Tuesday, December 22, 2020

China Does Not Control Bitcoin


The County Election, George Caleb Bingham 1856

Let’s say there is a person who has never experienced or learned how a democratic process works. He could be a North Korean subject, or perhaps a time traveling Feudal era peasant. If we explain to this person what the American government looked like in 2017 -2019, when the Republican party took control of the executive and legislative branch (or 2008–2010 when Democrats took control), he may wrongly conclude that a single party controls the country, and that the American government is autocratic. This conclusion is of course wrong. In a functioning democratic process, a single party can take majority control but the people will vote them out if they don’t like how that party is governing.

This hypothetical person is making an observation regarding the configuration of a democratic government in a single slice of time, and makes the wrong conclusion because he does not understand the political process that created this configuration. A person who only understands tyranny will have a hard time comprehending a political process that is able to remove people in power through fair elections where each citizen has a singular vote.

Similarly, in the cryptocurrency community and in casual observers of Bitcoin, there are people who claim that Bitcoin is controlled by China because much of the current mining appears to be coming from China. While estimates are unreliable due to the anonymous nature of mining, industry insiders and studies places the percentage of mining from China to be at around 65%.

Referencing these estimates, Ripple CEO Brad Garlinghouse stated: “Bitcoin is really controlled by China. There are four miners in China that control over 50 percent of Bitcoin. How do we know that China won’t intervene?”. Garlinghouse is much like the confused North Korean subject who does not understand Democracy. As the CEO of Ripple, he only understands cryptocurrencies which are ruled through singular entities. Therefore, he has a hard time understanding that there is a systematic process in Bitcoin that allows for miners to be removed from power if they are deemed to be unworthy. Since he does not understand this process, he can merely describe the state of affairs in a single slice of time.

This willful ignorance is of course part of Ripple’s strategic effort to appeal to US based regulators. In response to the recent SEC lawsuit against them, Ripple responded by saying that this lawsuit will cede innovations in cryptocurrencies to China since “Bitcoin and Ethereum blockchains are highly susceptible to Chinese control because both are subject to simple majority rule, whereas the XRPL prevents comparable centralization.” The obvious subtext here is that Ripple is winking to the regulators saying: “Hey don’t sue us because we control XRP and if you take it easy on us, we’ll let you control it and not China”.

Although many like Garlinghouse are confused by it, Bitcoin’s systematic process of mining has been made clear from the beginning. Satoshi stated in his white paper that Bitcoin is a consensus mechanism of “one-CPU-one-vote”. Although we now have special machines custom built to perform mining (ASIC’s), the spirit of the statement remains the same. If you are willing to expend resources to mine, you are given votes proportional to the resource you’ve expended. One hash equals one vote.

Since Bitcoin does not know or care who is doing the mining, a singular entity is free to accumulate the majority of the hashrate of the Bitcoin network. But this is not a problem for Bitcoin, the same as how it is not a problem for Democracy if a political party gains majority control. At the inception of the Bitcoin network, Satoshi owned 100% of the hashrate for quite some time. There were also times in the past when a mining pool was verified to have more than 51% of the hashrate. The caveat to this is that if people do not vote out misbehaving or tyrannical entities, then Bitcoin cannot function. Democracy works in the same way through an informed and motivated electorate. Critics of Bitcoin are correct to say that China could in the future forcibly mobilize the miners in their country to 51% attack Bitcoin. But critics would be dead wrong if they believe that proponents of Bitcoin will do nothing in response.

While mining farms already operating outside of China will play a huge role to counter such attacks, individuals can make a difference simply by running ASIC’s from their homes. Right now, you can buy an Antminer S9 for about 30$ and run it with about a microwave’s worth of power consumption. With the current network hashrate of about 130 million TH/s, a single S9 (14 TH/s) buys you roughly 1 vote out of 10 million on the Bitcoin network (consider that a US citizenship buys you 1 vote out of 250 million). Such mining can be done by anyone in the world, and individual can expand their operation to as many ASIC’s as they are willing to spend money on. Furthermore, the availability of capable ASIC miners will increase in the future as newer generations of ASIC’s hit the physical limits of Moore’s law and their advantage against older ASIC’s become diminished.

If one does not have access to facilities or the power required to mine, they can fund friendly miners with Bitcoin. This can be done by either utilizing Bitcoin transaction fees, or by directly sending a transaction to the miner. By simply initiating transactions that would get accepted on the friendly chain (but not the chain of the 51% attacker), Bitcoin users can fund and incentivize friendly miners to counter the 51% attack.

I would also not underestimate the Bitcoin miners in China. Many of them will refuse to comply if China orders them to work against Bitcoin, as the destruction of Bitcoin also means that their livelihood is destroyed. The competitive nature of mining guarantees that miners are mostly people who believe in the long term value of Bitcoin. Profit seeking miners who intend to convert their gains into fiat will generally get pushed out by the believers who are willing to take short term fiat losses. Mustafa Yilham, VP at a large Chinese Bitcoin mining firm, states that “from our experience in China, most large scale miners are very firm believers in Bitcoin”.

