Certain topics recur periodically in my work. This page sorts some favorites thematically.
As a brand new non-sovereign monetary commodity still undergoing a process of monetization, Bitcoin is perhaps the most curious development in the last few decades of capital markets. It’s simultaneously impregnated with the values of the cypherpunks, while also being a tabula rasa for the visions of its users. While Bitcoin may have been possessed of intentionality at creation, today its telos, or purpose, is fought over by rival tribes with ferocity. Constitutional debates rage, as adherents practice “Satoshi exegesis” to try to ascertain what he intended for the protocol.
This teleological muddle is sometimes held up as a shortcoming, as more centrally-controlled projects move more nimbly. But there’s an alternative reading: the leaderlessness and emergent nature of the project is one of its greatest strengths. This debate strikes right to the core of the project, so it’s no surprise I have been fascinated with it for a long time.
- Medium, Bitcoin’s Existential Crisis (originally titled: ‘What is it like to be a Bitcoin?’)
- Medium, Visions of Bitcoin (with Hasu)
- Hidden Forces: What is Bitcoin? A History and Ontology of the Cryptocurrency, hosted by Demetri Kofinas
Something I often think about is how Bitcoin can scale and function in a layered manner as the liability-free collateral for a robust financial system. Currently, Bitcoin is partially financialized, held by a patchwork of intermediaries like exchanges and custodians. Some of these have begun to offer banking services, as a proto-crypto banking network has begun to develop.
It’s my belief that, given Bitcoin’s amazing auditability and verifiability properties, and the ease of taking “physical” delivery of the asset, Bitcoin could function as a kind of neo-specie to power a free banking system that would echo the successful periods of unregulated banking in the 19th century in places like Scotland.
A development of a system like this would enable Bitcoin to scale its usage of the base-layer blockchain and functionally scale in the layered manner than visionaries like Hal Finney predicted. However, much work remains to be done: Bitcoin banks operating today must be held accountable, lest they abuse their privilege, as they have done many times in the past:
- Coindesk, The Case for Bitcoin Banking (Despite Cred’s Bankruptcy)
- Medium, How to scale Bitcoin (without changing a thing)
- Medium, Unpacking Bitcoin’s Assurances
- Bankless, A crypto banking reality check
- BlockFi, BlockFi live
- On The Brink, Lawrence White – Free Banking in the Age of Crypto
Proof of Reserves
Proof of Reserves / Proof of Solvency is the idea that custodial businesses holding cryptocurrency should create public facing attestations as to their reserves, matched up with a proof of user balances (liabilities). The equation is a simple one:
Proof of Reserves + Proof of Liability = Proof of Solvency
If you can prove to the general public that your cryptocurrency held on deposit matches up with user balances, you can plausibly claim to be solvent. Of course, in practice, this isn’t quite so simple. Proving that you control some funds on chain is trivial, but you could always borrow those funds on a short term basis. This is why point-in-time attestations mean relatively little. Proving liabilities is tricky, and generally requires an auditor to engage in a full assessment. For instance, exchanges can omit certain liabilities to ‘cheat’ a PoR attestation. This is why I recommend both a user-facing PoR protocol, allowing users to obtain ‘herd immunity’ by collectively verifying their individual balances, and an auditor-facing PoR protocol, to grant additional assurances that the liabilities are faithful to reality.
