A Deep Look at the Basis Protocol

Note: This is an old article being moved over from Medium

After taking a broad look at stablecoins as a whole and then Dai in specific, I decided to keep the momentum going and take a deep look at the Basis Protocol. Same rules as I did for Dai, you guys are coming with me as we go through the whitepaper (I may skip things that are super boring, or I think are meaningless marketing speak). Also, always remember I do not edit, I write in one straight run through, and it is often late at night when I’m writing so my thoughts tend to…meander.

First we’re skipping all the stuff about why they think stability is important, because that is not what we are discussing today. Plus, most of it sounds like marketing speak to my ear. I am pulling out this one phrase though, just because it made me incredibly nervous when I read it for some reason. Mainly because whenever I see algorithm here, I imagine the potential for nefarious actors to manipulate it by exploiting weaknesses in the algorithm, however, I need to judge them on their implementation and not my biases.

This phrase is going to piss off the libertarians and “sound money” fans who love that Bitcoin is fixed, but I have always been nervous that Bitcoin’s deflationary nature represented a potential risk for a small number of oligarchs to end up with a disproportionate amount of wealth. (Apparently I’m okay with pissing people off tonight, sweet this is going to get interesting)

For the record it took until page 8 for them to start discussing how this works, and that upsets me. Way too much marketing speak before this. The next section is all about the quantity theory of money which is basically the ability to inflate or deflate.

Biggest problem I see here is the potential for aggregate demand to be mismeasured by one of the Oracles, or however they determine this.

Okay so here I am going to copy and paste my own previous explanation of these different coins from my stablecoins article.

  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 from the shares 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.”

Despite those issues we are going to continue on this whitepaper and make sure there isn’t anything that Preston Byrne and I have missed. (Spoiler alert: I doubt there will be.)

I’m pretty sure the Treasury issues bonds not the Fed right? Am I mistaken?

https://en.wikipedia.org/wiki/United_States_Savings_Bonds

No, I am not mistaken they are. Troubling considering how many millions of VC dollars they have raised.

Okay let’s discuss these mechanisms for a minute. First one is obviously worthless. One glitch in the feed and you could seriously hurt your monetary supply. Toss it. Second one is probably reasonable. However, both the second and the third one are going to run into the problems that the Ethereum DAO and the EOS launch have had. Mainly most people just do not vote. The incentive may help, but it makes this protocol naturally inflationary, which will require the issuing of more bonds, and I worry that the inflation could start to outrun the system.

This claim that it would require 50% of the voting coinbase is an interesting one. Namely because it is important to remember that likely much of the coinbase will not be voting (see Ethereum DAO and EOS). Thus comparing it to Bitcoin where you need objectively 51% of the hashpower to execute a double-spend attack (closer to 33% for a selfish mining attack) is very different than 50% of the voting coinbase which might be closer to 10% of the total supply. Therefore, it is much more vulnerable than they make it seem here. They think that their incentive system will help increase the percentage who are voting, but it is important to remember much of this coin is probably going to be like other stablecoins where it is held at an exchange and used primarily for short-term trading, so I do not buy that

We already discussed this above.

Already discussed this above too.

Well I kinda want that later discussion, this makes me very nervous. Also means there is always going to be a risk that bond holders are taking on, which is different than the risk-less way they pitch it.

Here we go, they are saying basically what I said. Now, there are other existential risks that occur when demand falls like they are worried about here, mainly centered around the “stability fund” they discuss alter in this paper.

I’m just imaging what would happen if the United States Government decided to start just defaulting on their debt. (The answer is the rate at which people would lend them money would skyrocket as their credit rating plummeted, and the USD would likely lose it’s place as global reserve currency, while it inflates in order to try to cover remaining debt) So basically not the analogy you want to evoke.

Intuitively to me it feels like at any point of serious expansion, arising after a long period of stability, it is going to be more beneficial to be a shareholder than a bondholder.

Okay, so contraction is interesting. We’re back to these bonds. My issue with these bonds again, is that you could potentially (though five years is a long time) be left holding a worthless bond. If I am understanding the clearing price part right, they are also basically trying to incentivize bond purchases near the peg, which is actually really clever. I quite like the thought that went into that, because it was initially counterintuitive to me. Basically, you are encouraged to put your order at a high price, because if they need more coins than that, it will actually fill at a lower price than your order, but you are guaranteed to be getting in first. Clever little bit of game theory and incentive setting. Props to the Basis team for that.

Quite frankly, I do not think I am qualified to analyze this part. My one fear is the fitting of GBM parameters to those assets, which generally trend up. I am still worried about potential Black Swan events, but I am not qualified to judge this model setup.

This seems true, if the price is expected to return to peg. Though I am not sure about people taking short positions, because of the cost. There is also the key point here that as long as there is sufficient liquidity, that will come in later when they discuss the “stability fund”.

