How to Identify a Token Project that Deserves None of Your Ether: With Example

Note: Old article being moved over because I hate Medium

Today I want to take a look at a token project that I stumbled across today. It is called Slidebits. It is an ERC20 that is currently (in theory) accepting “donations” of Ether in exchange for tokens. That is not a joke, they are literally called donations. I’m sure the SEC will be okay with that… If you get exit scammed by a token project telling you your money was a donation you deserve it.

Second red flag? THERE IS NO WHITEPAPER! I never would consider investing a penny in any project without a whitepaper, and this project couldn’t even go the Tron route and hack together a plagiarized one. There is literally zero whitepaper. No way to analyze it, or judge it. Never give any money to a project that will not even describe how it works.

Next red flag? The token creator can freely mint more tokens at any point they want. Here is the code that allows it:

it(‘should have a mint function’, async function() { const txResult = await token.mintToken(tokenBuyer, 100, { from: tokenCreator });

This is also admitted on the website:

Gotta love when people are upfront about their ability to print more at a moment’s notice.

Also there is evidence of sloppy OPSEC. For example it appears the crowdsale wallet was funded by the creators personal wallet because when we click to the funding address through Etherscan we find that they are a big fan of Cryptokitties.

You also need to worry about projects that have been going for several months and seem to have raised no funds. Now the amount a project raises is not a perfect symbol of the quality of a project, but if they have failed to raise even a fraction of an Ether so far it is quite likely that there is something amiss.

Finally, well there is an obvious appeal to crypto tokens that work with an app on something like Apple’s App Store please remember that this is a centralized point of failure. It lacks the essential censorship resistance that crypto was supposed to have been built on.

Oh and look at that, that is exactly what happened, and look at the reasons for that rejection, there is no reason they won’t pull it tomorrow. (In case it gets taken down: http://archive.li/qvdZZ)

I could continue, but I think it is clear to see some of the signs that should ensure you immediately avoid giving up your money. Oh and if you cannot answer in one second the advantage of it being a crypto-token instead of fiat, it’s probably a scam.

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Untethered Tether: Old Developments

Note: This post is out of date but is part of my transition away from Medium.

So today we are going to take a look at some of the Tether drama that has occurred over the last week or so, and it gets interesting fast.

Background: There has been a theory for a while now that Tether has been used to fuel the massive price increase in Bitcoin during 2017.

This was exacerbated by the fact that they did, and still do promise regular audits but have never delivered it. After firing the last auditor they claimed, “Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame.” I do not know about you, but that sounds to me like the auditors were you know trying to do an audit.

Now as for the price pumping.I was introduced to this theory by Bitfinex’ed and was recently supported by a paper published by a couple of professors that suggested again that Tether’s printing was used to increase demand, and was not created “naturally.” Now there have been some criticisms of this paper, including the fact that their method can only show correlation and not causation, and that it was not peer-reviewed, but it did increase public pressure on Bitfinex and Tether to start clearing the air.

Transparency report: So the law firm of Freeh, Sporkin and Sullivan, LLP has released a report meant to show that Tether actually does have the funds to back the Tether’s currently in circulation. Now this report is interesting for several reasons and I am going to try to highlight them for you, and then I’m going to take you down the rabbit hole. So the report can be read here. It basically attests that on June 1st that the accounts (yes there’s two banks now) had enough to cover the number of Tethers in circulation. However, there are several interesting phrases in here, and one that sends us down the rabbit hole.

Well obviously not great news, but probably not unexpected.

It is obviously not an audit, this one should surprise exactly zero of us.

Here is where they admit that this in no way proves that the Tether was always backed.

Good to know that Tether might still be used for money laundering.

WAIT WHAT?! That’s right, a partner for this law firm is an advisor to this bank. Time to go figure out which bank this is now right? I am not a lawyer, but that feels bad, like it could be a conflict of interest (especially if Tether is one of the only clients for this bank….), and casts doubts over this entire report.

Banking: The question we now had to try to figure out was what bank was Eugene Sullivan advising. Several of us set out to Google and dig and try to find something. I even spent several hours digging through the Panama/Paradise Papers in the hopes that I would find a connection and this continued until @eastmother tweeted at me and said this.

When you check the cached version of this page you can see that Eugene Sullivan was an advisor to Noble Bank in Puerto Rico!

This is valuable for a couple of reasons, first and foremost they deleted this and tried to hide it. Which seems odd. Secondly, it helps confirm the research from BitMex that suggested that Noble Bank in Puerto Rico was the most likely steward of Tether’s funds. BitMex also seems to suggest that Tether may be a significant percentage of the total deposits at this bank, suggesting to me excessive scrutiny into Tether likely does not work well for Noble.

Now, Noble Bank is an interesting entity because it is a full reserve bank. This means that they do not fractional reserve like the majority of banks, and they actually keep the cash on hand that they claim. So if your account says $1,000,000 then they have that $1,000,000 in their vault. These kinds of banks often do not offer interest rates, because they cannot afford to. They are not lending the money out and so cannot earn the money from loan interest. Several people have tried to contact Noble and have not been able to get an answer as to what interest rates may be offered. This leads us directly into the next part of the problem.

Business Model/Profit Model: So now we need to try and figure out how Tether could be making money. In their whitepaper they say that the way that they make money is by interest on their bank accounts and by charging a ten basis points fee on transfers to customers (of whom Bitfinex is their sole customer). So if we assume that a significant portion of their assets are being held at Noble Bank, which being a full reserve is likely unable to offer interest, then the only interest they could possibly be getting is from their second bank and from the ten basis points fee. This leads us to two issues. One the ten basis point fee by itself is almost definitely not enough for them to be profitable. So the question then becomes who is their second bank and could they be offering enough interest for Tether to be profitable. If we assume that the larger amount from the two accounts is held at Noble, then the only part earning interest is about $600 million.

