Bitcoin zero-ville

I meant to blog about this Liberty Street Economics piece on Bitcoin mining last week, but ran out of time.
Which is kind of apt because the economics in question kinda relate to running out of time in competitive terms.
As the authors  found:
As the aggregate hash rate declines, the aggregate network profit should return to zero. We may, however, see increased concentration of mining power in locations with the cheapest energy costs.

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Scaling and why it matters

Adam Smith never talked about scaling per se. But he did say this:

When the division of labour has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes, in some measure, a merchant, and the society itself grows to be what is properly a commercial society.

Which is to say that you can’t have civilisation without division of labour. The two are inseparable. Indeed, it is only when we specialise in certain sectors or develop expertise that we can achieve the sort of efficiencies that allow civilised existence to manifest.

Trust and centralised distribution are essential ingredients in that set up because without them there is no point in being a specialist. The benefits of specialisation would not be able to flow further because nobody would be able to trust you had done your job properly, thus eliminating the scaling advantage. Hence civilisation would not follow.

Look around. Structural specialisation based on trust in centralised process is everywhere around us. From the food we consume — mostly produced, slaughtered or prepared by other specialists — to the energy we depend on, or the entertainment we enjoy. Even when we cook our own meals, the ingredients, hardware or recipes we use are all the product of many other people’s specialised activities. And what makes all that specialised delegation possible is trust in the units that entitle specialists to the product of other specialists.

The way capitalism organises itself, those who specialise in sectors that are most demanded by society or which are most difficult to dislodge competitively  — because of years and years of necessary investment and specialisation — gain the greatest social rewards, which are mostly distributed to them in varied claims on the product of other people’s specialisation.
This can cause resentment, tiering and inequality — especially if the specialism is inherited rather than earned. That’s not good for society because it prevents new generations acquiring the skills or knowledge necessary to deploy in useful specialisations of their own and develops a dependency on the primary specialist at the cost of other specialisations and diversity.
Scaling in the digital economy
The digital economy, like the financial industry, has been profoundly useful in encouraging smarter distribution and matching of other people’s specialisations vis-a-vis their wants and needs. When done well, this becomes a service that allows society to organise itself more efficiently, growing the pie for everyone. It — the service — even becomes a specialist activity in its own right.
This works great for as long as these specialists, whose core product is trust in themselves to better distribute product, don’t demand excessive returns, don’t abuse the trust and society as a whole doesn’t grow too dependent at the cost of its own knowledge, capacity or expertise.
Sadly, in both the digital and financial industry the temptation to abuse this trust can be significant. In some cases, just as per the real economy, powerful monopolies can emerge squeezing the fruits of other people’s specialisation beyond their entitlement. It’s arguably more malicious in finance and information technology, because their returns are based on allocating other people’s goods and services not even their own. Consequently, if and when there’s a major breach of trust, the implications for the real economy can be significant.
Critically, trade related scaling is impacted because vendors/producers have to once again supervise distribution directly, almost on a back to barter basis. But that’s not sustainable for a world economy which has structured itself to take advantage of scaled up services.
It is these circumstances that understandably lead us to the search for a new type of digital or financial organisation, one that doesn’t need to be trusted at all. The thinking is that if you can turn finance or information technology into a mechanism by which people’s wants and needs can be matched with those of other specialists at their own prerogative, there is no scope for abuse. You will remain in control whilst drawing benefits from information-based distribution mechanisms provided and developed by someone else.
But as I pointed out in this post, this may be a dangerous fallacy.
For a so-called P2P system to effectively reduce our dependency on a central agent or institution it must instead increase our dependency on bilateral trust relationships at the cost of our own labour and expertise. This is why these systems can’t scale! 
And because unscaling or zero-scale structures simply can’t support our modern system, P2P systems don’t tend to stay P2P systems very long. They quietly evolve instead into centralised or pejorative structures.
That they have to do this is no sin of course. It’s inevitable. What is a sin is their insistence to the common man that they are somehow different to the trust/centralised systems that have come before them.
In fact, that’s the most dangerous thing about the current P2P platform fad. By presenting itself as “trustless”, it encourages the common man to take his eye off the trust abuse ball. That’s not good for society because it’s far easier to abuse someone’s trust if they didn’t even know they’re having to trust you.
In any case, what you need to know is that as time moves on, the rules that govern scaling in the real world end up governing these “P2P” systems as well. Small eBay vendors are pushed out by professionals. Amateur property landlords or hospitality agents lose business to professional landlords or hospitality agents on AirBnb. And in companies like Uber, the lowest cost service providers survive at the expense of the higher cost agents — mostly those who are prepared to go into debt to the same extent or diminish their quality of life.
Amateurs using these platform either get taken advantage of by more adept professional parties or end up trusting third parties to make decisions on their part without even knowing it.
Before you know it these platforms moat up, the winning agents become entrenched vested interests, and we arrive back at exactly the same model we had before.

