Matt Levine Explains Cryptocurrency Markets

Kanav Kariya

Matt Levine's superpower is his ability to describe financial issues in wonderfully simple terms, and in a section of Monday's column entitled Crypto is for fun he is on top form:

In many cases, the essential attribute of a crypto token is liquidity: What you want, often, is a token that trades a lot, because your goal for the token is to trade it a lot. Real-world utility, a sensible business model, acceptance in real transactions, etc., are all less important than just trading if you think of crypto as a toy market for traders to play with. If a token trades a lot at a high price, that in itself justifies the price, because that is all that is asked of a token: It doesn’t need to have a good underlying business or cash flows; it just has to trade a lot at a high price.

Below the fold I discuss the astonishing story behind this explanation of why wash trading is so rife in cryptocurrencies.

Accelerated Computing

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One big problem of the economies of the US and the UK is the cult of the CEO, and the resulting flood of CEO hagiographies that appear after a surge in their company's stock price. These aren't harmless fluff pieces, they contribute to a CEO mindset that is profoundly destructive — see Elon Musk for one example. Will Hutton writes:

But decades of being congratulated and indulged for the relentless pursuit of their own self-interest has turned the heads of too many of our successful rich. They really believe that they are different: that they owe little to the society from which they have sprung and in which they trade, that taxes are for little people. We are lucky to have them, and, if anything, owe them a favour.

Below the fold I continue the "Old man yells at cloud" theme of recent posts by trying to clarify an aspect of the current Jensen Huang hagiography.

More On The Halvening

At the end of May I wrote One Heck Of A Halvening about the aftermath of the halving of Bitcoin's block reward on April 19^th. Six weeks later it is time for a quick update, so follow me below the fold.

Engineering For The Long Term

Content Warning: this post contains blatant self-promotion.

Contributions to engineering fields can only reasonably be assessed in hindsight, by looking at how they survived exposure to the real world over the long term. Four of my contributions to various systems have stood the test of time. Below the fold, I blow my own horn four times.

X Window System At 40

X11R1 on Sun
Techfury90 CC0

I apologize that this post is a little late. On 19^th June the X Window System celebrated its 40th birthday. Wikipedia has a comprehensive history of the system including the e-mail Bob Scheifler sent announcing the first release:

From: rws@mit-bold (Robert W. Scheifler)
To: window@athena
Subject: window system X
Date: 19 June 1984 0907-EDT (Tuesday)

I've spent the last couple weeks writing a window
system for the VS100. I stole a fair amount of code
from W, surrounded it with an asynchronous rather
than a synchronous interface, and called it X. Overall
performance appears to be about twice that of W. The
code seems fairly solid at this point, although there are
still some deficiencies to be fixed up.

We at LCS have stopped using W, and are now
actively building applications on X. Anyone else using
W should seriously consider switching. This is not the
ultimate window system, but I believe it is a good
starting point for experimentation. Right at the moment
there is a CLU (and an Argus) interface to X; a C
interface is in the works. The three existing
applications are a text editor (TED), an Argus I/O
interface, and a primitive window manager. There is
no documentation yet; anyone crazy enough to
volunteer? I may get around to it eventually.

Anyone interested in seeing a demo can drop by
NE43-531, although you may want to call 3-1945
first. Anyone who wants the code can come by with a
tape. Anyone interested in hacking deficiencies, feel
free to get in touch.

Scheifler was right that it was a "good starting point for experimentation", but it wasn't really a usable window system until version 11 was released on 15^th September 1987. I was part of the team that burned the midnight oil at MIT to get that release out, but my involvement started in late 1985.

Below the fold are some reflections on my contributions, some thoughts on the astonishing fact that the code is still widely deployed after 40 years, and some ideas on why it has been so hard to replace.

Blog On Vacation

This blog will be taking a break for a couple of weeks.

