Bitcoin is Toxic to Fiat Mentality. Bitcoin Tech Talk #259

Rent-seeking is a common feature of any fiat economy. This is because there’s a large pot of money to be gained through Cantillon effects, and that means a lot of economic activity is not subject to normal market forces, like the need to satisfy customers. Like a malignant cancer, rent-seeking tends to spread through the economy, usually through government regulation, where many unnecessary positions, created to satisfy some bureaucrat, end up adding cost. Such positions tend to be perceived as relatively easy, as the hard work of creating something the market wants is avoided.

I say perceived, because rent-seeking positions are what a lot of people aspire to. In a sense, rent-seeking jobs are easy because they optimize the work to salary ratio. The much more underrated dynamic at play is that such work tends to feel meaningless and many people in such positions have a profound sense of despair. The reason is obvious. Work that doesn’t contribute anything to anyone may pay well, but provides little in the way of self actualization or life satisfaction.

What’s more, rent-seeking is difficult because it ties the rent-seeker very tightly to their employer. Employers are benefiting from the Cantillon Effect, whether as a company, government entity or another person. In a sense, rent-seekers have someone to satisfy, but unlike in a free market where there’s a clear good or service to provide, rent-seeking is much more ambiguous and difficult to discern. This generally means that the opinions of rent-seekers are going to be very much aligned with the employer to minimize the chances of losing the lucrative job.

This is obvious in any large company as the employees tend to hold the same general opinions as the company does. This is profoundly restrictive to the possible thoughts an employee can have. As they have to be team players, rent-seekers cannot deviate from the Overton window of allowable opinion. Any deviation is considered toxic and given how easy it is to fill rent-seeking positions, even small deviations do not have to be tolerated.

I write this because this mentality is causing some angst in the cryptocurrency space. Bitcoin Maximalists are being accused of being toxic because so many people have this fiat mentality. Altcoiners are not used to this level of conflict, or being called out. They have been in a fiat bubble so long that being told they’re wrong is downright offensive.

People with a fiat mentality are not used to being told they’re wrong by non-superiors. If they are criticized at all, it’s done passive-aggressively (aka “nicely”) by someone that manages them. With rent-seeking positions, any deviation from the correct opinion is fixed this way. Rent-seekers are not used to getting criticized, especially directly, by people they perceive as their equals or beneath them. And indeed the directness is what so many people find offensive.

Maximalists are portrayed as toxic, as if they have a critical character flaw. What’s ignored is that “toxic maximalists” criticize from a well-reasoned rational basis. It really doesn’t matter how gentle someone is on Twitter, they will be called toxic by altcoiners that’s a convenient way to dismiss the argument.

The typical response to Bitcoin Maximalist criticism is something like: Why is some guy living in his mom’s basement telling me I’m wrong about coin X? The fact that so many altcoiners feel the need portray their critics as losers should tell you something about their perception of the world. It is a pure fiat mentality borne of entitlement. Instead of reflecting on whether they might be wrong, they just accuse Bitcoiners of being mean, impolite, and toxic.

The accusation here is that harsh criticism of altcoinery will turn off people from actually investing in Bitcoin. In a democratic fiat world, this would be true. Criticism of bosses is simply not tolerated. In other words, there’s an in-built conformity to rent-seeking. Bitcoin isn’t a company and there’s no boss whose opinion needs massaging. In other words, Bitcoin doesn’t play by fiat rules.

A lot of people find Bitcoiners’ harsh criticism to be distasteful. But then again, isn’t medicine distasteful to a parasite? Maximalism is toxic to fiat mentality and that’s a good thing.

Bitcoin

A new paper does a security analysis of BIP32 wallets. The paper is quite technical and goes through a proof of the various security properties of BIP32 in a formal way. They prove that keys are secure as long as messages are signed only once. That is, the same message should not be signed twice by the same key. There’s also a mitigation for a particular type of attack based on a random oracle. It’s great to see academia start to formally analyze these constructions that Bitcoin has created.

Wasabi has a great blog post on the privacy guarantees of their approach. Dubbed Wasabi 2.0 coinjoin which they call dynadenomination coinjoin, the inputs do not need to be equal. That said, there are only certain denominations that are allowed, to give a larger anonymity set to the coinjoins. The interesting part of this approach is that each user coinjoins with many inputs and many outputs. The approach maximizes the anonymity set by creating a large combinatorial space of possible input amounts and output amounts. It apparently took 2 years of research to come up with this method and there seems to be great promise in anonymization, which shows just how the free market will come up with solutions on its own in lieu of protocol level changes.

