Why Altcoins are No Different than Fiat. Bitcoin Tech Talk #261

Vitalik Buterin made the news again, criticizing Bitcoin Maximalists about their support of El Salvador.

The post is obviously a way to rationalize his anger at the El Salvador government for not including Ethereum in their Bitcoin campaign. He specifically uses words like “cryptocurrency” and “crypto space” to make it seem like Ethereum should be considered as similar to Bitcoin. Never mind the fact that Ethereum is insanely centralized, that they change the monetary policy every 6 months and are constantly picking winners and losers on their platform whereas Bitcoin is decentralized.

This post is amazingly self-serving. This is a guy who believes in Keynesian economics, normalized premines and purposefully created a platform that encourages scamming. Now he suddenly cares about legal tender laws? This is about as objective an analysis as taxi drivers complaining about Uber and pretending it’s about public safety and not about their jobs. He doesn’t care at all about El Salvador’s policies and he’s only criticizing them because Ethereum doesn’t have the status that Bitcoin does. But enough about Vitalik’s hypocrisy, that’s not what I’m writing about today.

The real question is why did Vitalik write that post? And why are media outlets covering it?

Vitalik’s post points to a characteristic of altcoin projects. Altcoins have incentives that end up making its owners dependent on its controllers. Owning Ethereum doesn’t just mean an investment, it’s being sucked into the entire ethos of the ecosystem. That ethos is one where premines—money printed for the sake of the insiders—is fine, where raising money from the public without any investor protections is fine, where marketing, not merit, trumps all.

Traders talking up their own book is nothing new. The entire investor class sings the praises of the investments they own. Like Vitalik, investors in stocks will generally be against public policies that hurt their investments and in favor of public policies that benefit their investments. In other words, the investors become a worker for the investment in some way. This is in contrast to what an investment is supposed to be, where the investment works for the investor.

This dynamic is something that’s inherent in fiat monetary systems because the investor class is so large. Fiat money doesn’t store value very well, which means that anyone that wants to store value has to invest. This means that we have a lot more people investing that frankly shouldn’t be. They’re not necessarily talented at capital allocation and are much more susceptible to marketing, rather than fundamentals or merit. As more people are forced to become investors that don’t have the evaluation skills that good capital allocators have, marketing the investment becomes more important than the investment itself.

As a result the investors become not just political partisans on behalf of the investment but also its marketers. It’s not just important to allocate money, but also to get others to allocate money to the same investment. This dynamic is true of stocks, but the dynamic is even more prominent in altcoins.

At least with stocks, there’s a clear business model that can be grasped by any reasonably informed person—fraudulent companies like Enron withstanding. With altcoins, the utility of the coin is in the code, which few people understand and even fewer people verify. Thus, altcoins as opposed to stocks, are much more dependent on trust. This opens up enormous gaps of understanding, making marketing that much more important. In other words, convincing people trumps any fundamentals or merit.

So what are the consequences of an investor class that acts in this way? Such investors essentially trust the centralized controllers of these tokens with their money and recruit others into their scheme through marketing. They don’t understand what the token does other than what they’ve been told by the central controllers. If this sounds familiar, it should, it’s how MLMs and Pyramid Schemes work. In other words, they’re more dependent on the central controllers than even fiat money.

This is why so many people pay close attention to what Vitalik says. He is the Jerome Powell of Ethereum, and how he views things matters because everyone that owns ETH is trusting in him. Actually, he’s more than just Jerome Powell, he’s also Joe Biden, Nancy Pelosi and all 9 justices of the Supreme Court in one. This is in stark contrast to Bitcoin where verifying is the norm and trusting is frowned upon. ETH holders are forced to trust Vitalik more than USD holders are forced to trust Jerome Powell.

Which should lead to the question, how trustworthy are these altcoin central controllers? Given how altcoiners can print their own money, it’s not a surprise that a lot of known scammers, particularly those good at marketing called confidence men, are in this space. Most people are aware of CSW’s sordid history, but comparatively few people remember that Vitalik once tried to start a company based on quantum mining.

Altcoins require a trusted third party and that’s why they’re no different than fiat.


Pieter Wuille has a writeup on how to encode secp256k1 public keys to make them indistinguishable from random bytes. It uses the Elligator Squared algorithm, which is a way to covertly transfer public keys, say in an adversarial environment. His contribution here is to modify Elligator for use with the secp256k1 curve, which allows for this covert public key transfer. This sort of thing may be very useful as governments like China look to restrict Bitcoin even more.

Square explains how they’re approaching self-custody and in particular how they’re going to build multisig into their product. Their approach is not the typical cold-wallet setup, looking to eschew the display and making it multisig by default. They seem to be looking to question every assumption in the Bitcoin self-custody space and I think that will lead to a really interesting and innovative product.