Capital City

Last night — as part of my research into Thatcher’s enterprise zone initiatives and their effects on business incentives and jobs — I found myself re-watching the British TV Show Capital City from 1989.

I must have been about 11 when I first watched it ( mainly because my mother was excited about the fact there was a polish actress in it) so at the time I had no idea what the hell was going on with respect to the financial narrative.

Yes, it’s kitsch. Yes, it’s dated. Yes, it’s poorly made. But goddamit, for someone like me, it’s as fascinating an insight into finance and how it was perceived during the deregulation period as the Paul Tudor Jones 80s documentary which has since been pulled from the internet. High yield currency swaps. EEC frauds. Space agency financing. Insider dealing. 80s excess. Cliche trading chat. Rigging. ALL THERE. I’m on my third episode already.

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Cryptic bullet points

I have A LOT of theories/post ideas bustling around in my head, but sadly not enough time to explain the logic behind them or to write them. Many are counter-intuitive. Some are more obvious but under explored.

So here’s a list of stuff I am currently thinking about, considering or quietly exploring and bookmarking in my mind, which may or may not be relevant to the bigger picture and which I don’t have time to explain my thinking on at this point.

  • Too much competition is a bad thing, especially when it involves providing below cost or subsidized services by anyone other than a publicly accountable entity. 
  • P2P lending is turning into a Pfandbrief.
  • Some P2P firms are probably mispricing returns, hence the interest from institutional investors who want yield without an S&D price discovery process. There is no bond style price discovery auction process.
  • Traditional offshore centres are being cut off from predictable/dependable liquidity channels and this is going to be a major problem for them in the next few years.
  • Fintech is being seized upon as a solution to the above, hence Osborne’s desire to make London the fintech capital of the world.
  • The history of “the corporation” behind the City of London is pretty fascinating, from a quasi-autonomous relations with the state perspective.
  • Offshore conduits prey on HNWI who don’t understand risk and are so delighted with their tax savings they overlook risks they are being duped into taking elsewhere. Do they inadvertently end up funding  some of the riskiest assets in the world? Do they know this? Do their tax evasion tendencies make them less likely to sue or complain about fiduciary mismanagement?
  • If offshore tax centres quietly use HNWI funds to fund the riskiest loans in the world, does that mean tax evasion (unless the losses are bailed out by the state) is self-defeating on an aggregate level?
  • Without the potential for tax savings would these funds be much more risk averse? Does this explain the post 2008 shortage of safe assets?
  • How exactly do Chinese cash buyers pay for London properties? I want to know the actual mechanics.
  • Is Google actually a hedge fund/financial org?
  • The next crisis will probably be a billionaire crisis. This is good for the middle classes.
  • Championing anacyclosis as a socio economic theory. It’s the only political system/theory that makes sense to me.
  • The real reason billionaires own super yachts.
  • The return of media 1.0. It will be making a comeback because quality, filtering and neutrality is worth paying for.
  • The return of single-entry accounting (aka blockchain) and whose interests it really serves. And no, blockchain isn’t triple entry.
  • The history of RTGS and why 2008 proved instant clearing is not necessarily a good thing.
  • Amateur investing is a really bad idea for the economy. (From a division of labour perspective – doctors should not be worrying about selling the Dow when operating)
  • What do the sopranos and goodfellas have to do with Switzerland? Arguably, a lot.
  • Turning every day people into gamblers is a core part of the  fintech model. 
  • Alpha is based on luck or information advantage/someone else’s dumbness.
  • Gambling centres: there’s a reason we used to put them in inhospitable places. And there’s a reason why they invested a lot of money in turning them into hedonistic hubs. 
  • Lottery as a public funding mechanism.  
  • Dubai as an offshore centre.
  • Commodity traders are actually EM financiers, doing business where banks fear to tread.
  • Twitter is not a sustainable business model. Nor are most winner-takes-all unicorns.
  • Fintech: too small to succeed. Also, finance can’t be democratized and is always going to be oligopolistic or monopolistic. The product is access to consumption, which has to be rationed/limited to have value. You can’t compete on rations.
  • How certificates of deposits originated in the first place.
  • The “everything now” economy compromises our collective human intelligence. Policy is also hindered and becomes way too reactionary.
  • Gold is the original offshore tax haven.
  • Contrary to popular belief Bitcoin is a luxury market and its fees will eventually reflect that. If they don’t, banks will exploit the resource parasitically at someone else’s cost. (Back to the subsidization point.)
  • Linkedin is a misleading false information hub and a propagandist’s dream. 
  • I have a pre-written post called “don’t buy anything!”, referring to the Goodfellas scene with the fur coat, which is about consumption censorship for the sake of power accumulation.
  • ETFs were ultimately devised to give market makers the chance of reaping profits from countercyclicality without the associated balance sheet risk and the ability to book these profits today rather than tomorrow. Outsourcing the role of risk warehousing to dumb money.
  • Is ethical finance an oxymoron?
  • The Enron emails are really insightful.
  • Ronen Palan’s book on offshore banking is really worth your time.
  • Prefunding/full reserve system is not compatible with growth because of depreciation.

