Downfall

I was asked to talk about cryptocurrencies to the 49^th Asilomar Microcomputer Workshop. I decided that my talk would take the form of a chronology, so I based the title on a book by the late, great comic Spike Milligan. It became Crypto: My Part In Its Downfall¹.

Below the fold is the text, with links to the sources.

Red Team Blues

Since I started my career as a Cassandra of Cryptocurrencies I haven't had much time to read novels; I have too much fun reading about the unfolding disasters. But I did enjoy Cory Doctorow's Little Brother and Homeland, so when he asked me to review Red Team Blues I sat down and read it.

The first thing to catch my eye was the dedication to the late, great Dan Kaminsky, a fellow attendee of the Asilomar Microcomputer Workshop and someone I admired.

It is an engrossing read. The action moves swiftly, the plot requires little suspension of disbelief and has plenty of twists to keep you thinking. The interesting parts are the details about how people and their money can be tracked, and how people with a lot can prevent it being tracked. Doctorow gets to cover many of his favorite themes in a fast-moving story about a character approaching retirement. I'm well past that stage, but I understand some of those issues.

The story ends happily because all the bodies that pile up are bad guys. This is necessary since this is apparently the first in a series. I'll definitely read the next one.

You don't need to understand blockchains and cryptocurrencies to enjoy the story, but I do so, below the fold, I can't resist picking some nits with the technical details.

Compute In Storage

Tobias Mann's Los Alamos Taps Seagate To Put Compute On Spinning Rust describes progress in the concept of computational storage. I first discussed this in my 2010 JCDL keynote, based on 2009's FAWN, the Fast Array of Wimpy Nodes by David Anderson et al from Carnegie-Mellon. Their work started from the observation that moving data from storage to memory for processing by a CPU takes time and energy, and the faster you do it the more energy it takes. So the less of it you do, the better. Below the fold I start from FAWN and end up with the work under way at Los Alamos.

How Bubbles Are Blown

Last October I wrote Non-Fungible Token Bubble Lasted 10 Months. The NFT market is still dead, a fossil relic of a massive wave of typical cryptocurrency pump-and-dump schemes and wash trading. But the great thing is that this all happened on a public blockchain, so data palaeontologists have an unrivalled dataset with which to unearth the inner workings of a speculative bubble.

Bryce Elder's What NFT mania can tell us about market bubbles points us to NFT Bubbles in which Andrea Barbon and Angelo Ranaldo do just that. Their abstract states:

Our study reveals that agent-level variables, such as investor sophistication, heterogeneity, and wash trading, in addition to aggregate variables, such as volatility, price acceleration, and turnover, significantly predict bubble formation and price crashes. We find that sophisticated investors consistently outperform others and exhibit characteristics consistent with superior information and skills, supporting the narrative surrounding asset pricing bubbles.

Below the fold I discuss the details.

Two Great Reads

This post is to flag two great posts by authors always worth reading, both related to the sad state of the venture capital industry upon which I have pontificated several times:

• Molly White's The venture capitalist's dilemma.
• Fais Khan's Zero Knowledge Influencer: Are ZKPs Worth the Hype?.

Each will reward your time. Below the fold I comment on both of them.

More Cryptocurrency Gaslighting

Ignacio de Gregorio is a "crypto expert" with 8.5K followers on Medium and he's worried. In The one word that can kill Crypto is back he discusses the New York Attorney General's suit agains KuCoin and, once again, demonstrates how gaslighting is central to the arguments supporting cryptocurrencies. Below the fold I point out the flaws in his argument.

C720 Linux Update

The three Acer C720 Chromebooks I wrote about in:

• 2014's A Note of Thanks,
• 2017's Travels with a Chromebook,
• and 2021's Chromebook Linux Update

are all still running Linux just fine despite the one I'm typing on being more than 8 years old. Below the fold I have some good news and some no-so-good news.

I was becoming a little concerned by the fact that the 5.0-series kernel I was stuck with was getting long in the tooth. So as an experiment I wiped C720 #3 and:

• Installed Mint 21.1 from scratch with LVM and full-disk encryption.
• Installed Mint 21.1 from scratch without full-disk encryption and with encrypted home directory, and updated to the current 5.15.0-67 kernel.

Below the fold, my notes on these experiments.

On Trusting Trustlessness

Nearly five years ago some bad guys used "administrative backdoors" in a "smart contract" to steal $23.5M from Bancor. In response I wrote DINO and IINO pointing out a fundamental problem with "smart contracts" built on blockchains. The technology was sold as "trustless":

A major misconception about blockchains is that they provide a basis of trust. A better perspective is that blockchains eliminate the need for trust.

But the "smart contracts" could either be:

• immutable, implying that you are trusting the developers to write perfect code, which frequently turns out to be a mistake,
• or upgradable, implying that you are trusting those with the keys to the contract, which frequently turns out to be a mistake.

The "smart contract" either is or is not mutable after deployment, there is no third possibility. Both cases require trust.

Now, in response to some good guys using an "unknown vulnerability" in a smart contract to recover $140M in coins looted in the Wormhole exploit, Molly White wrote The Oasis "counter-hack" and the centralization of defi on the same topic. Below the fold, I comment on her much better, much more detailed discussion of the implications of "smart contracts" that can be upgraded arbitrarily changed by their owners.

The Center For Gaslighting About Blockchains

Source

On March 10^th 2022, as Bitcoin recorded a 43% loss from its peak the previous November, and 8 weeks before Terra/Luna crashed, driving the loss to 76%, Princeton launched the Center for the Decentralization of Power Through Blockchain Technology.

A year later I am laughing as I read Francesca Maglione’s Princeton Says Crypto Chaos Helps Justify Its Blockchain Center describing their desperate attempts to spin this as a good move. Below the fold I pour scorn on this outbreak of "blockchain is the answer, now what was the question?".

Sybil Defense

Source

Calling a system "decentralized" because its architecture looks decentralized causes two serious problems:

• It ignores the fact that decentralization isn't binary, it is a spectrum. Systems claiming decentralization can be characterized by their "Nakamoto coefficient":
  

  The number of entities sufficient to disrupt a blockchain is relatively low: four for Bitcoin, two for Ethereum, and less than a dozen for most PoS networks.

  This number varies through time, but for both is almost always between two and five, which is not very "decentralized". Given that the "entities" in question are known to coordinate their behavior off-chain, this number doesn't tell you anything useful about the system.
• What calling a system "decentralized" even though it actually isn't does usefully do is to inhibit regulation. It creates the false impression that responsibility for the state and actions of the system is so diffuse that regulators lack a viable traget.

Because a system's Nakamoto coefficient is variable, somewhat difficult to measure and likely to be an over-estimate, the claim that a system is "decentralized" is always subjective.

There is a much more useful, completely objective criterion. Participation in a system either is, or is not subject to permission from some authority, and this can be confirmed by the experiment of trying to participate without asking permission.

Permissionless systems can claim some advantages, but they suffer from some serious disadvantages. Chief among them is the need to defend against "Sybil attacks". Below the fold I discuss Sybil attacks, the defense against them, and the implications for the systems that adopt this defense.

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.