The Inevitability of Smaller States. Bitcoin Tech Talk Issue #211

Governments in today’s world are large. Not only are they bloated beyond reason, but they also cover insane amounts of territory. EU, Russia, USA, India and China are not only populous but span a large swath of land. This presents a natural governance problem. It’s hard to have the same exact rules for someone in Athens and Paris, Moscow and Vladivostok, or San Francisco and Fargo. This makes central government inefficient and politicizes way more issues.

The alternative is self-rule, and unsurprisingly, many smaller territories are demanding it. From the UK to South Assetia to Quebec, there’s a desire by smaller territories to be independent from governments that are often out of touch and have little clue as to what the governed people want.

The reason why governments have centralized is largely due to finances. War in the past was to get resources or the taxes from a given territory. Trade is a major reason for large territories that function under a government. Of course, under central-bank-backed fiat money systems that we live under today, trade is very difficult unless there’s a common currency. Having to create a new currency is one of the unspoken barriers to smaller countries.

Near everyone likes more local rule. It’s a lot easier to affect city council than Washington DC, so in a sense, the large government we have is unnatural and undesired. What’s been keeping it afloat is fiat money.

As we continue on a path toward hyperbitcoinization, it’s worth asking, will Bitcoin usher in an era of more local governments? Perhaps city-states? It’s not out of the question, for example, for a US state to secede in the next 10 years. Same for the EU, and perhaps violently, in other parts of the world. A world of city-states with different rules that compete with each other for citizens would be a welcome change from what we have now.

Bitcoin

CommerceBlock has completed a statechain implementation called Mercury and it’s available to play around with on testnet. If you don’t remember, statechains are a layer-2 protocol that uses a semi-trusted third party. Like Lightning, statechains allow transfer that’s not recorded on the blockchain and for that reason is a nice privacy feature. I’d like to see this progress a bit more and integrate with Lightning for even better privacy.

Tor v3 is being supported by Bitcoin Core v0.21. As v2 is being deprecated, this is a necessary upgrade. A lot of node-in-a-box services use Tor as the default, so upgrading now makes sense. Among other things, Tor v3 uses elliptic curve cryptography (ECC) rather than RSA. This should theoretically make Tor more secure.

Aleks Svetski has a thought piece on Bitcoin and Lockdowns. This is a well-thought-out article on human motivation and the adoption curve we can expect for Bitcoin. The main thing I got from the article is that there will come a time when we’ll *have* to have Bitcoin. Much like technologies we take for granted today (internet, cars, air travel), Bitcoin at some point will become ubiquitous.

Lightning

Breez has a new release coming that features Point-of-Sale mode! This is a major UX improvement for merchants, who are about half of all LN transaction parties. The QR code part of the process is still not something most people are used to, but hopefully becomes more familiar over time. I, for one, will be using this at the next conference I’m at to sell my books.

lnd had a couple of disclosures this week. The first was related to HTLC pre-images which could be maliciously obtained. The second is a failure to check on-chain transactions for standardness, which can cause non-relay of transactions even if the fees are high. Both have been corrected with v0.11.

Economics, Engineering, Etc.

Paypal is going to allow purchases of Bitcoin. The move looks like a way to monetize Venmo, which is known to not make Paypal any money. CashApp’s success definitely shows that this is a clear path to monetization. As they’re offering more than BTC, they need a comprehensive custody solution, which is why they’re looking at acquiring BitGo. That said, it’s going to be exposure to the asset only, at least at the beginning and as Trezor says, you really shouldn’t use them to store your Bitcoin.

Filecoin had a bit of drama. To summarize, a lot of Chinese miners spent a lot of money to mine this coin, but they’re mining only a tiny amount. This is because Filecoin is a distributed file system and miners have to prove that they have the data they purport to have and that’s a *lot* of computation. In addition, it looks like they accidentally let some testnet coins become mainnet coins. This is an ICO that raised $200M and was considered one of the safer bets. The fact that it’s messed up this badly only points out just how screwed up the incentives are and how unnecessary a token is. Remember, this is one of the better ICOs and if it’s faring this badly, I can’t imagine how much worse others will fare.

Nigerians are using Bitcoin during their protests. They are protesting police brutality and corruption, but the state retaliated by closing their bank accounts. They’ve since converted their accounts to Bitcoin, which is helping their cause. This is another case of human rights getting a voice because of Bitcoin.

Hodlhodl has a new lending product that works peer-to-peer. Much like other “defi” services, the collateral will be Bitcoin, but the borrower will receive stablecoins. It’s an interesting idea, but like most lending markets in Bitcoin, it’s normally used to leverage to buy more Bitcoin or to delay selling Bitcoin, which amounts to the same thing. I personally wouldn’t do this as it’s a quick path to getting rekt, but for some, this may make for an interesting hedge.

Another week, another company using BTC for their reserves.

Podcasts

I talked on my podcast this week with Ken Liu, SF author and winner of many awards. This is the longest podcast I’ve done to date and we talked about everything from book publishing, culture and communities. He’s an insightful person about all sorts of things and an enjoyable listen.

I went on Tone’s show to discuss Filecoin, CFTC, Paypal and the possibility of a Bitcoin ETF.

Lastly, I did a short interview with Market Banter. I explained Bitcoin’s value proposition and why it’s important.

My books can distract you from this election season.

Fiat delenda est.