An Alpha-bet to a Zero-ville

From Google’s official blog on Monday:

Our company is operating well today, but we think we can make it cleaner and more accountable. So we are creating a new company, called Alphabet ( I am really excited to be running Alphabet as CEO with help from my capable partner, Sergey, as President.

What is Alphabet? Alphabet is mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main Internet products contained in Alphabet instead. What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose-sensing contact lens), and Calico (focused on longevity). Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related.

For Sergey and me this is a very exciting new chapter in the life of Google — the birth of Alphabet. We liked the name Alphabet because it means a collection of letters that represent language, one of humanity’s most important innovations, and is the core of how we index with Google search!

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And now from Jean-Luc Godard’s Alphaville (the english translation):

And what’s Alpha 60? A giant computer, like they used to have in big business Nueva York… IBM…Olivetti… General Electric…Tokyorama… Alpha 60 is one hundred and fifty light years more powerfulI see. People have become slaves of probabilities. Their ideal here, in Alphaville is a technocracy, like that of termites and ants. I don’t understand. Probably one hundred and fifty light years ago. One hundred and fifty, two hundred there were artists in the ant society. Artists, novelists, musicians, painters. Today, no more. Nothing. Like here. Has Professor Von Braun organized it all? He obeys logical orders. Then why didn’t you kill him? “Why”… what does that word mean? I forgot…

Let’s finish with some wise words from Lemmy Caution:

The truth is that the essence of man is love and faith courage, tenderness, generosity and sacrifice. The rest is the obstacle created by the progress of your blind ignorance.

Breaking the wheel

About a year ago I interviewed Geoffrey West, a well known complexity scientist and theoretical physicist at the Santa Fe Institute, regarding city scaling and the ticking time bomb we’re facing with regards to sustainability.

At the time I was in my tech-utopian phase. I put it to West that technology could help us overcome this challenge, if not, in the words of Khaleesi, “break the wheel” which represents the vicious nature of the innovation cycle which West claims quickens the pace of life for all of us unsustainably.

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According to West’s research the period between each disruptive cycle is getting shorter. At the same time the scale of the disruption is intensifying — something which must continue to happen if our growing and scaling system is to avoid collapse:

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But West is not optimistic that technology can break the wheel. In his opinion, the system always wants to return to the equilibrium state, and this — unlike the disruptive cycle — is connected to humanity’s own capacity for change, which isn’t all that great, meaning we’re probably running out of time.

Essentially, it takes much longer for human behaviours to change than for new technologies to be rolled out. Even if our behaviours did change, there’s so much legacy infrastructure around, the environment prevents them from changing enough to ensure we can keep up with the innovation cycle.

Geoffrey West, in short, is very pessimistic. His research states that the bigger human social networks get the more they speed up, a fact that runs contrary to the way biological and sustainable natural systems scale. These slow down as they get bigger.

Why bring this up?

Because, like I said, at the time I was sure technology could overcome this challenge. I was drunk on the potential of the sharing economy to allow us to do more with less.

Many months later, however, I think I finally understand West’s concerns.

With respect to the sharing economy’s ability to “unscale” things he specifically noted that this is probably a short term phenomenon while the economy adjusts to a new phase.

This is important because it gets to the heart of the Silicon Valley problem.

First, for networks to genuinely unscale they have to be true sharing economy models. That means homeswapping rather than Airbnb. Carpooling not Uber. Shared dining, not bespoke individualised dining at home. Problem is those models genuinely can’t scale, so they won’t ever be squillion dollar unicorn businesses. Bitcoin too is notoriously difficult to scale. Unlike the sharing economy models, which at least unscale by taking advantage of existing capacity, Bitcoin neither scales nor saves resources. It’s the worst of both worlds. And over time the network will realise the only way it can sustain itself is by scaling, which means turning into the conventional banking model.