Video Game Preservation

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I have written fairly often about the problems of preserving video games, most recently last year in in Video Game History. It was based upon Phil Salvador's Survey of the Video Game Reissue Market in the United States. Salvador's main focus was on classic console games but he noted a specific problem with more recent releases:

The largest major platform shutdown in recent memory is the closure of the digital stores for the Nintendo 3DS and Wii U platforms. Nintendo shut down the 3DS and Wii U eShops on March 27, 2023, resulting in the removal of 2,413 digital titles. Although many of these are likely available on other platforms, Video Games Chronicle estimates that over 1,000 of those games were exclusive to those platforms’ digital stores and are no longer available in any form, including first-party Nintendo titles like Dr. Luigi, Dillon’s Rolling Western, Mario & Donkey Kong: Minis on the Move, and Pokémon Rumble U. The closures also affected around 500 historical games reissued by Nintendo through their Virtual Console storefronts, over 300 of which are believed not available on any other platform or service.

Below the fold I discuss recent developments in this area.

The Great MEV Heist

The Department of Justice indicted two brothers for exploiting mechanisms supporting Ethereum's "Maximal Extractable Value" (MEV). Ashley Berlanger's MIT students stole $25M in seconds by exploiting ETH blockchain bug, DOJ says explains:

Anton, 24, and James Peraire-Bueno, 28, were arrested Tuesday, charged with conspiracy to commit wire fraud, wire fraud, and conspiracy to commit money laundering. Each brother faces "a maximum penalty of 20 years in prison for each count," the DOJ said.

The alleged scheme was launched in December 2022 by the brothers, who studied at MIT, after months of planning, the indictment said. The pair seemingly relied on their "specialized skills" and expertise in crypto trading to fraudulently gain access to "pending private transactions" on the blockchain, then "used that access to alter certain transactions and obtain their victims’ cryptocurrency," the DOJ said

Below the fold I look into the details of the exploit as alleged in the indictment, and what it suggests about the evolution of Ethereum.

One Heck Of A Halvening

The fundamental idea behind Bitcoin is that, if you restrict the supply of something, its price will rise. That is why the system arranges that there will only ever be 21 million Bitcoin by halving the reward paid for mining the next block every 210,000 blocks (about every four years), an event called the "halvening" (or more recently just the halving). It is an article of faith among the crypto-bros that, after the halvening, the price will rise. For example:

In the image below, the vertical blue lines indicate the previous three halvings (2012-11-28, 2016-7-9, and 2020-5-11). Note how the price has jumped significantly after each halving.

Source

The most recent halvening happened on Friday, April 19^th. It was eagerly awaited so, six weeks later, it is time to go below the fold and look at the effects.

Library of Congress: Designing Storage Architectures 2024

I participated virtually in the 2024 Library of Congress Designing Storage Architectures for Digital Collections meeting. As usual, there were a set of very interesting talks. The slides from the presentations are now online so, below the fold, I discuss the talks I found particulary interesting.

"Sufficiently Decentralized"

Mining Pools 5/17/24

In June 2018 William Hinman, the Director of the SEC's Division of Corporate Finance, gave a speech to the Yahoo Finance All Markets Summit: Crypto entitled Digital Asset Transactions: When Howey Met Gary (Plastic) in which he said:

when I look at Bitcoin today, I do not see a central third party whose efforts are a key determining factor in the enterprise. The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception.
...
Over time, there may be other sufficiently decentralized networks and systems

Below the fold, thanks to a tip from Molly White, I look at recent research suggesting that there is in fact a "central third party" coordinating the enterprise of Bitcoin mining.

Pew Research On Link Rot

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When Online Content Disappears by Athena Chapekis, Samuel Bestvater, Emma Remy and Gonzalo Rivero reports results from this research:

we collected a random sample of just under 1 million webpages from the archives of Common Crawl, an internet archive service that periodically collects snapshots of the internet as it exists at different points in time. We sampled pages collected by Common Crawl each year from 2013 through 2023 (approximately 90,000 pages per year) and checked to see if those pages still exist today.

