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

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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.