In summary, China does not control Bitcoin. They are merely voting participants in the global Bitcoin network, the same as everybody else. The beauty of the Bitcoin network is that it does not discriminate against anyone from participating in the formation of consensus. If you take this aspect away, you end up with XRP, or whatever abomination of a currency that Facebook is creating. Does China have a chance to maliciously control Bitcoin? Yes they certainly do. I think it would be irresponsible to say that China didn’t have a chance. Such predictions can create complacency, much like how incorrect polling numbers can create complacency in the electorate. But I’m certainly not betting on that to happen. And like many others, I will be vigilant and ready to make sure that never happens because that is how Bitcoin truly works.

Monday, December 21, 2020

The Biggest Short : On the Impending Bitcoin Bull Market

As I write this, Bitcoin just ripped through 19,000 $ and hit all time highs. As a holder of Bitcoin, part of me is euphoric, the other part of me is a bit melancholy. If this bull market is going to play out, this would be my third bull/bear cycle in Bitcoin, and this feeling of melancholy is a bit new for me.

Every Bitcoin bull market has a story. During my first in 2013, I was just in amazement that this Bitcoin thing existed at all. I really didn’t know much about it other than that it was this magic internet money. The 2013 cycle was a story about the rise and fall of the Mt. Gox Bitcoin exchange, which I nearly lost money on while trying to arbitrage it. At my second bull market in 2017, the story was the rise of blockchain and distributed software. I felt validated that I was right about the potential of Bitcoin. I was also stupefied by the number of altcoins and Initial coin offerings (ICO’s) that Bitcoin managed to catapult into the stratosphere, some of them which I’ve helped develop.

This incoming bull market feels different, because the story isn’t about Bitcoin, blockchain, or cryptocurrencies at all. The story is not about some niche things that only a bunch of nerds care about, where I could join in and make some money. The story is one that affects everyone in the world, and we are living it as we speak. As Bitcoin rockets upwards, COVID is raging around the world, governments have failed to contain it and destroyed their economies, central banks have unleashed the printing press, institutions are failing, and people are suffering.

There’s a scene in the movie Big Short where the two young traders from Brownfield fund are dancing and celebrating the deal of their lifetime. They just managed to short the CDO’s which will shortly blow up in the bank’s faces in the 2008 financial crisis. The veteran trader who helps them out, played by Brad Pitt, angrily tells them to stop dancing. He tells them this:

“Do you have any idea what you just did? You just bet against the American Economy. Which means, if we’re right, people lose homes, people lose jobs. people lose retirement savings, people lose pensions.”

Like the young traders in the movie, I didn’t really understand or comprehend the gravitas of what I was buying in my first two bull cycles. It was just magic internet money. But now I do, and the story of this bull market makes it clear. If you are buying Bitcoin, you are going short. Most shorts are of no consequence. If you are right, maybe a company goes bankrupt or the price of an financial instrument drops by a few percentage points. But if you are making a “Big Short”, you are betting against a foundational economic reality. If you are right, the pain will be so real and prevalent that it will affect you even though you are theoretically on the other side of the trade.

Buying Bitcoin is a short against the foundation of the world’s economic system. It is simply impossible to be 100% on the other side of this trade because you exist in it. It’d be like trying to short the Titanic while you are on the Titanic. As Bitcoin rises, so will global inequality and social unrest. Currencies will fail and financial systems will crumble. People will lose homes, jobs, savings, pensions, and their lives. At the same time, governments will tighten their financial controls, increase censorship, and violently try to prop up their failing regimes.

Up until about 2017, I used to believe that Bitcoin was mostly only useful in failed countries with hyperinflation like Venezuela, and that people like myself who live in first world countries didn’t really need it. I thought of Bitcoin as a short against these regimes, and these regimes only. However, as I learned more about economics and how central banks worked, I realized that this wasn’t the case. In 2020 much of what I learned in theory is being played out in reality.

There are really two stories to this bull market. The first story is one of historic unemployment borne by the lower class. You can see this clearly in the chart below where the unemployment rate for low wage workers have exploded, while high wage workers are nearly back to previous levels.

This story is also that of people waiting in long lines at the food bank, and of people looting. Of small businesses getting crushed. It’s also a story of people looking for answers to their economic woes in the wrong places. The left seeks out Marxism, and the right seeks out Fascism like it’s the 1920's.