Mercury is a bitcoin privacy tool that uses Ruben Somsen’s statechains. Bitcoin Magazine has a nice long writeup. I’ve covered statechains in this newsletter before, but what’s different about this angle is that it’s focused largely on privacy. Statechains work by transferring UTXOs off-chain, but by mixing them up through an anonymity protocol, UTXOs can be swapped with one another giving a layer of privacy. The protocol does require some trust in a third party, but that’s part of the statechains design. I like the many choices we are getting in the anonymity space as any one method may have a flaw, but having so many will allow for robustness.

BitMex has given new grants to Rene Pickhardt and Chris Cloverdale. Congrats to both of them and especially Chris since he took my class back in 2018 and has gone on to be a Bitcoin Core and Lightning contributor.

Lightning

Twitter has started rolling out its lightning tips feature! They are taking advantage of the new Strike API. The feature is available to a subset of iOS users—I still don’t have it on my old iPhone—and should make for some interesting use-cases. Twitter already has multiple monetization options including Ticketed Spaces and Super Followers, both of which are in beta. If Lightning allows for Twitter to get off of its largely ad-driven revenue model, I think it will be a much better service.

LNBits is a way to create interesting Lightning applications. Ben Arc has made a LN version of SatoshiDice! If you aren’t familiar SatoshiDice was an on-chain provably fair gambling app. Since it’s based on Lightning, I would say that this is a way better version given that it doesn’t spam the blockchain. We really should start saying Lightning Network, not blockchain, as it’s a far better fit for the really dumb altcoin ideas that have proliferated in this space.

DarthCoin has compiled a list of things you can do with Lightning. The list reminds me of the early days of Bitcoin when people would compile places where you could spend it. Again, this is far more appropriate for Lightning since it’s faster and is much better suited to small payments. We’re getting to see Lightning give scalability to Bitcoin in real-time.

Economics, Engineering, Etc.

Allen Farrington has a thorough and complete debunking of DeFi in this very well researched article. As he points out DeFi is neither decentralized nor is it finance as currently implemented. The article is long, but very much worth reading in detail, especially for your friends that seem to believe DeFi is some amazing innovation.

Jameson Lopp has launched bitcoinpoliticians.org as a way to keep track of who owns how many Bitcoins in Congress. As he points out, much of Congress, even the ones that are proponents of Bitcoin, don’t actually own very much. It will be interesting to keep track of the general level of Bitcoin investment over time as a way to gauge Bitcoin’s influence.

This Time article shows just how much prices have jumped and how the supply chain is strained as a result of inflation. In particular the cost of international shipping has increased dramatically, suggesting that this is not a problem that’s going away anytime soon. The current narrative in the media is that the price increases are just temporary, but as the article shows, prices for everything, especially labor and supplies, has increased, going downstream to the rest of the economy.

China has banned Bitcoin again. For real this time. I personally see this as very bullish as this will force the Bitcoin owners in China to really test the privacy of Bitcoin transactions. How dedicated will China be in its enforcement? And how much of their economy will get on the black market? Necessity is the mother of invention and while this really sucks for the people of China, I expect better and more interesting tools to be built for Bitcoin as a result.

Wyoming has made natural gas flaring for Bitcoin mining tax-exempt. This makes sense as otherwise the gas flares will add emissions and cost to any oil rig. I expect other states to follow suit.

Quick Hits

Bitcoin.org was hacked earlier this week.

Chainalysis has been running a block explorer as a honeypot.

Here’s why Evergrande is a giant malinvestment.

Yellen and the Treasury are starting to flex its regulatory powers over exchanges.

Gavin is either hoping for schadenfreude or delusional, but either way, this post shows why he’s no longer a maintainer of Core.

Texas is considering a state constitutional amendment to allow payment of taxes in Bitcoin.

Events

I will be in Miami for the Oslo Freedom Forum October 3-6, Texas Blockchain Summit October 8 and in Atlanta for TabConf on November 4-5.

The Programming Blockchain seminar is in Atlanta, GA on November 2-3. This is a 2-day seminar for programmers to learn about Bitcoin. You can apply here. I also have a few scholarships available for those that can’t afford it.

Podcasts, Etc.

On this week’s Bitcoin Fixes This, I talked to Preston Pysh about Evergrande and Jay Gould about Venture Capital.

I read through last week’s newsletter which you can find here. I was on Tone’s show to talk Chainalysis, Evergrande and more.

I talked about the new book with some people at The Bitcoin Standard Conference:

My other books are here.

Unchained Capital is a sponsor of this newsletter. I am an advisor and proud to be a part of a company that’s enhancing security for Bitcoin holders. If you need multisig, collaborative custody or bitcoin native financial services, learn more here.

Fiat delenda est.