Suckers of Information Asymmetry. Bitcoin Tech Talk #281
Bitcoin is pretty mainstream these days. From Canadian truckers to corporations, the use cases of Bitcoin are being proven to the market in real-time. Many are finally seeing the unconfiscatability, the store of value, and fast digital transacting nature of Bitcoin. It wasn’t always this way.
For years, Bitcoin enthusiasts were seen as the weird people, the misfits, the crazies. It’s only as the rest of the market catches up to the reality of Bitcoin that such characterizations are being reformed. The early adopters had information that the rest of the market wasn’t aware of. This is called information asymmetry. Early adopters did the work of finding out the value of Bitcoin while the broader market remained ignorant and the early adopters have been rewarded as a result. Of course, information asymmetry doesn't just go in one direction. It's currently being used against us and that’s what today's column is about.
Information asymmetry exists because there is too much information. Sifting through all of it is very difficult and unless we want to spend all of our time learning all sorts of subjects in depth, we have to trust others to summarize volumes of information. This is unfortunately where the information asymmetry is to our disadvantage. Information can be presented in a way as to get us to feel and act in a way that the summarizer wants.
News used to be financed by consumers of these summaries. Newspapers used to charge readers in exchange for more or less objective information. The customer and newspaper had a monetary relationship and bad service to the customer meant that the newspaper would lose revenue. This changed, however, starting with network television. The business model changed from that of direct consumer sales to one based completely on advertising. This meant that there was no direct relationship between the news provider and the news consumer. The advertiser became an important intermediary who started influencing the programming. This has only gotten worse with the internet where ad views and click-throughs are the metrics that pay.
As a result, news aggregators have been taking advantage of the information asymmetry. They present the news in such a way as to satisfy an agenda. The value of the news organization nowadays is largely in its ability to manipulate their audience. In other words, the audience is their product.
News organizations are by no means the only ones to have this business model. Google, Facebook, Twitter and a lot of “free” services on the internet use the information asymmetry to sell their audience to the highest bidder. The information asymmetry is a bit different in this case, though. They know much more, not about the topic in question, but about their audience. They know about their search habits, friends, location, political leanings and buying habits among other things. They use this information asymmetry to manipulate their users in subtle ways for their profit.
By using these services, our minds are under constant assault. It can influence what we buy, how we think, who we vote for, what we invest in and much more. Our self-sovereignty is under attack through the psyops of these giant, well-funded corporations. Too many people trust and not enough people verify.
So what can we do about this? How can we defend ourselves against these assaults on our perceptions of the world?
First and foremost, we have to recognize our congitive attack surface. We are vulnerable where we want to believe something. People that hate politician X relish bad news about X, so will have a tendency to believe such news. Being honest with our biases is the first step to being free from these attacks.
Second, we have to be much more careful about where we consume content. Content from free services inevitably will be to manipulate us for their profit. Free is the wrong price to pay as that will generally mean that we're the product. That means we should make information sifting a real service that we pay for instead of relying on ads.
Third, we need to take privacy very seriously. The more these companies know about us, the easier it is for them to manipulate us. Privacy is our main defense against being manipulated.
Finally, we need to be willing to do our own research. It's easy to be opinionated about something. It's very hard to be informed. Sadly, too many people mistake the former for the latter. This means not just evaluating primary sources, but also to avoid conclusions drawn by others until you've had a chance to look at the data yourself. Opinions need to be the last thing we make.
We are unfortunately on the short end of the information asymmetry. The elites have used this advantage to great effect, particularly in democracies. We can and should fight back.
Gleb Naumenko and Antoine Riard have written a paper on CoinPool. The idea is similar to OP_TLUV and OP_EVICT from last week’s newsletter, but uses 2 new SIGHASH values (SIGHASH_ANYPREVOUT and SIGHASH_GROUP) along with a new op code OP_MERKLESUB. The main idea is very similar to OP_TLUV in the sense that a UTXO has a TapScript Tree with various balances. OP_MERKLESUB checks that the new output is essentially the same tree minus the user’s balance. The SIGHASH_GROUP lets the output be at any index. The idea feels very similar to both the other proposals and there will be a lot of minutiae which will be argued about as these proposals battle to become the next soft fork.
The Bitcoin Manual has a nice overview of Stealth Addresses. These are addresses that usually require some form of Diffie-Hellman exchange and have great privacy properties. As the article points out, there are unfortunately also some significant downsides as recovering your coins is not as simple as re-entering your seed words. There are also regulatory concerns, though for me, that’s a large part of the value proposition.
