A Guide to a Hypothetical Internationally Coordinated State Level Attack On Bitcoin

There was a recent comment by Joseph Stiglitz in which he expressed his desire to “shut down the cryptocurrencies”.  This prompted me to seriously consider how one would go about shutting down or seriously damaging Bitcoin. This is not an easy problem because Bitcoin is designed to be a remarkably resilient system, however, I do think with coordinated international action a significant amount of damage could be done.  My proposed plan relies partially on how Bitcoin does difficulty adjustments.

Every 2016 blocks (~2 weeks) the difficulty of Bitcoin mining adjusts so that blocks continue to come approximately every 10 minutes.  This is important because the hashrate dedicated to mining Bitcoins has varied significantly over time, and so this helps keep block time relatively stable.  However, major swings in hashpower can significantly change the time between blocks.

Furthermore, it is important to remember that Bitcoin mining tends to run with a pretty narrow profit margin, and as such major swings in price can significantly affect the profitability of miners on the network.

So knowing these things, how do we attack Bitcoin? Step 1 is to start buying up old mining hardware.  Because mining demands a high level of efficiency to be profitable old generations of miners are rapidly abandoned as miners with access to more efficient technology can reap larger rewards.  However, if you do not care about profitability you can acquire these miners. Now make sure you keep them off the network, you do not want people to know that you are acquiring hashpower as it would cause suspicion.  Right after a difficulty adjust bring all of your hash online and wait until the next difficulty adjustment.

The next step is to try to negatively affect the price as much as possible in as short of a time as possible.  These steps need to occur right after the difficulty adjustment after you brought your hash online. You will accomplish this price with drop with two primary techniques. The first, as a major state level actor you have seized and safeguarded Bitcoin and other cryptocurrencies in the normal course of law enforcement actions. You will now sell it all, or as much of it as humanly possible.  Instead of trying to maximize your potential monetary gains from these sales you will instead try to sell them on the lowest liquidity places you can access, with the goal of throwing off indices and inciting further selling from major holders. While you are doing this you will simultaneously try to pull a major source of liquidity from the market. If there exists for example a poorly regulated exchange and stablecoin who combine for a significant portion of the liquidity in the market you will seize them right as you begin to sell.  Allow as many people as possible to stampede for the exits.

Now we must do everything we can to reduce hashpower on the network.  Turn off all of the hashpower you brought onto the network, and simultaneously coordinate with China to convince them to cutoff as many of their miners as possible.  Seize any mining hardware you reasonably can and keep it off the network for now. This drop in hashpower, combined with a major drop in price will cause many previous profitable miners to now be mining at a loss.  Many will choose to turn off their machines rather than lose money continuing to mine. The lower the hashrate goes here the less usable the network is. Block times will lengthen and people will grow increasingly frustrated and apt to sell, perpetuating the cycle.  Whenever anyone sells mining hardware buy it.

Now you wait for the next difficulty adjustment.  This will take longer than it normally will because the time between bloks has vastly increased.  However, Bitcoin is a stubborn beast and there are likely some people who have isolated themselves reasonably well from state intervention and will mine to keep it alive.  Once the difficulty adjusts again, you will again deploy your hash which should now be even more. If you control the majority of hash you will mine empty blocks making the network entirely useful.  The only transactions you will allow through are those meant to help you sell your block rewards. You will sell your entire block rewards with the goal of continuing to push the price even lower.

If you do not control the majority of hash, but do control >25% you will selfish mine and continue to try to identify other miners on the network and seize their hardware.

Regardless of whether or not you are controlling the majority of the hash the next difficulty adjustment should come quick, in less than two weeks.  Again you will withdraw your hash and let block times lengthen, but now transactions will be going through, giving desperate people a chance to sell.

Lather, rinse, and repeat.  Eventually you will control the majority of hashpower and once this happens you will force the community to make incredibly tough decisions.  These could include changing the hashing algorithm or changing how difficulty adjustments work. These decisions are likely to be contentious and will therefore further fragment the community.  If these contentious issues result in forks you will see people on each side of the fork trying to dump the other side of the fork, further depressing the price. Even if some vague semblance of a Bitcoin is left standing after this attack it will be a shell of its former self and you will have demonstrated to people that it is more vulnerable than they have ever believed.  Enjoy your continued monopoly on money printing.