We found that 25% of all the pages we collected from 2013 through 2023 were no longer accessible as of October 2023. This figure is the sum of two different types of broken pages: 16% of pages are individually inaccessible but come from an otherwise functional root-level domain; the other 9% are inaccessible because their entire root domain is no longer functional.

Their results are not surprising, but there are a number of surprising things about their report. Below the fold, I explain.

Fee-Only Bitcoin

Mining a Bitcoin block needs to be costly to ensure that the gains from an attack on the blockchain are less than the cost of mounting it. Miners have two sources of income to defray their costs, the block rewards and the fees for the transactions in the block.

On April 19^th the block reward was halved from 6.25BTC to 3.125BTC. This process is repeated every 210,000 blocks (about every 4 years). It limits the issuance of BTC to 21M because around 2140 the reward will be zero; a halving will make it less than a satoshi.

Long before 2140 the block rewards will have shrunk to become insignificant compared to the fees. Below the fold I look at the significance of the change to a fee-only Bitcoin

Elon Musk: Threat Or Menace? Part 5

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Much of this series has been based on the outstanding reporting of the Washington Post, and the team's Trisha Thadani is back with Lawsuits test Tesla claim that drivers are solely responsible for crashes. My main concern all along has been that Musk's irresponsible hyping of his flawed technology is not just killing his credulous customers, but much more seriously innocent bystanders who had no say in the matter. The article includes video of:

• A driver who believed Autopilot could drive him home despite his being drunk. The car drove the wrong way on the highway and killed another innocent victim of Musk's hype.
• Autopilot rear-ending a merging vehicle and killing another innocent victim, a 15-year-old.
• Autopilot slamming into a broken down vehicle on the highway. When the Tesla driver left the wreck she was hit and killed by another car.
• Autopilot speeding through a T-junction and crashing into a parked truck.

Below the fold I look into Tesla's results, Musk's response, the details revealed by the various lawsuits. and this excellent advice from Elon Musk:

"If somebody doesn’t believe Tesla is going to solve autonomy, I think they should not be an investor in the company."

Elon Musk, 24^th April 2024

The 50th Asilomar Microcomputer Workshop

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Last week I attended the 50^th Asilomar Microcomputer Workshop. For a crew of volunteers to keep a small, invitation-only, off-the-record workshop going for half a century is an amazing achievement. A lot of the credit goes to the late John H. Wharton, who chaired it from 1985 to 2017 with one missing year. He was responsible for the current format, and the eclecticism of the program's topics.

Brian Berg has written a short history of the workshop for the IEEE entitled The Asilomar Microcomputer Workshop: Its Origin Story, and Beyond. It was started by "Three Freds and a Ted" and one of the Freds, Fred Coury has also written about it in here.Six years ago David Laws wrote The Asilomar Microcomputer Workshop and the Billion Dollar Toilet Seat for the Computer History Museum.

I have attended almost all of them since 1987. I have been part of the volunteer crew for many, including this one, and have served on the board of the 501C3 behind the workshop for some years.

This year's program featured a keynote from Yale Patt, and a session from four of his ex-students, Michael Shebanow, Wen-mei Hwu, Onur Mutlu and Wen-Ti Liu. Other talks came from Alvy Ray Smith based on his book A Biography of the Pixel, Mary Lou Jepsen on OpenWater, her attempt to cost-reduce diagnosis and treatment, and Brandon Holland and Jaden Cohen, two high-school students on applying AI to the Prisoner's Dilemma. I interviewed Chris Malachowsky about the history of NVIDIA. And, as always, the RATS (Rich Asilomar Tradition Session) in which almost everyone gives a 10-minute talk lasted past midnight.

The workshop is strictly off-the-record unless the speaker publishes it elsewhere, so I can't discuss the content of the talks.

The Roach Motel Of Banking

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You may have seen a Bitcoin Teller Machine (BTM) and wondered who would use one and and why. I have, there is one in our local Safeway. Elijah Nicholson-Messmer and Ella Ceron look into BTMs in Bitcoin ATMs Flood Black, Latino Areas, Charging Fees up to 22%. The headline sums up the story well, but there is a rather interesting sting in the tail of their article.