Even at about 2% per year that works out to about $1 million dollars a month. It feels as though that would likely be insufficient for Tether considering the size of the operation, but I could be mistaken. However, it is important to remember that Tether is still a business that needs a way to be bringing in money, and so paying attention to this mechanism could be important.

The Brock Pierce Connection:

Now we start to flirt with where this all gets really crazy. Brock Pierce is one of those characters who tends to pop up in weird places and doing weird things in Crypto. He was one of the founder of Tether, though has since (according to him) sold his position in it. He is also the cofounder of Noble Markets which controls Noble International the bank. So one of the founders of Tether, is also a founder of the bank they use, which has an advisor who is also one of the lawyers who issued this memorandum. What we are seeing here is in my opinion serious conflicts of interest that force us to seriously question the nature of all of the relationships in play here. Also in general Brock Pierce has a history of being evasive about his relationship with various entities.

Plus, the more you look into Brock Pierce, the more you recognize how he represents much of the worst of the cryptocurrency space. In March he was interviewed and had this great little nugget to share with the world, ““I don’t care about money, if I need money, I just make a token.” Remember, this is the founder of Tether, and the man currently making sure they have banking. Let’s hope he didn’t need money when he made Tether huh?

The MTGOX Connection: This web of connections gets even weirder when we start looking even further into a very weird part of this story. Namely, these same players are connected to MTGOX. So after the whole MTGOX debacle there were several different players who were looking to be the ones who determined the best way to rehabilitate those were injured in the hack. It turns out that there was a group called Sunlot Holdings who proposed a rehabilitation plan. Both Brock Pierce and John Betts were partners at Sunlot Holdings, and John Betts is now a Founder and CEO of Noble Markets who controls the bank Noble International. Furthermore, Sunlot Holdings was advised by Louis Freeh, one of the cofounders of Freeh, Sporkin and Sullivan LLP the law firm that did the report. None of this is criminal, but it suggests that these players have an entangled and complicated relationship stretching back at least until 2014. The more entangled the relationships the more we have to worry that there is a shared incentive to ensure that Tether survives.

The Whole Web of Connections:

This whole web of connections was recently summarized in this image here. As you can see by how entangled all of these people are it becomes very dangerous to trust the word of FSS as to whether or not Tether is in any form usable.

The Imperial Pacific Connection: While researching Freeh, Sporkin, and Sullivan; specifically the fact that Sullivan was claimed in the report to be an advisor, I, along with others, found that he was connected to a casino called Imperial Pacific. He was part of their advisory board until recently. The reason this is interesting? Imperial Pacific has been dinged for money laundering and human trafficking along with general corruption. Freeh also used to be associated with this very same casino. This starts to paint a disturbing image of who these men are willing to be associated with.

Other FFS Shadiness: This law firm actually has quite a few unsavory connections like this. Eugene Sullivan has previously been dinged for trying to use his former position as a judge to profit. They have also defended Ukranian Oligarchs. There have also been criticisms of Freeh’s tenure as FBI director, including how he had handled the critically important Penn State case.

Phil Potter Leaves: Now as the waters start to get really murky and the pressure on everyone seems to be reaching a fever point, Phil Potter the Chief Strategy Officer of Bitfinex departs. The timing of this is very poor for Bitfinex and Tether as public pressure increases on them. He also claims that he is doing this because Tether is focusing less and less on the US, but to my eye, there banking and the majority of their volume is still in the United States, and so that excuse does not pass muster. Furthermore, we do know that the Fed’s were looking into Bitfinex and Tether and it is possible that he may have flipped to protect himself. Finally the most recent dump started shortly before the news of his departure became public, and as such we do need to wonder whether or not there were people trading on this insider information. Just to be clear I have no strong evidence for either of these claims, but the timing is quite odd.

Weird Connections from Noble: Now we are going to temporarily back to Noble, because there are some weird connections that I cannot fully explain.

I got another tip on Twitter:

that there have been some….interesting websites associated with the same Google Analytics ID as Noble. Including….Blockchain Capital! The venture capital fund that Brock Pierce used to be a part of! Isn’t it fun when little things like that work out? Also a bunch of other “blockchain” focused websites including: Blockchain Alliance, bloq, Chicago Blockchain Center, the Chamber of Digital Commerce, Dunvegan Space Systems (blockchain in space), Silk Road Equity. Now just to note, I do not neccesarily think all of these are connected, because there were also a couple of design sites for something called Neu Entity and so it is possible that is why these are shared. However, it is funny to see Blockchain Capital which is another of Brock’s babies coming up in here.

Other Recent Weird Happenings: So one of the last really weird things that has happened, was a weird transaction of Tethers. Namely there have been some “send-all” transactions which are quite uncommon, and sent primarily to wallets that are “back and forth” meaning they receive it from Bitfinex and then send it back and that’s it. These have happened before, but no one knows why.

Claim that Audit is Impossible: This is my favorite claim that Bitfinex makes. They try to claim that it is impossible for them to get an audit. First and foremost it is important to remember that back in 2017 they had someone who agreed to audit them, and they fired them because, “Given the excruciatingly detailed procedures Friedman was undertaking for the relatively simple balance sheet of Tether, it became clear that an audit would be unattainable in a reasonable time frame.” They fired their auditor being thorough….

Best part of this claim is that True USD, which is an incredibly similar stablecoin (with fewer, but not zero problems), gets regular attestations by an actual accounting firm. So apparently their claim that it is impossible, not just for them, but for anyone is false. (Important note, these attestations are only done once a month, and it would technically be possible to game them, but it is still better having an actual accounting firm do it, and having them do it every month.)

Conclusion: In conclusion, Tether and Bitfinex cannot be trusted. Their transparency report has actually helped expose how deep some of their entangled relationships go, and I am now more scared than ever for the cryptocurrency market. Brock Pierce is likely still materially involved in Tether, and is working with them to help maintain banking through his own bank, and even the lawyers have worked extensively with him before. Phil Potter was the first executive to leave, but he will not be the last. I would expect Giancarlo to be next, and when he does leave, I would recommend (not financial advice) to stand clear of the house of cards that is the cryptocurrency market.