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On the Social Scalability of Bitcoin and the 21 Million Cap

Many Bitcoin proponents, chief among them Nick Szabo, laud Bitcoin for its social scalability.  In order to discuss this issue fairly we must first define social scalability. In the famous blogpost where it was first used, Szabo defines it as:

“Social scalability is the ability of an institution –- a relationship or shared endeavor, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors — to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate. Social scalability is about the ways and extents to which participants can think about and respond to institutions and fellow participants as the variety and numbers of participants in those institutions or relationships grow.  It’s about human limitations, not about technological limitations or physical resource constraints.” (http://unenumerated.blogspot.com/2017/02/money-blockchains-and-social-scalability.html)

First, I must acknowledge that there are significant benefits to Bitcoin’s design that enable social scalability.  Among these are the expense required to censor a transaction, the prevention of double spend without a centralized entity, and the issuance of rewards without a central entity.  Each of these has contributed significantly to the success of Bitcoin and are what make it such a compelling piece of technology to me. However, certain design decisions have created a significant and hard to rectify argument surface that may limit future growth.  The most important of these, in my opinion, is the choice of a finite, hard cap.

Challenging this hard cap is challenging many of the fundamental ideas held by Bitcoiners and as such I’ll belabor certain points in order to ensure they’re addressed thoroughly.  First of all there is a conception among Bitcoiner’s that inflation is inevitable in our modern fiat system, and that this inflation will be bad either for them individually, or for society as a whole.  I am willing to concede among these points that inflation may sometimes be bad for the individual, however I contend it is often still a net-positive. Furthermore, I want to challenge the assumption that a finite supply is useful in reducing argument surface.

As Bitcoin’s are lost to theft, technical mistakes, and deaths the supply will continue to contract as Bitcoin becomes a deflationary currency..  For existing holders this seems to be a positive thing. The more the supply contracts the greater proportion of the total value their investment represents.  However, it may still be a net negative if it places an upper bound on total value of Bitcoin. Furthermore, it is valuable to realize that, due to the emission schedule of Bitcoin, a large number of Bitcoins are held by a small number of people.  I will not attempt to estimate exactly how many, because it is beyond the scope of this article, but I would estimate 0.01% of the world’s population possess at least half of the Bitcoins that will ever exist (it is likely much less, for statistics go here: https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html).  This is an intense concentration of wealth, and as the price of a Bitcoin measured in fiat goes up you will expect significant wealth to accrue to these holders.

This natural enrichment of early holders could be considered fair for them shouldering the lion’s share of the initial risk, and believing in a nascent technology before there was significant evidence it would survive.  However, the truth of the matter is that having such disproportionately large early holders makes it harder to convince people to buy in, because the primary benefit to their investment is enrichment of the early investors.  Now, the response here would be that these people are still incentivized to buy in, as they will end up capturing a larger share than the later holders, however, a structure depending on convincing people to enrich early holders at the expense of later investors is a structure that has made many people at the top quite wealthy.  Even now while we are still relatively early in the long life of Bitcoin, it’s difficult for me to envision mass usage, as most are unwilling to enrich a few solely to gain censorship resistant transactions. However, they may purchase Bitcoin as a speculative asset, but my only response to that is I do not see it as a path to adoption.

Furthermore, with Bitcoin (or any other deflationary currency) widescale adoption would provide the largest holders with an entrenched power base.  If it were to become globally accepted in the manner described by the proponents of hyperbitcoinization, then early adopters will obtain incredible wealth, and from that, shocking power.  Since they are incentivized to hold that wealth and not to spend or deploy it, the wealth changes hands infrequently.  This appears to predispose Bitcoin to create an entrenched oligarchic system.