West’s point ultimately is that humanity tends to pile resources into the models that can scale. This, of course, is why we’ve ended up with the rise of the Faux Sharing Economy, epitomised by Uber and Airbnb, not homeswapping or carpooling.

These companies don’t stop the scaling effect. To the contrary, they speed it up. Indeed, the only difference between their models and conventional corporate models is that they transfer the cost and risk of fixed asset acquisition to an unlimited amount of contractors, thus breaking the corporate structure’s ability to keep things in check and to prevent over-investment. There are no five year plans in this sector. From a scaling and innovation cycle point of view these outsourcing corporates grow like cancers because there is no management oversight or control over growth and investment. From the perspective of companies like Uber the more regions, human and fixed capital they control the better.

As West noted to me:

While the innovations may not scale at the moment, in the long run — if they are to persist — West believes they will no doubt settle down to the same scaling forces that have dictated urbanisation trends since the year beginning of civilisation.

There are two significant problems with all this. First, and perhaps most importantly, it runs contrary to the interests of an “eco-system”. This is ironic, because the word “eco-system” is perhaps the most overused word in technological circles. But as West and colleagues have noted in papers like this, corporates that have a tendency to grow through winner takes all acquisition fests deprive the system of diversity. In fact, they imbalance the system and make it less resilient because their performance doesn’t improve as they grow. These are faux eco-systems.

When unrestrained growth of one or a few of these unicorns is allowed it can lead to a systematic imbalance much like the unrestrained growth of cells causes cancer. They become a new too big to fail entity.

Which is to conclude that the likes of Google, Uber, Airbnb kill diversity. They lead to a frightening homogeneity and over-dependence in the system which suggests only their way is the right way, and contractors have to conform to that methodology to succeed.

From the New Scientist:

So a few big companies keep on getting bigger but, on average, do not improve their performance. Here, we emphasise the importance of an ecosystems perspective: 
it is precisely due to the web of interdependencies among all companies that the unrestrained growth of one, or a few companies, leads to a systematic imbalance analogous to the unrestrained growth of cells we see in cancer.

Equally critical to this problem is the “copycat” effect.

In earlier research, we developed a tool to evaluate the ecosystems of financial markets, which identified two mechanisms that act as catalysts for the emergence of a crisis. The first is banks copying the business models of the most (short-term) successful bank, which leads to loss of both diversity and resilience. The second is investors such as fund managers increasing their appetite for risk by trying to outperform competitors. In our view, those two items are to banks the equivalent of fast food and alcohol to a person on the verge of diabetes – factors that speed up and enhance the onset of disease.

How do you spot these vulnerabilities in the system? According to West and team it’s by paying attention to a company’s ancestry:

This mechanism can be summarised in a simple form: the larger a company’s ancestry (the number of entities acquired which then form part of the company) the higher the likelihood that company will merge again, leading to a positive feedback loop. Returning to our analogy with diabetes, the ancestry mechanism is the genetic flaw in free markets that leads to the onset of a chronic condition.

Which all leads back to one thing really: quality.

What a lot of the modern information technological revolution is about is getting people to forgo quality in exchange for instant servicing. Small wonder there’s a speeding up effect. In the case of Uber specifically it’s about disguising poor quality as good quality via the distraction of instant servicing.

But the truth is that human relationships, especially in the service sector, evolve on bespoke terms. They do so because individuals are unique and come with unique wants and needs. It takes time to know someone well enough to deliver a high standard of service. There is no short cut to a good reputation. You have to earn it by way of proving your ability and knowledge to the client. This takes years to evolve. You can’t rush it. And arguably if you do rush it, you make the relationship really brittle. This is also why it’s impossible to scale. This is why we humans can’t keep up with the rate of change and why we are unlikely to handle the necessary technology needed to keep up with these exponential forces well.

I think I understand why West is so pessimistic now. The laws of scaling imply poorer quality and overstretched services over the long run. They suggest we have to abandon all hope of quality in our lives, and move to an instant environment because it’s only by condensing the time period in which services can be performed that the necessary scaling effects can be achieved.

Try as we might, our society does not have the capability or time to replenish the stock of high quality Georgian buildings if and when they crumble and need replacing. To survive we will have to radically change the nature of our lives or give up on what it means to be human (upload to the cloud etc?).