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A Deep Look at MakerDAO and Dai and MKR

So I recently did a pretty broad breakdown of stablecoins. When I was going back over it, I realized that I wanted to dive really deep into some of these and so I am going to start with Dai, and I am going to do it by going step by step through their whitepaper and giving my thoughts and potential problems with it.

First of all what is MakerDAO: it is the “Decentralized Autonomous Organization” that governs DAI.

What is DAI?: It is a soft pegged stablecoin.

What is a soft-pegged stable coin?: It is supposed to be near a certain value, but is allowed a degree of flexibility.

What is MKR?: MKR is a separate token used in the DAO to govern Dai and also to pay the “stability fee” which is the annual fee you pay to get your Dai.

Okay so that’s a lot of moving pieces, and as I have already discussed in my previous article there are issues in general with the concept of stablecoins. But without further ado let’s take a look at this whitepaper and see if there are any issues.

Okay, I can buy this so far, that’s a very fair opening argument.

Okay now we are starting to get into problems. It is going to be really hard for any collateral-backed cryptocurrency to keep a stable value relative to the US Dollar, unless the collateral backing it is the US Dollar. Otherwise we are going to be vulnerable to changes in the value of our collateral that are not reflected in changes in the value of the dollar. Also they never explain why it is necessary to realize the full potential of blockchain, but ignoring the grandiose marketing speak masquerading as technical language, we soldier on.

The issue here is appropriately incentivizing external actors. Namely it’s a really hard thing to do without accidentally introducing perverse incentives, but maybe they were able to do it.

First question, why would any in their right mind hold it for savings? Either directly hold your collateral or hold fiat. That is not a use case for a stablecoin. Also here we are bumping against an issue both I and the developers have acknowledged, we are not collateralizing with USD, but instead with Ethereum, and as the developers explained Ethereum is too volatile to be used as a currency, which means for this to work we are going to need to over-collateralize. Meaning if you want say $100 worth of Dai you will need to put up significantly more than $100 worth of Ether. Which makes it hard for me to figure out why someone is going to choose to do this.

So here we see where they say you need to have more collateral than Dai. They also say that you need to pay back an equivalent amount of Dai, and that is true, but what they have not explained yet is that you also need to pay a stability fee in MKR, their other token. Also they cannot always be collateralized in excess, because if there is a black swan event that destroys the value of Ethereum that is no longer true.

Here we finally get the mention of the “Stability Fee” which has to be paid in their MKR token.

It’s been six months and they still have not launched Multi-Collateral Dai, but they do still have time so that is not a true criticism.

This is my favorite part of the entire whitepaper. So I have mentioned how even with the overcollateralization this is still very vulnerable to a black swan event that destroys the value of Ethereum. This part is where they say they in the event of this crash they will dilute the “Pooled Ether” which means that when you go to reclaim your Ether you will not even be receiving the full Ether you put in (if I’m understanding this right). Why someone would trust this, I do not know. The developers are obviously aware of this risk, but it seems to be ignored.

This is where we start to look at their incentives to determine whether they designed intelligently. These are just definitions so do not help us a ton. Just a warning this next part they try to obscure what they are doing with really technical language, but I am going to do my best to break it down.

So best as I can understand this section, when Dai falls below $1 what happens is that generation of new Dais becomes more expensive, meaning require greater collateral. They hope this restriction on new supply and the knowledge that presumably this should be worth about $1 means that there will also be increased demand below this point. Then when it breaks above $1 it now requires less collateral to generate Dais and presumably people are less likely to want them. My biggest fear here is in the case of a serious, say 40% 1 hour movement in the value of Ethereum. You are going to have people selling their Ether, possibly into Dai if it is trading in a pair, creating a strong demand driving the price of us, at this same time it is now easier to collateralize and create more Dais, but the value of the collateral is rapidly depreciating, thus leading to a greater likelihood of Dai becoming under-collateralized. If I am misunderstanding this mechanism however please reach out and help me.

Intuitively, I feel like this is a value that is going to need to be set very careful, because otherwise I worry about appropriately capturing signal and noise.

Now this is again where things get really interesting. Basically shuts down the whole system and gives them their share of the “pooled ether”. Problem with it? If it is being used there is a very good chance that Ether is now worth much less than your Dai was supposed to be. The term “long term market irrationality” to me feels like their hedge against the chance that crypto prices fall and they have no recourse.

Basically saying what I said. This is the ripcord they pull when they are giving up because they are no longer collateralized.

So now we are starting to get into the MKR token and what powers it gives in the DAO. We have already discussed some of these, but you can see how these are very important decisions.

The important thing here is the liquidation ratio. This will help us figure out how likely it is that the whole house of cards falls down.

So the stability fee like I have mentioned is the annual fee you pay for the privilege of having your collateral tied up by them. The penalty ratio is a little bit more confusing to me. As I understand it, if the value of your collateral gets to close to the value of your DAI it is automatically liquidated and then it used to buy up MKR when we have the multi-collateral system, but for now it looks like it burns the “Pooled Ether” which helps if it had to be diluted previously. This is honestly clever. I need to give props to this. If I am understanding it right it can help Dai survive pretty significant corrections, but I am dubious about a black swan event.

This part is endlessly fascinating to me. Apparently the plan with multiple assets is to sell off MKR whenever they become under-collateralized. The issue here is the legal issues with basically continuing ICO sales. Plus, I feel like this gums up the works economically, but I cannot put my finger on why yet. Best I can come up with is this: MKR is likely to be highly correlated to other crypto assets, the need for this dilution would arise in a situation wherein the value of MKR is already depressed due to a crypto crash, this market condition will require huge amounts of dilution to raise the funds necessary to recapitalize. It also makes it interesting, because it’s a constant downward pressure on the governance token, potentially making it easier for people to start influencing the DAO, but that of course depends on how the holding of MKR shakes out.

