How Bitcoin Returns US Manufacturing. Bitcoin Tech Talk Issue #207

The Cantillon Effect, generally speaking is how the first spenders of newly printed money benefit more than the later spenders. The Cantillon Effect is an analysis of how inflation affects an economy. If you’re unfamiliar, here is an excellent primer on the Cantillon effect from back in April.

An underrated aspect of the Cantillon Effect is that there’s much less incentive to manufacture for those close to the money. To see why, let’s walk through the incentives. Under inflation, the early spenders have more purchasing power. Within a country, this is certainly true, but this is much more true internationally.

As Cantillon pointed out, in his day, if a country had more gold mines, they would be able to buy goods from abroad for cheap since they got to spend the money first. The domestic manufacturers wouldn’t be able to compete with them since their costs, particularly labor, would be higher than the manufacturers abroad, so would go out of business. New manufacturers would form where the costs were lowest, which would be farthest away from the Cantillon Effect. In other words, inflation causes the countries closest to the inflation to get lazy and produce less stuff.

Does that sound familiar? It should, because that’s essentially what’s happened to the US since the world has been on the dollar standard, and particularly so since 1971. Manufacturing has moved almost completely abroad as the Cantillon Effects have multiplied with the USD monetary expansion. The arbitrage of labor and goods from another country with the purchasing power of freshly printed dollars have created a new global elite: US citizens. We’ve become a nation that’s rent-seeking off the productivity of the rest of the world, particularly China.

The people that can take advantage of this arbitrage, manufacturing goods in a cheap place and selling in an expensive place, get a tremendous windfall. Many new billionaires have risen in China exactly for this reason.

In other words, the US is never going to return to manufacturing until the “exorbitant privilege” of the USD ends. The only way middle class manufacturing jobs come back is through a fairer money that’s got no Cantillon Effect, yet another reason to adopt Bitcoin.

Bitcoin

Another DIY hardware wallet continues to improve, called Lethe Kit. The kit uses a SparkFun Thing Plus, an e-ink display and a 16-button keypad. The parts cost less than $60, making it one of the cheapest DIY options I’ve seen. That said, the assembly instructions look pretty intense with some soldering and lots of pin connections. I would love to see this thing support PSBT and multisig.

Speaking of multisig, Casa has published how their recovery keys are used to sign multisig transactions. The disclosure about how they sign with their key is an important part of the security considerations under a multisig model. Eventually, I’d love to see them offer a service that will sign whatever PSBT I send them. That way, I could have privacy about how much I have using that public key until the moment I need a signature and also be able to construct more interesting scripts, say with timelocks, where I want some backup.

Knox has an article on Bitcoin custody tradeoffs. This is an excellent review of all the different ways in which things can go wrong. The article has an overview of how security and simplicity are the main tradeoffs. A single-key solution is simple, but not that secure, but a multisig setup is complex but much more secure.

Unchained Capital has an article on collaborative custody. The article is an overview of what they see as becoming important in custody, such as more advanced accounts for businesses, joint ownership models and independent key holders. The article is rich with things I’ve personally not thought much about with respect to the needs people in the market have when it comes to monetary access controls. As institutions are complex, a custody solution that’s flexible will be key to adoption of good security practices.

Lightning

BitFinex is taking their lightning integration to the next level with support for Wumbo channels. Retail users can get up to 2 BTC channels on lightning, which should allow for really fast withdrawals. As more exchanges add support for lightning, this should naturally increase liquidity across exchanges.

Lightning Labs has an informative newsletter that gives all the different updates on Lighting-related things going on. These include various explainers and articles, latest releases of different Lightning-related software and events and current state of the network useful to understand where it’s headed. This is a must-read for any Lightning enthusiast.

Economics, Engineering, Etc.

Tone Vays has an article on why Bitcoin is unique in its decentralization. Too many altcoin projects think that they can claim decentralization by saying so. Tone puts an end to this notion and points out why Bitcoin is decentralized. There’s a lot in this article and it took him a long time to write for that reason. Between users running their own nodes, the variety of mining operations and the different coders that contribute, Bitcoin is decentralized in ways that altcoins are not.

Pierre Rochard has a new initiative to pay for specific work on Bitcoin Core. You can now pledge money to get certain pull requests finished. Note that some Core devs have expressed some concern in the past that this may lead to wrong incentives. This is all well and good, but in a free market, that’s not their call. As Bitcoin is permissionless, they can’t stop this whether for good or ill. I personally like that there will be more focus on specific features, though I’m worried that harder-to-explain or unsexy tasks like improving the test infrastructure won’t get as much funding.

Venezuela is attempting to control Bitcoin mining by decree (really, by fiat!). All Bitcoin mining is now decreed to belong to the state. Given that the government is socialist, this sort of policy is completely consistent with what they’ve been doing. I suspect that the net effect will be that more of the mining will go underground.

A harrowing account of a smart contract rescue operation. The story is of a flawed Ethereum smart contract with almost $10M locked in it and the lengths a whitehat hacker went to rescue those funds from getting it stolen. The whitehat hacker had to not only create a theft transaction, but also do it in a way as to not get front-run by the many bots looking for a way to take the funds themselves. Ultimately, the whitehat hacker had to collaborate with a miner to get the transaction mined. I suspect that these sort of things will become more commonplace and Ethereum smart contracts get even sloppier going forward.

Podcasts

My podcast this week was with Dan Held. We talked about how Dan came from traditional finance and his entry into Bitcoin, marketing and growth hacking, altcoins and the ethics.

I was on Tone’s show twice this week. The first was on ETH gas fees, FinCen data leak and central bank digital currencies. The second was on the BCH fork, whether it’s a good idea to attack it and Microstrategy’s strategy in buying BTC.

Adam Meister published an interview I did at Unconfiscatable back in February. We talked mostly about how a lot of people use their brain to rationalize the beliefs they want to believe instead of seeking the truth.

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Fiat delenda est.