Follow me below the fold as I discuss the article and finally get to why the sting in the tail is interesting..

Elon Musk: Threat or Menace Part 4

The previous post in this series, Elon Musk: Threat or Menace Part 3, was based on the impressively detailed reporting from a team at the Washington Post on the crash that killed Jeremy Banner in The final 11 seconds of a fatal Tesla Autopilot crash. The team's subsequent equally detailed Tesla worker killed in fiery crash may be first ‘Full Self-Driving’ fatality triggered this comment which concluded:

It seems the driver thought that it was OK to drive home with a blood alcohol level of 0.26 because he believed Musk's hype that Fake Self Driving would handle it despite having to repeatedly override it on the way out.

Now, the team's Faiz Siddiqui and Trisha Thadani are out with In 2018 crash, Tesla’s Autopilot just followed the lane lines. Below the fold I look into what it reveals about Autopilot.

Decentralized Systems Aren't

Below the fold is the text of a talk I gave to Berkeley's Information Systems Seminar exploring the history of attempts to build decentralized systems and why so many of them end up centralized.

The Little Garden

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Below the fold is the story of how I got a full-time Internet connection at my apartment 32 years ago next month, and the incredible success of my first ISP.

The reason I'm now able to tell this story is that Tom Jennings, the moving spirit behind the ISP has two posts describing the history of The Little Garden, which was the name the ISP had adopted (from a Chinese restaurant in Palo Alto) when I joined it in May 1993. Tom's perspective from the ISP's point of view contrasts with my perspective — that of a fairly early customer enhanced by information via e-mail from John Gilmore and Tim Pozar, who were both involved far earlier than I.

The Left Curve

@tzedonn

Muyao Shen explains the concept of the Left Curve in The Big Winners of This Crypto Bull Market Are the `Left Curves’:

There is a surprising amount of respect for people who appear to know nothing about the industry. They’re known as the “left curves.”

The nickname comes from a popular meme in crypto that shows a bell curve with investors on the left who know nothing, or very little, and those in the fat middle of the curve who know something about crypto. On the right are investors who seemingly know everything.

Below the fold I look at the left side of the curve

More On Pig Butchering

Thankfully, pig butchering scams are getting attention. Three weeks after I posted Tracing The Pig Butchers, John M. Griffin and Kevin Mei posted How Do Crypto Flows Finance Slavery? The Economics of Pig Butchering:

Through blockchain addresses used by ‘‘pig butchering’’ victims, we trace crypto flows and uncover methods commonly used by scammers to obfuscate their activities, including multiple transactions, swapping between cryptocurrencies through DeFi smart contracts, and bridging across blockchains. The perpetrators interact freely with major crypto exchanges, sending over 104,000 small potential inducement payments to build trust with victims. Funds exit the crypto network in large quantities, mostly in Tether, through less transparent but large exchanges—Binance, Huobi, and OKX. These criminal enterprises pay approximately 87 basis points in transaction fees and appear to have recently moved at least $75.3 billion into suspicious exchange deposit accounts, including $15.2 billion from exchanges commonly used by U.S. investors. Our findings highlight how the ‘‘reputable’’ crypto industry provides the common gateways and exit points for massive amounts of criminal capital flows. We hope these findings will help shed light on and ultimately stop these heinous crimes.

Griffin & Wei Fig. 9

Their Figure 9 shows the flow of funds over time into the scammer's wallets at exchanges. This is how they estimated the $75.3B; their extremely conservative estimate is $35.1B, and their liberal estimate is $237.6B. Note the huge ~$45B increase from January 2021 to January 2023, partly driven by the cryptocurrency boom, and the slowing until January 2024. Presumably the ETF pump will accelerate the rate.

Below the fold, some commentary on this and other recent developments.

Petabit Optical Media?