So first question how is every Ether backed CDP not a risky CDP? But basically as I understand it sometimes they will force liquidation of the underlying asset to preserve the value of the Dai. The issue here could be if enough sales are triggered simultaneously, and they are selling into thin liquidity.

Again look at the last paragraph here. Our biggest issue is going to be events where the market moves fast and suddenly. They’re going to get caught in some ugly dilution issues if I am reading it right. I’m gonna skip the section of the whitepaper on multi-debt auctions because it does not exist yet.

The keepers here are interesting. Many of them are bots that are meant to trade Dai to help it maintain it’s peg and sometimes they fail… as they did here https://twitter.com/prestonjbyrne/status/953769228238286848 so not exactly a foolproof tool.

Pretty typical oracles. Some claim they represent an attack surface and they are right, but not an important one in my underinformed opinion. Some claim they aren’t truly decentralized, and that’s somewhat true, but sometimes you do not have a better option. I have no serious issue with them.

My biggest question here is about how many of these there will be, because this seems like a ton of power. The next section is examples of how to use it and we are gonna skip right over that. Section after that is called addressable market and is marketing bullshit so we are gonna skip that too. Then we get into the risks section and this is where I get excited.

All I have for this part is a reminder that a problem in a DAO smart-contract is the entire reason that Ethereum had to fork. $60 million stolen if I remember right. However, multiple security audits does seem reasonable.

Hey they are aware of my fears, do they have a solid solution though….

Nope….Next risk is competition which I do not care about so skipping.

Yes! We are finally to more of the problems and risks I have been pointing out. Namely they can only increase their liquidity so much to compensate, and they admit right here they need to maintain a large capital pool to feed the bots. You know what that sounds like to me? They’re gonna need more investment continually coming in to keep it working….

Better watch out for the SEC, and the CFTC, and the rest of the alphabet soup….

In conclusion, I still do not believe stablecoins are gonna be effectively created because unless they are backed by the asset they are pegged to and convertible there is always too much risk. This article was written in one night without editing, so please help me out in the comments if you find any errors.

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How Does a Stablecoin Make Money?

Note: This is an old post with some minor flaws, I am posting it here in protest of Medium.

This post is prompted by something interesting I have noted in the cryptocurrency space, namely that there has been a significant proliferation of so called “stablecoins.” Besides the proliferation there has also been recent VC investment into some of them, making me wonder, “how does a stable coin make money for a VC?” Let’s look into this and make sure everything adds up.

Update: I published a deep look at the Basis protocol here.

Let’s start with Basecoin, oh wait I mean Basis Protocol. This “stablecoin” has raised well over $100 million dollars from VC investors. I’m worried about these investors, many coming from top firms after looking at the economics of this BitShares 2.0 (Worry anyone else that the founder of that project is the founder of the new $4,000,000,000 darling EOS?). The way it works as best as I understand is using a three-token system. The tokens are as follows:

  1. Base Shares
  2. Base Coins
  3. Base Bonds

The base shares are created in the genesis block and all new base coins go to them as “dividends” (holy shit I hope they spent some of that $100 million on Securities lawyers). The base coins are a separate coin that is issued to holders of the base shares when the price of the base coin exceeds peg, in theory diluting their value and bringing the value back to peg. Base bonds are issued when the value falls below peg. When this happens you can purchase a Base bond for the current value so say $.80 and then redeem it for $1.

Now where this gets even trickier is when it comes time to issue new coins is that it goes first in, first out. So it goes to the oldest bond holder first, and then continues down the line, and if there are in theory no bond holders then the coins are issued to the share holders.

Now what is the issue with this system? Economics mostly. Let’s start with what is the most obvious to me, my incentive if I am a whale and if this is liquidity is to become a large share holder, and then whenever I get a dividend to immediately sell it, purchase bonds, wait for them to redeem, and then dump again. If the market gets too big for me to do this alone, I do what all the whales are already doing in crypto and organize this process with a few other people.

The second problem and the more troubling one, where this needs more investors always coming in (gotta maintain the stability fund they talk about) is better captured by Preston Byrne than I could: “It seems to me on this very cursory review that Basecoin depends on

  • Printing free money and giving it to crypto-investors who are inclined to hold it and thus restrict supply;
  • Providing financial incentives to subsequent investors to introduce money into the scheme and subsidize the price of the scheme if the price of a coin should fall below a certain level (say, $1);
  • Vulnerable to a not-at-all-decentralized reliance on price indicators provided by unsupervised, unregulated third-party trading venues already suspected of serious shenanigans;
  • Granting primary benefits of the scheme to early buyers in an unregulated ICO;
  • Where every participant is betting on the price of their assets rising;
  • Which cannot sustain itself without finding new buyers for $BASE.”

Now the question that is blowing my mind is why the investment in this from VC firms? And then I figured it out. The reason this stablecoin has gotten so much investment is because of the structure of the shares. When they buy their shares they are trying to basically buy money printing machines they will continue to issue them dividends, as they accumulate the follies of every retail investor who purchases the coin to use to trade in the crypto world. They’re trying to profit of a couple really nice facts.

  1. Many cryptocurrencies banks have no strong fiat on-ramp and thus depend on stablecoins like Basis protocol for people to trade, creating built in buy pressure.
  2. The initial purchase of shares will allow for the stability fund to maintain the peg long enough for them to cash out their investment.
  3. Plus, if the price of cryptocurrencies continue to rise and more people are purchasing then they can continue to print money for longer.

Not exactly a great product for all of us.

Update: I wrote an in depth look at MakerDAO, Dai, and MKR here.

So let’s look briefly at another stablecoin. This time MakerDAO.