The second story is that of ballooning asset prices, despite the cratering of economic activity caused by a global pandemic. The Federal Reserve has increased its balance sheet by more than 3 trillion dollars by going on a massive buying spree for bonds, corporate debt, and mortgage backed securities. Stock prices is at all time highs relative to GDP and the Dow just hit 30k for the first time ever. The real estate market is booming. Absurd business operations have received millions in federal loans. The beneficiary of all this is of course the upper class, who owns most of such assets. The people that should have the largest safety nets in an economic crisis, are getting the most “aid”, if you can even call it that.

The mainstream media and politicians have described the current situation in the US as a K- Shaped recovery. Austrian economists describe this as the Cantillon effect, a process where those closest to the money spigot gain the most benefit from all the money being printed. Both of these descriptions are very polite ways to describe the systematic pillaging and redistribution of wealth to the upper class. As one Twitter user describes it, “K-shaped recovery” is a phrase assholes use with a straight face instead of “I got mine, suckers.”

The most insidious part of this story is that the average person getting screwed has no idea what is happening to them. They can instinctively feel that they are getting a bad deal, but they don’t know who or what is screwing them over. The right will blame immigrants, china, and liberals. The left will blame racists, rich people, and conservatives. Watching this play out is like playing the popular multiplayer game “Among Us” where you try to identify the imposter (or “sus”) among your space ship crew. You know exactly who the imposter is because you watched him kill your crewmates, but the other surviving crewmates don’t believe you.

Image for post
Fed is very sus

Being right is not enough. Bitcoin can go to a billion dollars and you can still lose. And in this bull market, the stakes have been raised. It’s no longer about insignificant bullshit like Mt. Gox, blockchain technology, or ICO’s that has no relevance to the rest of the world. This bull market is about the ungodly amount of money that has been stolen and injected into the world economy that is trickling its way into Bitcoin. People are finding it impossible to go long on a market that has been rigged by the central banks and the ruling class. Even big name macro investors in traditional finance like Stanley Druckenmiller and Paul Tudor Jones agree with this sentiment on a logical level. For many who have held onto their Bitcoin for a long time, they agree on a moral level.

If you are a Bitcoin holders now, congratulate yourself for being here. But before getting too giddy, we have to remember the story of this bull market. Bitcoin is no longer some niche thing in its own little world. The world of Bitcoin is colliding and merging with the real world as we speak. In this Bitcoin bull market, and in many more cycles to come, the story will be about failed economic systems all over the world meeting its inevitable demise. The pain is coming regardless of whether you hold Bitcoin or not. I’m going to be humble and ready, but I’m not in the mood for much dancing.

Wednesday, March 20, 2019

Bitcoin Is a Cult, Fiat Is a Religion

Frances Coppola, a long time critic of Bitcoin, declared that “Bitcoin is a Cult”, which predictably stirred a lot of shit posting and ruffled feathers. Many Bitcoin’ers were offended by this declaration, resulting in name calling and ad hominem attacks, which ironically proved Coppola’s points. Bitcoin is a cult, and no cultists likes to be pointed out as a cultist. She is not the first to point out this fact, others have said the same thing.

The cult label can be seen as a pejorative but I will attempt to explain here how it is a perfectly reasonable and necessary description of Bitcoin. A cult is just a religion with limited membership status and social acceptance. Musician Frank Zappa cleverly stated that “the only difference between a religion and a cult is the amount of real estate they own”. So if Bitcoin is a cult, fiat money is a religion.

To demonstrate this point, I created the above meme which people really seemed to like. I believe this meme was popular because people are subconsciously aware of the religious nature of money. The fact that American paper money contains the phrase “In God We Trust” in capital letters is a confirmation of their awareness. It is only through faith that a piece of paper turns into some thing of value. In the modern age, it is a faith so firm and unshakable that it makes Jesus look like a second rate deity.

Once ideological faith has taken complete hold of an individual, the individual is no longer aware that he believes. A true believer does not see his ideology as an ideology, and divine facts are just facts. They do not practice religion, they practice the truth. Or as Marx would say of someone who is under the spell of a powerful ideology: “They do not know it. But they are doing it.” (he is talking here about the ideology of capitalism). It is through this ideological lens that people are able to declare Bitcoin as a cult. It is akin to a Catholic declaring Mormonism a cult. Such ignorance can only be achieved when you have been ideologically compromised to accept your own ideology as the plain truth.

Bitcoin cultists also suffer from the same syndrome when they reject the cult status of Bitcoin, while at the same time participating in carnivore dinners, and engaging in emotionally charged social media attacks against heretics.
Readers may be skeptical of the intrinsic connection between money and faith. When we pay our electricity bill or buy some food at the grocery store, we do not feel any special connection to the divine, nor do we feel that we are practicing some religious activity. But yet, the foundations of our economic lives are directed by an object which only exists in the mind. Even though fiat money is just a piece of paper, or digits on a bank’s computer, we devote our daily lives in pursuit of it. We do not know it, but we are doing it. We place an enormous amount of faith in our money, without knowing it.

