Shadow Banking 2.0

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Prof. Hilary Allen of American University Washington College of Law has a very important 27-page essay entitled DeFi: Shadow Banking 2.0?. In it, she details a whole other set of externalities that, being beyond my limited understanding of banking and finance, I didn't discuss in my EE380 Talk. Prof. Allen summarizes her work:

TL;DR: DeFi is neither decentralized, nor very good finance, so regulators should have no qualms about clamping down on it to protect the stability of our financial system and broader economy.

Her arguments are supported by a less detailed, slightly earlier paper, DeFi risks and the decentralisation illusion by Sirio Aramonte, Wenqian Huang and Andreas Schrimpf of the Bank for International Settlements. Below the fold I comment on both of them.

Talking Their Book

My EE380 talk gained about a quarter-million page views, thanks to @markrussinovich, a shout-out from Prof. Dave Farber, and an enthusiastic review from Cory Doctorow.

Unusually for my blog, the majority of the comments weren't spam, and almost all passed moderation. Here are some hints that will help your comment survive moderation:

• Long blocks of text without paragraph breaks are completely unreadable.
• Long screeds, even with paragraph breaks, will cause readers to stop reading. This isn't fair to the comments that come after yours. Try to make your point in no more than three short paragraphs.
• It helps if you display technical knowledge. One way to do that is to show that you understand how links are made in HTML. Pasting the URL in as text shows you're ether clue impaired, or too lazy to help the reader.
• Just making a link without motivating people to click on it is rude. Quote a snippet, or at least explain why it should be clicked.

Compared to most authors posting criticism of cryptocurrencies I was very lucky. The reason I started the talk by pointing out that I wasn't "talking my book" is that the discourse around cryptocurrencies has become corrupted by HODL-ers "talking their book", and that their response to critics is often toxic.

Below the fold, I look at this problem.

Talk For Bace Cybersecurity Institute

I was invited to present to the Bace Cybersecurity Institute. My talk was slightly condensed and updated from my talk to Stanford's EE380 course, which was an updated version of my talk to the TTI/Vanguard Conference last December. The latest text with links to the sources and much additional material is below the fold.

EE380 Talk

I was asked at short notice to fill in for a speaker in Stanford's EE380 course who had to cancel. Below the fold is a hastily updated version of a talk from last December.

Update 28^th February: the video of this talk is here.

List And Dump Schemes

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In Alternatives To Proof-of-Work I wrote:

The Chia "price" chart suggests that it might have been a "list-and-dump" scheme, in which A16Z and the other VCs incentivized the miners to mine and the exchanges to list the new cryptocurrency so that the VCs could dump their HODL-ings on the muppets seduced by the hype and escape with a profit.

Now, in "You Don't Own Web3": A Coinbase Curse and How VCs Sell Crypto to Retail, Fais Khan takes the idea of "list and dump" and runs with it:

If coins, especially VC-backed coins, consistently underperformed Bitcoin/Ethereum after listing on Coinbase, that says to me that insiders were waiting for a big, dollar-based exchange to list so they could sell - VCs taking profits at the expense of retail. Those insiders include venture capital firms like a16z and, incredibly, Coinbase’s own venture arm, which has a number of investments listed on Coinbase. Other exchanges like Kraken, FTX, and Gemini are also all active in venture, and have listed their own investments.

Below the fold I comment on Khan's excellent analysis.

Another Layer Of Centralization

Moxie Marlinspike tried building "web3" apps and reports on the experience in his must-read My first impressions of web3. The whole post is very perceptive, but the most interesting part reveals yet another way the allegedly decentralized world of cryptocurrencies is centralized.

Below the fold, I explain the details of yet another failure of decentralization.

Blockchain Gaslighting

In Web3/Crypto: Why Bother? Albert Wenger draws an analogy between the PC and "web3" as platforms for innovation:

The late Clayton Christensen characterized this type of innovation as being worse at everything except for one dimension, but where that dimension really winds up mattering a lot (and then over time everything else gets better also as the innovation is widely adopted).

The canonical example here is the personal computer (PC). The first PCs were worse computers than every existing machine. They had less memory, less storage, slower CPUs, less software, couldn’t multitask, etc. But they were better at one dimension: they were cheap. And for those people who didn’t have a computer at all that mattered a great deal.
...
A blockchain is a worse database. It is slower, requires way more storage and compute, doesn’t have customer support, etc. And yet it has one dimension along which it is radically different. No single entity or small group of entities controls it – something people try to convey, albeit poorly, by saying it is “decentralized.”