So a Proof of Reserve program isn’t entirely trustless. However, it’s still worth doing, for several reasons:
- It’s good housekeeping. A periodic PoR attestation demonstrates to your end users that you have your house in order, and that you are being vigilant with regards to solvency
- It’s a strong self-regulatory measure. If exchanges collectively adopted PoR, regulators might be more inclined to adopt a light touch approach. Much better to operate in relative freedom with voluntary self-regulatory measures rather than suffering onerous regulatory impositions later on
- It helps safeguard against toxic operators by making fractional reserves virtually impossible to hide. These exchange failures reflect badly on the whole industry, so it’s in everyone’s interest to avoid them
More will be coming soon on PoR, but here’s what I have so far:
- Coindesk, How to Stop the Next Quadriga: Make Exchanges Prove Their Reserves
- Medium, How to scale Bitcoin (without changing a thing)
- On The Brink, The auditor view of Proof of Reserves (with Noah Buxton and Jeremy Nau of Armanino LLP)
The political economy of Bitcoin
Bitcoin isn’t just a monetary phenomenon. It’s a profoundly political idea. Some of its critics use this as a smear, attempting to class Bitcoin as a dangerous or radical notion. While Bitcoin is a neutral money, thanks to its free market initial distribution as well as the abolition of monetary discretion within the protocol, its imposition on the world is decidedly non-neutral. Bitcoin is perhaps best described as a revanchist movement, aimed at taking back what certain developed countries once had: a system of free and unconstrained banking based on a gold standard.
Thus it’s very important to understand the values that are embedded in the protocol: self-determination, a strong and inviolate respect for property rights, a rejection of seigniorage and ‘Cantillon insiders’, and an indifference to the contingencies of an individual’s birth or circumstances. All are treated equally by the protocol.
- Medium, A most peaceful revolution
- Medium/The Bitcoin Times, The cat is out of the bag
- Medium, Lessons from the uneven distribution of capital
- American Mind, Après Le Déluge, Bitcoin
- Coindesk, Corporate America Knows the Bailout Is Baked In
- Coindesk, Crypto Progressives Become Conservative With Their Own Chains (originally titled ‘The paradox of crypto-progressivism’)
- Palladium Podcast: Bitcoin as a Disciplinary Force, hosted by Wolf Tivy
I make no secret of the fact that I believe that a complementary phenomenon to Bitcoin is the insertion of fiat currency on chain. Far from being competitive with Bitcoin, I view this trend as highly synergistic. Cryptodollars have only been able to reach critical mass because of the infrastructure built to support Bitcoin: exchanges in virtually every country on earth, and ever more sophisticated wallet technology, in particular on mobile. And as cryptodollars proliferate, they introduce users to the notion of storing value as information, popularizing non-state cryptographic bearer assets.
In the long run, Bitcoin will impose discipline on every single central bank, but in the near term, the greatest threat to weak sovereign currencies is simply high-powered, frictionless cryptodollars – delivered on crypto-financial infrastructure. While I initially wasn’t impressed by cryptodollars, I have come to see them as occupying a different niche: they are ultimately liabilities of the banking system and will never be liability-free “digital specie” like Bitcoin. Nevertheless, it is cryptodollars which have seized the spotlight this year.
- Coindesk, The Crypto-Dollar Surge and the American Opportunity
- Castle Island, Cryptodollars: the story so far
- Coindesk, Policymakers Shouldn’t Fear Digital Money: So Far It’s Maintaining the Dollar’s Status
- On The Brink Podcast, The crypto-dollarization miniseries
- ARK Invest’s FYI Podcast: A History of Bitcoin’s Predecessors, Dollarization, and Stablecoins, hosted by Yassine Elmandjra
- Bankless, Crypto-fiat: Mutualistic or Parasitic?
- On The Brink Podcast, Matt Ahlborg on Bitcoin as a bridge currency
How to measure public blockchains
Actually determining the relative importance of public blockchains is a controversial field. While measures like transaction count and market capitalization have historically been lionized, I have endeavored to help researchers think beyond those metrics and look for more sophisticated measures.
Time to finality
Relative measures of economic significance
- Coin Metrics, Evaluating Bitcoin forks with network data
- Medium, Transaction count is an inferior measure
- SSRN, Calculating Cryptoasset Market Shares (with Konstantinos Stylianou)
- HBS Blockchain Conference (2019), Assessing the relative economic impact of public blockchains
New measures of transactional value and economic size
- Coin Metrics, Introducing Realized Capitalization
- Coin Metrics, Introducing our adjusted transaction volume estimates
- Baltic Honeybadger Conference (2018), Bitcoin as a Novel Market Institution (where I first introduced Realized Capitalization)