Monday, June 5, 2017

Bitcoin: Is decentralization possible?

Disclaimers- This is all coming from someone who doesn't own any bitcoin or other cryptocurrencies, and I don't have a PhD in cryptography (crypto is insanely complicated at a software level) so I am giving a pass to most of the software questions with crypto.  This is primarily an equity investor perspective on the transition point between the digital side of crypto and where it meets the water's edge of requiring real world resources, and ultimately being influenced by real economics and politics. 
And yes I think this tangentially ties into Short VIX, we will get there!

Is Decentralization possible?

I would break the crypto crowd into the groups of true believers/ early adopters and investors/speculators.  However far down the chain from the true believers of a decentralized digital currency, when looking at it from an investment standpoint as a commodity such as gold, there must be some trailing connection back to its original 'value' to justify it's speculative value.  (I'll get into intrinsic value as well)
I understand all or at least some of the vision of the true believers- a decentralized currency which isn't manipulated by central banks, interest rates, and global politics.  This is based on a public ledger which is transparent and accountable for transactions, yet anonymous for individual users.
I don't even want to dispute the main bulletpoints against crypto such as:
  • It isn't backed by anything (neither is any currency, its just public perception)
  • It can be hacked (again not even getting into the software behind it but assuming the hash/algorithms aren't solved like SHA 1 , plus similar hashes back up many non Bitcoin services) 
  • It isn't doesn't scale (Assuming software changes such as soft and hardforks can overcome the maximum block size and current max transactions caps. Again I'm trying to avoid the pure software/ math PhD issues.)
I want to discuss the point where the digital currency meets real world resources and policies , which ultimately tie back to the currency-

I wonder the original vision of Satoshi, if he imagined many people privately running the full blockchain node on their computer, and possibly mining with a backup computer, or even a few computers together in a garage?
Whatever the vision, it very quickly morphed much past that into groups coming together to pool resources and build huge computer farms in cooled buildings/warehouses to mine huge amounts of bitcoin.  Whats even more impressive is the hardware innovation of ASIC processors  which are basically a hardware specifically optimized to compute the Bitcoin hash, effectively making normal mining noncompetitive. 

Here is my first question to Bitcoin true believers-
How can the mining infrastructure and the ideal "decentralization" of node management and mining account for the acceleration of infrastructure/ hash power at the top?
   Unfortunately there is a lot of reading to do to get even close to up to speed with the huge amount of interlocking pieces, but here is a semi quick overview on the ASIC and ASICboost hardware situation.  The key takeaway is the potential patent issue of current or future hardware/software implementations that give an advantage in Bitcoin mining.  This brings real world government and patent law into the "decentralized" digital currency.  Seeing how quickly that came up in the scope of Bitcoin, was interaction with government ever avoidable?

Even if there was no patent/hardware advantage to specific processors, we still must account for the concentration of mining in China, with pools which account for ~60% of blocks mined. 

This comes to my second question-

How does the "decentralized" model account for the natural accumulation of resources at the top, who ultimately influence the software direction of Bitcoin itself?
The biggest example character I see is Jihan Wu who runs one of the largest mining pools and has influence on the software direction of the blockchain.
As the direction of software changes are based on the majority of mining, we see the influence of single actors rising almost organically in what was supposed to be a "decentralized" system.  Again there is a lot of reading to do but given the infrastructure advantage Wu has, his position on potential software forks obviously leans in the direction of an advantage to his own infrastructure system and against any "nuclear" option which reverts the ASIC advantage.

I was going to get into further valuation/ fundamental analysis (which I think is stupid for stocks, so why delve into it for another asset class) but maybe that will be for another article, if anyone cares.
While these questions (which I haven't seen a rebuttal to) point issues at Bitcoin and cryptocurrencies, I think it points out an even more fascinating characteristic of people and economies- the organic ability to centralize.
Despite entropy of the universe and the human condition which has us on the trajectory to destroy ourselves, moments like this show an incredible ability for people to pool resources to optimize, even if the consequence is destroying the underlying ideal of democracy.
There is an incredible parallel here to the trajectory of governments where an initial independent "decentralized" group of people come together, pooling resources to achieve more, while in the process end up throwing away their freedom for "security."  
If Wu didn't do it with Bitcoin it would easily have been someone else, because it is in human nature to optimize even if it means destroying the long term structure (look at smog in China).

If you haven't read enough secondary articles yet, here is a Google Talks of Janis Varoufakis on the 2015 Greek crisis.  At ~20min he summarizes a lot of my thoughts on cryptocurrencies concisely:
Money can be digital, but it can't be apolitical. 

Money is a function of human emotion.  He is speaking to engineers/number people at Google and points out just because money/economics has numbers in it, it is an illusion to think that some algorithm can solve global finance. Money has numbers but is more than a math problem.

And I promised this would tie back to Short VIX-
Given all these points, is decentralization truly possible?  Given the history of the planet for resources to pool, organize and create a top heavy power structure, why would Bitcoin be able to break out of that as long as it is in the rest of our physical world?  There are still people involved. 
Given all of this I truly don't think cryptocurrency has the capacity to take over global finance in the sense that the aforementioned true believers do. That means the true power still lies with central banks, which will ultimately suppress volatility- by printing their way out of a crisis.  
Cryptocurriences aren't centrally managed at the software/scarcity level, and can't print their way out of a crisis.  I try to make Short VIX more than the trade idea of short VXX spreads, it is a world view.  Volatility is overstated, new structures will not be destructively disruptive, things will blow over.

And finally , a wonder Yellen -

1 comment:

  1. So as far as i can see now is a golden time of bitcoin or other cryptocurrencies. As you`ve said in the end someone will take major part in cryptocurrency life. And they would be able to keep main resources in here. Now bitcoin gives birth to thousands of business owners. Like these guys, for example: casherbox