Below the fold I explain why this is typical blockchain gaslighting.

DMCA To The Rescue!

In NFTs and Web Archiving I pointed out that the blockchain data representing an NFT of an image such as this CryptoPunk is typically a link to a Web URL containing metadata that includes a link to the Web URL of the image. That post was about one of the problems this indirect connection poses, that since both the metadata and the data are just ordinary Web URLs they are subject to "link rot"; they may change or vanish at any time for a wide variety of reasons.

I Confess To Right-Clicker-Mentality discusses another of the problems this indirect connection causes, namely that trying to create "ownership", artificial scarcity, of an image represented by a Web URL is futile. Anyone can create their own copy from the URL. Miscreants are now exploiting en masse the inverse of this. Because art images on the Web are URLs, and thus easy to copy, anyone can make a copy of one and create an NFT for it. No "ownership" of the image needed. Liam Sharp suffered this way:

Sadly I'm going to have to completely shut down my entire @DeviantArt gallery as people keep stealing my art and making NFTs. I can't - and shouldn't have to - report each one and make a case, which is consistently ignored. Sad and frustrating. pic.twitter.com/oNH6yXQtyU

— Liam 'Sharpy' Sharp (@LiamRSharp) December 17, 2021

Yet another externality of cryptocurrencies!

Follow me below the fold for an explanation of how the DMCA was used to fix the problem.

I Confess To Right-Clicker-Mentality

"Worth $532M"

Both Cory Doctorow and Matthew Gault and Jordan Pearson have fun with the latest meme about NFTs, "Right-Clicker-Mentality". (Tip of the hat to Barry Ritholtz)

Gault and Pearson explain the meme:

what is the “right-clicker mentality”? Quite literally, it is referring to one’s ability to right-click on any image they see online to bring up a menu and select the “save” option in order to save a copy of the image to their device. In this term we have a microcosm of the entire philosophical debate surrounding NFTs.

I join in below the fold.

Making Sure "Number Go Up"

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Fake it till you make it is the way Silicon Valley works these days, as exemplified by Theranos, Uber, WeWork and many other role models. It is certainly the case with cryptocurrencies. Would you believe that an NFT of this image was worth $532M? How about nearly $1.1B? Most numbers that are quoted about cryptocurrencies are fake, in the sense that they are manipulated in order to fool the press, and thereby buy time until they become "too big to fail".

The credulous press reports make it look like the cryptocurrency market is much bigger and much more successful that it really is, further inflating the bubble. Below the fold, I provide a set of examples of the techniques that are used to fuel the mania.

A Writer I Admire

Wouldn't it be great to write like Maciej Cegłowski? I've riffed off many of his riveting talks, including What Happens Next Will Amaze You, Haunted By Data, The Website Obesity Crisis and Anatomy of a Moral Panic. Now, in a must-read tweetstorm, Cegłowski takes on "Web3", the emerging name for the mania surrounding blockchains and cryptocurrencies. He starts from this tweet:

We’re starting a new crypto team at @Stripe. I’m hiring engineers and designers to build the future of Web3 payments: https://t.co/A40QPCw3XG. pic.twitter.com/ygYTrA125T

— Guillaume Poncin (@gponcin) October 12, 2021

The replies it garnered are hilarious. Below the fold, some extracts from Cegłowski to persuade you to read his whole thread (Unroll here).

NFTs and Web Archiving

One of the earliest observations of the behavior of the Web at scale was "link rot". There were a lot of 404s, broken links. Research showed that the half-life of Web pages was alarmingly short. Even in 1996 this problem was obvious enough for Brewster Kahle to found the Internet Archive to address it. From the Wikipedia entry for Link Rot:

A 2003 study found that on the Web, about one link out of every 200 broke each week,^[1] suggesting a half-life of 138 weeks. This rate was largely confirmed by a 2016–2017 study of links in Yahoo! Directory (which had stopped updating in 2014 after 21 years of development) that found the half-life of the directory's links to be two years.^[2]

One might have thought that academic journals were a relatively stable part of the Web, but research showed that their references decayed too, just somewhat less rapidly. A 2013 study found a half-life of 9.3 years. See my 2015 post The Evanescent Web.

I expect you have noticed the latest outbreak of blockchain-enabled insanity, Non-Fungible Tokens (NFTs). Someone "paying $69M for a JPEG" or $560K for a New York Times column attracted a lot of attention. Follow me below the fold for the connection between NFTs, "link rot" and Web archiving.