Bitcoin vs. Gold! Bitcoin Tech Talk #192
Gold has been around thousands of years. The various properties it has, including durability, recognizability, divisibility and value density due to scarcity make it a very good money. Which is why this particular tweet of mine seems to have triggered a few people:
On its face, this seems like a purposefully trollish statement. After all, gold is physical, Bitcoin is (mostly) not. As Ron Paul and many libertarians have argued in the past, you can hold gold in your hand, you can’t hold Bitcoin. Before the comic book guys castigate me, technically, if you’re holding a hardware wallet or a seed or something else, you’re holding private keys, which is not precisely the same thing. This is what also allows multi-signature and distributed custody arrangements.
The lack of physicality of Bitcoin is a stumbling block for many, especially older people. Bitcoin doesn’t trigger the same circuits in terms of desirability. That said, there’s a sense in which Bitcoin is more real than gold. Specifically, it’s possessability. Physical objects are only possessed in the sense that the owner has exclusive access to the object. This is generally difficult to achieve as theft is always a possibility and thus, people looked for other solutions.
Having a physical form is exactly why people in the past put gold in gold vaults, or as they later were to become known, banks. Once these banks started practicing fractional reserve banking, the ownership of the gold became a little more theoretical and a little less real. This further weakened with Bretton Woods, where even central banks that weren’t the Fed started to recognize that the dollars in their vaults weren’t really gold. In other words, gold’s realness depended on the dollar’s realness and the “realness” of the dollar was permenantly ended in 1971 with the closing of the gold window by Nixon.
Of course, similar things can happen with Bitcoin if custodied with a trusted third party, but the fact that digital object security is less costly than physical object security means that there’s an obvious way in which Bitcoin can be more real and gold more theoretical.
Bitcoin
Antoine Riard has proposed another coin anonymizing solution, CoinPool. The idea is to have multi-party ownership of UTXOs via multisig. Then some state is kept among the multiple parties to keep track of who owns how much. Ultimately, the anonymity set in such a protocol becomes the parties that you are pooled with. This is still in the design stages and it’s quite generic to allow it to be used in different contexts.
Microsoft announced a decentralized identity protocol: ION. The protocol gets its decentralization by anchoring to the Bitcoin blockchain through the use of something called SideTrees. This is an interesting development in public key infrastructures, as that’s been an unsolved problem. The fact that revoking keys is relatively simple, makes this system much easier than something like PGP.
HRF is funding Bitcoin developers! The first grant is to Chris Belcher, a long time Bitcoin developer who’s working on CoinSwap, an anonymizing alternative to CoinJoin. This is probably the only way to get a tax deduction for Bitcoin development donations.
Lightning
An interesting new project has popped up, which is a centralized version of Ethereum (I know, that phrase is redundant) on Lightning: Etleneum. The idea of admitting to its centralized nature while optimizing for interesting smart contract applications is an innovation worth watching. I’ve written before on why smart contracts are not nearly as useful as some think, but this is one project that could potentially change my mind.
Another interesting application of Lightning is bootstrapping a mesh network. This is using something called the Lot49 Protocol, which is a layer on top of Lightning for stuff like goTenna. There’s a great deal of potential for making a new kind of internet that’s a lot more peer-to-peer based instead of the centralized hubs that we have now.
Economics, Engineering, Etc.
Parker Lewis writes an excellent article on Bitcoin’s antifragility. In the article, he talks about how Bitcoin benefits from disorder, randomness, exogenous shocks in some surprising ways. Single points of failure have a tendency to go away over time and centralized control naturally resisted. The economic case for Bitcoin is in its antifragility and why it tends to not correlate with anything else.
Amun has published an article on the problems that BitMex creates for the Bitcoin community. Much of the problem is in their outsized influence over price, as traders can leverage at insane multiples causing a lot more convexity. The article notes that requiring stablecoins for leverage should improve things in the long-term.
Dean Patrick argues that Bitcoin is the currency of the gods. Essentially, Bitcoin lowers time preference so much that it might as well be currency of beings that live forever. This is an interesting idea that civilization is built by those with lower and lower time preference and that a money that induces lower time preference will benefit civilization. We only need look at the looting to know that the opposite, that is, high time preference behavior destroys civilization.
The Ontario Securities Commission has published a report on what happened at Quadriga, the exchange where the CEO apparently died after losing all of its customer funds. The exchange apparently lost a significant amount of funds in 2017 and the CEO tried to make that money back by trading against its own users. Eventually the cash crunch later caused them to collapse. What struck me about this story is how similar this situation is to fractional reserve banking and bank runs before fiat money.
An Ethereum whale has sent two transactions that paid $5.2M worth of ETH in fees. As this was done from the same address, it’s probably the same software that’s creating these very strange transactions. There’s speculation that this is to increase the average fee for some particular types of smart contracts or perhaps even something in DeFi. I suspect that this user is going to try to get that money back.
CoinMetrics is claiming that 40% of all PAX transfers are directly related to a known Ponzi scheme, MMM global. Bitcoin is often accused of being a Ponzi scheme, but as the report shows, real Ponzi schemes are far more interested in cashing out and use the dollar a lot more often.
Podcasts
Last week’s show was on how Bitcoin optimized for security. I did a show with Shaheen, talking about economics, Bitcoin and entrepreneurism. Lastly, I did two shows with Tone Vays, one on why Coinbase is a bad actor, and another on Pentagon war game scenarios involving Bitcoin.
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Fiat delenda est.