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Sabine Hossenfelder does the good Dr. Pangloss proud in her report on A 3D nanoscale optical disk memory with petabit capacity by Miao Zhao et al. Their abstract claims that:

we increase the capacity of [optical data storage] to the petabit level by extending the planar recording architecture to three dimensions with hundreds of layers, meanwhile breaking the optical diffraction limit barrier of the recorded spots. We develop an optical recording medium based on a photoresist film doped with aggregation-induced emission dye, which can be optically stimulated by femtosecond laser beams. This film is highly transparent and uniform, and the aggregation-induced emission phenomenon provides the storage mechanism. It can also be inhibited by another deactivating beam, resulting in a recording spot with a super-resolution scale. This technology makes it possible to achieve exabit-level storage by stacking nanoscale disks into arrays, which is essential in big data centres with limited space.

Below the fold I discuss this technology.

Microsoft's Archival Storage Research

120

$38.7B

$0.320

693

$26.8B

$0.039

40

$0.65B

$0.016

Six years ago I wrote Archival Media: Not a Good Business and included this table. The argument went as follows:

• The value that can be extracted from data decays rapidly with time.
• Thus companies would rather invest in current than archival data.
• Thus archival media and systems are a niche market.
• Thus archival media and systems lack the manufacturing volume to drive down prices.
• Thus although quasi-immortal media have low opex (running cost), they have high capex (purchase cost).
• Especially now interest rates are non-zero, the high capex makes the net present value of their lifetime cost high.
• Archival media compete with legacy generic media, which have mass-market volumes and have already amortized their R&D, so have low capex but higher opex through their shorter service lives.
• Because they have much higher volumes and thus much more R&D, generic media have much higher Kryder rates, meaning that although they need to be replaced over time, each new unit at approximately equal cost replaces several old units, reducing opex.
• Especially now interest rates are non-zero, the net present value of the lower capex but higher opex is likely very competitive.

Below the fold I look into why, despite this, Microsoft has been pouring money into archival system R&D for about a decade.

Competition-proofing

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Apart from getting started in the midst of one of Silicon Valley's regular downturns, another great thing about the beginnings of Nvidia was that instead of insisting on the "minimum viable product" our VCs, Sutter Hill and Sequoia, gave us the time to develop a real architecture for a family of chips. It enabled us to get an amazing amount of functionality into a half-micron gate array; I/O virtualization, a DMA engine, a graphics processor that rendered curved surfaces directly, not by approximating them with triangles, a sound engine and support for game controllers. As I write, after a three decade-long history of bringing innovations to the market, Nvidia is America's third most valuable company.

I've written several times about how in pursuit of a quicker buck, VCs have largely discarded the slow process of building an IPO-ready company like Nvidia in favor of building one that will be acquired by one of the dominant monopolists. These VCs don't support innovation. Even if their acquisition-bound companies do innovate in their short lives, their innovations are rarely tested in the market after the acuisition.

Below the fold I discuss a new paper that presents a highly detailed look at the mechanisms the dominant companies use to neutralize the threats startups could pose to their dominance.

Clouds Over The Mines

In early December 2022 when I wrote skeptically about the economics of Bitcoin mining in Foolish Lenders the Bitcoin "price" was around $17K. It has now climbed 153% to around $43K and, below the fold, I am still posting skeptically about the economics of mining.

Tracing The Pig Butchers

"Vicky"

Chapter 18 of Zeke Faux's Number Go Up: Inside Crypto's Wild Rise and Staggering Fall is entitled "Pig Butchering". It starts when he receives a supposed wrong-number text from a "Vicky":

I showed my phone to my friend and explained that I was stringing Vicky along because I’d heard about a new kind of investment fraud that often started with a random text message. I had a hunch that this was why “Vicky” was texting me. The scam was called “pig butchering” because the scammers liked to build up the victim’s confidence with a pretend romantic relationship and made-up investment gains before stealing all their money in one fell swoop—like how hogs are fattened up before their slaughter.

This is a romance- and cryptocurrency-enabled version of the "Wee Forest Folk" scam we described in our 2003 SOSP paper.