I just realized they do not discuss their “stability fund” in their whitepaper. In some of their other documents, they say that they will use money raised to provide a stability fund that will provide off chain stability in price. So just like the other stablecoins, they are trading their own coin to maintain the peg. One of the biggest peg breaks for Dai was when their bot doing this trading failed. They also need this to provide the liquidity neccessary for price responsiveness, but in order to maintain the fund they will continually need money coming in. That is….dangerous.

Overall, I would not trust Basis, or any other stablecoin I have analyzed so far. Remember, I wrote this late at night, and in one straight shot without editing, so if you catch any errors please let me know.

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Billion Grains of Bullshit: Calling out an Exploitive Cryptocurrency Scam

Sometimes life has a weird way of working out for me, like I was bored on Twitter looking for something to write about and then suddenly a scam decided to start spamming my mentions. I love when the scammers come to me! Saves me a step in my research process. This is a pretty blatant and awful scam too. So what is the Billion Coins Scam? It is basically a multi-level marketing scam applied to cryptocurrencies. (Note: I will not be linking to their sites in this piece because I do not want to raise their search engine ranking, instead I will embed screenshots.)

So the very first red flag for me was that it required an upfront wallet setup fee. This is very unusual in the cryptocurrency space. Then saw their claims of free transaction fees and I got really suspicious. After you pay this fee you can then be gifted 25,000 Kringles. (Actually cookie rewards but redeemable for Kringles.) Then things get well let’s call it crazy, but honestly that is being too nice.

This is a claim they frequently make, however, their Twitter account decided to contradict them and said this:

This kind of fundamental disagreement always puts me on edge when I am looking for scams.

This is where I get that sinking feeling in my gut that tells me this is without a doubt a scam. This kind of thing has been tried before. Anything that can only go up is without a doubt a scam and you should avoid anyone selling it. Then I kept reading and started to feel very sick to my stomach.

This chart is complicated but let me explain how it works to the best of my ability. This chart is an attempt to incentivize people to evangelize for this project. It dictates the price at which coins can be bought and sold at on any single day. The idea is that increases every single day, and you need to continue to recruit people in order to maximize the growth rate. It also encourages original stakeholders to sell their original tokens in order to “cash in.” This is classic multi-level marketing structure and it tries to avoid any free market input.

Any attempt to sell your tokens for less than the agreed on price and you lose access to your wallet. Any disparaging remarks on social media mean that that you will no longer be able to use your wallet. So what happens when there are no people willing to take anymore tokens at whatever price they end up at? You are left with worthless, illiquid crap, that a centralized authority can freeze at any time. This isn’t just a scam it’s fundamentally antithetical to the point of cryptocurrencies. The fundamental issue with any pyramid scheme is eventually the world runs out of fools.

Even this part confuses me, if they are guaranteed to always increase in value then as a holder I want to be purchasing as many as possible! However, the truth is if you do that they are not pulling in enough of the wallet fees.

Yes you should definitely do this! Sign up babies! Spam your friends! Get everyone involved in your pyramid scheme. Make sure they keep collecting your wallet fees, you are not the one who will end up profiting from this.

Hard for me to imagine why these places would block your email? You are obviously on the up and up. Nothing to see here.

This is not decentralized. We have already established the admin team can censor. They are lying.

Tell me if you think they have made it over 1,000,000,000 users. (Protip: they haven’t and they won’t.)

This video is where they say that people flow is cash flow. This is classic multi level marketing. Stop watching after that it is revolting.

They also cannot even maintain consistency as to at what price this locks in at.

This story starts to go completely off the rails when you follow the connections of Dan Lutz who is closely affiliated with this scam.

So who is Dan Lutz? Well he is a frequent scammer, and in this video where he is interviewed by Tracy Davison and claims to have met M1.

Now who is Tracy Davison and who is M1? Tracy Davison is another known scammer who promoted a Ponzi scam the SEC brought down. And who is M1? Well strap in because things go absolutely insane here.

There is a cult that is led by “M1” called Swissindo who claim to be able to pay off debt thanks to a vast fortune of gold and platinum, and he claims to be the one true world leader, with the blood of every royal family running through him. (Yes it is that crazy.) It’s also a lie that is used to prey on the most societally vulnerable people.

Also piles of gold sound familiar to me, let’s check and see….

There we go, they did claim to me they had a bunch of gold. In my opinion this scam is closely connected to Swissindo and all of these scams are awful because they take advantage of desperate people who feel like they are out of options.

These scams are preying on people, and selling them a dream that they cannot deliver. It is evil to so wantonly attempt to profit off another’s hopes and desperation.

Just know if you are one of the creators or promoters of a scam like this, working to intentionally defraud people I hate you. And if you are a scammer do not be stupid enough to serve yourself up on a silver platter by saying dumb-ass shit to me on Twitter.

Gonna miss out on my abundance for this post guys

h/t to Kyle Gibson for helping with the research for this.

-Team Red

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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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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