Philip Goodchild writes in Theology of Money, that “All religion, in essence, direct and distribute time, attention, and devotion. Religions enrich life by establishing patterns for living.” Does money not have the same effect ? Is money not the method in which our modern capitalist society direct and distribute time, attention, and devotion? If this is indeed the purpose of money, than the question of what money should be is inherently a moral, ethical, and political question. The answer to such a question cannot be monopolized by economists masquerading as scientists, for the answer we seek is not scientific in nature. We are not measuring the effects of physical phenomenons or proving a mathematical theorem. We are not mere automatons in a system designed to optimize GDP, employment numbers, and trade surplus.

If we define money as the method in which society direct and distribute time, attention, and devotion, than that means any attempts to redefine money is inherently a political activity rooted in an ideology of how society should be structured. Given how radically opposed Bitcoin is from the prevailing modern fiat system, there is no way for Bitcoin to succeed without true believers. True believers will be at the front lines in a fight against the inquisitors of the fiat system, who will do everything they can to to keep their money printable and censorable. These two properties of the fiat system are the cornerstones of the modern capitalist society. By presenting an alternative, Bitcoin is not only challenging a prevailing ideology, it is challenging the established hierarchy and power structure that has been constructed around it.

Those that believe that this fight is not coming, either misunderstands the above stated fact, or is overestimating what Bitcoin as a technology can achieve. They erroneously believe that “blockchain technology” magically secures itself and can autonomously impose its own will on society without human intervention. As Eric Voskuil writes: “Technology is never the root of system security. Technology is a tool to help people secure what they value. Security requires people to act. A server cannot be secured by a firewall if there is no lock on the door to the server room, and a lock cannot secure the server room without a guard to monitor the door, and a guard cannot secure the door without risk of personal harm. Bitcoin is no different, it is secured by people who place themselves at personal risk (Risk Sharing Principle).”

Casual users and profit seekers driven purely by economic incentives will not place themselves at personal risk to protect Bitcoin. They are weak hands that will scatter at the first sight of trouble. It is only the true believers who will place themselves at personal risk. When propaganda starts to fill the social media channels, true believers will fight back with education. When the law comes knocking on people’s door, true believers will keep their Bitcoin hidden. When the state starts to perform a 51% attack, true believers will deploy hashing power to fight back. And it is the true believers who are tirelessly developing on Bitcoin; trying to make it more secure and easier to use without enforcing a tax on the system or rent seeking for personal profit.

Bitcoin can only succeed as a cult for all money is a religion. It is only when Bitcoin has won that it will shed its cult status. When Bitcoin becomes a religion, as fiat is now, we will no longer be aware that we are believing. One Bitcoin will simply be one Bitcoin, and one dollar will be a memory of an irrelevant and dated ideology.

Thursday, November 29, 2018

The Nigerian Nakamoto Scam

Craig “Faketoshi” Wright and Bitcoin SV is running a variant of the Nigerian scam. Nigerian scams work because “by sending an email that repels all but the most gullible, the scammer gets the most promising marks to self-select, and tilts the true to false positive ratio in his favor.” [Cormac Herley, “Why do Nigerian Scammers Say They are From Nigeria”]. In other words, Nigerian scams work because it is a hyper efficient idiot finder. Only an idiot would engage with such a preposterous claim regarding a Nigerian prince. Most people will just ignore it, and this is good for the scammer because the scammer does not have to waste time engaging people with brains. Imagine if you were a scammer and you sent out a million emails. You don’t want to waste time corresponding with hundreds of people with normal intelligence, you want to find the stupidest of the bunch.
Craig Wright is basically a Nigerian prince (or as per the title of this article, a Nigerian Nakamoto). Only an idiot will actually believe that someone like Craig is Satoshi. He is in fact the exact opposite of Satoshi. A patent trolling, plagiarizer who uses 4chan insults and technobabble.

So called creator of Bitcoin rallying against soy boy committees

It would be a mistake however to believe that Faketoshi himself is an idiot, he is not. He is merely playing a character that attracts gullible idiots. Craig was smart to position himself into the Bitcoin Cash crowd because he correctly deduced that they had the right combination of gullibility and liquidity. He saw that they were eating up ridiculous conspiracy theories that revolved around Blockstream. It would not be that hard to convince them that he was Satoshi, especially if he was on their side of the fight against Bitcoin. I suspect that people in leadership position within Bitcoin Cash like Roger Ver were smart enough to know that Craig was a fraud. However, they were morally bankrupt enough and too short sighted to reject him because they thought that he was on their side. I’m surprised that Ver has so far received almost no backlash from the ABC camp from this ordeal. He 100% enabled the SV camp from gaining credibility within Bitcoin Cash. If you are a Bitcoin Cash conspiracy theorist who believe everyone is a Blockstream plant, you have to wonder whether Roger Ver himself isn’t a Blockstream plant.

