The Gaslit Asset Class

James Grant invited me to address the annual conference of Grant's Interest Rate Observer. This was an intimidating prospect, the previous year's conference featured billionaires Scott Bessent and Bill Ackman. As usual, below the fold is the text of my talk, with the slides, links to the sources, and additional material in footnotes. Yellow background indicates textual slides.

Luke 15:7

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The title of the post refers to the King James Version of the Bible:

I say unto you, that likewise joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons, which need no repentance.

Luke 15:7

In the throes of 2008's Global Financial Crisis Satoshi Nakamoto published Bitcoin: A Peer-to-Peer Electronic Cash System. It inspired a large group of enthusiastic advocates who asserted that Bitcoin would possess the following attributes:

• It would be decentralized.
• It would be trustless.
• It would be censorship resistant.
• It would be securely encrypted.
• Users would be anonymous.
• Users could transact without intermediaries.
• Users could transact cheaply.

In short, it would enable users to escape the clutches of the TradFi (traditional finance) system that had so obviously failed. It has been obvious for many years that it doesn't, and in July there appeared a truly excellent mea culpa from a former advocate, Peter Ryan's Money by Vile Means. Below the fold I comment on it, and a couple of other posts describing how TradFi has obliterated Nakamoto's vision.

The $740B Prize

Forty-two months ago I wrote The $65B Prize citing Divesh Aggarwal et al's 2019 paper Quantum attacks on Bitcoin, and how to protect against them. They noted that:

the elliptic curve signature scheme used by Bitcoin is much more at risk, and could be completely broken by a quantum computer as early as 2027, by the most optimistic estimates.

It is time to re-visit the "optimistic estimates", so follow me below the fold.

The Risks Of HODL-ing

Lamborghini Urus
Alexander Migl, CC BY-SA 4.0

Traditionally, the big risk in HODL-ing cryptocurrencies has been their volatility. Fortunately, now the US government is all-in on cryptocurrencies, this risk is greatly reduced. Progress moon-wards is virtually guaranteed, so it is reasonable to invest a small part of your portfolio into Lamborghinis. HODL-ers can rest easy while the rest of the coins in their wallets appreciate because they are protected by strong cryptography (at least until the advent of a sufficiently powerful quantum computer). But progress moon-wards exacerbates some other risks to HODL-ers, as I explain below the fold.

Who Is Mining Bitcoin?

BTC "price"

It is just over a year since One Heck Of A Halvening, when Tether had pumped the Bitcoin "price" up to $73,094 the month before. Thanks to The Cryptocurrency Industry's Unprecedented Election Spending it was pumped over $100K and is now around $92K. The security of the Bitcoin blockchain depends upon Proof-of-Work, the idea being that it is more expensive to attack than any possible gains. Thus it is important that miners both spend a lot of money to mine coins, and that they can make a return on their investment in doing so. Now it is time to take a look below the fold at how the miners are doing post-Halvening.

Software Supply Chain Attack

Joel Wallenberg interviewed me on 14^th February for his article in the 28^th February edition of Grant's Interest Rate Observer entitled Memo to the bitcoiners. Alas, it is paywalled, but among the many quotes from me Wallenberg used was that blockchain-based systems "are very vulnerable to supply-chain attacks".

Exactly a week after the interview and a week before the article went to press, we got an example, the biggest cryptocurrency heist in history. Below the fold I discuss the details.

Bitcoin's Fee Spikes

I've written several times, for example in Fixed Supply, Variable Demand, about the mechanism that causes the cost of transacting on a blockchain like Bitcoin's to suffer massive spikes at intervals. When no-one wants to transact, fees are low. When everyone does, they are high. Below the fold I look in detail at a typical Bitcoin fee spike.

On Not Being Immutable

Economist 2/1/25

Regulation of cryptocurrencies was an issue in last November's US election. Molly White documented the immense sums the industry devoted to electing a crypto-friendly Congress, and converting Trump's skepticism into enthusiasm. They had two goals, pumping the price and avoiding any regulation that would hamper them ripping off the suckers.

Back in November of 2022 I added an entry to this blog's list of Impossibilities for The Compliance-Innovation Trade-off from the team at ChainArgos. It started:

tl;dr: DeFi cannot be permissionless, allow arbitrary innovation and comply with any meaningful regulations. You can only choose two of those properties. If you accept a limited form of innovation you can have two-and-a-half of them.

Fundamental results in logic and computer science impose a trade-off on any permissionless system’s ability to both permit innovation and achieve compliance with non-trivial regulations. This result depends only on long-settled concepts and the assumption a financial system must provide a logically consistent view of payments and balances to users.

This is a semi-technical treatment, with more formal work proceeding elsewhere.

Two years later, the "more formal work" has finally been published in a peer-reviewed Nature Publishing journal, Scientific Reports, which claims to be the 5^th most cited journal in the world. Jonathan Reiter tells me that, although the publishing process took two years, it did make the result better.

Below the fold I discuss Tradeoffs in automated financial regulation of decentralized finance due to limits on mutable turing machines by Ben Charoenwong, Robert M. Kirby & Jonathan Reiter.