Next, it’s pertinent to consider the value of inflation.  Important to this conception is the idea of a risk curve. The risk curve, which can be gracelessly summed up as a comparison between two assets showing how the change in risk affects the expected return, is important to understanding the said value of inflation:  For example, you may choose to switch your excess money from USD (low risk, negative expected return) to equities (high risk, high positive expected return). The value of maintaining the negative expected return for USD is that it incentivizes greater deployment of capital up the risk curve.  Investors are willing to take on risks in order to protect their wealth and ensure returns. This capital allows for the expansion of the total economic pie as businesses grow and create new products, new efficiencies, and new markets. However, deflationary money can seriously mess with this contention.  If you have a well-established deflationary money then your money will have (low risk, positive expected return), and as such you have little incentive to deploy it up the risk curve. This may seem to be a relatively small and technical matter but it is a significant matter. Hyperbitcoinization would be destructive for society and would result in a regression of economic games to zero-sum along with establishment of an entrenched oligarchy.  This may not prevent adoption, but it may affect the argument surface.

My argument rests on,  “a relationship or shared endeavor, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors — to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate.”  The hard cap on Bitcoin has created disincentives to cooperative behavior. The reduction to zero-sum or net-negative games makes it such that the nature of every interaction becomes competitive instead of cooperative.

There are a couple potential counter-arguments to my points here.

The first many Bitcoiners/Austrians (big overlap there) will turn to is an effect referred to as the Cantillon effect or the injection effect. I am not a true economist, but it can be summarized as the place where money enters a system, has a significant effect, and is likely to enrich those closest to the injection point.  There is little, but not zero, empirical evidence for this in traditional central banking systems, but even if we accept that it is a real effect other features of Bitcoin help minimize it. Consider who is closest to the injection point in Bitcoin: the miners. The miners are required to either exchange it for fiat to pay power bills, or purchase power directly using Bitcoin.  This cost to produce helps eliminate the disproportionate wealth effect (if it exists) from monetary injection.

Some, Hasu comes to mind, have advocated that instead of removing the hard cap there could be a requirement to move your coins regularly or they will be ‘reclaimed’.  I have always considered this idea seriously problematic because of the implications it has for some of the fundamental tenets of Bitcoin. One of the primary tenets of Bitcoin is that your key gives you, and solely you, control of your Bitcoin, and this invalidates that assumption. For those who keep their coins in cold storage it also represents a (slight) security risk to have to access the coins and move them to a new wallet.  Additionally, this could destroy the predictability of mining rewards which may change the incentive structure. It seems to me this would more fundamentally change the protocol and argument structure than simply continual issuance.

The argument that creating a hard cap and creating such a cult around the inflation schedule has reduced the argument surface surrounding Bitcoin and in so doing improved its social scalability.  This would fit neatly with Szabo’s definition, as it basically limits the participant’s ability to influence the inflation rate. It also helps with the argument that a cap was necessary in order to achieve any social scaling of Bitcoin, because the early adopters would not have been motivated to use it without that cap.  This theory does have significant merit, and is even somewhat compelling to me. However, the fact that we are already having regular conversations about the cap suggests to me that the argument surface has not been maximally minimized.

The final argument I’ll address is that modification of the inflation schedule begets greater modification of the inflation schedule.  I may have to concede this argument. It is possible that by deviating from the cap we have created a scenario where people will continually advocate for changes to the inflation schedule, but Bitcoin governance is helpful here.  Bitcoin relies on what can be termed fork-based governance in which people have the freedom to run exactly what node implementation they choose, miners choose which chain to mine, and exchanges choose which versions to trade. This means that the only way for this inflation schedule to change is with a very difficult consensus making process, which reduces the likelihood of more than one switch (and makes the one switch I want incredibly difficult).

Fundamentally, Bitcoin does solve several important scaling issues by creating irreversible, censorship resistant transactions without a central party.  However, the economic model of Bitcoin limits social scalability and mass adoption.  It may also be important for Bitcoiners to realize that they may be potentially limited their returns and adoption due to devotion to this hard cap.

Thank you very much to CasPiancey and Kyle S Gibson for their help with this article.

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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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