Roger Ver sharing a drink with SV

Once Craig gained credibility within Bitcoin Cash, the next step was to splinter off the chain into Bitcoin SV. This step is equivalent to the phase where the Nigerian prince gives you a bank account number to wire the money to. With the financial backing of billionaire and online casino mogul Calvin Ayre, Bitcoin SV was created. Before and during the chain split, SV made a lot of noise regarding a hashwar where they threatened to 51% attack the ABC chain. Many people took the bait and believed that there would only be one chain that would remain after the split. However, this was all just a marketing ploy to give legitimacy to SV.

SV would gain nothing and probably lose by engaging in a hashwar against ABC which has the backing of mining giant Bitmain. What SV wanted was for the stupidest people within Bitcoin Cash to self select themselves onto a chain where they have 100% control. The next step is obvious. Once they have total control on the chain containing a bunch of stupid people that are members of the cult of Faketoshi, they are free to do whatever they want. Faketoshi has already hinted that they were going to be stealing burned coins, by changing the code to interpret them as miner rewards. There are also other creative ways to make money, especially if you control both the software development and mining on the chain. Bitmain showed that such a scheme was possible with their implementation of ASICBoost. I would also not be surprised if they decided to implement some inflationary scheme that enriches their own wallets at some point in the future.

I think the mastermind behind this idea can be traced to Calvin Ayre, who made his money running online casinos. He sees the blockchain as a poker table. And there’s two sure fire ways of making money in poker and that is a) to make sure you are the house and b) that you are always playing against terrible poker players. POW mining is like a game of chance after all. Being able to fully control the software development enables you to be the “house” and set the rules of the game. Kicking out Bitmain into their own chain also allows them to be the biggest player on the table. Now the only task remaining is to steadily dump the newly minted SV coins. I suspect that SV will be very good at doing this because the crypto market is mostly just a large unregulated online market for people to gamble their excess money away. Calvin Ayre is an expert in that market, and Faketoshi gave him the best customers.

Saturday, August 25, 2018

Crypto Ideology: The Bitcoin Cash Ideology and the Incoming Schism

Bitcoin cash is facing a schism. Developers on Bitcoin ABC seems to be completely oblivious to this threat, hence they are proposing to hardfork over non critical matters on Nov 15th. It is not clear what the other BCH implementations like Bitcoin Unlimited and the new Craig Wright project Bitcoin SV intends to do on Nov 15th. What is clear is that there is a good deal of hostility (devs being banned from communication channels, Faketoshi posturing), and a high likelihood of Bitcoin Cash splitting into multiple chains. Various vulture chains have started to come out like Bitcoin Cobra and Bitcoin Stash trying to take advantage of the situation.

Bitcoin cash is founded on the ideological tenet that a hard forked minority chain can be a legitimate successor to the original chain. “Bitcoin Cash is Bitcoin” is a Roger Ver invented meme based on this tenet. It should not surprise anyone that disagreements within the Bitcoin Cash community will be settled by the chain splitting into multiple forks, using the tenet as the justification. Allow me to “unroll” this statement:

The core foundation of any large group of people rests on ideology. Nations, religions, and political movements cannot exist without ideology and neither can cryptocurrencies. Stable ideologies allow communities to thrive. A simple example in religion is the Christian tenet that “there is one true god”. This belief strengthens the religion because it weakens membership in competing religions. Communities with unstable ideologies will eventually collapse. Think of the Shakers, a 18th century Christian sect that endorsed celibacy as a core tenet. It should be no surprise that Shakers are now extinct because its members did not have children that could continue the practice of the religion.

The very ideology that justifies the existence of Bitcoin Cash, also justifies the use of chain splits to settle any disagreements within the community. Its easy to see that this ideology, that a hard forked minority chain can be a legitimate successor to the original chain, is completely unstable. Witness below this profoundly confused statement by professional BCash shill David Jerry. He proposes that to solve a chain split, the minority chain capitulates and switches to the winning chain, while not realizing that Bitcoin Cash itself is a minority chain to Bitcoin.

While David Jerry’s solution is sensible in Bitcoin, it is completely incompatible with the Bitcoin Cash ideology. It is thus reasonable to conclude that Bitcoin Cash will face a never ending threat where its community members threatens to split off permanently from the main chain. I predict that within 1 year, there will be multiple competing hard forks that come out Bitcoin Cash. Eventually, the chain will have been split so many times that it will be a forgotten footnote in the history of cryptocurrencies.

Now let us go back to the original debate which created Bitcoin Cash in the first place, the block size debate. Bitcoin Maximalists often say that the block size debate is not about the block size at all. This is true, the block size debate is about retaining a stable ideology. The most important belief that the maximalists wanted to stand by in the block size debate is that backwards compatibility is never broken (or that we never hard fork). This ideology is stable because it guarantees that members who failed to upgrade their software are never dropped from network. This may sound like a rigid requirement for a software project, but Bitcoin is not just a software project. It is a method of coordination for a large group of people who face extremely hostile and powerful adversaries. Understanding this fact, it becomes clear that software upgrades can be a large attack vector and may not be feasible when the adversaries are fully engaged.