BitcoinPy is a nice resource for Python developers to learn Bitcoin using a couple of different Python Bitcoin libraries. Full disclosure, I’m a contributor to buidl, which is part of the resources of their website. You can create all sorts of different addresses and transactions using the tutorials on there. It’s a good source for learning for those that want to make their own applications.
Paul Alcorn details Intel’s first generation ASIC chips. These are pretty impressive from a spec perspective, though it’s hard to know what the yield on these is. At least for a first generation chip, they seem to have done very well and their second generation will have a lot of customers, including Jack Dorsey’s Block, Argo and GRIID. The will need a lot better engineering to get to the levels that Bitmain and MicroBT have, as their first generation chips get only about 40% of the hash rate at the same amount of power. Given that AMD has surpassed them in market cap, the entry into the Bitcoin mining space looks like a way to compete.
Voltage has an article on how to get inbound liquidity. Inbound liquidity tends to be the main thing preventing useful routing for nodes, and locking up that liquidity has a real opportunity cost for the other party, so this is a tricky issue. The post goes through some common ways in which nodes get inbound liquidity including the most capitalistic one of simply buying it. I personally think that’s going to be the most useful way in which Lightning can develop since that’s a lot more scalable.
Breez Tech argues that Lightning is a liquidity network. As the article explains, lack of liquidity is what makes for a bad user experience in the form of failed payments. The optimization of network liquidity depends on each node doing local optimizations, which requires each node to care more about the fees being generated. Tools are still lacking in this area and being able to visualize how much traffic each payment channel gets over time is something sorely needed. The article concludes that until each node optimizes on routing fees and gets lots of traffic, the liquidity is not allocated properly. In other words, we need more people that care about making money on Lightning.
Kollider explains how we already have synthetic USD on the Lightning Network. The main way to do this is by using a financial derivative called an inverse perpetual swap. The details are a bit math-y, but essentially, you can hedge your Bitcoin by buying the swap and selling it later when you want to get out of the USD position. In a sense, this is a bit of a cheat since there’s a counterparty to consider, but it’s not different than any other USD stablecoin since there’s some central party that you need to trust anyway. More promising is something like Tether on LN which will be a lot easier for normal people to understand.
Economics, Engineering, Etc.
There’s a bipartisan effort to oversee El Salvador’s use of Bitcoin. These senators essentially want the state department to keep tabs on El Salvador’s use of Bitcoin, particularly with respect to the role of USD as the world’s reserve currency. Whether this is the first step toward sanctioning El Salvador or an innocent inquiry into the usefulness of Bitcoin is anyone’s guess. Let’s just say that I think it’s probably the former.
Laura Shin has published a preview of her new book where she claims to have found the DAO “hacker.” For those that don’t remember or weren’t around at the time, the DAO was a smart contract on ETH that had about 1/6 of all ETH at the time in it. The contract was a complete mess and someone found some loopholes in the smart contract and drained it of its money in 2016. Vitalik famously rolled back those transactions discarding the “code is law” principle which he had been championing and ETC was born as a result. This seems like a genuine addition to this event. The article hand waves over some crucial details like how Chainalysis undid a Wasabi coinjoin, but is worth reading just for the history. I’ve said it many times, Ethereum and all altcoins are really centralized and there is nothing that proves this as much as this incident.
Shinobi goes through how Bitcoin is empowering Ukrainian Refugees. As many people are leaving the country for obvious reasons, there’s a lot of demand for liquid assets. For example, Tether was trading at $1.10 in the Ukraine. People leaving the country really want digital forms of USD and are willing to pay a significant premium for it. Perhaps Bitcoin really can relieve some of the serious suffering from war through empowering individuals.
Jaran Mellerud has an interesting profile of Bitcoin mining in Georgia (the country, not the US state). Apparently, 9-15% of all electricity generated in Georgia goes toward Bitcoin mining, and what used to be an electricity exporter has since become an electricity importer. Given that their main electricity generation is hydroelectric, the power profile is pretty ideal for Bitcoin mining.
Turns out MimbleWimble coins have a DoS vector.
A lot of BTC is being donated to the Ukrainian government.
Single people, be careful out there.
Another week, another useless blockchain project shows just how useless it’s been.
Another week, another scammer finally gets his due.
I’ll also be doing the Programming Blockchain seminars in London Tuesday and Wednesday March 1-2 and Miami April 4-5.
On this week’s Bitcoin Fixes This, I talked to Texas Slim about the Food Industrial Complex. Learn about all the middlemen in between the farm and your table.
I read through last week’s newsletter which you can find here.
Here is the latest book which is out now!
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.