Below the fold, I look into the details of pig-butchering scams, and how the tracing techniques I discussed in Criming On The Blockchain are being applied to identify the cryptocurrency companies facilitating it.

The Stanford Digital Library Project

The Stanford Digital Library Project stated its goal thus:

The Stanford Integrated Digital Library Project will develop enabling technologies for an integrated “virtual” library to provide an array of new services and uniform access to networked information collections. The Integrated Digital Library will create a shared environment linking everything from personal information collections, to collections of conventional libraries, to large data collections shared by scientists.

Stanford librarians Vicky Reich and Rebecca Wesley provided the "library" input for the research.

Wayback Machine, 11/11/98

In particular Vicky explained citation indices, the concept behind Page Rank, to Larry Page and Sergey Brin. Andy Bechtolsheim was famously instrumental in persuading them to turn their demo of a Page Rank search engine into Google, the company. In his fascinating interview in the Computer History Museum's oral history collection, Andy explains why the idea of ranking pages by their inbound links was so important.

Below the fold I have taken the liberty of transcribing and cleaning up the relevant section of Andy's stream of conciousness, both because it is important history and because it exactly reflects the Andy I was privileged to know in the early days of Sun Microsystems.

Criming On The Blockchain

I apologize for the delay in posting but, as you will see, the post I was working on grew rather long.

It seems obvious that doing crimes and writing the receipts to an immutable public ledger is risky, but many criminals have been convinced that there is no risk because cryptocurrencies such as Bitcoin are anonymous. Although there are cryptocurrencies with anonymous transactions, such as Monero and zCash, they are much more difficult to use and much less liquid than pseudonymous cryptocurrencies like Bitcoin. As many criminals have discovered, without an unrealistically intense focus on operational security (opsec), the identity behind the pseudonym can be revealed. An entire industry has evolved to do these revelations, tracing the flow of coins through their blockchains.

Below the fold I discuss the techniques and results of blockchain tracing, based on four main sources:

• Andy Greenberg's new book entitled Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency.
• Chainalysis' report 2024 Crypto Crime Trends: Illicit Activity Down as Scamming and Stolen Funds Fall, But Ransomware and Darknet Markets See Growth and his ‘Stablecoins’ Enabled $40 Billion in Crypto Crime Since 2022.
• The UN Office for Drugs and Crime (UNODC) report Casinos, Money Laundering, Underground Banking, and Transnational Organized Crime in East and Southeast Asia: A Hidden, Accelerating Threat.
• Recent posts on ChainArgos blog.

A Lesson Learned

You know how backups work great until you really need them? Below the fold, a lesson learned from my recent example of this phenomenon.

Autonomous Vehicles: Trough of Disillusionment

Jeremykemp CC BY-SA 3.0, Link

This is the famous Gartner hype cycle and it certianly appears that autonomous vehicles are currently in the Trough of Disillusionment. Whether they will eventually soar up to the Plateau of Productivity is unknown, but for now it is clear even to practitioners that the hype bubble they have been riding for years has burst.

Below the fold I try to catch up with the flood of reporting on the autonomous vehicle winter triggered by the bursting of the bubble.

Good News For Tether

USDT "market cap"

The good news for Tether is shown in this graph, with two huge surges in "market cap" this year. One of about $15B early in the year, and another of about $6B recently. It looks like the euphoria over the prospect of spot Bitcoin ETFs has solved the Greater Fool Supply-Chain Crisis with the cryptosphere experiencing a massive inflow of around $20B actual dollars. As one might expect from injecting $20B whose only uses are to HODL or to buy cryptocurrency into the market, the result has been a massive bubble in cryptocurrency "prices".

BTC "price"

Bitcoin has gone from about $16K at the start of the year to around $42K recently. Ethereum has merely doubled, from about $1.2K to about $2.4K.

So all is well with the world; Tether gets to keep the interest on another $20B, which at say 4% is an extra $800M/year on their bottom line, and the Bitcoin HODL-ers see their investment gamble return a 160% gain. Is all really well with the world? Follow me below the fold.