Critics are correct in saying that currently, the state level adversaries are not fully engaged and that hard forks are completely possible in practice. What they don’t understand is the nature of ideology. Ideology can only be strengthened through strict adherence to it. A cryptocurrency project will not be able to easily switch to a policy of having no hardforks when the adversaries become suddenly engaged. For a project like Bitcoin Cash, which have already hard forked twice within a year to solve its problems, the users have been conditioned to believe that hardforks are safe. Thus when a malicious state sponsored hard fork comes along, they will be sitting ducks. Bitcoin users, who have been conditioned to believe that all hardforks are unsafe, will be immune when such an attack comes.

A stable and sustainable ideology must be the foundation of all cryptocurrencies. No amount of cryptography, consensus protocol development, and technical optimizations will help a cryptocurrency with an unstable and bankrupt ideology.

Monday, June 4, 2018

Forking for ASIC Resistance: A Monero Case Study

This research has been sponsored by LBRY, a free, open, and community-run digital marketplace.

Designing ASIC resistant proof-of-work blockchains, and particularly hard-forking to achieve such ASIC-resistance is a contentious new issue in the cryptocurrency space. ASIC chips are custom manufactured computing devices designed specifically for a particular blockchain or hashing algorithm. As such, they are far more efficient at mining than commodity hardware such as CPUs or GPUs.

Forking to prevent such resistance, referred to as an AAHF (Anti-ASIC Hard Fork) for the rest of this article, changes the mining algorithm on a blockchain so that ASICs tailored to the old algorithm can no longer mine effectively. AAHF aren’t just theory. Recently Monero executed one and Zcash is pondering whether to do the same. At LBRY, we’ve received requests to hard fork due to the release of a Baikal miner appearing on the market (the miner is likely a FPGA machine, not an ASIC, however).

This article is a case study on the recent Monero AAHF. The Monero hard fork that occurred on April 6th was interesting in that it:

A) Set the Monero dev/community against the much maligned ASIC manufacturer Bitmain
B) Resulted in the chain splintering into various alternative projects that took over the old pre-fork chain (you can read about this here)

The goals of this article is to look at verifiable data instead of speculating about the nature of the fork, and to see what kind of lessons we can learn from it.

Effects on Hashrate

First let’s look at Monero’s hash rate before and after the hard fork. In the below graph, you can see the hashrate for Monero in green. The black line is the hashrate for the the various alt-coin splinter projects that took over Monero’s old chain after the hard fork (from henceforth called Monero Original)*.

*Note that according to GPU miners that I’ve talked to, the pre-fork and post-fork Monero POW algorithm is equivalent in computational difficulty thus the hash rate before and after the fork should be comparable.

Green: Monero hash rate, Black: Monero Original hash rate
Source: Blkdat.com

One possible interpretation of this graph is that the total Bitmain ASIC hashrate is around 500 Megahash/sec. This matches up with the amount that seemed to drop off from Monero post-fork, and also matches up with the amount that remained on the Monero Original chain post-fork. However, we can’t say this with certainty that the above interpretation is correct since it is impossible to associate hashrate to a specific type of miner.

Regardless of what the total hashrate of Bitmain’s ASIC miners is, losing almost 50% of the hashrate post fork should be a concern for Monero. The recent 51% attack of Bitcoin Gold illustrates the very real connection that exists between hash rate and security.

ASIC Capabilities

The primary argument for an AAHF is that ASIC manufacturing results in more mining centralization by pushing out the commodity hardware miners. To verify this claim, we need to look at the capability of these ASIC miners and compare them to commodity hardware. Below are the respective specs for the Bitmain Monero miner and a top of the line AMD GPU miner:
  • Bitmain X3: 220 KH/s, 550 Watts, 0.4KH/s per Watt, Retail value: 1900$
  • AMD HD 7990: 1.1 KH/s, 110 Watts, 0.01 KH/s per Watt, Retail value: 900$
We see that the Bitmain miner is 220 times more powerful than a single top of the line AMD GPU unit. More importantly, it is 40 times more energy efficient at mining. It is clear that commodity GPUs are outclassed by these custom miners, but it’s also important to note that there are a whole lot of GPUs out there in the world. Consider that AMD shipped 19.6 million discrete GPUs in 2017 alone. AMD does not release sale numbers for specific models, but if we assume that all 19.6 million of the GPUs sold were of the cheap 400 series variety, this adds up to 7.84 GH/s (a 400 series runs about 0.4 KH/s on the Monero network). This is 15 times larger than the 0.5 GH/s that we estimated to be the Bitmain ASICs total hashrate and the current Monero hashrate.