So rather than breaking the wheel with true unscaling effects — so, doing things on a micro quality level, in a way which protects diversity — we’re heading towards a “scaled up on steroids” system, which involves doing more things, more quickly and in poorer quality form.




I have often stated that my belief in technology saving the world swings from tech-utopian to tech-dystopian, depending on what the majority is thinking at the time. My general inclination is to stress-test consensus or “on trend” thinking.

So, after being all “abundance, tech, wow!” for many years, small surprise people are confused as to why I’m suddenly coming across so “anti-tech”.

Let me explain. My core view is that absolutism serves no-one’s interests, and one has to adapt and sculpt one’s thinking to the circumstances in hand.

When it was popular to be pessimistic and bleak, it seemed logical to express the opinion that “hey, look around, there’s so much amazing stuff technology is bringing to the table and that in many respects we’ve never had it this good.” Also, technology really is a fundamental force in economics.

Now, however, I’m increasingly coming across a whole generation of smart young minds who are convinced that “this time is different” and that free information/connectivity can not only save the day but that things like fintech can literally cure poverty and cancer…

I’m biting back. I’m biting back because I worry that this line of thinking is only going to create a whole bunch of suckers who are going to be scammed. Technology does have the potential to save the day. But technology alone will not be responsible for this.

Technology, especially information technology, serves us by changing how we behave. Technology will save the day if it helps change our behaviours, so that we no longer have to scam, con or abuse each other — especially the productive part of society — or burden the planet on the resource front.

But the problem is that it takes a long time to influence social behaviours or to educate people in the ways of technology so that as behaviours change, they’re not the one disadvantaged by the behavioural shift.

What bothers me about “fintech” in particular is that it assumes digitisation alone can help influence behavioural shifts. But really there only two ways that fintech can bring affluence to developing markets.

1) if it can enforce behavioural changes by better rationing access to consumption goods than the current system — mostly by way of algorithmic judgments. (Something that I’m actually not convinced it can do, because: endogenous money, theft, black market etc etc)

2) By anticipating your wants and needs through mass surveillance and data capture, and then manipulating them if they don’t fit the resources to hand, to the point you’re not really free at all.

[Now, there is some truth in the idea that the web helps one access information and make better judgements that can then lead to greater cooperation and new trusted trade relationships that would never have existed before. My concern with that assessment is that the bulk of the information on the web is bullshit and/or lies. High gloss self-PR doesn’t equal reputation. Nor does multiple endorsements by mutual vested interest cronies. Just look at Linkedin. If we took Linkedin to be a perfect reflection of society, we should all be highly accomplished practitioners and entrepreneurs. Show me one profile where it says serial failed entrepreneur or bankrupt or “I can’t hold a job down because I have an alcohol problem”??? The web as it stands is a big fat lie. Sadly, the younger generation thinks that because 80% of the facts on Wikipedia are correct, that makes it a great social resource. But as any propagandist will tell you, propaganda is much easier to digest if 99% of the facts are correct. You steer opinion by shaping the 1% bit of the story nobody will think to double check, and bury it in a sea of truth.

As an aside, I have a particular hatred of Linkedin. You’ll notice I have “fly fishing” endorsed as an actual skill of mine even though I haven’t spent a day fly-fishing in my life. I am continuously shocked by the number of people who appear on the Bitcoin circuit making all sorts of bullshit claims about their competence and creditability, based on a number of self-employed entries on linkedin. Nowadays there is no such thing as self-employed, only “entrepreneur”. ]

I’m still pro digital payments. BUT… I’m not pro the roll out of digital payments by private cartels or monopolies. The reason for this is because digital payments are fundamentally about data capture, and getting rid of cash-in-hand payments and tax dodging to profit the honest guy, who’s been losing out to cheaters.

But with great power comes great responsibility. Digital cash can make a massive difference but it can also lead us to an Orwellian dystopia.

Private unregulated companies operating in the guise of “tech firms” when really they’re just a new breed of shadow bank should not be allowed to grab all this power.

Digital payments should be rolled out by the regulated banking network. This can be achieved through banking union and payment harmonisation, under the auspices of publicly accountable regulators, and within a regime that mandates strict rules about data sharing and abuse. It’s all about governance. And shock of all shocks: governance costs money. Thus a regulated digital network, regulated by CONSCIOUS agents,  is always going to be more expensive than an unregulated one.

Handing power over to a corporate behemoth or silicon valley digital payments god is not the way to go. Don’t let technologists fool you into thinking they’re not just trying to recreate the old banking system before it was properly regulated.