MakerDAO which issues DAI confuses me because I cannot figure out the advantage to using it. Basically you put up about a whole bunch more money than you want in Ether. They then issue the Dai. So say you wanted $1,000 worth of Dai, you need to overcollaterize and put up let’s say $1,500. Now why would you do this instead of trading into the much more stable USD? Good question. I cannot for the life of me figure it out.

Best part is though how vulnerable this system is. Let’s say that tomorrow there is a another horrible event on Ethereum. Think like the DAO hack, but larger, and they are unable to achieve consensus to roll the chain back. The value of Ethereum plummets and then you are not overcollaterized, you are undercollaterized and the value plummets.

There is also a bunch of the same algorithmic BS that Basis Protocol and BitShares try to use to maintain their value thrown in for good measure.

Oh and the best part if they do end up undercollaterized? They dilute the pooled Ethereum so you can no longer claim back the same amount of Ethereum you put in. How’s that for a fun little twist?

So well I’m confused about this, at least it’s clear how they make money. To pay back their “Stability fee” you need to use their MKR token.

Worst of all? It hasn’t maintained it’s peg.

Finally, we need to discuss the elephant in the room. The one who’s imminent collapse will also be the black swan event that destroys MakerDao and wipes out a ton of value in the crypto ecosystem. Tether. I am not going to go back over ground that has been thoroughly covered, so just read everything Bitfinex’ed said. But more than that, it is supposedly backed, with no audits, and no convertibility yet trades with no counterparty or insolvency risk even when bank accounts get seized.

Plus, it’s linked to Bitfinex, which has also been linked to the delightful market makers over at Cumberland mining as Spoofy McSpoofface detailed already. Namely bad.

Though if you want me to answer how does Tether make money, again I’m not exactly sure, best guess I have is they don’t and it’s all used for money laundering. (Remember Kraken let’s you trade fiat into Tether with no fees, but won’t let you trade using Tether).

Update: I wrote a piece discussing recent developments in Tether here.

Update: Okay so Tether makes money in two ways, 1. a ten basis points charge on Tether purchases, and 2. Interest on the money held. However, it is still an open question as to whether or not they are actually earning interest due to the complexity of their current banking situation.

That’s the secret behind all of these stablecoins. They hide behind their algorithms and everything else, but they all rely on market-making bots in order to maintain their pegs. Some even outright admit it, like Basis with their “Stability Fund” or this one which is just beautiful: https://twitter.com/prestonjbyrne/status/953769228238286848

If you still are in doubt, ask George Soros about what happens when someone tries to peg something. In his case he got rich. For many people in this case they will get caught holding a bag. If you are going to trade crypto, then trade responsibly and do it with real fiat on ramps not magic pegged currencies. And as always nothing I say is legal or financial advice, I’m just an angry guy on the internet.

Update: Added clarifying comment about nature of Cumberland mining.

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A Bear’s Perspective on REP

A Bear’s Perspective on Augur

Myles Snider has already written an excellent introduction to Augur and Prediction markets and for the sake of brevity I will not rehash it here. I highly recommend reading his piece before considering my piece: here. In this I will present a different perspective on the coin, focusing on potential regulatory risk, but not on the normal worry of the SEC treating the coin as a security.

CFTC Risk

In the United States the Commodity Futures Trading Commission (CFTC) has previously cracked down on other prediction markets. Most visibly and noticeably on Ireland based Intrade. Despite its international basis it was still able to be shut down by the United States based CFTC. Even DARPA and the CIA experimented with a prediction market, that was shut down due to Congressional pressure. (Interesting read about it here) These and other examples of various prediction markets being shut down thanks to regulatory pressure, seem to suggest that the United States is not ready for a prediction market. The common argument given defending Augur is that because it is decentralized it is protected from this kind of intervention. However, several issues arise when you consider that argument. First and foremost there needs to be a way to get your fiat money (think USD) into and out of the currencies being used for Augur. I would not expect a significant crackdown on the Ethereum that is used to trade (though it is possible with the SEC comment about coins being security, and the fact that there was an initial sale). The greater issue here is that the market makers need to hold the REP coin associated with this platform. That means they must have a way to get into and out of this coin. In the Intrade shutdown it was possible because there was cooperation between the CFTC and the bank associated with Intrade. It is possible that any exchanges that offer trading from fiat to REP or vice versa will have difficulty finding banks that will accept their business, or if a bank is found it is also possible that individual holders of REP could become a target of investigations. We have already seen many cryptocurrencies including Binance and Bitfinex having trouble finding banking and I do not see that being an issue that will be easily solved soon. Carrying coins like this will make it that much more difficult for exchanges to find banking.

The second major CFTC risk I see associated with Augur is the ability for anyone to make a market on anything, and then collect trading fees on it. This potentially could mean that the real risk here is that these individuals market makers could end up sanctioned by the CFTC. Especially since they are receiving a portion of the fees associated with the market, meaning that they are receiving a direct and trackable benefit from this platform. This is especially worrisome in light of some of the specific complaints that were levied against Intrade that led to its closure. In 2005 Intrade was found to be in violation and they were then required to inform US customers with a pop-up on the exchange that told US customers they were not allowed to trade these options, and to try to ensure that US based customers could not trade these options. My fear with Augur here is two-fold, one the Augur trading platform will need to make sure that US customers are told that they cannot trade these options, and that individual market makers will become liable for US customers who do trade their options.

Insider Trading Risk

There is another risk that is neglected, but in my opinion represents a smaller overall risk to Augur as a whole, however, it does represent a risk to people using Augur. Every single market participant on the Augur platform needs to understand that they are liable for insider trading regulations in their countries. Many of these options, especially if they are tied to the price or performance of “real” securities, are ones where anyone trading in the market need to ensure that they are not in violation of insider trading laws. Failure to appropriately recognize this risk, by any market participant increases their legal liability.