The point of this calculation is to show that while AMD/NVIDIA may not produce profitable miners, the total hash rate they produce is immense. ASIC producers like Bitmain may be able to obtain monopolies on profitable mining, but they have not monopolized mining. If Bitmain tries to perform a 51% attack, the Monero community will likely be able to fight it off using commodity GPUs. If we assume that 0.5 GH/s is the correct estimate for the Bitmain ASICs total hash rate, this will require 1.25 million AMD 400 series GPUs. Assuming 150 watts of power consumption per unit and 12 cents per kilowatt-hour we get the energy costs to be 22,500$ per hour. The numbers will obviously be better if we use a higher end GPU.

Aftermath for Users

Software upgrades by nature are attack vectors. Some users will end up downloading a compromised version of the upgrade which may for example send all their coins to a hacker’s address. We can actually get download numbers for Monero 0 and Monero Original. They are two projects that took over the old chain after the Monero fork and released their binaries on GitHub (GitHub tracks download numbers through their API).

About 1000 users total have downloaded either Monero Original or Monero 0 binaries and have presumably used them. I’m not suggesting that these binaries are malware but they are unsigned binaries from anonymous developers. Needless to say, there are significant risks involved in running such software. It is worth considering whether it is worth exposing users to such attack vectors when hard forking.

Other users may not even be aware that the Monero network has hard forked and may be transacting on the old network unaware of what is happening. It is impossible to tell whether the transactions happening on the Monero Original chain are intentional or accidental but the below graph shows that there is still small amount of transactions occurring on the Monero Original chain (note that the Monero Original chain is traded on hitbtc.com so the transactions below could all be intentional).

Green: number of transactions on Monero, Black: number of transactions on Monero Original
Source: Blkdat.com


There are several causes for concern regarding Monero’s AAHF.

The first concern is that the AAHF may have been unnecessary in the first place because the Monero community underestimated the total amount of hash rate that can be produced through commodity hardware. If the community had concerns about Bitmain abusing their powers, they certainly could have fought back without resorting to a hard fork.

The second concern is that the AAHF created attack vectors that could be exploited against its users. The lowered hash rate can be used to 51% attack the chain, and the software update necessary for the hard fork may have left users on the wrong chain or exposed them to malware.

It remains to be seen how these concerns will work out for Monero in the future. So far, things has gone smoothly as the Monero price has been stable and there has been no noticeable network disruption for the user. The market for the most part has deemed this AAHF to be a success. However, this AAHF is likely just the opening battle in a war to determine who gets to control the Monero network. Bitmain, and other ASIC manufacturer, will not be undeterred if there is money to be made. The next time this battle is fought, these concerns are going to be revisited again.

Friday, March 2, 2018

Left/Right Political Ideologies of Hodlers: Part 1

I’ve been thinking a lot about left and right-wing politics, due to the extremely polarized nature of the current American/Western political landscape. Naturally, I started thinking about left and right-wing ideologies in the cryptocurrency space, and how increasingly relevant these ideologies have become in this space. In the early days of Bitcoin, arguments revolved purely around the technology and efficient solutions to tractable engineering problems. If there was any ideological arguments, they were mostly between Hodlers (people that believe in, or can at least see some value in cryptocurrencies) and Nocoiners (people who think that Bitcoin is stupid).

But these days, major conflicts in the crypto space can be described as intractable ideological conflicts. The block size debate is an example of this. The numerous skirmishes between altcoins vs Bitcoin, or altcoins vs altcoins is another example. In this article, I will describe how we can look at these ideological conflicts the same way we look at mainstream political conflicts. More specifically, I will describe how the concept of left-right political spectrum applies to people in the cryptocurrency space, which I will call “hodlers” for a lack of a better term.

Psychologists have done many studies to discover differences in the way conservatives and liberals think. One important finding from these studies is that the amount of fear, or the lack of it, is a critical component of whether a person is left or right-leaning. The presence of fear shifts people to the right side, while the lack of it shifts people to the left side. Studies have shown that conservatives (right-leaning people) are more responsive to physical threats and other negative stimuli, focus more on threatening imagery rather than pleasant imagery , and have a larger amygdala (a region of your brain that processes fear stimuli) than liberals. Academics have coined the phrase “negativity bias” as a way to describe the tendency of right-leaning people to be more fearful and more responsive to negative stimuli. Conversely, you could use the phrase “positivity bias” to describe the tendency of left-leaning people to be less fearful. The opposite of fear is hope so you could say that liberals are more hopeful, and conservatives are more fearful. Here are some further summary readings on the issue: 1 , 2.

The hypothesis that fear and hope are the driving emotions that separates people into the right and left seems to be very fitting if we look at ideological battles in the cryptocurrency space. Below, I present my definition of right-wing hodlers and left-wing hodlers.