1.5C Here We Come

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John Timmer's With four more years like 2023, carbon emissions will blow past 1.5° limit is based on the United Nations' Environmental Programme's report Emissions Gap Report 2024. The "emissions gap" is:

the difference between where we're heading and where we'd need to be to achieve the goals set out in the Paris Agreement. It makes for some pretty grim reading. Given last year's greenhouse gas emissions, we can afford fewer than four similar years before we would exceed the total emissions compatible with limiting the planet's warming to 1.5° C above pre-industrial conditions.
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The report ascribes this situation to two distinct emissions gaps: between the goals of the Paris Agreement and what countries have pledged to do and between their pledges and the policies they've actually put in place.

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Back in 2021 in my TTI/Vanguard talk I examined one of these gaps, the one between the crypto-bros' energy consumption:

The leading source for estimating Bitcoin's electricity consumption is the Cambridge Bitcoin Energy Consumption Index, whose current central estimate is 117TWh/year.

Adjusting Christian Stoll et al's 2018 estimate of Bitcoin's carbon footprint to the current CBECI estimate gives a range of about 50.4 to 125.7 MtCO2/yr for Bitcoin's opex emissions, or between Portugal and Myanmar.

and their rhetoric:

Cryptocurrencies assume that society is committed to this waste of energy and hardware forever. Their response is frantic greenwashing, such as claiming that because Bitcoin mining allows an obsolete, uncompetitive coal-burning plant near St. Louis to continue burning coal it is somehow good for the environment.

But, they argue, mining can use renewable energy. First, at present it doesn't. For example, Luxxfolio implemented their commitment to 100% renewable energy by buying 15 megawatts of coal-fired power from the Navajo Nation!.

Second, even if it were true that cryptocurrencies ran on renewable power, the idea that it is OK for speculation to waste vast amounts of renewable power assumes that doing so doesn't compete with more socially valuable uses for renewables, or indeed for power in general.

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Note that the current CBECI estimate shows that Bitcoin's energy consumption has increased 43% since 2021, a 12.7%/yr increase.

Follow me below the fold for more details of the frantic greenwashing, not just from the crypto-bros but from the giants of the tech industry that aims to ensure that:

Following existing policies out to the turn of the century would leave us facing over 3° C of warming.

It Was Ten Years Ago Today

Ten years ago today I posted Economies of Scale in Peer-to-Peer Networks . My fundamental insight was:

• The income to a participant in a P2P network of this kind should be linear in their contribution of resources to the network.
• The costs a participant incurs by contributing resources to the network will be less than linear in their resource contribution, because of the economies of scale.
• Thus the proportional profit margin a participant obtains will increase with increasing resource contribution.
• Thus the effects described in Brian Arthur's Increasing Returns and Path Dependence in the Economy will apply, and the network will be dominated by a few, perhaps just one, large participant.

In the name of blatant self-promotion, below the fold I look at how this insight has held up since.

Lie Down WIth Dogs, Get Up WIth Fleas

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It is generally quite difficult to upset the denizens of a wretched hive of scum and villainy by further besmirching their reputation, but recently the Trump family has succeeded.

Below the fold I explain how they did it, and why the denizens of the wretched hive are not happy.

Astroturfing

I seem to be stuck on the theme of cryptocurrency gaslighting with two weeks ago More Cryptocurrency Gaslighting and one week ago Greenwashing. Now I look at cryptocurrency gaslighting in the political arena, where it is termed astroturfing:

it is defined as the process of seeking electoral victory or legislative relief for grievances by helping political actors find and mobilize a sympathetic public, and is designed to create the image of public consensus where there is none. Astroturfing is the use of fake grassroots efforts that primarily focus on influencing public opinion and typically are funded by corporations and political entities to form opinions.

Donald Trump, 2019

Currently, the crypto-bros have poured money into primaries, defeated several incumbents deemed to be insufficiently crypto-friendly, and have accumulated an immense war-chest for November's general election. This pot of gold was enough to turn Trump from crypto-skeptic to telling Maria Bartiromo:

Who knows, maybe we’ll pay off our $35 trillion dollar [national debt], hand them a little crypto check, right? We’ll hand them a little Bitcoin and wipe away our $35 trillion

Below the fold I discuss the gaslighting the cryptosphere is using in their massive attempt to purchase "regulatory clarity", and what the scale of this investment suggests about the profits they expect to garner if it succeeds.

Greenwashing

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You have only to scan Molly White's Web3 is Going Just Great to realize that you will never find a more wretched hive of scum and villainy than the cryptosphere. Everywhere you look you find lies, grift, fraud, and theft. Below the fold I discuss the latest example, in which a coal company marketing itself as "zero-carbon Bitcoin mining" is just the start.

More Cryptocurrency Gaslighting

SEC vs. Consensys

On 30^th June Amy Castor and David Gerard reported that SEC sues Consensys over MetaMask Swaps and Staking:

The SEC is charging Consensys for unauthorized sales of securities through MetaMask Staking and for failure to register as a broker and a dealer while offering crypto trades and staking services through MetaMask Staking and Swaps. The SEC says that Consensys took $250 million in fees as an unregistered broker.

MetaMask is Consensys’ main money maker — a popular browser-based wallet that also lets you stake ETH and buy and sell crypto via decentralized exchanges with “swaps.”

Consensys' defense strategy poses potentially serious problems for the concept of open source, because they are gaslighting about the software that is the basis for the SEC's complaint being open source. Were the court to (a) fall for their gaslighting but (b) agree with the SEC's complaint it could provide a basis for imposing liability on open source developers.

I am afraid that the explanation for why this is so is necessarily rather long but I and others think that it needs to be understood. So stock up with supplies for the journey and follow me below the fold.

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.

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.

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.

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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.

"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.
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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.

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