Manipulating market to affect real world

Augur has described the potential for these prediction markets to serve as a more accurate way to predict various real life events. However, what I have not seen described yet is the fact that if these markets are being used to predict various real life events, they are open to manipulation. For example, consider a prediction market in Augur that is predicting the price of oil a month later. The market on Augur is likely going to be much smaller than the equivalent futures contract. This means that a sufficiently large enough whale could potentially make large enough bets to manipulate the Augur market, which could then potentially change either the futures market or the actual price of oil. This is in my opinion is one of the smallest risks to the price of REP and to Augur in general because it requires several things to happen:

  1. Augur needs to become a large enough platform that its predictions are used in securities trading.
  2. The market needs to be small enough that a single or a team of whales can manipulate the market.
  3. The whales need to be able to make these manipulations, while hiding that these manipulations are occuring.

As such this seems to be the smallest risk in my opinion to Augur as a platform or REP’s price.

Conclusion:

In conclusion, while I feel that Augur is a fascinating platform, and the way REP is used to adjudicate disputes in the prediction market is innovative, I worry the regulatory risks are being underestimated. There is a history of these kind of markets coming under regulatory investigation and that is neglecting the fact that it is possible that the REP ICO may have also been an illegal security sale (based on the recent comments suggesting most ICO’s were illegal). This suggests to me that REP may initially gain value, it is likely to fall under regulatory scrutiny that will significantly depress its value, and may permanently prevent Augur from flourishing, which is disappointing because I find prediction markets fascinating.

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Medium as a Syndication Platform

Update: I disavow this post. Left up for reference sake.

Medium for a long time was my preferred publication platform.  It offers a beautiful interface, simple interaction features, and the ability to be featured in a variety of ways to extend your reach.  I have to give the creators of Medium support for designing what is arguably one of the best reading and writing platforms on the internet.  However, they fall victim to the same fundamental flaw as other proprietary platforms, and that is that they tend to silo your content. Once you have placed your content in the control of another platform you are now, at least in part, subject to their whims and vagaries.  For example, it used to be possible to set Medium up with your own custom domain, that feature has now been deprecated.

Giving Medium the benefit of the doubt, they are one of the best silos on the internet.  Thanks to them several of my articles on various cryptocurrencies projects got thousands more views than they likely would have otherwise, so it is a little bit hard for me to complain about them.  However, even the best silo is still a silo and perhaps more insidious for being so tempting. However, the reason Medium still has incredible value even after you “leave” is that they allow themselves to become a syndication platform for your content.  

Since Medium has a need for content to be available on the platform they made the very prudent decision of making it easy to import posts from other locations (like this one will be) and share them on Medium.  The benefits of this are a canonical link that boosts your own site SEO, improved visibility, and the ability to have your article in a Medium publication. This let’s you profit from most of the benefits of Medium and maintain control of your content.

Toothbrush

John was shaking.  It all came down to this interview, he had been dreaming of this job since graduation and he wanted to make sure that he was totally ready.  Walking into the bathroom he grabbed his toothbrush, placed a small strip of toothpaste on it, put in his mouth, went to turn it on, and it did one quick buzz in his hand and then stopped.  Pulling it out he looked at the small display where the scrolling words said:

“Firmware must be updated, please check attached phone.”

Pulling out his cell phone, John opened up the app and saw the notification that his toothbrush needed an update.  He clicked the button to trigger the update and sat down on the toilet to do his morning business while it loaded.  A couple minutes later he opened the app and saw an error message saying that download had failed, he quickly clicked the button to download it again and waited increasingly impatiently for the update to download and install.

Again the update failed.  John reboot his phone, and force-rebooted the toothbrush in an attempt to correct whatever was the problem that was preventing him from brushing his teeth.

Again the update failed.  John jogged out to his living room, unplugged his router for 30 seconds, plugged it back in, and waited a couple minutes for it to turn back on and re-connect.  He tried the update one more time.

Again the update failed.  John grabbed the toothbrush and brushed his teeth manually before running out the door.

 

Inspirational Link: https://twitter.com/AndrewCrow/status/1074565600083492864?s=20

 

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A New Brave World

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Disclaimer: This story is a fictional rendition of what it would be like if there was a company that chose to accept payments on the behalf of content creators without their knowing about it, and then give them away if not claimed in time. There is unlikely to be any resemblance to real life events because there is no chance anyone would do that right? It was also meant to be satire, but sometimes when you live in the craziest possible world, the best you can do is a retelling.

It was a long evening of grinding away on his stream. John had been working for months and finally built up a couple thousand followers on Twitch. He was far from a major name who could do it exclusively, but he did have a few people who were willing to subscribe and make sure he had a few dollars every month. They seemed to enjoy his dry wit and his ability to break down certain strategy games that were a little bit less common on Twitch. He figured he was going to playing anyway, might as well share his love of the games with a few others.

Erin was a huge fan of John. As often as she could she would tune into his streams. She had never met someone in real life who played these same games as her, and especially not someone who could make even the watching exciting. She was a huge supporter of her favorite content creators online, and luckily her browser had a couple of buttons that made it super easy to tip people she loved watching. She logged on to watch John stream and soon found herself laughing uproariously. She clicked a couple buttons and sent him a few dollars, glad to help someone who brightened up her days.

John’s lifeblood as a subscriber was the few people who chose to invest the money to subscribe to his channel. Those who chose to do this got a couple of little perks: a badge they can use in the chat, a subscriber only chat, no ads, and the pleasure of knowing they were supporting a content creator. He didn’t have a ton of subscribers, but the few he did have he started to gradually develop relationships with. Since they got access to the subscriber only chat he would pop in and talk to them, many of them fans of his same favorite games. It was a good arrangement. Besides those subscribers there were some people who were willing to hop in to his streams and “cheer” which acted as a small tip for John. This right now only added up to a about a hundred dollars a month for him right now, but this amount helped convince him it was worth continuing, and kept his equipment up to date. He was hoping in a couple of months he would able to justify an upgrade to a brand new keyboard, one he had been eyeing for a while.