The right-wing hodlers are driven by a fear of the worst case scenarios. Worst case scenarios in the crypto space will generally involve adversarial attacks against the blockchain by a nation state. It could also be related to personal loss/theft or unforeseen errors in the code that results in catastrophic consensus failure. Because their main instinct is fear of the worst case, the right-wing hodler’s focus is on security above everything else. For a right-winger, means to achieve security is derived from their strict adherence to cryptographic rules and stable Nash equilibrium solutions. In some sense, you could characterize them as Technocrats, an overly logical bureaucrat that is beholden to technology, instead of the government. A good fictional archetype might be the Vulcan race in Star Trek. Someone like Gregory Maxwell and Peter Todd would be a good example of a right-wing hodler.

The left-wing hodlers are driven by their hope for the best case scenario. The best case scenarios generally involve the destruction of fiat or a large scale adoption of cryptocurrencies in the global market. The scenario also includes personal increase in wealth, narratives regarding egalitarianism (i.e, “banking the unbanked”), and the take down of tyrannical governments. Because their main instinct is hope of the best case scenarios, their focus is on innovation. Innovation for a left-winger involves creating new ways to utilize the blockchain, or inventing some alternative decentralized consensus methods (such as proof of stake). This is not to say that a left-winger does not care about security at all, it just means that they are more willing to make a security trade-off in order to achieve their goals. The left-winger could be characterized as techno-evangelists and culturally they have a lot in common with Silicon Valley start-up entrepreneurs in the mold of Steve Jobs and Mark Zuckerberg. Vitalik Buterin and Roger Ver are good examples of left-wing hodlers.

Here is a rough graph I made that places different cryptocurrencies and ideas in the crypto space on a left-right continuum. For fun, I’ve named the left-wing after the latest Ethereum collectible craze CryptoKitties, and the right-wing after the POW stalwart meme-coin Dogecoin. The center is anchored by everyone’s favorite shining beacon of blockchain information, Andreas Antonopolous. Note that the words in red are ideas that have nebulous associations with their placement, thus their location are inexact (for example “freedom of speech” is historically a left-leaning concept in mainstream politics, but can also be adopted by the right).

The right-wing is anchored by Bitcoin, the original blockchain created by Satoshi Nakamoto. The central tenet since the inception of Bitcoin has been proof of work (POW), and to me it seems like it is still a centrist position despite the fact that I’ve drawn up Bitcoin to be on the far right. Rogue ideas like proof of stake may have pushed POW to the right-hand side by a bit, but since most cryptocurrencies are POW based, I think it’s in an appropriate position.

It’s important to note that when Bitcoin was first created, the concept of left and right-wing was limited in scope to conversation between sophisticated Bitcoin devs who understood that many problems in the blockchain could not be solved without making concessions on security or decentralization. This concept did not exist in the consciousness of the general public. In those days, the general Bitcoin public behaved very much like a classic left-wing archetype. Optimistic slogans like “global digital currency”, “fast peer-to-peer transactions”, “banking the unbanked”, and “low processing fees” are the creation of the left and can be credited with driving Bitcoin’s meteoric rise in the early days (the left-wing is much better at shilling than the right-wing).

The rise of altcoins began the split of the Bitcoin community into separate factions. Litecoin was the first significant altcoin to emerge, and when it first came out it was seen as a radical idea. These days many people mostly dismiss it as a Bitcoin clone (which it literally is in the parlance of git). Ripple then came onto the scene and staked out a very far left position in the continuum, completely abandoning proof of work and laying a dubious claim that a cryptographic distributed consensus system was sufficient for a cryptocurrency.

Currently, the left is anchored by Ethereum whose main difference from Bitcoin is its comparatively functionally rich and Turing-complete scripting language. Although Ethereum has many fundamental similarities with Bitcoin, the biggest one being proof of work, its leftist tendency is made clear by the grandiose plans of its developers and the actions it has taken to resolve difficult situations such as the DAO hack. Their proposed move to proof of stake will certainly move Ethereum even further to the left. If this happens, I suspect that some other cryptocurrency will fill the large gap in the left/right spectrum that it will leave behind.

In summary, the political spectrum in the cryptocurrency space is occupied by the left, who is driven by hope, and the right, who is driven by fear. The left-wing wants to focus on innovation and the right-wing wants to focus on security. Important homework questions you might want to think about are: A) Where would you place yourself in the crypto-political spectrum? B) What political spectrum does a certain cryptocurrency belong to? C) What is the future crypto left/right landscape going to look like?

In a future part 2 of this article, I will expand further on what it exactly means to be a left/right-winger in the cryptocurrency space and go over some examples from the past where this has played out with huge consequences. Further, we can establish some basic theories about how left/right-wing politics will play out in the future that will help us navigate all you hodlers out there to the moon.