Casa has a QR code signing option using the Keystone hardware wallet. They finally have a way to use the hardware wallet’s air gap capabilities and allowing signing without the need to plug in hardware to potentially compromised computers. Good on them for allowing this option and good to see that Keystone continues to push forward on the hardware wallet development front.


Anthony Towns has a proposal for PTLCs to be used with Lightning. The idea is that HTLCs (hash-timelocked contracts) require a lot of data storage to make sure that your counterparty isn’t cheating. By using PTLCs (point-timelocked contracts), this data storage can be reduced significantly while preserving the trustlessness of payment channels. The proposal is very clever and cleans up lightning implementations considerably. I look forward to seeing what drawbacks there are to this proposal.

Antoine Riard has disclosed a vulnerability on lightning clients involving Dust HTLCs. The basic vulnerability is that one party can define their dust limit to be very large and punish their counterparty by forcing them to pay large fees. This doesn’t necessarily benefit the party that creates this attack, though that’s certainly possible if that party is also a miner, but the ability to punish their channel partner is potentially hazardous. The vulnerability has been patched but it’s interesting to see how subtle things like the dust limit can cause trouble.

Arcane Research has published a report on the state of the Lightning Network. The report shows just how much LN keeps growing and shows general trends, like the fact that it’s gone from mostly a way to pay online to being used more for peer-to-peer payments. The report is thorough and meant for people researching the Lightning Network. I suspect many more companies will be bullish on Lightning after reading this report.

We’re now at over 3000 BTC locked up in public Lightning channels. 2000 BTC was surpassed only a few months ago, so this looks like the early part of some exponential growth. I suspect El Salvador and Plebnet are the main reasons for its growth, and as they continue to grow, Lightning capacity should grow with it.

Economics, Engineering, Etc.

Greg Foss calculates the value of Bitcoin using credit default swaps. His thesis in this intrinsic value calculation is based on insuring against the default of USD. Based on what CDS on US Treasuries trade for, he thinks that Bitcoin market cap based on protection against USD default alone is around $1.33T to $1.9T, which is more than the current market cap of ~$1T. Given that there are a lot more currencies that Bitcoin also hedges against, he comes to the conclusion that Bitcoin is severely undervalued. This is an interesting way to price Bitcoin and I think there’s some merit in it.

Edward Snowden has a must-read long read about how CBDCs are a threat to freedom. The article is thorough and goes into what a CBDC is, the history of money and the role of commercial banks. His conclusion is that CBDCs will be used for all sorts of privacy violations and that the government will have unprecedented control over our lives. As he says, banks aren’t holding gold or even cash anymore. They are essentially an intermediary for money printing through loans. Awesome article, and I’m glad to see that Snowden has such a clear understanding of our current system and what CBDCs will do.

David Morris opines that we can use as much energy as we want. The article is a nice counter to the ESG narrative and though we’ve seen so many such articles in the past few years, this one has a different punch. The argument goes far deeper into the purpose of energy and how it ultimately advances humanity. The article is based on this documentary produced by Swan Bitcoin, which is also worth watching.

Nic Carter explains how investors can make sure energy is “green” in his article on Pigovian economics. The gist is that by subsidizing green energy mining, non-green energy mining will not be competitive and will thus go away, making all mining green. A Pigovian tax is a tax on emissions, and this is the inverse, where the more desirable environmental outcome is supported by the market. As he points out, those who want cleaner energy Bitcoin can simply subsidize it instead of using government force. The thought-experiment here is definitely worth exploring with the ESG-types that want to argue Bitcoin is bad and have no understanding of energy markets.

Tomer Strolight explains what the Bitcoin Rule is. This is a take on the Golden Rule, but instead, it’s more about consensus and finding something all parties can agree to. This is notably different than majority rule, which generally will punish the minority. Sadly, majority rule is the best we can hope for in a fiat system, with dictatorship by a few the worst. This is why I say that Bitcoin is freedom money.

Quick Hits

Liquid had some problems, with the post-mortem here.

Riot Blockchain has mined a lot of Bitcoin and are holding it. Marathon has stats on what they’re doing as well.

There are no less than 4 Bitcoin ETFs that may be approved before the end of the month.

The most expensive coin in the world is now a Cassascius Coin.

Another week, another centralized altcoin makes a really dumb mistake.


I will be 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 Pete Rizzo about altcoin ethics. He definitely thought through the piece that this episode is based on quite a bit and we talked about why he made the argument that he did. He’s definitely become one of the more important journalists in this space and his argument has teeth.

I read through last week’s newsletter which you can find here.

I was on Tone’s show to talk about the Oslo Freedom Forum, the 1000 BTC coin and more. I talked to Hardcore Crypto about why altcoins are scams. My fireside chat with Stephan Livera from the Oslo Freedom Forum is up. My fireside chat with Ted Cruz at the Texas Blockchain Summit is also up.

I talked about the fixed truth with Bitcoin World View in light of the new book:

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.