Erin had continued to tip John through the browser, and finally decided one day to send him a message noting her appreciation for his channel.

Hey John,

Just wanted to send you a quick message to say that I love your channel. Not often do I find someone else who loves these games, and you make watching them fun and funny. I hope you keep doing what you are doing, and I hope my few small tips of RAT is helping to make that happen :).

Your fan,

Erin

John opened up his messages and was confused. He had never before heard of a tip of RAT and was totally confused what Erin might be doing. He decided to sent Erin a quick message back to find out what was going on.

Hey Erin,

I wanted to say thank you for your message, support like yours is why I keep doing this. I was wondering though what a “RAT” is, obviously I know the furry little rodent, but I’m guessing that is not what you are sending me.

-John

Erin was now the one confused, when she had opened up her tipping page on her browser, she had seen a total profile for John, complete with his profile picture and his information. It had seemed like all of her favorite content creators had pages, and so she would send them a few dollars when she can. Now she was a little bit confused, because it seemed like John had never gotten any of her tips. She decided to start digging and went looking through what she could find out about how this tipping worked.

In the meantime John who had a small but loyal following on Twitter decided that he wanted to describe his experience.

I want everyone to know that if you have been tipping me RAT that I am not set-up to receive it. I have shared no information with that company and I am not receiving those tips. 1/

It appears that this company decided to make a fake profile for me and they have been soliciting these tips on behalf of me and other creators. 2/

Glancing through the ToS for this company it also looks like they do not refund these tips to the people who choose to tip, but instead use them for their own purposes. 3/

This company seems to be exploitive and seems to take advantage of both creators and their fans. It is not right to use my image to solicit money that will never get to me. 4/4

This quickly became one of John’s most interacted with post he had ever made on Twitter. Turns out that RAT had previously been quite popular. Even the CEO of the company that made RAT decided to chime in on the issue. He wanted everyone around to know that he saw no problem with what he was doing, and that furthermore it was okay to be doing it because he saw himself as a Nietzschean Ubermensch. It turns out that many content creators had been “receiving” tips that they never received, and many people had been tipping people who never received.

It seemed that the goal of this company was to get content creators to opt-in by convincing them they were missing out on these tips, which then makes the platform look better to people because there are more people using it. Quite possibly one of the worst tactics in the sleazy growth-hacking playbook. John considered for a second signing up in order to receive these tokens, because every dollar did help, but the simple truth is he refused to support a sleazy model like this. He hoped that if he refused to participate and drew attention to it, other creators may eventually see some of the problems.

Erin seeing this whole debacle made a simple choice. It was time to find a new browser, and she decided to sign up as a channel subscriber to John. She still loved his content and wanted to do what she could to support him.

Disclaimer: I am not signed up to receive RAT or any similar products, please do not send them to me.

Totally Unrelated Link: https://twitter.com/tomscott/status/1076160753793683456

A Response to “Bitcoin’s Existential Crisis”


View at Medium.com

Nic Carter, one of the General Partners at Castle Island Ventures (a previous edition misidentified the fund), the VC fund infamous for investing in Flipside Crypto who sold baskets of shitcoins, recently wrote an article describing what he called the existential crisis of Bitcoin. If you don’t have 12 minutes to read it, it can be summarized as “Bitcoin has no leader and therefore it forks sometimes.” However, in this article that has some in the Crypto Media referring to Nic as Satoshi 2.0, he has several instances of flawed or incomplete thinking.

The first three paragraphs of this piece are quite well thought out, and if you ignore the usage of phrases like “intersubjective consensus” (for those who do not know intersubjective consensus is an idea that pops up in cognitive and philosophical journals to describe how people create a shared conception of reality) a useful introduction to some of the issues in the identity of cryptocurrency.

“The first and most common method is to give a corporation or foundation rights to a trademark, as is the case with Tezos or EOS.IO. This is the default for non-Bitcoin blockchains and gives an entity the legal force to anoint and ratify a single chain. Of course, no one is bound to follow this, and there could be a fork of Tezos that everyone mutually agrees to use.

However, the trademark carries certain legal protections, and if a fork tried to retain the name, the trademark owner would have recourse, at least where the fork tried to interact with regulated institutions. In this case, the trademark is just one manifestation of the core issue, which is confirmation that the leadership of a blockchain is seeking authoritative ratification of their control. Other activities this entity might engage in would be pressuring exchanges to use one ticker over another or support one fork over another as well as spreading a consistent message to the media. All of these give the entity de facto control over which fork is chosen in a dispute.”

This section is humorous to me because people have tried to trademark Bitcoin. See here, here, here, here (cash), here, here, here, here, and here. (Note many of these are for different products, not actual Bitcoin.) However, Nic is making a good point. Namely, that you can either defend against identity crises with legal structures, which are generally antithetical to the stated goals of this space, or you can embrace the difficulty.

The other approach is to throw caution to the wind and spurn any external marker of identity, relying instead on an intersubjective consensus, such that the system can change over time while remaining faithful to its original goals. This is the approach leaderless (or, more accurately, leader-minimized) systems like Bitcoin and Monero go for. Of course, there are influential individuals in both systems, but neither has a foundation or corporation in control of a trademark or a clear decision-making body. Many critics would say that Bitcoin Core, as the author of the dominant implementation of Bitcoin, wields disproportionate control, but that’s a reductive reading. It is not an official body, and the dominant implementation that they create does not define the essence of Bitcoin but rather its instantiation.

Here is where we get into some of the fun parts of the argument. The idea that Bitcoin Core is solely an instance of the consensus around the rules that define Bitcoin. This is ostensibly true, but it is important to remember that Bitcoin is at its core the software the nodes run. There was a recent instance wherein Bitcoin Core had a massive denial of service and inflation bug. Any inflation bug like that is inherently against the social consensus that governs the emission schedule of Bitcoin, yet it existed nonetheless in the instantiation, suggesting the influence of Bitcoin Core here is much larger than Nic is trying to imply. I do agree that there is no single leader of Bitcoin, but denying the influence of Core is myopic. He tries to cover it up with a Pierre Rochard quote that claims when the software and the consensus conflict, the software is mistaken, however, since we have established the software is the instantiation of the rules, the practical reality is that Bitcoin depends on the software. Without the code instantiating the network, there is a brief paper popular amount cypherpunks. Furthermore, since Bitcoin is decided solely by social consensus, and due to the primary software being written by one body, we actually see an increased likelihood for forks arising when the incentives of Core do not align with the incentives of holders or users.

Absolute commitment to the sound monetary policy (the 21 million hard cap) is a core virtue of Bitcoin but limits its design space and ability to pivot if the fee market doesn’t work. But this is the tradeoff Bitcoin has opted for.

Okay quick pet peeve here: finite supply is not the only way to sound money. Even gold had an elastic supply that inflated over time. Furthermore, in order to accept that Bitcoin has a capped supply, we must accept that forks do not represent an increase in the supply. This is true to a point, in that a Bitcoin will likely always remain capped. However, there is still an incentive to increase supply, meaning that in the future the social consensus around Bitcoin could change and the supply could increase. Claiming that Bitcoin will always have a capped supply is ignoring the practical realities of the incentive model that governs the security of the network. As former Bitcoin Foundation member Brock Pierce once said, “If I need money, I just make a token.” The appeal of determining the values, and taking the lion’s share of the reward is immense and difficult to avoid, even for those closely connected to Bitcoin for years like Brock.

Moreover, when forks occur due to a contentious issue in the community they will likely fracture the community, damage the networks effect around Bitcoin, and may, therefore, represent an increase in supply in proportion to the degree they fracture the community. This point is a little bit difficult to understand immediately and so I would like to break it out a little bit in an attempt to make it more clear.

  1. A significant portion of Bitcoin’s value derives from the network effects and continual strengthening of the community.
  2. The “real” Bitcoin is determined by social consensus.
  3. Contentious forks fracture the community and diminish the ability to reach unified consensus.
  4. Therefore, contentious forks increase the quantity of “effective” Bitcoin by diluting the ability for any fork to clearly claim to be Bitcoin.

The solution to this fracturing that Nic claims is the dedication to a few very stable values. However, we have already established that it is hard to keep this community aligned.

The remainder of the article divides perspectives on Bitcoin into various philosophical camps. I actually believe he may have usefully pointed out the ideological differences. However, I see the existence of these different camps as evidence that Bitcoin may never achieve alignment between these different positions, and is likely therefore to continue to fork as various issues arise. Every contentious fork that arises represents an increased difficulty in Bitcoin ever achieving the network effects it requires in order to be effective.

H/t to Kyle Gibson and Joshua Davis for help editing this

Expertise, Diminishing Returns, and Intersecting Niches

I have been thinking recently about skill development, because I have a habit of never being focused in a single area and instead trying to learn as much as I can in as many niches as I can. Because of this, I am only what could be considered an expert in a relatively narrow subset. However, I am significantly knowledgeable in a wider array of niches. I am beginning to think that this form of knowledge may actually be more valuable. (Crazy that I would try to justify my own shortcomings right?)

I also want to try to treat these mathematically in order to explain my thinking, however, do not worry the math will be kept relatively simple.

So this idea came to me after I was sitting and reflecting on the kinds of tasks that will become valuable as our economy progresses with increasing automation. The conclusion I came to is that many jobs now will be either partially or completely automated. Many industries where there is little fear of automation, will end up being partially automated, destroying job prospects and wages. For example: accounting. It likely will not be fully automated anytime soon, however, a significant number of hours are spent on heuristic based tasks that computers will be able to in large part supplant. There will still need to be humans, but if one person can do the work of ten wages will fall and job prospects will dissapear.

So what will become valuable? Until there is significant progress on Artificial General Intelligence, a huge amount of the automation will be in very focused niches. So the value will come from humans who can bridge niches, understand broader pictures and connect information from disparate realms. Now the issue with this at first glance seems to be that it is going to require significantly more time and effort to reach a competitive level in multiple niches rather than just one. I believe that may be a little bit simplistic however, and I will explain why.

There is this concept when you are learning a new skill called the point of diminishing returns. Basically as we asymptotically approach expertise the amount of effort required to gain additional expertise is exponentially greater. Or to phrase it more simply the vast majority of the improvement comes from the initial investments of efforts. The move from middle 50% to 95% may take the same amount of effort as the move from 95% to 99% which will take the same effort as the move to 99.9% which will take the same effort as the move to 99.99%. Why is this valuable to us? Because by focusing on intersecting niches we do not the same super high level of expertise in order to be successful.

Let me explain: expertise in intersecting niches can be expressed as the product of your expertise in each individual niche. So let’s say for example I am in the top 5% of the world in knowledge about healthcare, and in the top 5% of the world in knowledge about running a non profit, for expertise in running a healthcare based non profit I am not in the top 5% I am instead in the top 0.25%. How is this possible? Because our expertise in this intersection is equal to the product so in this case: total expertise=.05 * .05 = .0025. If I am correct about this construction of expertise (and I am not, it is vastly simplified but focus on the concept) then if we can bring even more niches into our areas of expertise we reach progressively rarefied realms of cumulative expertise.

To really emphasize this, consider the fact that we have already established that it will take the same amount of effort to reach the top 1% of a single niche, as it will take to reach the top 0.25% of the intersection of two niches. If I am correct about this vision of the future the value of the Renaissance man is back. Being able to conceptualize and view the world through multiple well honed viewpoints and see the connections between them will become an incredibly valuable skill.

If I am wrong, I have a whole list of skills where I am almost good enough to be an expert but not quite.